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Mortgage Interest Tax Deduction

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					Bruce Alan Danford, Esq.                                                              BruceDanford.com


                                             April 2, 2010

  Home Mortgage Interest Deduction When The Payments Are Made By Someone Other
                        Than The Obligor On The Mortgage

         Recently I have run into several instances of where the payments on a home mortgage were
made by a party other than the mortgage debtor. The question becomes, who gets the interest
deduction? Fortunately, this is a question which has been addressed by the Courts and under the
circumstances discussed below there is an answer under current law. This article is not meant to be
taken as a definitive answer but is offered as mere discussion of current law. The law can change due
to legislative action or judicial decision and therefore, the advice of an attorney, C.P.A. or a Tax
Practitioner conversant in this area should always be sought before taking any action.

                                                ISSUE

       Who is entitled, if anyone, to take the income tax home mortgage interest deduction where
the mortgage is in one name but the payments are made by another.

                                   LAW AND EXPLANATION

         The general rule under the Internal Revenue Code as found in 26 U.S.C.A. §163(a) is “There
shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.”
26 U.S.C.A. §163(a). From this point forward I will use the less formal reference method of referring
to Title 26 of the U.S.C.A. as I.R.C. (Internal Revenue Code) followed by the code section. The
general rule is then narrowed by I.R.C. §163(h)(1) which states “In general – In the case of a
taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal
interest paid or accrued during the taxable year.” I.R.C. §163(h)(1). The general denial of the
deductibility of personal interest is then modified to permit the deduction of interest from any
qualified residence interest. I.R.C. §163(h)(2)(D).

        “Qualified residence interest” is defined in I.R.C. §163(h)(3)(A) as any interest which is paid
or accrued during the taxable year on acquisition indebtedness or home equity indebtedness with
respect to any qualified residence of the taxpayer. I.R.C. §163(h)(3)(A). The restriction of a qualified
residence of the taxpayer is defined in I.R.C. §163(h)(4)(A) as being the principal residence of a
taxpayer and one other residence of the taxpayer. I.R.C. §163(h)(4)(A).

         The Internal Revenue Code therefore permits the deduction of interest by a taxpayer on a
mortgage paid by them on the mortgage for the house which is their residence. This is further
clarified in Internal Revenue Service Regulation (“I.R.S. Reg.”) §1.163-1 which states “Interest paid
by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even
though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be
deducted as interest on his indebtedness.” I.R.S. Reg. §1.163-1(b). The “indebtedness” for purposes
of I.R.C. §163 must be, in general, that of the taxpayer and not of another. Golder v. Commissioner,
604 F.2d 34, 35 (9 th Cir.1979).

       In 1997 the Internal Revenue Service (“I.R.S.”) sought to contest the deductibility of interest
paid on a mortgage because the taxpayer had no legal obligation on the debt. Uslu v. C.I.R. , 1997
WL 770235 (U.S.Tax Ct.) (U.S.Tax Ct.,1997) The Court found that because the taxpayers were
Bruce Alan Danford, Esq.                                                            BruceDanford.com


equitable owners and had shown they were liable to the debtors of the mortgage to pay the
mortgage they were entitled to the deduction of the interest.

       “The Court is satisfied, from all the evidence presented, that petitioners have
       continuously treated the Alisal property as if they were the owners, and that they,
       exclusively, held the benefits and burdens of ownership thereof. On this record, the
       Court holds that petitioners established equitable and beneficial ownership of the
       Alisal property, and that they were liable to Haluk and Aysun in respect of the
       mortgage indebtedness. As such, the Court holds that petitioners are entitled to a
       deduction for the $18,980 home mortgage interest paid by them during 1992.” Uslu
       v. C.I.R., 1997 WL 770235, 5 (U.S.Tax Ct.) (U.S.Tax Ct.,1997).

        The two critical factors to glean from this decision are the equitable ownership and an
obligation on a debt, whether the debt is that of the obligor under the mortgage itself or another
party who has in effect assumed the liability of the obligor under the mortgage.

         In a 2002 case, Hackley v. C.I.R. L 1825348, (U.S.Tax Ct.,2002), the Court upheld the
criteria established in Uslu of the two critical factors by specifically denying the deduction to the
taxpayer, Hackley. The taxpayer failed to establish his equitable ownership of the property. Hackley
v. C.I.R. L 1825348, 3 -4 (U.S.Tax Ct.,2002)

       In the instant case, the record establishes that during the years in issue Ms. Orum,
       and not petitioner, was (1) the legal owner of the LA property and (2) indebted to
       Countrywide on the mortgage loan it had made on the property. Although we find
       that petitioner may have made mortgage payments, real estate tax payments, and
       insurance premium payments for the LA residence, there is no objective evidence to
       persuade us that he had equitable ownership of the LA residence during the years in
       issue. The record lacks sufficient evidence, most notably Ms. Orum's testimony, of
       the purported arrangement with petitioner. Further, petitioner testified that Ms.
       Orum made no deposits into their joint checking account, where all mortgage,
       insurance, and real estate tax payments were made. His testimony, without more, is
       insufficient. See Loria v. Commissioner, T.C. Memo.1995-420 (taxpayer's attempt to
       establish equitable ownership with his sole testimony is insufficient).

