Court Opinion

ID: 9404933
Source: CourtListenerOpinion
Date Created: 2023-06-26 19:03:21.809672+00
Date Added: 2024-06-11T17:20:18.133465
License: Public Domain

United States Tax Court

                        T.C. Summary Opinion 2023-22

      FRANK R. MCNAMARA AND COLLETTE M. MCNAMARA,
                       Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 3237-22S.                                           Filed June 26, 2023.

                                     —————

Robert Bernard Nealon, for petitioner.

Aaron M. Bailey, for respondent.

                              SUMMARY OPINION

       CHOI, Special Trial Judge: This case was submitted pursuant to
the provisions of section 7463 of the Internal Revenue Code in effect
when the Petition was filed. 1 Pursuant to section 7463(b), the decision
to be entered is not reviewable by any other court, and this Opinion shall
not be treated as precedent for any other case. Furthermore, this case
was submitted to the Court fully stipulated for a decision without trial
pursuant to Rule 122.

      In a notice of deficiency dated November 29, 2021, the Internal
Revenue Service (respondent) determined a deficiency in petitioners’
federal income tax of $2,194 for taxable year 2019. The deficiency results

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and
Rule references are to the Tax Court Rules of Practice and Procedure.

                                 Served 06/26/23
                                     2

from the partial disallowance of the mortgage interest deduction
claimed on petitioners’ 2019 joint federal income tax return.

      The issue for decision is whether petitioners correctly calculated
the home mortgage interest deduction for the year in issue.

                               Background

       Some facts have been stipulated and are so found. The Stipulation
of Facts and the attached Exhibits are incorporated by this reference.
Petitioners were residents of Virginia when they filed the Petition.

      In 2019 petitioners owned two homes, which they acquired after
October 1987 and before December 16, 2017. Petitioners owned the first
home in Virginia for the entire year. They owned the second home in
Massachusetts (Massachusetts home) until or around May 10, 2019,
when they sold it.

       On their 2019 Form 1040, U.S. Individual Income Tax Return,
petitioners claimed a total mortgage interest deduction of $39,226 for
their two homes. Respondent disallowed $9,140 of the deduction,
asserting that petitioners miscalculated the deduction for the
Massachusetts home. Despite having sold the home in May 2019,
petitioners calculated the deduction using a 12-month period to
determine the average mortgage balance, the determination of which
was necessary for calculating petitioners’ mortgage interest deduction.

                                Discussion

I.    Burden of Proof

       Generally, the Commissioner’s determinations in a statutory
notice of deficiency are presumed correct, and the taxpayer bears the
burden of proving that those determinations are erroneous. Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). However, in
certain circumstances, if the taxpayer introduces credible evidence with
respect to a factual issue relevant to ascertaining the proper tax liability,
section 7491(a)(1) shifts the burden of proof to the Commissioner.
Petitioners do not contend, and the evidence does not establish, that the
burden of proof shifts to respondent as to any issue of fact. See Higbee v.
Commissioner, 116 T.C. 438, 442 (2001).
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II.   Mortgage Interest Deduction

       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, 116 T.C. at 440; Hradesky v. Commissioner, 65 T.C. 87, 89–90
(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976).

       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. Nevertheless, qualified residence interest is
excluded from the definition of personal interest and 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).

       Acquisition indebtedness is any indebtedness that 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). The aggregate amount of acquisition indebtedness
shall not exceed $1 million for any period. § 163(h)(3)(B)(ii).

       The issue here is not whether petitioners are entitled to deduct
mortgage interest, but the amount of the deduction to which they are
entitled. The amount of petitioners’ deduction depends on whether they
may calculate the average mortgage balance for the Massachusetts
home using a 12-month period or must use the 5-month period during
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which the home secured the outstanding balance on their mortgage.
When a 5-month period is used to calculate the average mortgage
balance for the Massachusetts home, petitioners’ aggregate acquisition
indebtedness exceeds the $1 million limit, making a portion of the
mortgage interest they paid for taxable year 2019 not deductible.
Petitioners rely on examples provided in I.R.S. Publication 936, Home
Mortgage Interest Deduction, to assert they correctly used a 12-month
period to calculate the average monthly mortgage debt for their
Massachusetts home.

       Petitioners’ reliance on Publication 936 to use a 12-month period
to calculate the amount of their mortgage interest is misguided. See
Miller v. Commissioner, 114 T.C. 184, 195 (2000) (explaining that
administrative guidance is not binding on the Court when the plain
meaning of a statute is clear). Section 163 is unambiguous in providing
that the mortgage interest deduction is allowed only for interest paid on
the outstanding mortgage balance secured by the taxpayer’s home. See
§ 163(h)(3)(A) (providing a deduction for interest paid on debt incurred
to buy, build/improve, or borrow against a taxpayer’s home when the
debt is secured by the home). A taxpayer may not claim the mortgage
interest deduction for periods during which the taxpayer’s outstanding
mortgage debt is not secured by the taxpayer’s home. See Temp. Treas.
Reg. § 1.163-10T(h) (providing that when calculating the average
mortgage balance, a taxpayer must consider the period the outstanding
mortgage balance was secured by the taxpayer’s home, which may be
less than a calendar year).

       Petitioners erred when they calculated the average mortgage
balance for their Massachusetts home using the 12-month period
instead of the 5-month period during which the home secured the
outstanding balance on the mortgage. Calculating the average mortgage
balance for the Massachusetts home using a five-month period causes
petitioners’ mortgage indebtedness for 2019 to exceed the $1 million
limit such that a portion of the interest they paid is not deductible.
Accordingly, the notice of deficiency in this matter is sustained.

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

      To reflect the foregoing,

      Decision will be entered for respondent.