A limited liability corporation is the owner of land and a building, which entered into a ground lease with a developer. The lease is described as a “net lease” with the developer / tenant being responsible for all expenses and maintenance. The developer reconstructed and renovated the building. In effect, with these changes, a new building was constructed on the premises.
Following completion of the building, the developer assigned the lease to a newly formed limited liability company which, in turn, merged into a new corporation so that the new corporation was the tenant owning the leasehold estate of the new building, which is now subject to a plan filed with the state for the sale of cooperative residential apartments.
The original lease provided that the developer would pay all real estate taxes. The succeeding corporation asserts that it qualifies as a cooperative housing corporation and also that the persons who purchase stock representing their apartments in the building will qualify as tenant-stockholders of the corporation. The ruling request concerned who will be eligible to claim deductions for the amounts of real estate taxes paid.
In this letter ruling, the IRS referred to Rev. Rul. 62-178—the facts of which the IRS found were substantially similar to the facts presented in this ruling request.
In the revenue ruling, the lessee was allowed a deduction for real estate taxes paid on a building (but not the underlying land) because the enjoyment of the entire worth of the building was with the lessee because the lessor received no rental income from the building and the useful life of the building (erected by the lessee with its own funds) was substantially shorter than the term of the lease. Following this guidance, the IRS found that the corporation will be entitled to deduct the real estate taxes (other than those attributable to the land) and that each tenant-stockholder’s rental or maintenance payments will be deemed to include his or her proportionate share of the real estate taxes and will be deductible by each tenant-stockholder.
For more information, contact KPMG’s National Director of Cooperative Tax Services:
David Antoni, in Philadelphia
Or Associate National Director of KPMG’s Cooperative Tax Services
Brett Huston, in Sacramento