Two cases from Tax Court today (2/21/13) get entered in  the  “nice try, but no prize” stakes.

First up is Thomas A. Wagoner, 2013 T.C. Sum. Op.14, filed 2/21/13, Judge Vasquez fielding this one. Tom claims that because his seven years’ worth of unpaid income taxes, penalties and interest gave rise to a lien on his principal residence, the interest and penalties were deductible as qualified residence interest under Section 163(h)(3)(A). Would you be surprised if I told you Tom was a lawyer?

Judge Vasquez: “However, his argument is erroneous insofar as neither a Federal tax lien nor the filing of a notice of Federal tax lien caused his tax indebtedness to be secured by a qualified residence. See sec. 1.163-10T(o)(1) (flush language), Temporary Income Tax Regs.,  supra. Furthermore, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), specifically provides that interest paid on income tax liabilities of individuals, regardless of the source of the income or other adjustments to which the tax liabilities relate, is to be treated as personal interest.” 2013 T. C. Sum. Op. 14, at pp. 9-10. (Footnotes omitted).

So Tom gets some more penalties and interest. Still, nice try, Tom.

Next entry is Philip C. Smoker, star of 2013 T. C. Memo. 56, filed 2/21/13. Smokin’ Phil has a variable rate mortgage on his principal residence, but the monthly payment has a ceiling. If the rate breaks the ceiling, the excess interest is capitalized.

Phil tries to deduct the capitalized interest currently, even though he is a cash-basis taxpayer like the rest of us. No go; the interest may be secured, but it wasn’t paid.

Smokin’ Phil tries the “paid or accrued” language in Section 163(h), but Judge Laro isn’t buying. He deluges Smokin’ Phil with all the “if you didn’t pay it you can’t deduct it” cases, and smothers Smokin’ Phil’s only authority, which is based on an accrual-basis taxpayer. I’ll spare you the welter of citations.

Smokin’ Phil goes down in flames, but joins Tom in the “nice try, but no prize” stakes.