Internal Revenue Code sec. 216 provides that “tenant-shareholders” of a housing cooperative may deduct from their personal taxes amounts paid to the co-op to cover their proportionate share of the co-op’s real estate taxes and interest obligation on debt used to acquire the building and land it sits on.  The term “housing cooperative” is defined to include several limitations, one of which is that the entity may have only one class of stock.

In this instance (apparently a new cooperative), each person purchasing a membership interest entitling them to occupy a housing unit will be allocated a proportionate share of the mortgage principal and interest of the cooperative.  When they join, each new member must make a minimum initial payment equal to a set percentage of their proportional share of the total cost of the facility.

Members have the option of making one of three levels of additional investments when they join.  These additional payments will be used to reduce the blanket mortgage on the property.  Members making additional payments will receive a corresponding reduction in the mortgage principle and interest obligation allocated to them.

Although they may make various initial investments, all members will have identical rights with respect to valuation, voting control, distributions, and liquidation.  And all members will have the same obligation to pay their monthly pro rata share of operating expenses.

The cooperative asked the IRS to rule that the highest payment tier (and by implication, the lower tiers) did not create a second class of stock in violation of sec. 216.  After quoting numerous provisions of sec. 216 and attending regulations, the IRS ruled as the cooperative had requested, that the payment tiers did not create additional classes of stock within the meaning of sec. 216 (PLR 200737036, released Sept. 14, 2007).

The full text of PLR 200737036 is posted on the IRS web site at http://www.irs.gov/pub/irs-wd/0737036.pdf.