Rev. Rul. 61-162

Advice has been requested whether the cost of stock in a corporation, qualifying as a cooperative housing corporation under section 216(b) of the Internal Revenue Code of 1954, represents an investment in such stock only, or whether a portion of the investment may be allocated to the tenant-stockholder's right to occupy an apartment in a building owned by such a corporation.

A taxpayer subscribed for and purchased stock in a corporation qualifying as a cooperative housing corporation under section 216(b) of the Code. At the same time the taxpayer and the corporation entered into an agreement termed a `proprietary lease' under which the taxpayer, as a stockholder, was entitled to the use of an apartment in the building owned by the corporation.

Although the majority of the tenant-stockholders of the corporation occupied their apartments for dwelling purposes, they were not obligated to do so. The instnat taxpayer, among others, subleased his apartment to a third person after the sublessee chosen was approved by the corporation.

Section 167(a) of the Code provides that as a general rule there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) of property used in the trade or business, or held for the production of income.

Section 216(b) of the Code defines a cooperative housing corporation as a corporation:

(A) having one and only one class of stock outstanding,

(B) each of the stockholders of which is entitled, solely by reason of his ownership of stock in the corporation, to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by such corporation.

(C) no stockholder of which is entitled (either conditionally or unconditionally) to receive any distribution not out of earnings and profits of the corporation except on a complete or partial liquidation of the corporation, and

(D) 80 percent or more of the gross income of which for the taxable year in which the taxes and interest described in subsection (a) are paid or incurred is derived from tenant-stockholders.

The corporation was the owner of the apartment building in question. The taxpayer contended, however, that he was the owner of a leasehold on an apartment and that he was entitled to depreciate or amortize a portion of his investment in the corporation, while his apartment was subleased, as an amount paid for a leasehold.

When the taxpayer paid money to the corporation in return for stock of the corporation, he established a basis in the stock for tax purposes. He was entitled to the occupancy or use of the apartment as a dwelling solely by virtue of the fact that he owned the stock, and upon disposing of the stock his rights would terminate. Since the right to occupy an apartment was conditioned upon continued ownership of the stock, it was inseverable therefrom, and the taxpayer established no tax basis in his rights with respect to the apartment as distinguished from the stock.

For tax purposes, the taxpayer is in the same position as any other owner of stock in a corporation except insofar as he is able to qualify for the deduction provided by section 216 of the Code with respect to real estate taxes and interest paid or incurred by the corporation during the taxable year. The fact that the taxpayer chose to sublease his apartment rather than occupy it himself does not change the nature of the property in which he invested.

Accordingly, it is held that the entire cost of stock in a corporation, qualifying as a cooperative housing corporation under section 216(b) of the Code, represents an investment in such stock only, and no part of the investment may be allocated to the tenant-stockholder's right to occupy a dwelling unit which was acquired with such stock. Therefore, the instant taxpayer may not depreciate or amortize any portion of his investment in the stock of the cooperative as an amount allocable to his right to occupy an apartment in the building owned by such corporation.