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Statement Presented by

Brewster Ives

September 26, 1969

Proposed Section 302, Allocation of Deduc-
tions, is an unreasonable attempt to limit
allowable deductions because of source of
payment. It will cause serious financial
reverses to cooperative apartment home
ownership and result in further problems
for our beleaguered cities.

It should be made clear that proposed Section
221, Limitation on Interest, is not applicable
to interest on loans taken to purchase or
carry cooperative apartments and to the deduc-
tion now allowed under Section 216(a)(2), IRC.

TENANT-OWNED APARTMENT ASSOCIATION, INC.

CONCERNING HR 13270

PREPARED FOR PRESENTATION AT A HEARING

OF THE UNITED STATES SENATE

WASHINGTON, D.C.

by

BREWSTER IVES

SEPTEMBER 26, 1969

I appear on behalf of the Tenant-Owned Apartment Association, Inc. which represents 218 buildings and more than 2,200 cooperative apartment owners in the New York metropolitan Our Association is devoted to the welfare of cooperative projects and the furtherance of responsible home ownership in urban areas. We wish to comment on Section 302, relating to allocation of deductions, and Section 221, relating

area.

to deduction of interest.

Section 302

We do not believe that the treatment provided by Section 302 is proper. As stated in the Report of the House Committee on Ways and Means (Part 1) (at page 82), Section 302 is intended to disallow expenses on the theory, and to

the extent, that they may reasonably be assumed to have been met out of tax-free income. The expenses subject to allocation are personal expenses (e.g., medical expenses, interest and real estate taxes in respect of residences) which cannot be considered as costs of earning tax-free income. Hence, a partial disallowance was thought to be appropriate because tax-free income was deemed to constitute the cash source for

the payment of these expenses.

Consistently with this approach,

the disallowance of these expenses under Section 302 is roughly in proportion to the tax-free income.

We respectfully submit that the proposed treatment is improper for two reasons. First, it assumes that the source of payment of the personal expenses in question is solely out of income, and not to any extent out of capital. Since such expenses are not costs of earning income, taxable or otherwise, this assumption is without basis. However, even if it is assumed that the source of payment is solely out of income, this would provide no sufficient reason for disallowance of the expenses, because the source of payment of an expense is irrelevant to its deductibility. Indeed, if Section 302 were enacted,

it would constitute the sole example of which we are aware in the entire Internal Revenue Code where the source of a payment

determines its allowability as a deduction.

Personal expenses

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