TAX COURT OPINION

Case: Stanley Michel & Mireille D. Michel
Docket Number: 22959-18
Judge: Lauber
Opinion Type: bench
Filed: 11/02/2020
Pages: 10

ALS UNITED STATES TAX COURT WASHINGTON, DC 20217 STANLEY MICHEL & MIREILLE D. MICHEL, Petitioners, v. ) ) ) ) ) Docket No. 22959-18. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Albert G. Lauber at Atlanta, Georgia, on September 22, 2020, containing his oral findings of fact and opinion rendered after conclusion of the trial. In accordance with the oral findings of fact and opinion, a decision will be entered under Tax Court Rule 155. It is further ORDERED that the parties shall file computations for entry of decision under Tax Court Rule 155 on or before February 1, 2021. (Signed) Albert G. Lauber Judge Dated: Washington, D.C. November 2, 2020 SERVED Nov 05 2020 RECEIVED 10/13/20 IN THE UNITED STATES TAX COURT In the Matter of: STANLEY MICHEL & MIREILLE D. MICHEL, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 22959-18 ) ) ) ) ) ) ) ) ) Pages: 1 through 8 Place: Atlanta, Georgia (Remote Proceeding) Date: September 22, 2020 cnners 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 23 24 25 IN THE UNITED STATES TAX COURT In the Matter of: STANLEY MICHEL & MIREILLE D. MICHEL, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 22959-18 ) ) ) ) ) ) ) ) ) Russell Federal Building & Cthse. 75 Ted Turner Dr., S.W. Room 1136, 11th Floor Atlanta, Georgia 30303 (Remote Proceeding) September 22, 2020 The above-entitled matter came on for bench opinion, pursuant to notice at 3:20 p.m. BEFORE: HONORABLE ALBERT G. LAUBER Judge APPEARANCES: For the Petitioners: STANLEY MICHEL, PRO SE MIREILLE D. MICHEL, PRO SE For the Respondent: HUIWEN AUDREY XI, ESQ. INTERNAL REVENUE SERVICE OFFICE OF CHIEF COUNSEL 401 W. Peachtree, NW Suite 1400, Stop 1000-D Atlanta, GA 30308 P R O C E E D I N G S 2 (3:13 p.m.) THE CLERK: Calling from the docket number 22959-18, Stanley Michel and Mireille D. Michel. (Whereupon, a bench opinion was rendered.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cnt'>ers 3 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge Albert G. Lauber september 22, 2020 Stanley Michel & Mireille D. Michel v. Commissioner Docket No. 22959-18 THE COURT: The Court has decided to render oral findings of fact and opinion in this case. This bench opinion is rendered pursuant to section 7459(b) of the Internal Revenue Code and Tax Court Rule 152, and this opinion shall not be relied on as precedent in any other 10 case. All statutory references are to the Internal 11 Revenue Code as in effect for the tax year at issue, and 12 all Rule references are to the Tax Court Rules of Practice 13 14 15 and Procedure. We round all monetary amounts to the nearest dollar. This case involves petitioners' 2016 taxable 16 year. By a timely notice of deficiency dated October 29, 17 2018, the IRS determined a deficiency of $3,725. It 18 computed this deficiency by (1) increasing petitioners' 19 income by $110 to reflect distributions from Carolina Farm 20 Credit; (2) disallowing a deduction of $2,098 for student 21 loan interest; and (3) reducing petitioners' allowable 22 23 24 deduction for home mortgage interest from $13,857, as claimed, to $1,346. The notice of deficiency also made a computational adjustment to petitioners' medical expense 25 deduction. Petitioners do not dispute the $110 upward 4 adjustment to their gross income. The parties have filed a stipulation of settled issues in which they agree that petitioners are entitled to a reduced deduction of $523 for student loan interest. Accordingly, the sole question remaining for decision concerns the claimed deduction for home mortgage interest. Most of the facts have been stipulated. The stipulation of facts and the attached exhibits are incorporated by this reference. Petitioners, who are husband and wife, resided in Georgia when they filed their 1 2 3 4 5 6 7 8 9 10 11 12 petition. They used the cash basis of accounting for the 13 14 15 2016 tax year. On August 19, 2011, petitioners took out a second loan on their primary residence. The promissory 16 note provided that interest would accrue at an annual rate 17 of 5.6% and that all accrued interest would be added to 18 the principal. Under the terms of the note petitioners 19 were not obligated to make any payments of interest or 20 Principal until August 2096. This type of loan is 21 commonly called a reverse mortgage. 