       Based upon our examination of the entire record in this case, we find that petitioner
       failed to establish that he was the equitable owner of the LA property during the
       years in issue, or that he is entitled to deduct for those years the mortgage loan
       interest he paid on that property. We therefore sustain respondent's determination
       disallowing the mortgage loan interest deductions that petitioner claimed on his 1995
       and 1996 returns. Hackley v. C.I.R., L 1825348, 3 -4 (U.S.Tax Ct.,2002)

                                          CONCLUSION

       If a taxpayer wishes to deduct interest payments on their tax return made on the debt of
another the taxpayer would be well advised to show through documentation two facts:

   1. An equitable ownership in the property whether by a purchase agreement, quit claim deed,
      or some other documentation showing they have a claim upon the property.
Bruce Alan Danford, Esq.                                                             BruceDanford.com




   2. The taxpayer has a legal obligation to pay the mortgage. Once again a written document
      signed and even notarized that would be enforceable in a Court to compel the taxpayer to
      make a payment would be desirable.

        It should be noted there was very little documentation showing the above factors in Uslu.
However, the weight given any evidence is up to the trier of the facts. Oral testimony may not be
given as much weight as written documents depending upon the Judge or the Jury in any court case.

       There may be gift tax issues which would need to be addressed as well as possible questions
of income due to debt relief.

This article is meant to be an informative discussion of current tax law and is not being offered as
tax advice. An attorney, C.P.A., or a tax practitioner conversant in these questions should be
consulted with prior to taking any action.


                                                       Sincerely,

                                                       Bruce Alan Danford, Esq.


Enclosure
       Uslu v. C.I.R. , 1997 WL 770235 (U.S.Tax Ct.) (U.S.Tax Ct.,1997)
       Hackley v. C.I.R., L 1825348, 3 -4 (U.S.Tax Ct.,2002)
Bruce Alan Danford, Esq.                                                              BruceDanford.com




                                  United States Tax Court.
                             Saffet and Ana USLU, Petitioners,
                                             v.
                       COMMISSIONER of Internal Revenue, Respondent.
                                        No. 9317-96.

                                           Dec. 16, 1997.

Saffet and Ana Uslu, pro se.

Timothy F. Salel, for respondent.

                                    MEMORANDUM OPINION

COUVILLION, Special Trial Judge:
                                                         FN1
*1 This case was heard pursuant to section 7443A(b)(3)         and Rules 180, 181, and 182.

Respondent determined a deficiency of $2,869 in petitioners' Federal income tax for 1992.

Following settlement of various issues by the parties, the sole issue for decision is whether
petitioners are entitled to a deduction for qualified residence interest under section 163(a). FN2

Some of the facts were stipulated, and those facts, with the annexed exhibits, are so found and are
incorporated herein by reference. At the time the petition was filed, petitioners' legal residence was
Covina, California.

Saffet Uslu (petitioner husband) immigrated to the United States from Turkey and, during the early
1980's, studied for a graduate degree in petroleum engineering at the University of Southern
California (USC). In 1983, while petitioner husband was attending graduate school, petitioner
husband's brother, Haluk Uslu (Haluk), immigrated to the United States from Turkey and lived with
petitioner husband. As an immigrant, Haluk was unable to open a bank account in his na me.
Petitioner husband and Haluk opened a joint checking account (joint account) at California Federal
Bank. Both petitioner husband and Haluk deposited money into and wrote checks out of this joint
account.

Upon receiving his graduate degree from USC, petitioner husband returned to work briefly in
Turkey. After working in Turkey for approximately 1 year, petitioner husband returned to the
United States and began working in areas other than the field of engineering. Petitioner husband
married Aria Uslu (petitioner wife), and two children were born of their marriage. During the year at
issue, petitioner husband was employed as a real estate broker, and petitioner wife was employed as
a registered nurse. In 1989, Haluk married Aysun S. Aslancirit (Aysun), and, at the time of his
marriage, Haluk ceased making deposits into or writing checks out of the joint account. Petitioners
assumed this account as their own.

