CP 2000 Notice

[S T]

Is it deductible

Oh Jainen!
Well I am reviewing the TC Memo 1997-551 that NY EA posted about. Some very interesting information. Did you read it??

Sandy

[jainen]

as good as a fact

>> I am reviewing the TC Memo 1997-551 <<

So what? There's a big difference between your brother accommodating your new purchase loan, and a co-owner making payments for a pre-existing mortgage on his own account.

Look, S T, this isn't a question about how to file Schedule A. The IRS has already selected your clients for audit, and you still haven't told us what the purchase contract says about the security for the buyers' obligation. That's all I'm asking, and all the IRS is asking. For some reason my esteemed colleagues think that, in an audit, a guess is as good as a fact.

[Black Bart]

Thank you very much.

my esteemed colleagues

That's the nicest thing you've ever said about me (assumin' you meant to include me).

Now I know you feel like that NYEA's rule doesn't matter, but I was overcome by an irresistable impulse, looked it up and -- now don't take this personally -- two CPAs on the "Bob Bruss Real Estate" website said it's okay to deduct it (they were "fer" and Bob was "agin"). They quoted -- not NY's TC memo -- instead, IRC Regulation 1.163-1 (b) which, accordin' to them, says "even if he is not directly liable on the mortgage." That's a quote from them; not from the reg and I'm sure you'll shoot it full of holes, but just thought I'd give you a heads-up.

P.S. Amazin' ain't it, how much practical advice you can get by just dancin' around the Net? While searching for the above info on the Macro Bologna Home Page, I also came across a fascinating discussion of "Neutrino Radiative Decays During A Total Solar Eclipse" (that came up in a discussion just the other day). Too, on the "Idiot Legal Arguments" site; a guy tried to beat a traffic ticket by claimin' the judge's courtroom flag was illegal because it had gold fringe on it; thereby invalidating the trial and the fruit of the poisoned flag/tree/trial, i.e., the verdict.

[Unregistered]

Black Bart
You need to be careful in interpreting that regulation.

This is from the 9th Circuit Court of Appeals (a review of a Tax Court case named Golder). Note how the first sentence gives a caution.

"Reg. section 1.163-1(b) must be read in its proper context, i.e. in light of its parent statute, section 163(a) of the I.R.C. Section 163(a) permits an interest deduction only on the taxpayer's own indebtedness. See cases cited supra. Reg. section 1.163-1(b) does nothing more than permit the deduction of interest in situations where the taxpayer-borrower is not personally liable on a mortgage of property which is used as security for a loan made to the taxpayer. For example, a taxpayer purchases land paying part of the purchase price in cash and the balance with a non-recourse note secured by a mortgage on the land; there, in the event of default, the creditor may look only to the property. Although the taxpayer is not directly liable on the debt—since the creditor may look only to the pledged property for repayment—Reg. section 1.163-1(b) permits the taxpayer to deduct interest payments since the default affects only the taxpayer and no one else. The taxpayer must pay the interest to avoid foreclosure of his ownership interest in the property. Thus Reg. section 1.163-1(b) does not create an "exception" to the statutory rule of section 163(a) that interest is deductible only with respect to the indebtedness of the taxpayer, but simply recognizes the economic substance of non-recourse borrowing. Reg. section 1.163-1(b) permits the taxpayer-borrower in such cases to deduct the interest on the loan even though the taxpayer is not personally liable on the loan."

The Uslu case (TC Memo 1997-551) extended this concept to a situation where the taxpayer was not on the mortgage. BUT, there was a specific set of facts in that case. It is possible, but not easy to show equitable ownership.

New York Enrolled Agent

[Kram BergGold]

Court case

Let's all remember the court case of brother A who wanted to buy a house (principal residence) but could not qualify for a loan. So brother B signed for the loan. The house was in the name of Brother A. Brother A made all interest payments. On examination the IRS ruled against brother A's mortgage interest deduction. However The Court allowed the deduction.