Landmark Casts Doubt on IRS Position

Article excerpt

The IRS' continuing campaign to apply IRC Sec. 277 to the commercial rent and investment income of cooperative housing corporations may have run into a snag as a result of the Court of Claims decision in Landmark, Inc. and its Subsidiaries v. The U.S. (No. 375-87T).

In Landmark, issued on January 10, 1992, the Court of Claims found that Sec. 277 does not apply to a cooperative subject to the provisions of subchapter T, Secs. 1381-1388.

Since 1987, when it prevailed in Concord Consumers Housing Cooperative v. Commissioner, 83 T.C. 105 (1987)! the IRS has taken the position that cooperative housing corporations defined in Sec. 216 are membership organizations described in Sec. 277 and are precluded from using "membership deductions," such as losses generated by the housing operation, to offset "nonmember income," such as interest on reserve funds or commercial rentals.

In 1990, the IRS issued Rev. Rul. 90-36 that described how cooperatives were to allocate expenses between member and nonmember income. The ruling is based on the assumption that Concord established definitively that Sec. 277 applied to cooperative housing corporations.

The problem with the IRS' position is that the petitioner in Concord never established that it was either a cooperative housing corporation under Sec. 216 or a cooperative subject to the rules of subchapter T.

Citing this absence, the Tax Court, in a footnote, stated:

Accordingly, our opinion below will be limited to Se. 277 and its application to the facts of this case, i.e., to the only issue pleaded, tried, and briefed by the parties. We leave to another day any exploration of the possible interrelationship and full sweep of Secs. 216, 277 and subchapter T. (Concord Consumers, supra, at 106, note 3).

In a series of cases now before the Tax Court, the lines have been drawn with greater clarity. All the cases, starting with Trump Village Sec. 3 Inc. v. Commissioner, have been assigned to Judge Laurence J. Whalen. In these cases, the IRS concedes that the cooperatives are operating under Sec. 216. The cooperatives have generally taken the position that Sec. …