In 1990, petitioners' unfortunate financial situation forced them to file for a Chapter 7 bankruptc y.
Shortly thereafter, through petitioner husband's work as a real estate broker, petitioners located a
Bruce Alan Danford, Esq.                                                              BruceDanford.com


house that they desired to purchase as a residence. The house was located at 733 East Alisal Street in
Covina, California (Alisal property). Because of their bankruptcy and poor credit rating, petitioners
were unable to qualify for financing to purchase the Alisal property. Petitioner husband discussed
this problem with Haluk, and the two agreed that Haluk and his wife, Aysun, would obtain
financing, in their names, for the purchase of the Alisal property, and that legal title to the property
would be transferred to Haluk and Aysun. They further agreed that, upon the purchase of the Alisal
property, petitioners and their children would occupy the Alisal property, and petitioners would
make all mortgage payments on the property as well as paying all expenses for repairs, maintenance,
and improvements. Basically, they agreed that Haluk and Aysun would execute documents necessary
to procure title to and financing for the Alisal property, and petitioners would exclusively occupy the
property and perform all the obligations pursuant to ownership of the property, financial and
otherwise. All of these agreements were oral but are undisputed.

*2 On April 9, 1990, a Grant Deed was issued to Haluk and Aysun for the Alisal property. Initially,
the Alisal property was sold by an assumption of the existing mortgage on the property. Petitioners
made mortgage payments directly to the mortgagee. In October 1990, Haluk and Aysun refinanced
the loan, and, pursuant thereto, a Deed of Trust was executed on October 5, 1990, listing Haluk and
Aysun as borrowers. The Deed of Trust was in the amount of $202,500 and was in favor of
Southern California Federal Savings and Loan Association (Southern California Federal). The Deed
of Trust on the Alisal property served as security for the loan. Due to extensive repairs needed on
the Alisal property, petitioners and their children were unable to occupy the property until June
1991.

Nevertheless, petitioners made all the required mortgage payments to Southern California Federal,
with respect to the Alisal property, from the commencement of the mortgage up until trial of this
case, including the entire year at issue. During 1992, petitioners paid a total of $18,980 to Southern
California Federal as interest on the mortgage of the Alisal property. Petitioners also paid all repairs,
improvements, and maintenance on the Alisal property since the time of its purchase in 1990. Up to
the date of trial, Haluk and Aysun had never occupied the Alisal property; they never made any
payments on the Alisal property, either as to mortgage, repairs, maintenance, improvements, or
otherwise, and they never agreed to or ever intended to spend their money on the property.

On their Federal income tax return for 1992, petitioners claimed on Schedule A, Itemized
Deductions, a deduction of $18,980 for home mortgage interest, representing the mortgage interest
paid on the Alisal property during 1992. In the notice of deficiency, respondent disallowed the home
mortgage interest deduction for the reason that “The interest expense you claimed is not deductible
since you are not legally liable for the debt.” Haluk and Aysun did not claim a Federal income tax
deduction for the Alisal property mortgage interest for the year 1992, nor did they ever claim
deductions on their tax returns for interest or taxes attributable to this property.

The determinations of the Commissioner in a notice of deficiency are presumed correct, a nd the
burden is on the taxpayer to prove that the determinations are in error. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933). Moreover, deductions are a matter of
legislative grace, and the taxpayer bears the burden of proving entitlement to any claimed deduction,
and that such deduction fits squarely within the ambit of the statute providing the deduction. New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348 (1934).

Section 163(a) provides that there shall be allowed as a deduction all interest paid or accrued within
Bruce Alan Danford, Esq.                                                             BruceDanford.com


the taxable year on indebtedness. Section 163(h)(1), however, provides that, in the case of a taxpayer
other than a corporation, no deduction shall be allowed for personal interest paid or accrued during
the taxable year. Section 163(h)(2) defines “personal interest” to mean any interest allowable as a
deduction other than, inter alia, “any qualified residence interest”. Sec. 163(h)(2)(D). Thus, qualified
residence interest is deductible under section 163(a). The term “qualified residence interest” is
defined, in pertinent part, in section 163(h)(3)(A)(i), as any interest paid or accrued during the
taxable year on “acquisition indebtedness with respect to any qualified residence of the ta xpayer”.
The parties do not dispute that the Alisal property was petitioners' qualified residence. The dispute is
whether petitioners' payments constituted interest on “acquisition indebtedness” with respect to the
Alisal property.

