Discussion:Mortgage Interest - Equitable Ownership

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Discussion Forum Index --> Tax Questions --> Mortgage Interest - Equitable Ownership


Solomon (talk|edits) said:

20 January 2006
I know there has been previous discussion on this topic. Nevertheless, I do not recall any reference to Code Section 7463(b). This in effect says that disputes less than $50,000 in which the tax court ruled in favor of the Petitioner can not be used as precedent.

Now in the Saffet case in which the court ruled in favor of the Petitioner based upon equitable and beneficial ownership allowing him to keep the mortgage interest deduction, according to 7463(b) this case can not be used as precedent.

My question is: I have a similar situation. Do I use for disclosure with the tax return the items in the Saffet case without citing the case per se. All of the facts (pertinent to equitable ownership) in Saffet are similar to mine. Thanks.

Riley2 (talk|edits) said:

20 January 2006
Disclosure is not necessary if the position is based on Treasury Regulations that have not been superseded. In this case, you are obviously relying on Treasury Regulation 1.163-1(b); consequently, I am not sure that disclosure is necessary.

Solomon (talk|edits) said:

21 January 2006
Riley: Thanks for mentioning 1.163-1(b). Linking to it from this site sure has nothing to do with the subject - unless I clicked wrong section. Found it elsewhere.

Solomon (talk|edits) said:

21 January 2006
Still ambivalent about doing this in view of 9th circuit interpretation of 1.163-1(b). Court said IRC 163(a) permits interest deduction only on taxpayer's own indebtedness and Reg 1.163-1(b) does nothing more than permit the deduction of interest when taxpayer-borrower is not personally liable. For example, taxpayer buys land and pays down payment and has a non-recourse note for the balance secured by the land.

My case is: mother buys house for son and mother only is on the mortgage. Son lives in house, makes mortgage payments to lender, pays taxes, utilities, repairs, etc and establishes equitable ownership.

My inclination is to give interest deduction the son in view of Saffet/Uslu prevailing. Anyone here actually done this? Thanks.

Solomon (talk|edits) said:

21 January 2006
Think I answered my own question. Saffet/Uslu much later than Golder and a few others in which Petitioners failed. Sorry for taking up space on this.

Riley2 (talk|edits) said:

22 January 2006
Your analysis of the Ninth Circuit’s decision in Golder is correct. A gurantor may not claim an interest deduction for payments made on another taxpayer’s mortgage since the guarantor is only secondarily liable.

However, the Golder court explained that a taxpayer who purchases property using debt for which he is not personally liable is entitled to use Regulation § 1.163-1(b). The Golder court cited the McDermott case in reasoning that interest on non-recourse debt should be allowed if the taxpayer is the owner of the underlying property which was purchased by assuming such debt. Using the common definition of non-recourse debt, your clients took the property subject to the underlying mortgage, effectively (but not formally) assuming the debt. I see no conflict between the Golder decision and the regulation.

Solomon (talk|edits) said:

22 January 2006
Thanks for your help Riley.

RentalGuy (talk|edits) said:

10 November 2006
Riley, you said something that is VERY important to a situation we are facing. Can you point to any case law or regulations that confirm that taking a property subject to an underlying mortgage is "effectively assuming the debt" even though there was no formal assumption? Thank you so much!

Solomon (talk|edits) said:

10 November 2006
Equitable or Beneficial Ownership

Tdoyle (talk|edits) said:

November 10, 2006
Note: Solomon actually created the page that he linked to above. Great work Solomon!

Iamt87 (talk|edits) said:

24 March 2007
I have a very similar case as the one cited above. Son lives in house that is in father's name. I appreciate all of the work that Solomon did in laying out the answer to my main question. My second question is, does the father need to claim the payments as rental income?

Kevinh5 (talk|edits) said:

24 March 2007
Sean, if the son is deemed an owner, then no, he is making the payments (princ, int, tax, ins) as an owner, and not as rental to dad. Kevinh5

Iamt87 (talk|edits) said:

25 March 2007
Hey Kevin. Once again, thank you very much.

Kevinh5 (talk|edits) said:

25 March 2007
You thought I didn't know it was you? LOL You're welcome!

Taxconsultant (talk|edits) said:

29 December 2007
I have read the cases and my question is fairly broad. In light of Circular 230, is anyone other than myself concerned about recommending a client take the deductions discussed on this board?

Solomon (talk|edits) said:

29 December 2007
"(1) More likely than not . A practitioner is considered to have a reasonable belief that the tax treatment of a position is more likely than not the proper tax treatment if the practitioner analyzes the pertinent facts and authorities, and based on that analysis reasonably concludes, in good faith, that there is a greater than fifty-percent likelihood that the tax treatment will be upheld if the IRS challenges it. The authorities described in 26 CFR 1.6662–4(d)(3)(iii), or any successor provision, of the substantial understatement penalty regulations may be taken into account for purposes of this analysis."

From Prop. Reg. 138637-07. Note that court cases are included in the types of authority in Reg. 1.6662-4(d)(3)(iii).

