Court Opinion

ID: 9365345
Source: CourtListenerOpinion
Date Created: 2023-01-23 20:01:00.7923+00
Date Added: 2024-06-11T17:15:44.970328
License: Public Domain

United States Tax Court

                             T.C. Memo. 2023-12

                        HRACH SHILGEVORKYAN,
                               Petitioner

                                        v.

              COMMISSIONER OF INTERNAL REVENUE,
                          Respondent

                                   —————

Docket No. 9247-15.                                    Filed January 23, 2023.

                                   —————

Jason M. Silver and Chris J. Sheldon, for petitioner.

John R. Gordon and Michael R. Harrel, for respondent.

        MEMORANDUM FINDINGS OF FACT AND OPINION

       ASHFORD, Judge: By statutory notice of deficiency dated
February 17, 2015, the Internal Revenue Service (IRS or respondent)
determined a deficiency in petitioner’s federal income tax of $22,867 and
an accuracy-related penalty pursuant to section 6662(a) of $4,573 for the
2012 taxable year. 1 After respondent’s concession, 2 the remaining issue
for decision is whether petitioner is entitled to deduct on Schedule A,

       1Unless    otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in
effect at all relevant times, and all Rule references are to the Tax Court Rules
of Practice and Procedure. We round some monetary amounts to the nearest
dollar.
        2After the trial was held, respondent conceded that petitioner is not

liable for the accuracy-related penalty because respondent has not satisfied his
burden of production pursuant to section 6751(b)(1).

                               Served 01/23/23
                                   2

[*2] Itemized Deductions, mortgage interest paid of $66,354. We resolve
this issue in favor of respondent.

                        FINDINGS OF FACT

       Some of the facts have been stipulated and are so found. The
Stipulation of Facts and the attached Exhibits are incorporated herein
by this reference. Petitioner resided in Arizona when his Petition was
timely filed with the Court.

       When petitioner was 12 years old, he and his family immigrated
as refugees to the United States from Armenia in 1987 or 1988.
Petitioner has two older brothers, Edvard and Artur. Petitioner and his
brothers co-own a number of auto shops, a jewelry store, and a
restaurant. He and his brothers are also members of Shilgevorkyan,
LLC, which owns and rents condominiums at Mountain Park
Condominiums in Phoenix, Arizona.

       During 2008 through 2011 petitioner was involved in a check
cashing scheme with his brothers. As part of the check cashing scheme,
false Forms 1120S, U.S. Income Tax Return for an S Corporation, were
filed for some of the businesses that he co-owned with his brothers.
Petitioner executed a closing agreement with the IRS for the 2008–11
taxable years which included an assessment of taxes due and civil fraud
penalties pursuant to section 6663. Edvard pleaded guilty to the filing
of false federal income tax returns and was sentenced to prison. As part
of Edvard’s plea agreement, he admitted that he acted willfully and
knew the 2008–11 returns he filed had false information. Additionally,
as part of his plea agreement, his brothers would not be prosecuted for
the check cashing scheme.

      The property involved in this case is in Paradise Valley, Arizona.
In 2005 Edvard purchased the property for $1,525,000, making a
$392,896 downpayment and obtaining a $1,143,750 bank loan from
Wells Fargo, N.A. (Wells Fargo). Edvard and his wife, Lusine, were the
borrowers. Around the same time as the property purchase, Edvard,
Lusine, and Artur took out a $1,200,000 construction loan. Both loans
were secured by the Paradise Valley property. The construction loan
funds were used to construct, inter alia, a 5,300-square-foot house and
a separate 1,700-square-foot guest house on the property.

      Then on August 25, 2006, Edvard, Lusine, and Artur entered into
temporary bridge financing with Wells Fargo to combine the previous
loan and the construction loan (2006 bridge loan). In October 2008 they
                                    3

[*3] refinanced the 2006 bridge loan with a new loan from Wells Fargo
for $2 million. In connection with this loan, they executed a disclosure
statement which included the following text: “Someone buying my home
cannot assume the remainder of the obligation on the original terms.”
The loan agreement also included text that indicated if the borrowers
sold or transferred the property without the lender’s prior written
consent, the lender could require immediate repayment.

       The deed of trust related to this loan stated that the borrowers
would “occupy, establish, and use the [p]roperty as [b]orrower’s principal
residence within 60 days after the execution” of the document. The deed
of trust further stated that the Paradise Valley property would be the
borrower’s principal residence for at least one year unless the lender
agreed in writing or there are “extenuating circumstances” beyond the
borrower’s control. It also included a provision that any transfer by a
borrower of his beneficial interest in the property constituted a default
and Wells Fargo could require immediate payment of the full loan.

