The Second Circuit Court of Appeals has reversed the Tax Court’s decision that a New York City co-op owner, Ms. Alphonso, could not deduct casualty losses that occurred on grounds owned in common with other cooperative shareholders.
The Tax Court held that Ms. Alphonso could not take a deduction for a casualty loss because she did not hold a property interest in the damaged property. The damage in question occurred when a retaining wall along the common property of the cooperative apartment building collapsed. The co-op shareholders contributed to the necessary repairs and clean-up. Ms. Alphonso took a deduction of about $23,000 for her share of the repairs, claiming that it qualified as a casualty loss under under IRC §165(c)(3).
The Tax Court did not address the merits of the casualty loss claim. Rather, the Court ruled as a matter of law that Ms. Alphonso did not hold a “sufficient” property interest in the common area of the apartment building to qualify for the deduction.
The Second Circuit vacated the Tax Court holding that although Ms. Alphonso’s interest in the damaged common area was not exclusive with respect to her fellow tenant shareholders it was still a property right. Thus, the “property” element of section 165(c)(3) was satisfied. The Second Circuit remanded the case to the Tax Court for further proceedings on whether the claimed damages qualified as a casualty loss.
Read the Second Circuit’s opinion here:
Alphonso v. Commissioner, No. 11-2364 (2d Cir. Feb. 6, 2013)
Read the Tax Court opinion here.
It only takes a couple of paragraphs to recognize a Tax Court opinion drafted by Judge Mark V. Holmes whose distinctive style is inimitable. In his latest effort, Judge Holmes expounds on sub-genres of hard rock and heavy metal music and flexes his vocabulary to describe what ordinary folks like us might just call a “strip club.” The taxpayer’s incarceration, risk management techniques, and references to Great White and Head East only added to the tale. All of this because of an incorrectly reported capital gain following a condemnation action. Taxation should always be so fun.
The 17 page Summary Opinion (which disposed of the taxpayer’s action but cannot be cited for precendent) had us reaching for the dictionary more than once as illustrated by the following sentence:
He rented out the old house to a tenant who installed minor improvements (e.g., poles) and opened an establishment felicitously–and paronomastically–called the “Landing Strip,” in which young lady ecdysiasts engaged in the deciduous calisthenics of perhaps unwitting First Amendment expression.
We couldn’t even find “paranomasia” (the root for the adverb above) in our three and a half inch thick Webster’s Unabridged Dictionary of the English Language. Fortunately the internet offered up the answer, which the curious can find here. All in a day’s work for Judge Holmes.
In the end, the taxpayer did get a bit of a break on the capital gain asserted by the IRS in the notice of deficiency but you’ll have to run the math yourself to know exactly how much as decision was entered under Tax Court Rule 155.
Read the opinion (and get the depreciation formula for the taxpayer’s gain) here.
Willson v. Commissioner, T.C. Summ 2011-132
The Tax Court, in a reviewed opinion by Judge Chiechi, finds that a shareholder in a cooperative housing corporation may not deduct losses incurred by the co-op and distributed among the shareholders under section 165(c)(3) or section 216(a).
Read the opinion here.
Alphonso v. Commissioner, 136 T.C. No. 11 (2011)
The Tax Court holds that payments made to settle automobile accident claims are not deductible casualty losses.
Read the decision here:
Pang v. Commissioner, TC Memo. 2011-55