All the condo owners in a condo complex that was used only in a high-end commercial accommodation business leased their units to a manager for a share equalling 50% of the aggregate rental income (but with the municipal taxes and condominium fees for common services continuing to be borne by the co-owners directly).
After the manager ceased operations, the syndicate of co-owners took over the operation of the condominium complex, but because there was no working capital, the syndicate retained for a period of 120 days all the revenues generated by the operation of the condominium complex. Now, the syndicate of co-owners has raised a special assessment, corresponding to the amount of the overdue rental income, to serve as working capital for the operation of the commercial accommodation business. Is this special assessment of the taxpayer (one of the co-owners, and amounting in the taxpayer’s case to $7,000) deductible in computing income?
After noting that under this arrangement, the taxpayer had paid $7,000 by way of “compensation” (i.e., set-off), stated:
[N]o deduction or capitalization of the expense is allowed before the amount is expended by the syndicate of co-owners. … [P]repaid expenses or expenses that are paid before they are actually incurred are not deductible in computing a taxpayer's income.