The Tax Court held that a resident of a coop apartment complex could not claim a casualty loss deduction for an assessment to repair a common area in which she held no property interest beyond a right to use it.
Christina Alphonso owned stock in Castle Village Owners Corp., a cooperative housing corporation under IRC § 216. This allowed her to lease an apartment in Castle Village in the Washington Heights neighborhood of New York City, on a bluff overlooking the Hudson River. The lease also allowed her to use the apartment complex’s gardens and common area. The lease required monthly payments and allowed the corporation to assess tenants for extra costs to maintain the buildings and common areas.
In 2005, Castle Village’s 70-foot-high retaining wall above the river and the Henry Hudson Parkway collapsed, causing significant damage. The corporation assessed its stockholders to repair the wall and other damage, and Alphonso paid $26,390 as her share. She deducted the payment as a casualty loss on her 2005 income tax return. The IRS denied the deduction on the grounds that the wall collapsed from gradual weakening and therefore did not qualify as a casualty under section 165(c)(3), also that it was on property owned not by her but by Castle Village.
In the Tax Court, the government cited as its basis for the latter argument West v. U.S., 259 F.2d 704 (3rd Cir. 1958). In that case, the taxpayer was a member of a social club that owned land on which it built a dam. The taxpayer built a cottage on property he leased from the club. The lease allowed the taxpayer to use the artificial lake created by the dam. A hurricane destroyed the dam, and the taxpayer claimed a casualty loss for the assessment by the club to repair the dam. The District Court for the Eastern District of Pennsylvania, affirmed by the Third Circuit, held that the lease did not give West a property interest in the dam and denied the claim.
Alphonso asked the Tax Court to instead follow S.P. Keith v. Commissioner, 52 TC 41 (1969). In Keith, a corporation built a dam to enlarge a lake on land it owned. The corporation’s shareholders could purchase land from the corporation to build a home. The deed’s conveyance included a portion of the lake bed adjoining the land. A flood destroyed the dam, and the corporation rebuilt it and assessed the landowners for the cost. The taxpayer deducted this assessment. The Tax Court allowed the casualty loss because the deed gave the taxpayer the right to the lake bed. In Alphonso, the Tax Court ruled that West, not Keith, was the appropriate precedent, since like West, Alphonso had a right only to use the property.
The court did not rule on the IRS’ argument that the wall collapse was not a casualty within the meaning of section 165(c)(3).
Christina A. Alphonso v. Commissioner , 136 TC no. 11
By Edward J. Schnee, CPA, Ph.D., Hugh Culverhouse Professor of Accounting and director, MTA Program, Culverhouse School of Accounting, University of Alabama, Tuscaloosa.
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