22 During 2016 petitioners paid $1,346 of interest 23 to United Community Bank on their first mortgage. 24 Interest of $12,511 accrued during 2016 on their reverse 25 mortgage. They made no payments of principal or interest . cr ners 5 1 2 3 4 5 6 7 8 9 during 2016 on their reverse mortgage. Petitioners filed a timely Federal income tax return for 2016. On this return they claimed a home mortgage interest deduction of $13,857. Upon examination of that return the IRS determined that petitioners, as cash basis taxpayers, were entitled to deduct during 2016 only the interest they actually paid, i.e., $1,346. The IRS accordingly disallowed a deduction for the $12,511 of accrued but unpaid interest on the reverse mortgage. 10 We tried the case remotely via Zoomgov on 11 September 22, 2020, during the Court's Atlanta, Georgia, 12 trial session. Petitioners conceded that during 2016 they 13 had actually paid only $1,346 of home mortgage interest. 14 15 They stated their belief that they could deduct the interest that accrued on the reverse mortgage because the 16 promissory note did not say otherwise. 17 The IRS' determinations in a notice of 18 deficiency are generally presumed correct and taxpayers 19 bear the burden of proving them erroneous. Rule 142(a). 20 Deductions are a matter of legislative grace and taxpayers 21 bear the burden of proving their entitlement to deductions 22 allowed by the Code. INDOPCO, Inc. v. Commissioner, 503 23 U.S. 79, 84 (1992). Petitioners do not contend, and could 24 not plausibly contend, that the burden of proof should 25 shift to the IRS under section 7491. Petitioners therefore bear the burden of proof on all factual issues. 6 Section 163(a) permits a taxpayer to deduct "all interest paid or accrued within the taxable year on indebtedness." This includes interest on certain mortgage loans. Sec. 163(h)(2)(D). For cash basis taxpayers like petitioners, amounts representing allowable deductions are taken into account for the taxable year in which those amounts are paid. Sec. 1.461-1(a)(1), Income Tax Regs. The interest must be paid in cash or a cash equivalent. Don E. Williams Co. v. Commissioner, 429 U.S. 569, 578-579 (1977). When a cash basis taxpayer owes interest on a loan and gives the creditor a note to cover the interest, the taxpayer has not paid interest for Federal income tax 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 purposes. That is what petitioners did here, by having 16 the accrued interest on their reverse mortgage added to 17 the principal of the promissory note. Because petitioners 18 are cash basis taxpayers, they may deduct only the 19 mortgage interest they actually paid during 2016, i.e., 20 $1,346. They cannot deduct the $12,511 of interest that 21 accrued on their reverse mortgage, because a deduction is 22 allowed only when the interest is actually paid in cash or 23 a cash equivalent. 24 Since the promissory note for the reverse 25 mortgage requires no interest payments until 2096, . cmoers Petitioners express concern that they may never enjoy a 7 deduction for that interest during their lifetimes. section 1.691(b)-1(a) of the Income Tax Regulations addresses their concern. That regulation provides that, if a taxpayer dies before a deduction is allowable, either the taxpayer's estate or the taxpayer's heirs will be allowed the deduction when the amount is paid. Thus, an interest deduction will be allowed at some point. It is true that this deduction will be deferred, but that is 1 2 3 4 5 6 7 8 9 10 what petitioners opted for when they executed a reverse 11 mortgage rather than a conventional mortgage. 12 To implement the foregoing and the concessions 13 made by each party, decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 3:27 p.m., the above-entitled matter was concluded.) 14 15 16 17 18 19 20 21 22 23 24 25 CERTIFICATE OF TRANSCRIBER AND PROOFREADER 8 CASE NAME: Stanley Michel & Mirelle D. Michel v. Commissioner DOCKET NO.: 22959-18 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 8 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by James Shank on September 22, 2020 before the United States Tax 1 2 3 4 5 6 7 8 9 10 Court at its remote session in Atlanta, GA, in accordance 11 with the applicable provisions of the current verbatim 12 13 14 15 17 18 19 20 21 22 23 24 25 reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Meribeth Ashley, CET-507 Transcriber 10/7/20 Date Lori Rahtes, CDLT-108 Proofreader 10/7/20 Date cr ners