By David Cho, Assistant Counsel

The Internal Revenue Service (IRS) seems poised to begin another drive to curtail the deductibility of real estate taxes on 216 cooperative residential buildings and properties, according to a discussion last month during a New York State Society of CPAs tax committee meeting.

NYSSCPA Taxation of Individuals Committee member Ira H. Inemer brought up the possibility that the IRS is once again seeking to close the deduction that helps co-op owners save on their taxes during the committee’s Sept. 18 meeting.

“It’s heated up, the IRS now wants to fight this issue,” Inemer theorized during the ‘open discussion’ portion of the committee meeting. Inemer, a tax practitioner with offices in midtown Manhattan, cited personal observations dealing with the case of at least one of his clients.

Inemer, whose client was taken to court by the IRS over this issue, said he has received calls from other practitioners who have had similar experiences.

If the IRS is preparing to fight 216 deductions, it would be reopening an old battle that the agency seemingly capitulated over four years ago, according to the Council of New York Cooperatives and Condominiums (CNYCC).

After numerous battles in and out of court, the IRS had agreed by 1999 not to apply Section 277 of the Internal Revenue Code to housing cooperatives of any kind, deciding instead to treat all housing cooperatives as subject to Subchapter T of the Code, said the CNYCC.

Subchapter T sections 1381-1388 deal with the taxation of organizations that operate on a cooperative basis. Under Subchapter T, “patronage” income is more broadly defined than is “member” income under 277.

For years before the IRS finally conceded in 1999, residential co-op advocates had pressed their cases in court, winning victories for co-op residents, said the CNYCC.

In Trump Village Section 3, Inc. v. Commissioner, Judge Whelan in 1995 held that the co-op was subject to Subchapter T and not Section 277. Yet, despite the decision in Trump, the IRS chose a very narrow interpretation of the judge’s decision and continued to apply Section 277 to housing cooperatives that did not precisely fit the Trump fact pattern, focusing on differences in co-op voting procedures.

One year later, the court in Thwaites Terrace House Owners Corp. v. Commissioner specifically confirmed that all Section 216 housing cooperatives are within Subchapter T and therefore not subject to Section 277, regardless of whether shareholders vote by the number of shares that they own or on a one-person, one-vote basis.

Despite the judge’s ruling, the IRS continued to refuse to acquiesce in the matter; instead continuing to investigate many New York housing cooperatives, asking questions based on Section 277, according to the CNYCC.

In 1998, co-op housing advocates pressed the IRS on the issue, said the CNYCC, commencing a case seeking a refund on behalf of a New York City housing cooperative in U.S. District Court. After months of discussion, the IRS apparently agreed that housing cooperatives are covered by Subchapter T instead of Section 277. Thereafter, barring exceptional circumstances, the IRS chose not to assert Section 277 claims against any housing cooperatives.

The IRS’ surrender on the matter in 1999 seemed to put to rest once and for all the question of the deductibility of real estate taxes on co-op property. However, if the observations of the Taxation of Individuals committee members are correct, another wave of Section 277 battles may be on the horizon.