ScottEG (talk|edits) said:

6 January 2012
I appreciate all the postings on this board. I agree with the concept of equitable and beneficial ownership. I prepared a 2009 return taking such position. Several months ago my client received a letter from the IRS disallowing the mortgage interest, but not the property taxes. I wrote them a nice short letter explaining that my client had all the burdens and benefits of ownership and listed them all in the letter. I mentioned several court cases that were favorable to the taxpayer. IRS has rejected our position and issued a 90 day letter. I believe the IRS would lose at Tax Court, but who has the money to fight it over $3,000? I am tempted to file the petition and hope that it gets sent to a reasonable appeals officer. (Is there such a thing?)

Any advice?

Kevinh5 (talk|edits) said:

6 January 2012
You can request an appeals conference right now, but don't let the 90 days get by without the taxpayer filing a TC petition while waiting for appeals to contact you. In the meantime, get your documentation in order.

There is considerable debate whether a non-admitted person may fill out the petition for the client. (UPL) DaveFogel wrote an interesting article on the subject, but I believe it concluded that it depended on state law and what the state bar association wanted to do about it.

Most of the folks who teach tax court CPE recommend getting someone admitted to practice before the court to fill out the petition, and certainly the reply to the respondent's answer.

Do remember that there is a way to recover attorney fees from the IRS when the IRS' position is completely off base.

ScottEG (talk|edits) said:

6 January 2012
Thank you so much for your quick response. I think I understand the documents I need to get, but I don't want to miss anything. What might I need that is not "obvious"? For example, do I need a signed document between mother and daughter establishing debtor/creditor relationship? We just got the letter so we have until March to file in Tax Court.

ScottEG (talk|edits) said:

6 January 2012
With respect to the Tax Court, this past year I filed a petition for another client. The case was sent to an appeals officer. We submitted additional documentation and I had several good conversations with the officer. In the end, we got back a little, but not as much as we had hoped. Our case was weak so we took it. The officer was NOT sympathetic, mostly went straight "by the book".

Are you suggesting that approach may not work again? I don't believe hiring an attorney is worth the money.

Is there any way for mother to take the deduction? Or does the IRS argue both ways - no legal ownership so no deduction for daughter and mom didn't make the payments so no deduction for her either.

Kevinh5 (talk|edits) said:

6 January 2012
Whatever exists that you relied on in taking the position on the tax return. It may be as simple as a checklist of all the things your client was responsible for (that owners usually are responsible for). Certainly if the taxpayer had a document with the mother that would help. Especially if the mother treated the payments correctly on her return (which MIGHT be Sch B interest income and Investment Interest Expense). Although you don't represent the mother (and might not be able to, because of the conflict of interest), you can bet that the auditor will ask that question.

DaveFogel (talk|edits) said:

6 January 2012
You might want to read my article “Non-Lawyers’ Handbook for Assisting Clients With Their Tax Court Cases” to tell you what you can and can't do when it comes to Tax Court cases.

The Tax Court has a simple Petition Kit that provides fill-in forms and explains how to file the petition. The filing fee is only $60.00.

As for what documents you need to establish equitable ownership, if you sent a letter to the IRS listing the burdens and benefits of ownership, then you should provide documents to support those facts.

If you ultimately prevail in Appeals, then you should raise the issue of fees and costs under Sec. 7430 with the Appeals Officer. They are required to consider an award of such costs if you raise the issue. See section 8.7.1.10.3 of the Internal Revenue Manual. Suggest that you read my article “Can You Get the IRS to Pay Part of Your Representation Fees?”.

ScottEG (talk|edits) said:

6 January 2012
For your reading pleasure, here's the language from the IRS letter: "In order to deduct home mortgage interest you must be legally liable for the loan. You cannot deduct payments made on someone else's behalf if you are not legally liable to make them. Please provide us with any documentation showing that you are liable for the loan."

Ckenefick (talk|edits) said:

7 January 2012
I think Kevin5's idea is a great one. A checklist of benefits and burdens of ownership. List as many things as you can and try to honestly show how each item weighs in favor of your client.

Also, just curious - On what Schedule A line to you report the mortgage interest?

And finally, maybe you can tell us more about the relationship between your client and the person whose name is on the mortgage...and if anything more than the mortgage/prop taxes were paid by your client.

DaveFogel (talk|edits) said:

7 January 2012
"You cannot deduct payments made on someone else's behalf if you are not legally liable to make them."

Reg. 1.163-1(b) directly contradicts this statement:

"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." [emphasis added]

There are several court cases that have been decided on this subject, and therefore, I suggest that you review the cases to see how your clients’ facts are similar or different from those in the court cases. Here are the cases:

Ckenefick (talk|edits) said:

7 January 2012
Definitely false advertising by the IRS. I've seen that statement before and it pisses me off.

Know what else pisses me off...the "e-file opt out" statement that clients have to sign. You know, it states all the great taxpayer benefits of e-filing, so as to coerce the client to e-file. Why can't all the downsides of e-filing be listed in this opt out statement as well?

Isn't that only fair?

Smktax (talk|edits) said:

7 January 2012
If the daughter acquired beneficial ownership of the property from the mother, did the mother file a gift tax return to report the transfer of ownership?

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