*3 The “acquisition indebtedness” in section 163(h)(3)(A)(i) must, in general, be an obligation of the
taxpayer and not an obligation of another. See Golder v. Commissioner, 604 F.2d 34, 35 (9th
Cir.1979), affg. T.C. Memo.1976-150;Smith v. Commissioner, 84 T.C. 889, 897, 1985 WL 15350
(1985), affd. without published opinion 805 F.2d 1073 (D.C.Cir.1986); Hynes v. Commissioner, 74
T.C. 1266, 1287, 1980 WL 4535 (1980). However, section 1.163-1(b), Income Tax Regs., provides,
in pertinent part:

Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable
owner, even though the taxpayer is not directly liable upon the bond or note secured by such
mortgage, may be deducted as interest on his indebtedness. * * *

In Golder v. Commissioner, supra, the Court of Appeals for the Ninth Circuit, to which an appeal in
this case would generally lie, indicated that section 1.163-1(b), Income Tax Regs., allows the
deduction of interest by the taxpayer, even though the taxpayer is not personally liable for the
mortgage as, for example, where the mortgage is nonrecourse, or where the taxpayer purchases
property subject to a mortgage. In such situations, although the taxpayer is not directly liable on the
debt, since the mortgage creditor may look only to the mortgaged property for payment, and the
taxpayer stands to lose the property if the mortgage is not paid, the taxpayer must pay the mortgage
to avoid foreclosure. Thus, section 1.163-1(b), Income Tax Regs., recognizes the economic
substance of nonrecourse borrowing and allows an interest deduction to a taxpayer, who, in the
situations contemplated in that regulation, is not directly liable on the mortgage indebtedness.

Respondent contends that petitioners may not deduct the subject mortgage interest payments
because they had no legal obligation to Southern California Federal with respect to such mortgage.
Respondent cites Golder v. Commissioner, supra, for the proposition that section 1.163-1(b),
Income Tax Regs., does not create an exception to the rule of section 163(a) that interest is
deductible only with respect to the indebtedness of the taxpayer. In other words, respondent
contends that section 1.163-1(b), Income Tax Regs., applies only to situations in which the taxpayer
has procured nonrecourse debt, and does not apply to a situation, such as in the instant case, where
a person other than the taxpayer is legally obligated on a mortgage. Respondent also cites Loria v.
Commissioner, T.C. Memo.1995-420, and Song v. Commissioner, T.C. Memo.1995-446, in which
this Court held that the taxpayers could not deduct mortgage interest payments made by them on
residences of which legal title was held by a sibling of the taxpayer. These cases, however, are
distinguishable from the instant case.

In Golder v. Commissioner, supra, the taxpayers were guarantors of a debt of their corporation,
which debt was also secured by the taxpayers' home. The Court of Appeals for the Ninth Circuit
Bruce Alan Danford, Esq.                                                            BruceDanford.com


held that the indebtedness in that case was not that of the taxpayers but, rather, was that of the
corporation, and that the taxpayers had merely guaranteed that debt. That is not the situation in this
case.

*4 In Loria v. Commissioner, supra, and Song v. Commissioner, supra, the taxpayers made mortgage
payments on residences upon which legal title was held in each case by the taxpayer's brother. In
both cases, the taxpayer's brother was also indebted to a third party commercial mortgage lender in
connection with such residence. In both cases, the Court denied mortgage interest deductions to the
taxpayers for the reason that the taxpayers had failed to prove that they held any equitable or
beneficial ownership in the residences. In the cases relied on by respondent, the Court held that the
subject indebtedness was not that of the taxpayer, and that the taxpayer did not have an ownership
interest in the mortgaged property.

In the instant case, petitioners' agreement with Haluk and Aysun coupled with petitioners' continued
occupancy of the Alisal property and the performance by petitioners of all of the obligations under
the Alisal property mortgage are sufficient to render petitioners' obligation to pay off the mortgage,
an enforceable debt, to Haluk and Aysun for the amount of the mortgage at the interest rate
specified in the mortgage. See Amundson v. Commissioner, T.C. Memo.1990-337;Belden v.
Commissioner, T.C. Memo.1995-360. On this record, the Court finds that the mortgage payments
made by petitioners to Southern California Federal with respect to the Alisal property were, in
effect, payments of principal and interest to Haluk and Aysun. See id. In other words, the payments
by petitioners constituted payments on an indebtedness of petitioners.

To be sure, as required by section 1.163-1(b), Income Tax Regs., the taxpayer must be the “legal or
equitable owner” of the property. Where the taxpayer has not established legal, equitable, or
beneficial ownership of mortgaged property, this Court has disallowed the taxpayer a deduction for
the mortgage interest. See Bonkowski v. Commissioner, T.C. Memo.1970-340, affd. 458 F.2d 709
(7th Cir.1972); Song v. Commissioner, supra.

