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A Ruling on Co-ops and Tax Deductions

December 11, 2005
NY Times

A RULING by a federal appeals court last month could increase income taxes for thousands of co-op owners, co-op lawyers and accountants say.

The ruling prevents co-op owners from deducting the portion of maintenance charges related to the co-op's property taxes when they calculate their alternative minimum tax.

While the decision puts co-op owners on an equal footing with owners of houses and condominiums for purposes of computing the minimum tax, co-op lawyers say that since many co-op owners took the deduction in previous years, they could be required to pay additional taxes - and interest - if those returns are audited.

"Thousands of co-op owners are going to be affected by this decision," said Ira Z. Kevelson, a Manhattan lawyer and tax accountant who represented the co-op owners in the case. "I have several hundred clients in my office alone who have been taking this position for years. And my firm is not unique."

The alternative minimum tax, he said, is a method of computing income taxes that was originally designed to prevent the wealthiest taxpayers from using tax deductions and credits to significantly reduce their tax liability Over the years, however, increasing numbers of middle-income taxpayers ha= ve become subject to the minimum tax, largely because the decades-old rule does not account for inflation.

Under the rules for calculating regular income taxes, Mr. Kevelson said, taxpayers deduct expenses like mortgage interest and property taxes to arrive at their taxable income. Under the minimum-tax rules, however, property taxes - and deductions like state and local income taxes and personal and dependent exemptions - must be added back to arrive at the taxpayer's alternative minimum taxable income. If the tax to be paid using this method is higher than that from the regular computation, the higher amount must be paid.

But accountants like Mr. Kevelson have taken the position that while tax laws clearly allow co-op owners to deduct an amount equal to their proportionate share of property taxes paid by the co-op, the laws for computing the minimum tax, they say, just as clearly do not require them to add back such amounts. That is because, they say, these amounts are not property taxes but are maintenance payments.

That was the position taken by Mr. Kevelson's clients in the case, entitled Ostrow v. Commissioner of Internal Revenue. In that case, he said, the Internal Revenue Service challenged a $10,489 deduction that Lauren Ostrow and her husband, Joseph Teiger, claimed on their 2001 tax return when calculating their alternative minimum taxable income. The amount was the portion of their maintenance charges related to real estate taxes paid by their co-op.

Mr. Kevelson, along with Marc Luxemburg, a Manhattan lawyer who filed a brief in the case on behalf of the Council of New York Cooperatives and Condominiums, maintained that the law does not require co-op taxpayers to add back such amounts, even though house and condo owners are required to restore property-tax deductions.

On Nov. 22, the United States Court of Appeals for the Second Circuit, affirming a lower court ruling, disagreed, saying that since Congress's intent was to treat co-op owners the same as other homeowners for tax purposes, co-op owners should have to add back the deductions.

Joel E. Miller, a Queens tax lawyer, said the ruling could result in affected taxpayers having to pay additional taxes, plus interest, for previous years. He said that under tax laws, the I.R.S. can go back at least three years to recalculate a taxpayer's liability and bill the taxpayer for any deficiency, plus interest. Mr. Kevelson said he plans to appeal.