Cooperative Owner Cannot Deduct Cooperative’s Casualty Loss

Gains & Losses

A shareholder in a cooperative housing corporation was not allowed to deduct as a casualty loss an assessment levied against her by the cooperative to pay for damages caused by the collapse of a retaining wall on its property.

Background

Castle Village Owners Corp. (Castle Village) is a cooperative housing corporation as defined in Sec. 216(b). Castle Village owned a tract of land overlooking the Henry Hudson Parkway and Riverside Drive in New York City on which there were five multistory apartment buildings with a total of 589 apartments. On the boundary of the property there was a large retaining wall (approximately 70 feet high and 250 feet wide) that Castle Village owned, which separated the property from the adjoining public roads.

Christina Alphonso was a stockholder in Castle Village. As such, Alphonso had the right to enter into a so-called proprietary lease with Castle Village with respect to an apartment in the complex. Alphonso executed a lease for the apartment with Castle Village and was living in the apartment in 2005.

On May 12, 2005, the Castle Village retaining wall collapsed, depositing large amounts of rock and soil onto the public roads below the Castle Village complex and causing significant damage. Castle Village levied an assessment against each of its stockholders, including Alphonso, to pay for the damage caused by the collapse of the retaining wall. The amount levied against Alphonso was $26,390, which she paid.

On her timely filed individual tax return for 2005, Alphonso claimed a casualty loss of $26,390 and a casualty loss deduction of $23,188. The IRS issued Alphonso a notice of deficiency for 2005 in which it disallowed the claimed 2005 casualty loss deduction. Alphonso challenged the IRS’s determination in Tax Court.

The Parties’ Arguments

The IRS argued primarily that because the collapse of the retaining wall occurred on Castle Village property, any casualty loss deduction must be claimed by Castle Village and not by its stockholders. Alphonso argued that she was entitled to the deduction because her proprietary lease with Castle Village gave her property rights in her apartment and the related grounds of the apartment complex (including the retaining wall) that supported a casualty loss deduction. In the alternative, she argued that under Sec. 216(a), she, as a cooperative shareholder, was entitled to deduct her share of the cooperative’s expenses.

The Tax Court’s Decision

The Tax Court held that Alphonso was not entitled to a casualty loss deduction. With respect to her first argument, the Tax Court, after reviewing Castle Village’s model proprietary lease, board house rules, corporate charter, and bylaws, found “nothing in those documents that allows us to conclude that petitioner possessed a leasehold interest, an easement, or any other property interest in the Castle Village grounds.” Therefore, because she had no ownership interest in the retaining wall, the loss was Castle Village’s, not hers, and she could not take a deduction for the loss.

Regarding Alphonso’s alternative argument, the Tax Court stated that the general rule that a stockholder cannot deduct the expenses of a corporation applies to stockholders in a cooperative housing corporation, and Sec. 216(a) expressly provides an exception to this general rule only for real estate taxes and mortgage interest. Alphonso argued that, by providing exceptions in Sec. 216(a), Congress intended that cooperative housing corporation stockholders be placed in the same position as homeowners, and therefore she should be allowed to deduct the casualty loss just as a homeowner would. However, the court noted that in cases where the law grants specific exceptions to a general prohibition, additional exceptions are not implied in the absence of evidence of contrary legislative intent. It then pointed out that the legislative history of the predecessor statute of Sec. 216 indicated that Congress intended Sec. 216(a) to create only an exception allowing the deduction of taxes and interest. Therefore, the court held that Alphonso could not deduct a casualty loss under Sec. 216.

Reflections

As this case suggests, a taxpayer may not be precluded from taking a deduction for a casualty loss on commonly owned property if the taxpayer can show that he or she has an actual direct ownership interest in the property. In Keith, 52 T.C. 41 (1969), a taxpayer owned a lot on a lake that had been created by building a dam. The taxpayer was a member of the corporation that built the dam. The taxpayer also owned a lot on the lake, the deed to which specified that the lot included land under the waters of the lake. When the lake was drained due to flood damage to the dam, the corporation repaired the dam using money collected through levies on the members of the corporation. The Tax Court allowed the taxpayer’s deduction for damages to the dam because his rights in the lake stemmed from his ownership of a portion of the lakebed, not from his ownership of stock in the corporation.

Alphonso,136 T.C. No. 11 (2011)