Rev. Rul. 89-59

1989-1 C.B. 317, 1989-18 I.R.B. 11.

                       Internal Revenue Service

                                 Revenue Ruling

      DOMESTIC BUILDING AND LOAN ASSOCIATION; LOAN SECURED BY COOPERATIVE

                           HOUSING CORPORATION STOCK

                             Published: May 1, 1989

Section 7701. - Definitions

(Also Section 593; 1.593-11.)

  Domestic building and loan association; loan secured by cooperative housing corporation stock. A loan made for the purchaser of stock in a cooperative housing corporation, and secured by such stock, qualifies as a loan described in section 7701(a)(10(C)(v) of the Code if the house or apartment that the stock entitles the stockholder to occupy is to be used as a residence.

ISSUES

  (1) Does a loan that is made for the purchase of stock in a cooperative housing corporation described in section 216(b) of the Internal Revenue Code, and is secured by such stock, qualify as a loan described in section 7701(a)(19)(C)(v) of the Code?

  (2) Does such a loan constitute a qualifying real property loan within the meaning of section 593(d)(1) of the Code?

FACTS

  § is a savings and loan association. Some of the loans made or acquired by § are loans made for the purchase of stock in a cooperative housing corporation described in section 216(b) of the Code. Each of these loans is secured by the stock purchased with the loan proceeds. The house or apartment that ownership of this stock entitles the stockholder to occupy is to be used as a residence.

LAW

  Section 216(b)(1) of the Code defines a cooperative housing corporation, in part, as a corporation each of the stockholders of which is entitled, solely by reason of ownership of stock in the corporation, to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by the corporation.

  Section 1.216-1(d)(2) of the Income Tax Regulations describes this right of occupancy as follows:

    Each stockholder of the corporation * * * must be entitled to occupy for dwelling purposes an apartment in a building or a unit in a housing development owned or leased by such corporation. . . . [The right to occupy the premises] must be conferred on each stockholder solely by reason of his ownership of stock in the corporation, that is, the stock must entitle the owner thereof either to occupy the premises or to a lease of the premises.

  Section 7701(a)(19) of the Code requires that, in order for an entity to qualify as a domestic building and loan association, at least 60 percent of the entity's total assets must consist of assets of a type listed in section 7701(a)(19)(C). One such type of asset, described in section 7701(a)(19)(C)(v), is a loan secured by an interest in residential real property. Section 7701(a)(19)(C)(v) provides that, for this purpose, residential real property includes single or multifamily dwellings.

  Section 301.7701-13A(d) of the Regulations on Procedure and Administration provides that, for purposes of the 60-percent asset test, it is immaterial whether the taxpayer originated the loans or purchased or otherwise acquired them from another.

  Section 593(a)(2) of the Code provides that, in order to deduct an addition to a reserve for bad debts under section 593, an otherwise eligible entity must meet the requirements of section 7701(a)(19)(C).

  Section 593(b)(1) of the Code provides that the reasonable addition to a reserve for bad debts is an amount equal to the sum of a reasonable addition to the reserve for losses on nonqualifying loans plus a reasonable addition to the reserve for losses on qualifying real property loans.

  Section 593(d)(1) of the Code defines the term 'qualifying real property loan,' with certain exceptions, as a loan secured by an interest in improved real property.

  Section 1.593-11(b)(3) of the Income Tax Regulations provides that, for purposes of section 593(d)(1) of the Code, the word 'interest' means an interest in real property which, under the law of the jurisdiction in which the property is situated, constitutes any one of several types of interest. For example, the interest may be an interest in fee in the property; or, in the case of a mobile unit, an ownership interest; or a long-term leasehold interest in the property, as described in the regulations.

  Section 1.593-11(b)(4) of the regulations provides that, for purposes of section 593(d)(1) of the Code, the term 'improved real property' includes land on which any building of a permanent nature is located, provided that the value of the building is substantial in relation to the value of the land.

ANALYSIS

  In the present case, the loans held by § are loans made for the purchase of stock in a cooperative housing corporation described in section 216(b) of the Code. Each loan is secured by the stock purchased with the loan proceeds, and the house or apartment that this stock entitles the stockholder to occupy is to be used as a residence.

  Each stockholder of a cooperative housing corporation described in section 216(b) is entitled, solely by reason of ownership of stock in the corporation, to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by the corporation. That is, ownership of stock in the corporation entitles the stockholder either to occupy the house or apartment or to a lease of the house or apartment. In other words, the stockholder is entitled to dwell in the house or apartment as long as the stockholder owns the stock.

  Assets described in section 7701(a)(19)(C)(v) of the Code include loans secured by an interest in residential real property, and section 7701(a)(19)(C)(v) specifically provides that, for this purpose, residential real property includes single or multifamily dwellings. Since ownership of stock in a cooperative housing corporation described in section 216(b) entitles the stockholder to dwell in a house or apartment, and since the house or apartment underlying each loan in the present case is to be used as a residence, the loans in this case are loans described in section 7701(a)(19)(C)(v).

  A qualifying real property loan, as defined in section 593(d)(1) of the Code, is a loan secured by an interest in improved real property. Section 1.593- 11(b)(3) of the regulations provides that the word 'interest' for this purpose includes an interest in fee, an ownership interest, or a long-term leasehold interest. Section 1.593-11(b)(4) provides that the term 'improved real property' includes land which is the site of any building of a permanent nature, if the value of the building is substantial in relation to the value of the land. Since ownership of stock in the cooperative housing corporation entitles the stockholder to dwell in a house or apartment, such stock constitutes an interest in improved real property within the meaning of section 593(d)(1). Accordingly, loans made for the purchase of, and secured by, such stock are qualifying real property loans for purposes of section 593.

  The treatment of loans secured by cooperative housing corporation stock under other sections of the Code supports these conclusions. For example, a loan secured by stock in a cooperative housing corporation described in section 216(b) is treated as a loan secured by an interest in real property for purposes of section 856(c). In Rev. Rul. 76-101, 1976-1 C.B. 186, an unincorporated trust, otherwise qualifying as a real estate investment trust under section 856, invested in notes that were secured by stock in a cooperative housing corporation. In order to qualify as a real estate investment trust, the trust was required by section 856(c) to derive at least 75 percent of its gross income from, among other items, interest on obligations secured by mortgages on interests in real property. The ruling concludes that since the owner of the stock in the cooperative housing corporation was entitled, solely by reason of the stock ownership, to occupy a specified unit for dwelling purposes pursuant to a proprietary lease, the stock qualified as an interest in real property within the meaning of section 856(c)(6)(C). Accordingly, the ruling holds that interest on the notes secured by the stock qualified as interest on obligations secured by mortgages on interests in real property for purposes of section 856(c)(3).

HOLDINGS

  (1) A loan that is made for the purchase of stock in a cooperative housing corporation described in section 216(b) of the Code, and is secured by such stock, qualifies as a loan described in section 7701(a)(19)(C)(v) if the house or apartment that the stock entitles the stockholder to occupy is to be used as a residence.

  (2) A loan that is made for the purchase of stock in a cooperative housing corporation described in section 216(b) of the Code, and is secured by such stock, is a qualifying real property loan within the meaning of section 593(d)(1).

DRAFTING INFORMATION

  The principal author of this revenue ruling is Mark S. Smith of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Mark S. Smith on (202) 566- 3829 (not a toll-free call).

Rev. Rul. 89-59, 1989-1 C.B. 317, 1989-18 I.R.B. 11.