And no good deed goes unpunished, as Oscar Wilde put it. Lourdes Puente learns this from Judge Haines in her eponymous Tax Court case, 2013 T. C. Memo. 277, filed 12/9/13.

The story is sad but simple. Lourdes’ brother Benny buys a house. He’s the only one on the deed and on the mortgage. Lourdes moves in; at some point down the road Benny loses his job and Lourdes, good sister that she is, steps in and pays some $28K in mortgage interest to keep the roof over her head and Benny’s investment from going south.

Lourdes claims the interest deduction. Benny gets the 1098. Lourdes gets the SNOD. IRS gets the win.

Lourdes doesn’t have legal title, so half the Section 163 toehold for the principal residence deduction is gone (everyone agrees it’s Lourdes’ principal residence).

Now for beneficial ownership: “The Court considers certain factors to determine whether a taxpayer has assumed the benefits and burdens of ownership, including: (1) whether the taxpayer had the right to possess the property and to enjoy the use, rents, and profits thereof; (2) whether the taxpayer had the duty to maintain the property; (3) whether the taxpayer was responsible for insuring the property; (4) whether the taxpayer bore the risk of loss of the property; (5) whether the taxpayer was obligated to pay taxes, assessments, and charges against the property; (6) whether the taxpayer had the right to improve the property; and (7) whether the taxpayer had the right to obtain legal title at any time by paying the balance of the purchase price.” 2103 T. C. Memo. 277, at pp. 5-6.

Lourdes has none of the above. There’s no agreement between her and Benny that lets Lourdes do anything, get anything, risk anything or pay anything.

No deduction. Probably, though, there’s a gift tax implication. But see my blogpost “Economic Substance – A Taxpayer Win”, 12/31/10, for a case where the gift tax didn’t apply.