Rev. Rul. 71-49

Advice has been requested whether tax equivalency payments made to the New York City Educational Construction Fund (the Fund) by a cooperative housing corporation are real estate taxes allowable as a deduction to the corporation under section 164 of the Internal Revenue Code of 1954, and therefore deductible by tenant-stockholders under section 216 of the Code in the amount that represents the stockholders' proportionate share of such payments.

The Fund was created by Act of the New York State Legislature in 1966 as a public benefit corporation. As part of its program, the Fund contemplated the construction of high-rise structures on air rights or air space above school structures. Some of these high-rise structures were leased on a long-term basis to cooperative housing corporations.

While the cooperative housing corporations involved are taxable corporations that finance the construction of the housing portion of the structures, they do not have title to the property.

Section 468 of the Education Law of the State of New York provides, in part, as follows:

1. It is hereby declared that the creation of the fund and the carrying out of its corporate purposes is in all respects for the benefit of the people of the city and state of New York and for the improvement of their health, safety, welfare and security and is a public purpose and the fund shall be regarded as performing a governmental function in the exercise of the powers conferred upon it by this article.

2. The monies and properties of the fund, including all properties constructed, acquired, reconstructed, rehabilitated or improved by it or on its behalf and all properties under its jurisdiction, control or supervision, and all of its operations and activities shall be exempt from taxation.

Section 460, subdivision 2b of the Education Law provides:

Whenever the easements, space rights, air rights or other fee or leasehold interests held or retained by such owner or developer, if other than the New York City housing authority, and/or the non-school improvements constructed or erected therein or thereon, shall be exempt from real property taxes pursuant to the provisions of section four hundred sixty eight of this article, such lease, sublease or other agreement shall also provide for the payment to the fund of annual or other periodic amounts equal to the amount of real property taxes that would otherwise have been paid or payable with respect to such easements, space rights, air rights or other fee or leasehold interests, and with respect to the non-school improvements constructed or erected therein or thereon, over the term of such lease, sublease or other agreement.

The foregoing provision was designed to furnish the Fund with the monies necessary to meet debt service on obligations which it would issue for the purpose of obtaining monies to pay the cost of construction of the school portion of the combined occupancy structure. Therefore, instead of the City of New York collecting the real estates taxes on the space rights covered by the leasehold and then paying a rental to the Fund in an amount sufficient for it to meet its obligations, a direct tax equivalency payment was utilized.

Section 216 of the Code provides that a tenant-stockholder in a cooperative housing corporation shall be allowed a deduction for amounts paid or accrued to the corporation within his taxable year representing his proportionate share of real estate taxes paid or incurred by the corporation. To be proportionately deductible by the tenant-stockholders, such taxes must be allowable as a deduction to the corporation under section 164 of the Code.

Section 164(a)(1) of the Code provides that except as otherwise provided in this section, state, local and foreign real property taxes shall be allowed as a deduction for the taxable year within which paid or accrued. Section 1.164-3 of the Income Tax Regulations defines real property taxes to mean taxes imposed on interests in real property that are levied for the general public welfare. Assessments for local benefits are not treated as real property taxes. See section 1.164-4 of the regulations.

For purposes of determining whether the payments made by the cooperative to the Fund are taxes within the meaning of section 164 of the Code, the fact that these payments are designated as payments in lieu of real property taxes under section 460 2b of the Education Law is not determinative. See Rev. Rul. 61-152, C.B. 1961-2, 42.

Whether a particular charge falls into the category of a tax depends upon its real nature. If it is in the nature of a tax, it is not material that it is called by a different name.

The word "taxes" as used in the statute is nowhere defined in the Code, and it must be "given its ordinary and commonly accepted meaning as established by judicial decisions." See United Gas Improvement Company v. Commissioner, 25 B.T.A. 1382 (1932), Aff'd. 64 Fed. 2d 957 (1933), Ct. D. 733, C.B. XII-2, 207 (1933). A tax has been defined as an enforced contribution, exacted pursuant to legislative authority in the exercise of the taxing power, and imposed and collected for the purpose of raising revenue to be used for public or governmental purposes. Revenue Ruling 61-152, C.B. 1961-2, 42.

Ordinarily, when amounts are paid into a specific fund, they are treated as imposed as a regulatory measure (such as licensing fees), or as a charge for a privilege or service rendered. The tax equivalency payments in the instant case cannot be so treated. They are not exacted for the purpose of regulating or restraining an occupation deemed dangerous to the public, nor are they imposed as a charge for a privilege or service rendered. They are charges imposed on the cooperative housing corporation in order to obtain revenue the city would otherwise lose because of its treatment of the Fund as a tax-exempt public benefit corporation.

The tax equivalency payments are measured by and are equal to the amounts imposed by the regular taxing statutes, and are themselves imposed by specific state statute even though the vehicle of the leasing agreement is utilized. Although the proceeds from these payments are paid directly to the Fund instead of the state's general revenue fund, they are nevertheless designated for a public purpose rather than for some privilege, service, or regulatory function, or for some other local benefit tending to increase the value of the property upon which the payments are made.

Accordingly, the tax equivalency payments made to the New York City Educational Construction Fund by the cooperative housing corporation are real estate taxes allowable as a deduction to the corporation under section 164 of the Code. These payments are therefore deductible by each tenant-stockholder under section 216 of the Code in the amount that represents the stockholder's proportionate share of such payments.