Legal title to the Alisal property was held in the names of Haluk and Aysun during 1992.
Nevertheless, since the time of the purchase of the Alisal property, petitioners have made each and
every mortgage payment on the property and have paid all expenses for repairs, maintenance, and
improvement in connection with such property from their own income. The real property taxes and
insurance on the Alisal property were paid from an escrow account at Southern California Federal
that was funded with a portion of petitioners' mortgage payments. Furthermore, petitioners and
their children have been the sole occupants of the Alisal property since the time of its purchase in
1990.

Haluk and Aysun have made no payments, either directly or indirectly, in connection with the Alisal
property for the mortgage, repairs, maintenance, or otherwise. They have not acted in such a manner
that would be consistent with an ownership interest in the Alisal property. Haluk and Aysun have
made no claim of ownership interest in the Alisal property since the time of its purcha se.
Furthermore, Haluk testified at trial that the sole reason he and Aysun procured legal title to the
Alisal property and obtained a mortgage loan secured by such property was to assist petitioners in
obtaining the Alisal property for petitioners' residence. Additionally, during 1995, Haluk and Aysun
executed a quitclaim deed transferring legal title to the Alisal property to petitioners. FN3 This
quitclaim deed, however, was not recorded. At trial, Haluk testified unequivocally that, even though
he and Aysun recognized their liability on the indebtedness, if he and Aysun were ever called upon
Bruce Alan Danford, Esq.                                                            BruceDanford.com


to pay the indebtedness (arising from a default by petitioners), they would look to petitioners for
payment of whatever amounts that Haluk and Aysun paid to the mortgage lender. The Court is
satisfied that, should that situation ever arise, Haluk and Aysun would have a cause of action against
petitioners.

*5 The Court is satisfied, from all the evidence presented, that petitioners have continuously treated
the Alisal property as if they were the owners, and that they, exclusively, held the benefits and
burdens of ownership thereof. On this record, the Court holds that petitioners established equitable
and beneficial ownership of the Alisal property, and that they were liable to Haluk and Aysun in
respect of the mortgage indebtedness. As such, the Court holds that petitioners are entitled to a
deduction for the $18,980 home mortgage interest paid by them during 1992.

Decision will be entered under Rule 155.

       FN1. Unless otherwise indicated, section references are to the Internal Revenue Code in
       effect for the year at issue. All Rule references are to the Tax Court Rules of Practice and
       Procedure.

       FN2. The parties agreed to the following: (1) Petitioners are entitled to an automobile
       expense deduction of $2,559 on the Schedule C of petitioner husband; (2) petitioners are not
       entitled to a repair expense deduction of $908 claimed on the Schedule C of petitioner
       husband; (3) petitioners are not entitled to deduct $1,550 of the $2,509 meals and
       entertainment expense deduction claimed on the Schedule C of petitioner husband; (4)
       petitioners are not entitled to deduct $1,802 of the $5,267 “other expenses” claimed on the
       Schedule C of petitioner husband; (5) petitioners are not entitled to deduct “other expenses”
       of $1,254 claimed on the Schedule C of petitioner wife; and (6) petitioners are entitled to an
       additional self-employment tax deduction of $120 due to a change in net earnings from self-
       employment resulting from the aforementioned adjustments. The remaining adjustments to
       petitioners' child and dependent care credit and to petitioners' itemized deductions for
       charitable contributions and unreimbursed employee business expenses are computational
       and will be resolved by the Court's holding on the mortgage interest deduction issue.

       FN3. The face of this quitclaim deed stated that it was “Ratified 4/9/90”, which the Court
       surmises was intended to make the quitclaim deed retroactive to the date of the initial
       purchase of the property.

U.S.Tax Ct.,1997.
Uslu v. C.I.R.
T.C. Memo. 1997-551, 1997 WL 770235 (U.S.Tax Ct.), 74 T.C.M. (CCH) 1376, T.C.M. (RIA)
97,551, 1997 RIA TC Memo 97,551
Bruce Alan Danford, Esq.                                                             BruceDanford.com




PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY
NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.

                                 United States Tax Court.
                            Hilton H. HACKLEY, Petitioner
                                            v.
                   COMMISSIONER OF INTERNAL REVENUE, Respondent
                                     No. 4924-00S.

                                            March 1, 2002.
Hilton H. Hackley, pro se.

Angelique M. Neal, for respondent.

GOLDBERG, J.

 This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be entered is not reviewable by any other
court, and this opinion should not be cited as authority. Unless otherwise indicated, subsequent
section references are to the Internal Revenue Code in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.

 Respondent determined deficiencies in petitioner's Federal income taxes for the taxable years 1995
and 1996 of $5,163 and $3,178, respectively, and penalties under section 6663(a) of $2,765 and
$1,219, respectively.

