Going for the hat trick today, three (count ‘em, three) posts, I have to reach back to yesterday, 1/9/14, for the final story to tell. As usual, the last race on the card is a small-claimer, Yong J. Dong and Lijun Weng, 2014 T. C. Sum. Op. 4, filed 1/9/14, as told by The Judge With A Heart, STJ Armen.

And the story is of special interest to New York City practitioners.

Yong and Lijun wanted a home of their own, so they got a loan of $130K from Yong’s Mom and Dad, wherewith to assist them to purchase what everyone agrees is their principal residence in Queens County, New York, a Borough of the City of New York. And they sign two documents in favor of the aforesaid parents, a “‘Home Equtty [sic] Loan Agreement’ (loan agreement) and ‘Home Equiity [sic] Deed of Trust’ (deed of trust). The loan agreement allows for a loan amount up to $130,000 with an interest rate of 3.5% plus a prime rate not to exceed a 12% annual rate. This was not a purchase money mortgage; rather, it appears to have been a credit line mortgage.” 2014 Sum. Op. 4, at p. 3.

The issue before Tax Court, of course, is deductibility of the payments Yong and Lijun made pursuant to the terms of the Home Equtty [sic] Loan Agreement.

By now, every New York City practitioner reading this should have calculator and tax table in hand; no, not the income tax tables in the Form 1040 instructions, rather the tax table for New York State and City mortgage recording tax, imposed by Article 11 of the New York State Tax Law, and shown on Form NYSDTFMT-15.

Did you get $2665.00? Well, Yong and Lijun didn’t get anything, so they are out the deductions, even though they paid in accordance with the documents and IRS asserts no intrafamily shenanigans.

What scuttles Yong and Lijun is that the indebtedness, though real, is not secured by their principal residence. And the Regulations to Section 163 require that the security interest of the lender must be perfected under local law, by recording or otherwise.

Now all New York practitioners worth their sodium chloride know that, for realty, the only way to perfect is to record. STJ Armen: “Petitioners have not, however, alleged or shown that they perfected the deed of trust or the loan agreement in any other way. Neither have they established that there is another way to perfect the deed of trust or the loan agreement under New York State law, nor are we aware of any such way. Thus, petitioners have not satisfied the third element of a secured debt under the regulations requiring that a mortgage or deed of trust be recorded or otherwise perfected under applicable State law.” 2104 T. C. Sum. Op. 4, at p. 11.

So they saved $2665.00 in recording tax (and practitioners in other jurisdictions may well gasp at that number, but New York State, the State That has Everything, has had such a tax since 1909), but lost about $30K of deductible interest.

Oh, and from the looks of the paperwork, they may have saved something less than a grand in legal fees for preparing the documents. And spent a lot more than that on legal fees for bringing this case.