Equitable or Beneficial Ownership
This concept extends to taxable entities as well as individuals. This article will begin with individuals and their ownership of a residence. A personal residence will be used and if the mortgage interest and property taxes are deductible thereon.
A taxpayer may generally deduct interest paid or accrued (depending upon the method of accounting) during the tax year. See Sec. 163(a). There are exceptions to this such as personal interest. See Sec. 163(h)(2). Qualified residence interest is what will be discussed in the context of equitable or beneficial ownership. See Sec. 163(h)(3).
In addition, the taxpayer generally may deduct property taxes paid or accrued (depending upon the method of accounting) during the tax year. Generally this tax must be imposed upon the taxpayer. See Reg. 1.164-1. However, as with qualified residence interest, equitable or beneficial ownership will determine which taxpayer (the legal owner or the beneficial owner) will be entitled to the deduction of the property tax.
In summary, a taxpayer could have legal ownership of a residence and yet not have equitable or beneficial ownership. One of the characteristics of this type of ownership is that there is an economic effect. This would include such rights and obligations as: possession, obtain legal title upon full payment of the purchase price, construct improvements, pay property taxes, risk of loss, insure and maintain the property.
For example, a mother with her own home buys (in her name) another residence through a lender. Her son lives in this residence. The mother never sets foot in the residence she purchased - well, maybe to visit now and then. Her son makes all mortgage payments directly to the lender. He also pays utilities, taxes, and all other expenses associated with the home. They have an understanding, perhaps in writing to solidify it, that should the son default on the payments, she has recourse to him. In this case, the mother is the legal owner and the son is the equitable or beneficial owner.
Several times, the courts have held that legal ownership in of itself does not equate with an automatic tax deduction. There are numerous cases but two that illustrate this clearly are Uslu TC Memo 1997-551 and Trans TC Memo 1999-233. The Trans vs Commissioner case addresses other issues as well. Nevertheless, the Court explicitly addressed property taxes and ruled in favor of the Petitioners. Finally, see Njenge TC Summary 2008-84 in which the Court ruled in favor of the Petitioners for the interest and taxes.
True, deductible interest must arise from a debtor-creditor relationship which is enforceable. Although Reg. 1.163-1(b) makes it clear the interest on non-recourse debt is deductible, the mother and son have created a debtor-creditor relationship.
Now the question arises, is either the mother or the son entitled to take the interest and property tax deductions for federal income tax. The mother could not because she is not a beneficial owner and did not make the payments. The son would be entitled to the interest and property tax deductions because of his beneficial ownership.
Notice how differently the court ruled in the Nair TC Summary 2007-116 case. This case was much different than Uslu, Trans, and Njenge because in these three cases the burdens and benefits of ownership were clearly established. Nair could not establish the burdens and benefits of ownership - that is the key.
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