Court Nixes Unit Owners Income Tax Deductions For Payments To Replace Collapsed 150-Foot Section Of 800-Foot Long, 75-Foot High Retaining Wall Supporting 575-Unit NYC Co-Op Housing Complex; Based On Engineering Reports, Judge Attributes Casualty To Progressive Deterioration Over 20-Year Period, Not Singular Event; Excessive Rainstorms Over 5 Month Period That Triggered Incident Merely A Contributing Factor

In the Washington Heights section of Upper Manhattan, CPA Practice Advisor reports:

• Suppose that your personal residence is substantially damaged and will cost you tens of thousands of dollars to fix. Is the repair cost deductible on your tax return as a casualty loss? It doesn’t always seem fair, but it depends on whether the damage was caused by a singular event or gradual deterioration over time.
  
  ***
  The taxpayer in the new case is a tenant-stockholder of Castle Village Owners Corp., a [575-unit] cooperative housing corporation in Manhattan. Castle Village owns a tract of land, which includes five high-rise residential buildings. The grounds were supported by a retaining wall of stone masonry construction that was built between 1921 and 1925.
  
  In 1985, Castle Village retained an engineer to inspect retaining wall. In a letter to Castle Village, the engineer indicated that a portion of the retaining wall showed signs of movement and instability and that several cracks were observed and relief drains weren’t functioning properly. For the next 20 years, various engineering and architectural firms addressed a number of issues relating to the retaining wall.(1)
  
  On May 12, 2005, a 150-foot portion of the wall collapsed.(2) The consultants whom Castle Village had retained over the previous 20 years had reported their findings about the retaining wall in numerous letters, reports, proposals, and/or memoranda sent to Castle Village. Most of the major problems those consultants had observed and described in those documents were observed in and around the 150-foot section of the retaining wall that collapsed.(3)
  
  Appearing before the Tax Court, the taxpayer stated that the cause of the collapse of the retaining wall was excessive rainfall during the months of January through May 2005. She said the rainfall overstressed the recently installed drainage system and caused rapidly accelerating movement in the wall in the four weeks immediately preceding the collapse. Thus, the taxpayer argued she was entitled to a casualty loss deduction. After applying the limits, she deducted $23,188 on her 2005 tax return.
  
  But the Tax Court disagreed with the taxpayer. According to the Court, the cause of the collapse of the retaining wall was due to a progressive deterioration in and around that wall that had begun at least 20 years before the collapse on May 12, 2005. Although the spring 2005 rainfall and the 2004 drainage modifications may have been contributing factors, they didn’t cause the collapse.

For the story, see Casualty Loss Deduction Collapses in Tax Court.

For the court ruling, see Alphonso v. Commissioner, T.C. Memo. 2016-130 (U.S. Tax Court, July 14, 2016).

-----------------------

(1) See generally, Board of Inquiry Report – Castle Village Retaining Wall Collapse, New York City Department of Buildings (April 2007).

See also, Report: Retaining wall collapse along Henry Hudson Parkway could have been prevented.

(2) See The New York Times:

• Wall Collapses Onto a Busy Manhattan Highway,
• New Wall Is Finished; Legal Debris Remains ("[n]early 29 months later, the replacement wall was completed at a cost of $23 million, even though one lane of the northbound parkway and an entrance ramp remained closed and fenced off").

(3) Ibid., footnote 1.