 After concessions by the parties, [FN1] the issues remaining for decision are: (1) Whether petitioner
is entitled to certain deductions claimed on Schedule A, Itemized Deductions, namely, mortgage
interest and real estate taxes; (2) whether petitioner is entitled to dependency exemption deductions;
and (3) whether petitioner is entitled to the filing status of head of household for the years in issue.

       FN1. Petitioner concedes that he is not entitled to the child care credit claimed of $960 for
       the 1995 and 1996 tax years. Petitioner further concedes that he is liable for the penalties
       under sec. 6663(a) with respect to the portion of the underpayment of tax, if any, that results
       from adjustments made with respect to dependency exemptions, filing status as head of
       household, and the child care credit for the years in issue. Petitioner concedes that he
       produced false documentation to support the claimed child care credits for the years in issue.
       Respondent concedes that petitioner is not liable for an increased deficiency pursuant to the
       provisions of sec. 6214 for the 1996 tax year.

Background

 The stipulation of facts, the supplemental stipulation of facts, and the attached exhibits are
incorporated herein by this reference. At the time the petition was filed, petitioner resided in Los
Angeles, California.

In 1995 and 1996, petitioner was employed by the Los Angeles County Metropolitan
Bruce Alan Danford, Esq.                                                              BruceDanford.com


Transportation Authority as a full-time bus operator. Since 1993 petitioner resided at 4431 West
49th Place, Los Angeles (LA residence). The LA residence was purchased in 1993 by Druetta R.
Orum (Ms. Orum), petitioner's sister. According to petitioner, he did not qualify for the loan to
purchase the LA residence and Ms. Orum "agreed to go in and get the property in her name" and
that "it was never intended for her to live there." During the years in issue, petitioner lived alone at
the LA residence. Petitioner testified that he did not pay rent to Ms. Orum but made the mortgage
payments directly to the lender, Countrywide Home Loans (Countrywide), and also paid for all real
estate taxes, homeowner's insurance, repairs, and maintenance of the LA residence. Petitioner and
Ms. Orum owned a joint checking account with Fidelity Federal Bank (joint account). All payments
for mortgage interest, real estate tax, and insurance on the LA residence were made from the joint
account. Petitioner testified that Ms. Orum did not make deposits into the joint account.

 According to petitioner, his name is not on the deed of the LA residence, and it is his belief that
during the years in issue he could not sell or transfer the property. The deed to the LA property is
not a part of the record, and Ms. Orum did not testify at trial.

 In 1998, petitioner assumed Ms. Orum's loan to Countrywide. Based on a letter from Countrywide
dated July 13, 1998, Ms. Orum, as seller, was released of any financial obligation arising with the
loan.

 The LA residence has three bedrooms, a living room, and a dining room. During the years in issue,
petitioner was in a relationship with Regina Kenneth (Ms. Kenneth), which he considered a
"common law marriage". Ms. Kenneth has a daughter from a previous relationship named Varela
Kenneth who was a minor during the years in issue. Samantha Robinson and Alisha Walker, also
minors during the years in issue, are petitioner's nieces, whose mothers are petitioner's sisters.
Samantha Robinson, Alisha Walker, and Varela Kenneth (collectively the children) were claimed as
dependents on petitioner's 1995 and 1996 Federal income tax returns. Although petitioner testified
that the children stayed with him "off and on" throughout the years in issue, the signed stipulation
of facts reflects that the children did not reside with petitioner during any part of the years in issue.

 Petitioner testified that during the years in issue, Ms. Kenneth lived at a separate residence and was
on drugs. According to petitioner, Ms. Kenneth was not receiving public assistance during these
years.

 Alisha Walker and Samantha Robinson were often dropped off at the LA residence, for "two weeks
this week. Maybe one week ... then three weeks." Petitioner, a family member, or petitioner's
girlfriend (not Ms. Kenneth), watched the children at petitioner's home or took them to another
relative's home for supervision. None of the children was enrolled in school during the years in
issue.

 Petitioner timely filed his 1995 and 1996 Federal income tax returns as head of household. He also
claimed dependency exemption deductions for the children, Schedule A mortgage interest
deductions of $9,602 and $8,044 for 1995 and 1996, respectively, and deductions for real estate taxes
paid of $2,087 and $2,309 for 1995 and 1996, respectively.

 In a notice of deficiency, respondent disallowed petitioner's Schedule A deductions for mortgage
interest and real estate taxes on the grounds that petitioner has not shown that the amounts were
incurred, or paid, for taxes which qualify as deductions, and that petitioner has not shown that he is
Bruce Alan Danford, Esq.                                                               BruceDanford.com


legally liable for the mortgage payments. Respondent further disallowed the dependency exemption
deductions because petitioner failed to establish that he was entitled to the exemptions. As a result
of the disallowance, respondent further determined that petitioner's filing status was single, not head
of household.

