Cooperative owner cannot deduct cooperative's casualty loss.

• Author: Beavers, James A.

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.

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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 riled individual tax return for 2005, Alphonso claimed a casualty loss of $26,390 and a casualty loss deduction of 523,188. 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...