Cooperative unit owner denied AMT property tax deduction.

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 section 164(a)" Thus, the precise question is whether a Sec. 216 deduction is a deduction for "taxes described in ... section 164(a)." Although Sec. 56(b) does not expressly refer to Sec. 216, the Second Circuit and Tax Court agree that, under Sec. 216(a)(1), tenant-stockholders can deduct their share of real estate taxes, because they are taxes described in Sec. 164(a).

According to the courts, the argument for allowing the deduction would be stronger if Sec. 56 restricted only "deductions under section 164(a)"; see Sec. 67(b)(2) (defining miscellaneous itemized deductions as deductions other than "the deduction under section 164"). However, the "taxes described in" language is broader and, under a plain and ordinary meaning, such language applies to deductions for real estate taxes, whether the deduction is taken for the direct payment of such taxes (Sec. 164) or their indirect payment (Sec. 216).That other Code provisions may treat Secs. 164 and 216 distinctly did not alter the court's interpretation of Sec. 56(b)'s language.

The undisputed purpose of Sec. 216 is "to give tenant-stockholders of housing cooperatives the same tax deductions as are allowed to homeowners" (Eckstein, 452 F2d 1036 (Cl. Ct. 1971) (citing legislative history)). Under this rationale, Sec. 216(a)(1) deductions are for the same kind of taxes described in, and deductible under, Sec. 164(a)(1). Second, this equal-treatment rationale suggests that tenant-shareholders' real estate tax deductions should be disallowed for AMT purposes, just like those of homeowners.

LAUREN OSTROW, 2d Cir., 11/22/05