In Uncategorized on 06/22/2016 at 10:35

I’m indebted to Roth & Co. CPAs, who are readers of this my blog, for a case from 6/21/16 that I unaccountably missed. Thanks, guys.

Barton Slavin and Amy Weinstock Slavin, 2016 T. C. Sum. Op. 26, filed 6/21/16, incidentally gets the 1111 Constitution Ave NW gang back in the black, as they went three-for-five yesterday with this win. That said, Judge Gale has to do some fancy footwork to nail Bart and Amy with a Section 6662 chop, because their admittedly-qualified CPA-Tax Court admittee-attorney-preparer did get Reg. Section 1.1001-3 wrong. And the arithmetic is what does it.

The point of the story is that, after a mortgage modification with capitalized interest and a reduced interest rate, cash-basis Bart and Amy tried to take capitalized interest as ordinary deduction. Now we know from Smoker that you can’t do that; if in doubt, read my blogpost “Nice Try,” 2/21/13.

But I’ll let Judge Gale tell the real story.

“Moreover, petitioners’ reliance on Mr. K’s theory of the deductibility of the interest was not reasonable. Even if petitioners did not understand that section 1.1001-3, Income Tax Regs., was not applicable to their situation, petitioner husband understood that Mr. K’s advice was at least partially based on the interest rate reduction from 6% to 3%. However, on each of their 2008-09 Forms 1040, petitioners deducted mortgage interest expenses of $54,000. This is the same amount of interest that petitioners had deducted for 2007, when the interest rate was 6%. Especially given petitioner husband’s education level, petitioners should have realized that an interest rate reduction would have translated into a smaller mortgage interest expense deduction for the year.” 2016 T. C. Sum. Op. 26, at pp. 12-13 . (Name and footnote omitted).

BTW, “Section 1.1001-3, Income Tax Regs., addresses when a modification of the terms of a debt instrument results in recognition of gain or loss under section 1001. It does not concern the deductibility of interest payments.” 2016 T. C. Sum. Op. 26, at p. 8.

Let me quote from my blogpost “Lawyers Can’t Add,” 1/17/13: “It’s an old jibe that lawyers are miserable businesspeople. Lawyers are too busy dealing with everyone else’s problems to take care of their own. And bookkeeping is such a tedious business, when dealing with clients, adversaries and fine theoretical points of law is so much more fun.”

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