Castle Village residents score court victory

Shareholders can take tax deductions after paying $25M to repair collapsed retaining wall
By David Jones | February 07, 2013 05:30PM

UPDATED, 11:17 a.m., Feb. 8: Residents at Castle Village — the 589-unit cooperative on Manhattan’s Upper West Side — won a major victory yesterday when a federal appeals court ruled that they qualify for tax deductions after paying roughly $25 million for repairs from the collapse of the complex’s retaining wall in 2005. Residents at the Washington Heights complex were assessed at least $25,000 each to cover repairs after a 75-foot retaining wall at the building spilled onto the Henry Hudson Parkway in an incident that brought traffic to a halt and sent TV cameras and emergency crews rushing to the scene. 

Yesterday’s ruling, which was made by a three-judge panel, overturned a prior decision by the U.S. Tax Court that denied the deductions.

The suit was originally filed by Castle Village tenant-shareholder Christina Alphonso in 2008. It was lodged after the Internal Revenue Service denied tax deductions to residents who were given legal advice to take “casualty losses” on their federal income tax returns upon getting hit with costly assessments

The IRS argued that Castle Village shareholders only had the right to deduct for property damage in their own units, not for the shared retaining wall. In 2011, the Tax Court sided with the IRS. But Alphonso argued that as a shareholder she not only owned her apartment, but also had ownership rights to the property’s common areas.

“That’s enough of a proprietary interest to sustain the deduction,” said attorney Eric Levine, from Manhattan-based Wolf Haldenstein, which appealed the case to the three-judge Second Circuit panel.

The Alphonso decision is considered a test case in the Castle Village saga, according to Levine. He said the decision will apply to more than 200 other lawsuits that were filed in this case.

While the panel ruled on the shared-property portion of the case, there are numerous other issues that could impact the ultimate decision on whether residents will be able to take full tax deductions. For example, it has yet to be determined whether the incident was due to long-term wear-and-tear of the retaining wall or if it was due to a single event.

Levine added that yesterday’s decision could also have implications for Superstorm Sandy victims. He said it paves the way for residents who were forced to help pay for damages at other New York co-ops the right to deduct those expenses from their federal tax returns.

“It’s obviously very good for us at Castle Village and I also think it’s good for co-ops across the city,” said Katherine Alsdorf, president of the board.

A spokesperson for the IRS said the agency does not comment on court cases.