Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-15

1973-1 C.B. 141

Sec. 216

IRS Headnote

A tenant-stockholder in a cooperative housing corporation may deduct as interest his proportionate share of the permanent financing expense ("points") paid and deducted by the corporation in the year that the stockholder subscribed for membership in the cooperative; Revenue Ruling 70-92 modified.

Full Text

Rev. Rul. 73-15

Advice has been requested whether, under the circumstances described below, a taxpayer, a tenant-stockholder in a cooperative housing corporation, may deduct as interest an amount he paid to the corporation that was allocated to the permanent financing expense of the corporation.

A cooperative housing corporation, as defined in section 216(b)(1) of the Internal Revenue Code of 1954, was formed for the purpose of acquiring, owning, and operating a housing project. In 1970 the taxpayer, who files his return on a calendar year basis and uses the cash receipts and disbursements method of accounting, subscribed for membership in the corporation and paid a membership fee to it plus a "working capital and permanent finance contribution" of 2000x dollars. Of this latter amount, 1500x dollars is allocable to the taxpayer's pro rata share of the permanent financing expense ("points") that was incurred, paid, and deducted by the corporation in 1970 on the mortgage covering the housing project. The "points" were paid as compensation to the lender solely for the use or forbearance of money and qualify as interest. See Revenue Ruling 69-188, 1969-1 C.B. 54. The membership fee and the 500x dollars balance of the "working capital and finance contribution" represents the equity investment of the taxpayer in the cooperative housing corporation.

Section 216(a) of the Code, relative to the deduction of 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--

* * * * *

(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.

Section 163 of the Code, and the regulations thereunder, provide that interest paid within a taxable year on indebtedness shall be allowed as a deduction in computing taxable income. See Revenue Ruling 69-582, 1969-2 C.B. 29.

In the instant case the amount allocable to the permanent finance fee paid by the corporation represents the taxpayer's pro rata share of interest paid or incurred by the corporation on indebtedness contracted in the acquisition of the housing project.

Accordingly, it is held that the taxpayer may deduct under the provisions of section 216 of the Code the amount he paid that was allocable to his proportionate share of the "points" paid and deducted by the corporation in that year.

Revenue Ruling 70-92, 1970-1 C.B. 53, which holds that no portion of the subscription payments for membership in a cooperative housing corporation prior to the beginning of the construction of the housing units is deductible by the tenant-stockholders under section 216 of the Code, is modified.