       Artur never contributed to the downpayment of any of the loans.
He neither lived at the Paradise Valley property nor paid any of the
property’s expenses. Artur executed a quitclaim deed dated August 18,
2010, which conveyed all his interest in the property to petitioner. No
request was made to Wells Fargo to approve Artur’s conveyance of
interest in the property. Wells Fargo did not approve the quitclaim
deed.

       Before the execution of the quitclaim deed, Edvard paid the
expenses related to the Paradise Valley property. Petitioner did not pay
Artur in exchange for the quitclaim deed. There is no documentation
associated with the quitclaim deed, including the substitution of
petitioner as a borrower in Artur’s place. During 2012 petitioner made
no payments to Wells Fargo related to the loan secured by the property.
Wells Fargo did not issue petitioner a Form 1098, Mortgage Interest
Statement, for 2012.

       In September 2010 Edvard listed the Paradise Valley property for
$4 million, but it did not sell at the time. The property was relisted for
$3,800,000 in 2013. Starting in July 2013, Edvard paid all the expenses
related to the property.

      Petitioner lived in the separate guest house on the Paradise
Valley property from September 2010 until he purchased a new house
in April 2013 in Phoenix. He also stayed at the Mountain Park
                                   4

[*4] Condominiums, which were used by other family members. Before
living in the guest house, petitioner lived with Lusine’s family, i.e.,
Edvard’s in-laws, in Phoenix, referred to as “15th Place.”

        For 2009–14, the electricity account with Arizona Public Service
for at least one of the units at the Mountain Park Condominiums was in
petitioner’s name. For 2012 petitioner paid the electricity charges by
personal check; before 2012, these expenses were paid by Shilgevorkyan,
LLC. The cable television account with Cox Communications for one of
the units at the Mountain Park Condominiums was also in petitioner’s
name for 2012. In 2012 petitioner renewed his driver’s license and listed
his address at the Paradise Valley address. Petitioner did not list the
Paradise Valley address on his checks or bank statements.

       Petitioner obtained a loan so he could purchase his new house. As
part of the loan application process, he executed a uniform residential
loan application dated February 21, 2013. He listed his address as the
Paradise Valley property and indicated that he had rented it for one year
since the date of the uniform residential loan application. The value of
this property was not included in his list of assets.

       Petitioner received numerous third-party information returns for
2010–13. None of the information returns for 2010, 2011, or 2013
reflects the Paradise Valley property as his address. For 2013 only one
third-party information return, Form 1099–G, Certain Government
Payments, from the Arizona Department of Revenue lists the Paradise
Valley property as petitioner’s address. The 15th Place address was
listed as petitioner’s address on most of the third-party information
returns.

      On his 2010 federal income tax return petitioner listed the 15th
Place address as his address, and on this return he did not claim a
deduction for mortgage interest paid related to the Paradise Valley
property. On his 2011 federal income tax return petitioner listed the
Paradise Valley property as his address. On his 2012 federal income tax
return petitioner listed his new house in Phoenix as his address, and on
the Schedule A attached to this return he deducted, inter alia, $66,354
for mortgage interest paid related to the Paradise Valley property. This
deduction was for one-half the total mortgage interest paid in 2012 on
the Paradise Valley loan as reported by Wells Fargo on the Form 1098
that was issued to Edvard and Lusine.
                                    5

[*5]                           OPINION

I.     Burden of Proof

        In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer bears the
burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). If the taxpayer produces credible evidence with respect
to any factual issue relevant to ascertaining his federal income tax
liability and meets certain other requirements, the burden of proof shifts
from the taxpayer to the Commissioner as to that factual issue.
§ 7491(a)(1) and (2).

       Petitioner contends that he has met the requirements of section
7491(a)(2) and produced credible evidence such that the burden of proof
has shifted to respondent. We disagree. Petitioner failed to maintain
and produce records as required to substantiate his entitlement to the
mortgage interest deduction he claimed on his 2012 Schedule A. Apart
from self-serving testimony by petitioner and Edvard, petitioner has
failed to produce evidence to support his position. Both petitioner and
Edvard offered testimony that was vague and contradictory. In
addition, we note that Edvard’s recent conviction for filing false federal
income tax returns renders his testimony suspect. See Welker v.
Commissioner, T.C. Memo. 1997-472, 1997 Tax Ct. Memo LEXIS 557,
at *17 (“[A] conviction under section 7206(1) may render a taxpayer’s
credibility suspect.”). Therefore, the burden of proof remains with
petitioner.

