SOPHY V. COMMISSIONER 138 T.C. 204 (2012) CASE BRIEF

SOPHY V. COMMISSIONER

138 T.C. 204 (2012)

NATURE OF THE CASE: Commissioner (P) determined that Sophy (Ds), co-owners of two residences, were together limited in deducting interest on $1 million of acquisition indebtedness and $100,000 of home equity indebtedness, under I.R.C. sec. 163(h)(3)(B)(ii) and (C)(ii). Ds contend that where co-owners are not married to each other, the limitations apply separately to each taxpayer who is a co-owner of up to two residences.

FACTS: Sophy (D) and Voss (D) purchased a house together in California, and financed the purchase by obtaining a mortgage that was secured by the house. In 2002 Ds refinanced the house with a new mortgage loan of $500,000. The proceeds of the new mortgage loan, which was secured by the house, were used to pay off the original mortgage loan. Ds were jointly and severally liable for the new mortgage on the house. In 2002, Ds purchased a house in Beverly Hills. Ds acquired the Beverly Hills house as joint tenants and held the property as joint tenants during the years in issue. To finance the purchase, Ds obtained a mortgage secured by the Beverly Hills house. In 2003 Ds refinanced the Beverly Hills house by obtaining a new mortgage loan of $2 million. The proceeds of this new mortgage loan, which was secured by the Beverly Hills house, were used to pay off the original mortgage loan. Ds were jointly and severally liable for the mortgage on the Beverly Hills house. In 2003 Ds obtained a home equity line of credit of $300,000 for the Beverly Hills house, on which Ds were jointly and severally liable. Ds used the Beverly Hills house as their principal residence and the Rancho Mirage house (the first one) as their second residence. In 2006 Sophy paid mortgage interest of $94,698 for the two residences, and Voss paid $85,962. The total average balance in 2006 was $2,703,568. In 2007 Sophy paid mortgage interest of $99,901, and Voss paid $76,635. The total average balance in 2007 was $2,669,136. Ds each claimed deductions for qualified residence interest. P disallowed portions of Ds' deductions for qualified residence interest. P computed the applicable limitation ratio as $1.1 million ($1 million for acquisition indebtedness plus $100,000 for home equity indebtedness) over the entire average balance of the qualifying loans. Ds argue that they should each be allowed a deduction for interest paid on up to $1.1 million of acquisition and home equity indebtedness with respect to the residences that they jointly own. Under their interpretation, because these cases involve two unmarried co-owners, together they should be able to deduct interest paid on up to $2.2 million of acquisition and home equity indebtedness.

ISSUE:

RULE OF LAW:

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LEGAL ANALYSIS:

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