Co-op owner still cannot take deduction for wall's collapse.

• Author: Beavers, James A.
• Position: 2016 Tax Court memorandum decision in Alphonso v. Commissioner

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The Tax Court found that progressive deterioration caused the collapse of an 80-year-old retaining wall at a cooperative apartment complex, and thus the wall's collapse was not a casualty for purposes of the Sec. 165(c)(3) casualty loss deduction.

Background

During 2005, the year at issue, Christina Alphonso owned shares of stock in Castle Village Owners Corp. (Castle Village), a Sec. 216(b) cooperative housing corporation. Castle Village owned a cooperative apartment complex that consisted of a seven-acre tract of land overlooking the Hudson River in New York City, on which a two-story cottage and five apartment buildings stood. The Castle Village apartment buildings ranged in height from 12 to 15 stories and contained a total of 589 apartments. Before May 12, 2005, an enormous retaining wall of stone masonry construction that had been built between 1921 and 1925 supported the grounds near those five Castle Village apartment buildings.

Concerned about the condition of the retaining wall, Castle Village began what would be a long series of inspections and studies of, and repairs to, the retaining wall, the part of the grounds adjacent to the walls, and the drainage system on that part of the grounds. Between 1985 and 2005, six persons or entities performed inspections or studies. The last company's study, which included sophisticated measurements of the movement of the wall over an extended period, indicated that portions of the retaining wall had serious problems that could result in a failure of the wall. Over the 20-year period, Castle Village had a number of repairs made to the wall, the grounds, and the drainage system in response to the various inspections and studies. The last major work done was a 2004 renovation of the drainage system around the wall to prevent water from pooling near the wall when it rained.

On May 12, 2005, part of 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 her a notice of deficiency for 2005...