REVENUE RULE 92-60

1992-2 C.B. 68, 1992-31 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

COOPERATIVE HOUSING CORPORATION; GROSS INCOME FROM TENANT-STOCK- HOLDERS; RENTAL PAYMENTS FROM SUBLESSEES

Published: August 3, 1992

Section 216. Deduction of Taxes, Interest, and Business Depreciation by Cooperative Housing Corporation Tenant-Stockholder, 26 CFR 1.216-1: Amounts representing taxes and interest paid to cooperative housng corporations.

Section 61. Gross Income Defined, 26 CFR 1.61-8: Rents and royalties.

Cooperative housing corporation; gross income from tenant-stock-holders; rental payments from sublessees. Rental payments received by a cooperative housing corporation from a sublessee of a defaulting tenant-stockholder pursuant to the terms of a proprietary lease are income derived from tenant- stockholders within the meaning of section 216(b)(1)(D) of the Code.

ISSUE

If a tenant-stockholder of a cooperative housing corporation defaults defaults on maintenance fees required under a proprietary lease on a residentialal unit unit and, pursuant to the terms of the lease, the corporation receives rent a payments due to the tenant-stockholder directly from a sublessee of the of the unit to apply toward that defaulted obligation, are the payments received considered income to the corporation derived from tenant- stockholders within the meaning of section 216(b)(1)(D) of the Internal Revenue Code?

FACTS

COOP, a cooperative housing corporation as defined in section 216(b)(1) of the Code, owns land and a building thereon containing apartments. All the units in the building are residential apartments, except for commercial space on the ground floor which is leased to busines tenants. In addition to rent from commercial sources, COOP collects maintenance fees from its tenant- stockholders pursuant to proprietary leases to cover the real estate taxes, mortgage interest, and other expenses of the corporation.

A, a tenant-stockholder of COOP, owns stock of the corporation allocated to three residential apartments, which A subleases to B, C, and D, who are not tenant-stockholers. The proprietary lease between COOP and A permits COOP to require a sublessee of any of the A's units to make all rental payments due to A directly payable to COOP in the event of a default by A on A's obligation to pay maintenance fees to COOP. The lease further provides that once the maintenance fees due to COOP from A become current, all rental payments from a sublessee once again are payments to A. Finally, the lease provides that if the rents collected from a sublessee are insufficient to satisfy A's obligations under the lease with COOP, A remains liable for the deficiency. These provisions are enforceable under applicable state law.

During the taxable year, A defaulted on the obligation to pay maintenance fees, and COOP exercised its right to require B, C, and D to make all rental payments due to A directly to COOP. If the payments COOP receives from B, C, and D are not considered payments derived from tenan-stockholders, COOP will receive less than 80 percent of its gross income for the taxable year from tenant-stockholder sources.

LAW AND ANALYSIS

Section 216(a) of the Code allows a deduction in the case of a tenant- stockholder for amounts (not otherwise deductible) paid or accrued to a cooperative housing corporation within the taxable year, but only to the extent that those amounts represent the tenant- stockholder's proportionate share of real estate taxes and interest allowable as deductions to the corporation under sections 164 and 163, respectively.

Under section 216(b)(2), a tenant-stockholder is a person who is a stockholder in a cooperative housing corporation. Section 216(b)(1) (D) of the Code provides that a coooperative housing corporation must derive at least 80 percent of its gross income in the taxable year from tenant-stockholders

As a tenant-stockholder and lessee of COOP, A remains responsible for the maintenance fees on the residential units covered by A's leases even though the units may be subleased by A to other parties. The provision in the proprietary lease that requires sublesseess, under certain conditions, to pay their rent directly to COOP is in effect a collection mechanism, for the cooperative housing corporation to obtain maintenance fees owed to it from a tenant- stockholder.

The amounts B, C, and D paid to COOP are, as to them, rents owed to A with respect to residential units in COOP's building. On the other hand, COOP receives these amounts pursuant to a proprietary lease to satisfy, or partially staisfy, A's obligation to COOP as a tenant- stockholder. Therefore, the amounts COOP receives directly from B, C, and D in satisfaction of A's obligation are payments on behalf of A and constitute income to the corporation derived from tenant-stockholders within the meaning of section 216(b)(1)(D) of the Code.

The amounts COOP receives from B, C, and D are payments by lessees (B, C, and D) of the expenses of lessor (A) and therefore are includible in A's gross income under section 61 of the Code. See section 1.61-8(c) of the Income Tax Regulations. In addition, these amounts are deductible by A under applicable provisions of the Code to the extent they would have been deductible had A paid the amounts directly.DPA1The analysis of this ruling would be the same if the corporation collected the rental payments from the sublessees pursuant to a statute permitting or mandating the collection of rents from sublessees, instead of pursuant to the terms of the lease with the tenant-stockholder.

HOLDING

If a tenant-stockholder of a cooperative housing corporation defaults on maintenance fees required under a proprietary lease on a residential unit and, pursuant to the terms of the lease, the corporation receives rent payments due to the tenant-stockholder directly from a sublessee of the unit to apply toward that defaulted obligation, the payments received are considered income to the corporation derived from tenant-stockholders within the meaning of section 216(b)(1)(D) of the Code.

DRAFTING INFORMATION

The principal author of this revenue ruling is Brian J. O'Connor of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. O'Connor on (202) 566-4819 (not a toll-free call).

Rev. Rul. 92-60, 1992-2 C.B. 68, 1992-31 I.R.B. 5.