Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-92

1970-1 C.B. 53

Sec. 163
Sec. 164
Sec. 216

IRS Headnote

Subscription payments for membership in a housing cooperative represent equity investment and no portion thereof is deductible by tenant-stockholders as their proportionate share of real estate taxes and interest paid by the cooperative during the period of construction.

Full Text

Rev. Rul. 70-92

Advice has been requested whether any portion of the amounts described below paid to a cooperative housing corporation by its tenant-stockholders represents real estate taxes and interest.

A cooperative housing corporation as defined in section 216(b)(1) of the Internal Revenue Code of 1954, was incorporated for the purpose of acquiring, owning, and operating a housing project. Subscriptions were accepted for membership in the corporation prior to the beginning of the construction of the housing units. The funds provided by the subscriptions were treated as the equity investment of the tenant-stockholders and were used for the payment of (1) the costs of acquiring the land and construction of the housing project over and above the mortgage proceeds, (2) working capital funds required by the Federal Housing Administration, (3) the cost of leasing, operating and maintaining the sales display area, and (4) a permanent financing (mortgage discount) fund payable upon the sale of the mortgage to a permanent lender.

The specific issue in this case is whether the tenant-stockholders are entitled to deduct under section 216 of the Code any portion of their subscription payments as their proportionate share of the real estate taxes and interest paid by the corporation during the period the housing units were under construction.

Section 216(a) of the Code, relating to the deduction of taxes and interest paid to cooperative housing corporations, provides as follows:

(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, or

(2) the interest allowable as a deduction to the corporation under section 163 which is paid or incurred by the corporation on its indebtedness contracted--

(A) in the acquisition, construction, alteration, rehabilitation, or maintenance of the houses or apartment building, or

(B) in the acquisition of the land on which the houses (or apartment building) are situated.

In the instant case, since the amounts paid represent the tenant-stockholders' initial equity investment in the corporation, the tenant-stockholders did not pay any amounts representing real estate taxes or interest during the construction period, nor did they accrue an indebtedness for such payments.

Accordingly, it is held that the tenant-stockholders, in the instant case, are not entitled to a deduction under section 216 of the Code for any portion of their subscription payments.