Schedule A Deductions

 Petitioner has the burden of showing that the determinations in the notice of deficiency are
erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of
legislative grace, and petitioner must meet the statutory requirements for the deduction he is
claiming. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). [FN2]

        FN2. With respect to Court proceedings arising in connection with examinations
        commencing after July 22, 1988, under sec. 7491(a) the burden of proof shifts to respondent
        in specified circumstances. The record in this case does not establish the date on which the
        examination of each of petitioner's taxable years at issue began, and neither party contends
        that sec. 7491(a) applies here.

 Section 163(a) provides that there shall be allowed as a deduction all interest paid or accrued within
the taxable year on indebtedness. Section 163(h)(1), however, provides that, in the case of a taxpayer
other than a corporation, no deduction shall be allowed for personal interest paid or accrued during
the taxable year. Section 163(h)(2) defines "personal interest" to mean any interest allowable as a
deduction other than, inter alia, "any qualified residence interest". Sec. 163(h)(2)(D). Thus, qualified
residence interest is deductible under section 163(a).

 The term "qualified residence interest" is defined, in pertinent part, in section 163(h)(3)(A)(i), as any
interest paid or accrued during the taxable year on "acquisition indebtedness with respect to any
qualified residence of the taxpayer". The "indebtedness" for purposes of section 163 must, in
general, be an obligation of the taxpayer and not an obligation of another. Golder v. Commissioner,
604 F.2d 34, 35 (9th Cir.1979), affg. T .C. Memo.1976-150; Smith v. Commissioner, 84 T.C. 889,
897 (1985), affd. without published opinion 805 F.2d 1073 (D.C.Cir.1986); Hynes v. Commissioner,
74 T.C. 1266, 1287 (1980). However, the pertinent part of section 1.163-1(b), Income Tax Regs.,
provides:
  Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable
  owner, even though the taxpayer is not directly liable upon the bond or note secured by such
  mortgage, may be deducted as interest on his indebtedness. * * *

 In Golder v. Commissioner,supra, the Court of Appeals for the Ninth Circuit stated that section
1.163-1(b), Income Tax Regs., does not create an exception to the rule of section 163(a) that interest
is deductible only with respect to the indebtedness of the taxpayer but, rather, simply recognizes the
economic substance of nonrecourse borrowing. Additionally, as required by section 1.163-1(b),
Income Tax Regs., the taxpayer must be the "legal or equitable owner" of the property. Where the
taxpayer has not established legal, equitable, or beneficial ownership of mortgaged property, the
courts generally have disallowed the taxpayer a deduction for the mortgage interest. Song v.
Commissioner, T.C. Memo.1995-446; Bonkowski v. Commissioner, T.C. Memo.1970- 340, affd. 458
F.2d 709 (7th Cir.1972).

State law determines the nature of property rights, and Federal law determines the appropriate tax
Bruce Alan Danford, Esq.                                                              BruceDanford.com


treatment of those rights. United States v. Natl. Bank of Commerce, 472 U.S. 713, 722 (1985);
Blanche v. Commissioner, T.C. Memo.2001-63. Therefore, whatever rights or interests, if any,
petitioner held in the LA property during the years in issue must be determined by applying
applicable California law. It is presumed under California law that the owner of legal title is the
owner of the full beneficial title. Cal. Evid.Code sec. 662 (2001). This presumption may be rebutted
only by clear and convincing proof. Id.

 In Uslu v. Commissioner, T.C. Memo.1997-551, the taxpayers, Mr. and Mrs. Uslu, made mortgage
payments on a residence for which legal title was held by Mr. Uslu's brother and sister-in-law. We
found in Uslu that the taxpayers "exclusively held the benefits and burdens of ownership", and,
therefore, were the equitable and beneficial owners of the residence. However, in Song v.
Commissioner,supra, where legal title was held by the taxpayer's brother, we found that the taxpayer
failed to prove that she had any equitable or beneficial ownership in the residence.

 An important distinction between Uslu and Song was the completeness of the record and the
credibility of the legal title holder of the residence: Mr. Uslu's brother and sister-in-law in Uslu, and
the taxpayer's brother in Song.

 In the instant case, the record establishes that during the years in issue Ms. Orum, and not
petitioner, was (1) the legal owner of the LA property and (2) indebted to Countrywide on the
mortgage loan it had made on the property. Although we find that petitioner may have made
mortgage payments, real estate tax payments, and insurance premium payments for the LA
residence, there is no objective evidence to persuade us that he had equitable ownership of the LA
residence during the years in issue. The record lacks sufficient evidence, most notably Ms. Orum' s
testimony, of the purported arrangement with petitioner. Further, petitioner testified that Ms. Orum
made no deposits into their joint checking account, where all mortgage, insurance, and real estate tax
payments were made. His testimony, without more, is insufficient. See Loria v. Commissioner, T.C.
Memo.1995-420 (taxpayer's attempt to establish equitable ownership with his sole testimony is
insufficient).