II.    Section 163 Mortgage Interest Deduction

       A.    Standards

       Tax deductions are a matter of legislative grace, and the taxpayer
bears the burden of proving entitlement to any deduction claimed. Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). This
burden requires the taxpayer to demonstrate that the claimed
deductions are allowable pursuant to some statutory provision and to
substantiate the expenses giving rise to the claimed deductions by
maintaining and producing adequate records that enable the
Commissioner to determine the taxpayer’s correct liability. § 6001;
Higbee v. Commissioner, 116 T.C. 438, 440 (2001); Hradesky
v. Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d
821 (5th Cir. 1976).
                                    6

[*6] Section 163(a) allows a deduction for all interest paid or accrued
within the taxable year on indebtedness. Section 163(h)(1), however,
provides that in the case of a taxpayer other than a corporation (i.e., an
individual) no deduction is allowed for personal interest paid or accrued
during the taxable year. Qualified residence interest is excluded from
the definition of personal interest and so is deductible under section
163(a). See § 163(h)(2)(D).

       The term “qualified residence interest” means any interest paid
or accrued during the taxable year on either acquisition or home equity
indebtedness with respect to any qualified residence of the taxpayer.
§ 163(h)(3)(A).   A taxpayer’s qualified residence is his principal
residence (within the meaning of section 121) and one other residence of
the taxpayer which is selected by the taxpayer and is used by the
taxpayer as a residence (within the meaning of section 280A(d)(1)).
§ 163(h)(4)(A). The determination of whether any property is a qualified
residence of the taxpayer shall be made as of the time the interest is
accrued. § 163(h)(3)(A) (flush language).

       Acquisition indebtedness is any indebtedness which is
(1) incurred in acquiring, constructing, or substantially improving any
qualified residence of the taxpayer and (2) secured by such residence.
§ 163(h)(3)(B)(i). For any period, the aggregate amount of acquisition
indebtedness shall not exceed $1 million. § 163(h)(3)(B)(ii). Acquisition
indebtedness also includes any indebtedness secured by such residence
resulting from the refinancing of acquisition indebtedness, but only to
the extent the amount of the indebtedness resulting from such
refinancing does not exceed the amount of the refinanced indebtedness.
§ 163(h)(3)(B)(i) (flush language). The parties do not dispute that the
mortgage secured by the Paradise Valley property qualifies as
acquisition indebtedness.

       Where a mortgaged property is jointly owned and the co-owners
are jointly liable on the mortgage, each owner is entitled to a deduction
for the mortgage interest that he actually pays out of his own funds.
Jolson v. Commissioner, 3 T.C. 1184, 1186 (1944); Castaneda-Benitez v.
Commissioner, T.C. Memo. 1981-157. The indebtedness generally must
be an obligation of the taxpayer claiming the deduction, not the
obligation of another. Golder v. Commissioner, 604 F.2d 34, 35 (9th Cir.
1979), aff’g T.C. Memo. 1976-150; Hynes v. Commissioner, 74 T.C. 1266,
1287 (1980). Interest paid by the taxpayer on a real estate mortgage of
which he is the legal or equitable owner—even though the taxpayer is
not directly liable upon the bond or note secured by such mortgage—
                                    7

[*7] may be deducted as interest on his indebtedness.        Treas. Reg.
§ 1.163-1(b).

      State law determines the nature of property rights, such as legal
or equitable ownership, while federal law determines the appropriate
federal tax consequences of those rights. See United States v. Nat’l Bank
of Com., 472 U.S. 713, 722 (1985); Blanche v. Commissioner, T.C. Memo.
2001-63, aff’d, 33 F. App’x 704 (5th Cir. 2002). Arizona law applies in
determining petitioner’s property rights.

      B.     Analysis

       Petitioner contends that he owns half of the Paradise Valley
property and has properly deducted his share of the qualified residence
interest. We need not accept a taxpayer’s self-serving testimony when
the taxpayer fails to present credible, corroborative, documentary
evidence. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Petitioner
must satisfy the following three requirements to be entitled to a
deduction pursuant to section 163(a) and (h)(2)(D): (1) the indebtedness
must be his obligation, (2) he must either be the legal or equitable owner
of the property subject to the mortgage, and (3) the residence is his
qualified residence. See Treas. Reg. § 1.163-1(b).

