Castle Village Wins Tax Case on Appeal, Allowing Deductions After Catastrophe
Feb. 8, 2013 — Updated 3:20 p.m. — A federal appeals court has granted a victory to shareholders of the Castle Village co-op in Manhattan, reversing a lower court's ruling that had disallowed residents from claiming assessments as tax-deductible casualty losses following a 2005 landslide that had devastated the property. The ruling has far-reaching implications for co-ops that suffer catastrophic damage to common areas, and subsequently level shareholder assessments for rebuilding,
"This is an important development in federal tax law applicable to cooperatives in New York City," said Castle Village's tax attorney, Eric B. Levine of Wolf Haldenstein Adler Freeman & Herz, in a statement.
A Day in May
Following the May 12, 2005, partial collapse of a retaining wall at the approximately 1,000-apartment co-op — spilling a hillside onto the northbound lanes of the Henry Hudson Parkway and six parked cars, creating traffic congestion and closing a highway ramp for nearly two years — Kiewit Constructors substantially completed a $24 million reconstruction of the wall and garden by October 2007. The co-op board levied an assessment of approximately $25,000 per unit to pay for the reconstruction.
On advice from the co-op's general counsel, Theresa Racht of Racht & Taffae, the co-op retained Wolf Haldenstein as its tax specialist and litigator. The firm advised that tenant-shareholders take casualty losses on their federal income tax returns in the amount of the assessments they paid. The IRS, however, disallowed the deductions and a series of legal actions ensued. The Tax Court agreed with IRS and disallowed the deductions under the reasoning that the destroyed grounds and retaining wall were not owned by the tenant-shareholders, since in a cooperative, shareholders own stock in a corporation, which owns the real estate.
The Second Circuit federal court on Wednesday, however, "agreed with us that because the tenant-shareholders have a common right to use the grounds, and because that right is part of their proprietary leases, that that is a sufficient 'property interest' to support the casualty-loss deduction," said Levine. "The court agreed with us that it does not matter that the tenant-shareholders do not own the real estate itself."
"A co-op isn’t just an interest in shares of a corporation," Racht told Habitat. "It's a strange blend of personal property and a lease, which is a real estate instrument. For the IRS to say you can deduct interest on a co-op loan and then say no, you can't claim a casualty loss because you just own shares doesn't make sense. For Castle Village it's very important, because it gives shareholders who bore the brunt of a very large investment to build this retaining wall a chance to recoup some of that."
One More Wall
She noted, however, that the Tax Court must now rule on a factual matter that may yet prevent Castle Village shareholders from deducting their losses. "The decision was sent back down to the Tax Court for a decision as to whether or not the collapse of the retaining wall was considered a sudden event, which gives rise to a casualty loss, or whether the result of wear and tear and erosion over time, which would not be considered a casualty loss," Racht said.
Still, says Thomas Ciantra, a former co-op board member and an attorney who served as the board's legal liaison, "It's a major victory for Castle Village and the shareholders. The case is not over but a significant piece of it was decided. I think potentially it has significance for folks who own co-ops throughout the city." His optimism, however, is tempered "The government still can claim that it wasn't a casualty loss and disallow the deductions on that basis. As a shareholder I feel much better, but that's a battle — the war's not over yet."
For more, see our Site Map or join our Archive >>
Photo: Castle Village, in Manhattan's Hudson Heights, showing partially collapsed retaining wall. Click on image to enlarge.
This article was updated to include the Thomas Ciantra quotes.