 Based upon our examination of the entire record in this case, we find that petitioner failed to
establish that he was the equitable owner of the LA property during the years in issue, or that he is
entitled to deduct for those years the mortgage loan interest he paid on that property. We therefore
sustain respondent's determination disallowing the mortgage loan interest deductions that petitioner
claimed on his 1995 and 1996 returns.

 Petitioner claimed Schedule A deductions for real estate taxes paid of $2,087 and $2,309 on his
respective 1995 and 1996 returns. Similar to mortgage interest deductions, real estate taxes are
deductible under section 164(a) only by the person on whom the liability is imposed. Magruder v.
Supplee, 316 U.S. 394, 398 (1942); Cramer v. Commissioner, 55 T.C. 1125, 1130 (1971); Manning v.
Commissioner, T.C. Memo.1993-127. Because we found above that petitioner was not the legal,
equitable, or beneficial owner of the LA property, he is also not entitled to Schedule A deductions
for real estate taxes paid thereon. Respondent is sustained on this issue.

Dependency Exemption

 Section 151(c) allows a taxpayer to deduct an annual exemption amount for each dependent of the
taxpayer. As relevant here, a "dependent" is defined in section 152(a) as an individual "over half of
Bruce Alan Danford, Esq.                                                             BruceDanford.com


whose support, for the calendar year in which the taxable year of the taxpayer begins, was received
from the taxpayer". In order to prevail, petitioner must show by competent evidence: (1) The total
support provided for each individual claimed, and (2) that he provided more than half of such total
support. The amount of total support may be reasonably inferred from competent evidence.
Stafford v. Commissioner, 46T.C. 515, 518 (1966). However, where the amount of total support of
an individual during the taxable year is not shown, and cannot be reasonably inferred from
competent evidence, then it is not possible to conclude that the taxpayer has contributed more than
one-half. Blanco v. Commissioner, 56 T.C. 512, 515 (1971); Fitzner v. Commissioner, 31 T.C. 1252,
1255 (1959).

 The record based solely on petitioner's claimed contributions is incomplete. Petitioner did not
present evidence to reconstruct the dollar amount of the total support for the individuals claimed
for the years at issue. Total support includes, inter alia, the cost of food, clothing, education,
household utilities, or home repair expenses necessary to maintain the household in 1995 and 1996.
Smith v. Commissioner, T.C. Memo.1997-544; sec. 1.152- 1(a)(2)(i), Income Tax Regs. We find
petitioner's testimony vague, incomplete, and self-serving. It is well settled that we are not required
to accept a taxpayer's self-serving testimony in the absence of corroborating evidence. Niedringhaus
v. Commissioner, 99 T.C. 202, 212 (1992).

 Furthermore, it is reasonable to infer that the children's respective mothers and fathers may have
contributed a modicum amount to their child's total support. Without the additional amounts
petitioner may have received from the children's extended family, we are unable to determine the
total support available to each child by all able parties.

 By failing to establish the total amount of support provided to the children from all sources, we are
unable to conclude that petitioner provided more than one-half of the children's total support
during the years in issue. Therefore, we hold that petitioner is not entitled to section 151
dependency exemption deductions for the 1995 and 1996 tax years. [FN3] Respondent is sustained
on this issue.

       FN3. It is therefore unnecessary to address whether Varela Kenneth is petitioner's
       stepdaughter.

Head of Household Status

 According to the relevant part of section 2(b), an individual shall be considered a head of household
if such individual (1) is not married at the close of the taxable year and (2) maintains as his home a
household which constitutes for more than one-half of the taxable year the principal place of abode
of a stepdaughter or of any other person who is a dependent of the taxpayer, if the taxpayer is
entitled to a deduction for the taxable year for such person under section 151.

 Because the parties stipulated that the children did not reside with petitioner during any part of the
years in issue, and because we held above that petitioner is not entitled to a deduction for the
children under the provisions of sections 151 and 152, petitioner is not entitled to head of
household status. Therefore, respondent is sustained on this issue.

Reviewed and adopted as the report of the Small Tax Case Division.
 Decision will be entered for respondent.
Bruce Alan Danford, Esq.                               BruceDanford.com




T.C. Summ.Op. 2002-19, 2002 WL 1825348 (U.S.Tax Ct.)

				
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Description: Mortgage Interest Tax Deduction document sample