Cooperative unit owner denied AMT property tax deduction.

• Author: O'Driscoll, David
• Position: Alternative minimum taxable income

L and T are tenant-stockholders of a cooperative housing corporation. On their 2001 joint return, they deducted their proportionate share ($10,489) of the housing corporation's real estate taxes from their adjusted gross income. They also included this deduction in computing their alternative minimum taxable income (AMTI). The IRS, asserting that the deduction was not allowed for alternative minimum tax (AMT) purposes, issued a deficiency notice. It was challenged by L and T, but the Tax Court held in favor of the IRS. The holding was appealed to the Second Circuit.

Issue

This appeal presented a purely legal issue that had not been decided by the Second Circuit or any other appellate court: whether a tenant-stockholder's Sec. 216 deduction is disallowed for AMT purposes.

Analysis

Unlike homeowners, who incur and pay their real estate taxes directly, tenant-stockholders of a housing corporation indirectly pay real estate taxes incurred by the corporation through their rent. Originally, courts did not allow tenantstockholders to take a Sec. 164 deduction for real estate taxes, under the general rule that the deduction is available only to the individual paying the tax; see Wood v. Rasquin, 21 FSupp 211 (DC NY 1937), aff'd, 97 F2d 1023 (2d Cir. 1938); and Holden, 27 BTA 530 (1933). In response to these rulings, Congress enacted Sec. 216, which provides in pertinent part:

(a) Allowance of deduction.--In the case of a tenant-stockholder (as defined in subsection (b)(2)), there shall be allowed as a deduction amounts (not otherwise deductible) paid or accrued to a cooperative housing corporation within the taxable year, but only to the extent that such amounts represent the tenant-stockholder's proportionate share of--

(1) the real estate taxes allowable as a deduction to the corporation under section 164 which are paid or incurred by the corporation on the houses or apartment building and on the land on which such houses (or building) are situated[.]

However, in computing AMTI, Sec. 56(b)(1)(A)(ii) disallows deductions "for any taxes described in paragraph (1), (2), or (3) of...