The United States Court of Appeals for the Second Circuit held that the shareholder of a cooperative housing corporation may deduct as a casualty loss her share of an assessment made to repair damage caused to the corporation’s property by a casualty. In Alphonso v. Commissioner (2d Cir., February 6, 2013), the taxpayer owned shares of Castle Village, a cooperative housing corporation that owned land and residential buildings in upper Manhattan, and, as is common, she also had a proprietary lease for her apartment unit from the corporation. A retaining wall collapsed on the property, causing considerable damage.
The corporation assessed the shareholders for the cost of repairs to the property. The taxpayer claimed a casualty loss deduction for her share of the assessment. The IRS disallowed the deduction on the basis that because the corporation owned the grounds on which the damage occurred, it could properly deduct the casualty loss — the taxpayer’s lease was for her apartment, not for the grounds owned by the corporation. The IRS also argued that IRC Section 216 does not authorize this deduction because, by its terms, it allows stockholders of cooperatives to deduct only their share of the corporation’s interest and property taxes and does not cover casualty losses. The Tax Court agreed with the IRS, and the taxpayer appealed to the Second Circuit.
The Second Circuit reversed the Tax Court, finding that the taxpayer’s ownership of stock and her proprietary lease, augmented by the house rules, gave the taxpayer a sufficient property interest in the grounds that were damaged. While the taxpayer’s lease covered only her own apartment, she did have the right to use the grounds and to exclude others who were not residents or guests of residents from any use of the grounds. The court ruled this was a sufficient interest in the property to allow the deduction of a casualty loss.