Attorney-at-Law

FAINA, MEET SOPHY

In Uncategorized on 05/17/2012 at 17:49

Equal Opportunity in Tax Court

The $500K/$50K limitations on Section 168(h) largesse (home acquisition indebtedness deduction and home equity indebtedness deduction) receive yet another full dress Tax Court opinion in Faina Bronstein, 138 T.C. 21, filed 5/17/12.

Faina and father-in-law buy a residence. It’s Faina’s principal residence; while  Faina’s husband lived there, he was never in title, never signed either note or mortgage, and never paid a cent of debt service (nor was he ever legally obligated to do so). Faina paid every cent of debt service on the $1.35 million mortgage. Faina files “married filing separately” and tries to take interest on the full $1.1 million that Section 168(h) allows, claiming the $500K/$50K limitation for marrieds filing separately is only there to keep two marrieds from each taking deductions for interest on $1.1 million. Cf. Charles J. Sophy, 138 T. C. 8, filed 3/5/12, and my blogpost “Sophy’s Choice” 3/6/12.

Interestingly, Sophy isn’t cited in Faina. Maybe Judge Goeke doesn’t read Judge Cohen’s decisions. For sure no Tax Court Judges read my blogposts.

Anyway, as with Sophy, the decision goes against Faina on plain language. Judge Goeke: “We believe section 163(h)(3)(B)(ii) clearly states that a married individual filing a separate return is limited to a deduction for interest paid on  $500,000 of home acquisition indebtedness. Similarly, we believe section 163(h)(3)(C)(ii) clearly states that a married individual filing a separate return is limited to a deduction for interest paid on $50,000 of home equity indebtedness.

“Petitioner has not offered any unequivocal evidence of legislative purpose which would allow us to override the plain language of section 163(h)(3)(B)(ii) and (C)(ii).7 As a result, we agree with respondent that petitioner is not entitled to a deduction for the interest paid on the entire $1 million of acquisition indebtedness incurred in purchasing the property. Rather, petitioner is entitled to deduct interest paid on only $550,000 of the mortgage indebtedness.” 138 T.C. 21, at pp. 8-9.

And what’s more, the statutory language is so unambiguous that Faina gets a 20% accuracy-related (understatement) penalty.

That’s Tax Court for you: Equal treatment for both married and unmarried couples, same-sex or opposite-sex; all are $500K/$50K limited.

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