Read the decision: Alphonso [PDF 46 KB]
The taxpayer, an individual, owned stock and was a resident of a cooperative housing apartment building in New York City.
In May 2005, a retaining wall owned by the cooperative collapsed, causing rocks and soil to fall onto the public roads and other significant damage. The cooperative levied an assessment against each of its stockholders—including a $26,390 assessment against the taxpayer—to cover a portion of the damage caused by the collapse of the retaining wall.
On filing her Form 1040, U.S. Individual Income Tax Return, for the 2005 tax year, the taxpayer claimed: (1) a casualty loss of $26,390, and (2) a casualty loss deduction of $23,188 (i.e., the deduction as reduced under the Code provisions with respect to the claimed casualty loss).
The IRS disallowed the claimed casualty loss and the taxpayer’s claimed deduction, finding that: (1) the cause of the collapse of the retaining wall was the result of a gradual weakening of the wall, which did not constitute a casualty loss under section 165(c)(3); and (2) because the collapse of the retaining wall occurred on the cooperative’s property, any casualty loss deduction must be claimed by the corporation—not by the stockholders.
The Tax Court in March 2011 granted summary judgment for the IRS, finding that the taxpayer was not entitled to a deduction under section 165(a) and (c)(3) for the assessment that she had paid to the corporation. As the Tax Court observed, only the owner of the property damaged by a casualty is entitled to a deduction for a casualty loss sustained to that property, and the Tax Court found that the taxpayer lacked a sufficient interest in the damaged property to support her claimed deduction.
On appeal, the taxpayer asserted that her right to use the ground and to exclude persons who were not tenants or guests of tenants, along with her obligations as a tenant-stockholder under the cooperative lease, constituted a property interest in the land sufficient to allow her the claimed deduction.
The Second Circuit today noted that all of the taxpayer’s rights were granted pursuant to a cooperative lease agreement and that while the taxpayer’s right to use the grounds was not exclusive with respect to her fellow tenants, it was part of her leasehold interest.
The Second Circuit conclude that under New York law, the taxpayer’s right to use the property grounds, shared with other residents of the cooperative and their respective guests but not with anyone else, was a property interest in the grounds. As such, the appeals court found that the taxpayer had a property interest in the grounds that satisfied the "property" element of section 165(c)(3).