             1.     Obligation on the Debt

       Petitioner argues that he was a legal owner of the Paradise Valley
property, and it was his only residence during 2012. He offered no
evidence to show that he made any mortgage interest payments relating
to the Paradise Valley property, including records of payment that he
claimed he made to Edvard. There is no record that petitioner made
payments to Wells Fargo or that Wells Fargo issued Form 1098 to him.

      Edvard testified that he had an agreement with petitioner in
which petitioner would pay half of the Paradise Valley property
expenses and be entitled to half of the profits from the sale of the
property. Petitioner produced no documentary evidence in support of
the purported agreement. Still, for the sake of argument we will assume
that petitioner was partially obligated to make payments on the Wells
Fargo loan.

             2.     Legal or Equitable Ownership of the Property

       Petitioner contends that the quitclaim deed shows that he has an
interest in the Paradise Valley property. The quitclaim deed does not
                                   8

[*8] establish whether Artur had title in the property. A quitclaim deed
cannot convey greater rights to property than those that the grantor
possessed. See, e.g., SWC Baseline & Crimson Invs., LLC v. Augusta
Ranch Ltd. P’ship, 265 P.3d 1070, 1079 (Ariz. Ct. App. 2011). Because
Artur did not have an interest in the Paradise Valley property, he could
not transfer ownership to petitioner.

       Under Arizona law, an accommodation is made when a single
instrument is signed both by the primary obligor who receives the
benefit of the instrument and by the secondary obligor who does not
receive the benefit of the instrument (the accommodation party). Ariz.
Rev. Stat. Ann. § 47-3419(A) (West 2022). If an accommodation party
ends up paying on the instrument, that party may seek reimbursement
from the primary obligor and may enforce the instrument, but the party
does not have a right to the underlying property. Ariz. Rev. Stat. Ann.
§ 47-3419(E) (West 2022).

       From the testimony we reach the conclusion that Artur was never
an owner of the Paradise Valley property, but rather was an
accommodation party. Artur was a cosigner but never made a single
payment, and there is no evidence to support that he could force a sale
of the property. Under Arizona law, Artur was an accommodation party
and had no ownership interest in the property. Therefore, Artur could
not transfer ownership to petitioner via a quitclaim deed.

       We conclude that petitioner did not have legal title to the
Paradise Valley property because Artur never had an interest in the
property to transfer to him. Neither did petitioner have equitable title
to the property. There is no evidence showing that petitioner was liable
for payments due on the Wells Fargo loan. Petitioner did not pay any
consideration for the quitclaim deed. He did not provide credible
evidence that he paid expenses associated with the property or that he
bore any benefits or burdens of the property.            See Baird v.
Commissioner, 68 T.C. 115, 124 (1977). Therefore, petitioner is not an
equitable owner of the property.

             3.    Qualified Residence

       For petitioner to be entitled to the mortgage interest deduction,
the residence needs to be his qualified residence. Whether property is
used by the taxpayer as the taxpayer’s residence under section 121
depends upon all the facts and circumstances. Treas. Reg. § 1.121-
1(b)(1).
                                    9

[*9] Even if petitioner was able to substantiate his payments to
Edvard, we would still uphold respondent’s determination because
petitioner failed to meet his burden of establishing that the Paradise
Valley property was his principal residence during 2012 or that he
selected it as “1 other residence” for purposes of section 163(h)(4)(A)(i).
Documentary evidence presented at trial was contradictory.

       Petitioner had his mail sent to multiple addresses; almost all of
the information returns issued to him in the relevant years listed 15th
Place as his address. He listed the Paradise Valley property as his
residence on a February 21, 2013, uniform residential loan application
but indicated that he was a renter. The property was not listed on his
bank statements or personal checks. He admitted to staying at the
Mountain Park Condominiums at times, and certain utilities at some of
those condominium units were in his name and paid out of his personal
banking account. Indeed, the record does not indicate how much time
during 2012 he spent at either the Paradise Valley property or the
Mountain Park Condominiums. We conclude that petitioner has not
met his burden of proving that the Paradise Valley property was his
qualified residence for 2012.

III.   Conclusion

      We hold that petitioner is not entitled to the mortgage interest
deduction of $66,354 that he claimed on his 2012 Schedule A.

       We have considered all of the arguments made by the parties and,
to the extent they are not addressed herein, we find them to be moot,
irrelevant, or without merit.

       To reflect the foregoing,

       Decision will be entered for respondent as to the deficiency and for
petitioner as to the accuracy-related penalty.