1defense
Susie King Taylor2 360x1000
Margaret Fuller 2 360x1000
Susie King Taylor 360x1000
Margaret Fuller1 360x1000
storyparadox3
Anthony McCann1 360x1000
12albion
Betty Friedan 360x1000
lifeinmiddlemarch1
9albion
Stormy Daniels 360x1000
10abion
1lafayette
Edmund Burke 360x1000
George F Wil...360x1000
14albion
4confidencegames
199
1transcendentalist
2albion
6albion
7confidencegames
Spottswood William Robinson 360x1000
Margaret Fuller3 360x1000
Richard Posner 360x1000
8albion'
5albion
1gucci
1madoff
lifeinmiddlemarch2
3albion
Thomas Piketty1 360x1000
5confidencegames
6confidencegames
2gucci
2lafayette
2lookingforthegoodwar
2transadentilist
3defense
1trap
Maurice B Foley 360x1000
Gilgamesh 360x1000
Storyparadox1
Office of Chief Counsel 360x1000
2confidencegames
Anthony McCann2 360x1000
13albion
3theleastofus
2trap
Adam Gopnik 360x1000
2falsewitness
AlexRosenberg
3confidencegames
LillianFaderman
Learned Hand 360x1000
Thomas Piketty3 360x1000
Margaret Fuller5 360x1000
7albion
1albion
Ruth Bader Ginsburg 360x1000
Mary Ann Evans 360x1000
storyparadox2
Margaret Fuller 360x1000
Thomas Piketty2 360x1000
2paradise
499
Margaret Fuller4 360x1000
Maria Popova 360x1000
1empireofpain
1falsewitness
Samuel Johnson 360x1000
2jesusandjohnwayne
399
Lafayette and Jefferson 360x1000
299
3paradise
11albion
1lauber
Mark V Holmes 360x1000
2defense
1paradide
1lookingforthegoodwar
James Gould Cozzens 360x1000
2theleastofus
George M Cohan and Lerarned Hand 360x1000
11632
Tad Friend 360x1000
Margaret Fuller2 360x1000
1theleasofus
1confidencegames
1jesusandjohnwayne
Brendan Beehan 360x1000
4albion

I really enjoy reading the appeals of Tax Court decisions that I have blogged.  I especially like decision where the Circuit sets the Tax Court straight and rules for the taxpayer, like the recent Second Circuit decision in the case of Christina Alphonso.  Ms. Alphonso was a tenant stockholder in a cooperative apartment complex called Castle Village.  It is in Manhattan, not far from the George Washington Bridge with a great view of the Hudson River. The complex had a retaining wall which collapsed spreading dirt, rocks and other debris on the road below.

The owners of Castle Village were assessed to pay for repairs.  Among them was Ms. Alphonso whose share was over $26,000.
It sure seemed like a deductible casualty loss to me.  The IRS did have an argument that the collapse was due to gradual erosion, but that is not what they pursued.  They instead attacked the deduction based on the nature of Ms. Alphonso’s property interest.  Obviously there would not have been a problem if Ms. Alphonso had outright owned the building.  The IRS even conceded that there would not have been a problem if her apartment had been a condominium.  Castle Village, however, is a cooperative.   The Court explained:

Under New York law, “he ownership interest of a tenant-shareholder in a co-operative apartment is sui generis.” The interest in a cooperative apartment “is represented by shares of stock, which are personal property, yet in reality what is owned is not an interest in an ongoing business enterprise, but instead a right to possess real property.”

A co-op owner owns stock in a corporation that owns the property and by virtue of the stock ownership has a right to occupy one of the apartments in accordance with a proprietary lease.  The IRS was trying to argue that there was not sufficient interest in the common areas to allow for a casualty loss.  The Tax Court bought it, but the Second Circuit does not agree:

In sum, as augmented by the appended House Rules, the Proprietary Lease in this case, unlike the lease at issue in West, gave a defined group of persons–building residents such as Alphonso–the right to use the Castle Village grounds. All of Alphonso’s rights are granted by the Lease; although her right to use the grounds is not exclusive with respect to her fellow tenants, it is part of her leasehold interest. We conclude that under New York law, Alphonso’s right to use the grounds, shared with other residents of Castle Village and their respective guests but not with anyone else, was a property interest in the grounds.

Lew Taishoff, a veteran New York attorney, commented:

Essentially, New York’s crazy-quilt of rights embodied in cooperative apartment corporations’ certificates of incorporation, by-laws, shares, proprietary leases and house rules, which concatenation our State’s highest court has called sui generis, and as a result of our State’s lower courts wrestling with same, equals a property right sufficient to pass the Section 165(c)(3) test for casualty loss deductibility.

While of great interest to New York practitioners, the case is of limited use elsewhere, as State law dictates property rights.

Although, the co-op form seems to be a New York thing, the common sense approach toward looking at the nature of a property interest could have broader relevance.

I was wondering a little about the case going this far given the relatively small deficiency involved.  According to this story this was being used as a test case for 200 other Castle View owners. Eric Levine, the attorney handling the case indicated that it may have broad implications in the wake of Hurricane Sandy:

He said it paves the way for residents who were forced to help pay for damages at other New York co-ops the right to deduct those expenses from their federal tax returns.

You can follow me on twitter @peterreillycpa.

 Afternote

The celebration at Castle View may be a little muted.  The issue of whether the wall collapse was a casualty is still alive.  Since the Tax Court had given summary judgment on the property ownership issue, it didn’t have to get into that.  Now it does.

Originally published on Forbes.com Feb 11th, 2013