Attorney-at-Law

SOPHY’S CHOICE

In Uncategorized on 03/06/2012 at 15:16

He Can Split the Interest Deduction, But Can’t Double-Up

That’s Judge Cohen’s conclusion, based on the “plain, everyday” meaning of the language of Section 163(h), the qualified personal residence interest section. The cases are Charles J. Sophy and Bruce H. Voss, 138 T. C. 8, filed 3/5/12.

Sophy and Voss weren’t married during the years at issue, but were joint tenants (co-owners) of two different residences, one principal and one secondary, during those years, and mortgaged the residences up to the hilt, some $2.7 million worth. Each claimed the one-and-one interest deduction, one million acquisition and one hundred thousand equity. No, says IRS, you are limited to one-and-one split between you, in whatever proportion you want, even though marrieds filing separately are limited to $500K, per Section 163(h)(3)(B)(ii).

IRS relies on a Chief Counsel Advice, C.C.A. 200911007 (Mar. 13, 2009). This Chief Counsel Advice states: “[T]he $1,000,000 limitation on acquisition indebtedness under §163(h)(3)(B)(ii) is used to determine the portion [of] Taxpayer’s interest payments that may be deducted. In particular, the amount of interest Taxpayer may deduct is determined by multiplying the amount of interest actually paid by Taxpayer on Taxpayer’s qualified residence by a fraction the numerator of which is $1,000,000 and the denominator of which is * * * the average balance of the outstanding acquisition indebtedness during the years in question.” 138 T.C. 8, at pp. 5-6.

Sophy and Voss argue that the one-and-one for marrieds is a “marriage penalty”, but Judge Cohen isn’t going there. Judge Cohen: “We begin our analysis by looking closely at the definitions of acquisition indebtedness and home equity indebtedness in section 163(h)(3)(B)(i) and (C)(i). The acquisition indebtedness definition uses the phrase ‘any indebtedness which is incurred’ in conjunction with ‘acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence.’ We note that the word ‘taxpayer’ in this context is used only in relation to the qualified residence, not the indebtedness. Similarly, the operative language in the definition of home equity indebtedness is ‘any indebtedness’ that is secured by a qualified residence (other than acquisition indebtedness). Sec. 163(h)(3)(C)(i). Once again, the phrase ‘any indebtedness’ is not qualified by language relating to an individual taxpayer.” 138 T. C. 8, at p. 11.

Judge Cohen goes on: “From Congress’ use of ‘any indebtedness’ in the definition of acquisition indebtedness, which is not qualified by language regarding an individual taxpayer, it appears that this phrase refers to the total amount of indebtedness with respect to a qualified residence and which is secured by that residence. The focus is on the entire amount of indebtedness with respect to the residence itself. Thus when the statute limits the amount that may be treated as acquisition indebtedness, it appears that what is being limited is the total amount of acquisition debt that may be claimed in relation to the qualified residence, rather than the amount of acquisition debt that may be claimed in relation to an individual taxpayer.” 138 T. C. 8, at p. 12.

Finally, “(A)lthough we have reached our conclusion by reviewing the language of the statute, nothing in the legislative history of the section 163(h)(3) indebtedness limitations suggests that Congress had any other intention than what we have determined from an examination of the language. We conclude that the limitations in section 163(h)(3)(B)(ii) and (C)(ii) on the amounts that may be treated as acquisition and home equity indebtedness with respect to a qualified residence are properly applied on a per-residence basis.” 138 T.C. 8, at p. 16.

Especially not since Sophy’s choice of interpretative language would give same-sex or other unmarried couples a better tax deal than married couples. But nice try, guys.

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