Bronstein v. Commissioner

FAINA BRONSTEIN, PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

Docket No. 24168–10. Filed May 17, 2012.

P obtained a $1 million mortgage to help finance her pur-

chase of a home. Although she was married, P paid the mort-

gage only with her own funds during 2007. P elected the

‘‘married filing separately’’ filing status on her 2007 tax

return and deducted the interest paid on the entire $1 million

of mortgage indebtedness. R issued a notice of deficiency

which determined that P was limited to a deduction for

382

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(382) BRONSTEIN v. COMMISSIONER 383

interest paid on $500,000 of home acquisition indebtedness

plus interest paid on $50,000 of home equity indebtedness as

a result of her filing status. Held: Under I.R.C. sec.

163(h)(3)(B)(ii) and (c)(ii) P is entitled to a deduction for

interest paid on only $500,000 of home acquisition indebted-

ness plus interest paid on only $50,000 of home equity indebt-

edness. Held, further, P is liable for an accuracy-related pen-

alty under I.R.C. sec. 6662(a).

Bruce Robert McElvenny, for petitioner.

Molly H. Donohue, for respondent.

OPINION

GOEKE, Judge: Respondent determined a deficiency in peti-

tioner’s 2007 Federal income tax of $8,038 as a result of

respondent’s determination that she improperly deducted cer-

tain home mortgage interest paid. Respondent also deter-

mined an accuracy-related penalty under section 6662(a) 1 of

$1,608. 2 The issues remaining for decision are:

(1) whether petitioner is entitled to a deduction for interest

paid on $1 million of home acquisition indebtedness when

she filed her tax return as ‘‘married filing separately’’. We

hold that she is not; and

(2) whether petitioner is entitled to a deduction for interest

paid on $100,000 of home equity indebtedness when she filed

her tax return as ‘‘married filing separately’’. We hold that

she is not; and

(3) whether petitioner is liable for a 20% accuracy-related

penalty under section 6662(a). We hold that she is.

Background

At the time the petition was filed, petitioner resided in

New York.

Petitioner was married throughout 2007. On February 12,

2007, petitioner and her father-in-law, Michael Bronstein

(father-in-law), purchased real property in Brooklyn, New

York (property), as joint tenants with right of survivorship.

The price was $1.35 million. To obtain the necessary funds,

petitioner and her father-in-law each signed and became

1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect

for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Proce-

dure.

2 All dollar amounts are rounded to the nearest dollar.

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384 138 UNITED STATES TAX COURT REPORTS (382)

liable on a mortgage for $1 million (mortgage) secured by the

property. Petitioner paid $2,500 for a loan discount (points)

at the time of closing.

From February through December 31, 2007, petitioner and

her husband resided at the property, which was their prin-

cipal residence for tax purposes. Petitioner’s father-in-law

never resided at the property. During 2007 petitioner used

her own funds to make all payments on the mortgage; nei-

ther her husband nor her father-in-law made any payments

on the mortgage. 3 Petitioner paid $49,739 in interest on the

mortgage during 2007.

Petitioner timely filed her 2007 Federal income tax return

and elected ‘‘married filing separately’’ filing status. On her

Schedule A, Itemized Deductions, she deducted $52,239 in

home mortgage interest and points paid. 4 On August 2,

2010, respondent issued a notice of deficiency to petitioner

for tax year 2007. Respondent’s notice allowed petitioner only

$27,506 of her claimed deduction for the home mortgage

interest paid. 5 Petitioner timely filed a petition contesting

the deficiency and penalty, and the case is before this Court

for a fully stipulated decision without trial under Rule 122.

The stipulated facts are incorporated in our findings by this

reference.

Discussion

I. Burden of Proof

Generally, taxpayers bear the burden of proving, by a

preponderance of the evidence, that the determinations of the

Commissioner in a notice of deficiency are incorrect. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deduc-

tions are a matter of legislative grace, and taxpayers bear

the burden of proving entitlement to any claimed deductions.

Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

3 During 2007 petitioner’s husband did not have a legal ownership interest in the property

and he did not have a legally enforceable obligation to pay the mortgage.

4 Neither petitioner’s husband nor her father-in-law deducted any amounts resulting from her

payment of the mortgage interest or points.

5 Respondent admits on brief that the notice of deficiency was in error in that it should have

allowed petitioner an additional deduction resulting from the $2,500 in points paid under secs.

163(h)(3)(A) and 461(g)(2). Accounting for this error reduces the deficiency to $7,589 and the

accuracy-related penalty to $1,518.

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(382) BRONSTEIN v. COMMISSIONER 385

84 (1992). Petitioner has not argued that respondent should

bear the burden of proof.

II. Qualified Residence Interest Deduction and Indebtedness

Limitations

Section 163(a) allows a deduction for all interest paid or

accrued within the taxable year on indebtedness. As an

exception, section 163(h) generally disallows a deduction for

personal interest. Personal interest, however, does not

include qualified residence interest. Sec. 163(h)(2)(D).

In general, a qualified residence is defined as a taxpayer’s

principal residence and one other home that is used as a resi-

dence by the taxpayer. Sec. 163(h)(4)(A)(i). Qualified resi-

dence interest means any interest paid or accrued during a

tax year on acquisition indebtedness or home equity indebt-

edness with respect to the taxpayer’s qualified residence. Sec.

163(h)(3)(A).

Section 163(h)(3)(B) provides:

(i) IN GENERAL.—The term ‘‘acquisition indebtedness’’ means any indebt-

edness which—

(I) is incurred in acquiring, constructing, or substantially improving

any qualified residence of the taxpayer, and

(II) is secured by such residence.

Such term also includes any indebtedness secured by such residence

resulting from the refinancing of indebtedness meeting the requirements

of the preceding sentence (or this sentence); but only to the extent the

amount of the indebtedness resulting from such refinancing does not

exceed the amount of the refinanced indebtedness.

(ii) $1,000,000 LIMITATION.—The aggregate amount treated as acquisi-

tion indebtedness for any period shall not exceed $1,000,000 ($500,000 in

the case of a married individual filing a separate return).

Section 163(h)(3)(C) provides:

(i) IN GENERAL.—The term ‘‘home equity indebtedness’’ means any

indebtedness (other than acquisition indebtedness) secured by a qualified

residence to the extent the aggregate amount of such indebtedness does

not exceed—

(I) the fair market value of such qualified residence, reduced by

(II) the amount of acquisition indebtedness with respect to such resi-

dence.

(ii) LIMITATION.—The aggregate amount treated as home equity indebt-

edness for any period shall not exceed $100,000 ($50,000 in the case of a

separate return by a married individual).

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386 138 UNITED STATES TAX COURT REPORTS (382)

There is no dispute that the property meets the definition

of a qualified residence and that the mortgage interest peti-

tioner paid is qualified residence interest because it was paid

on acquisition indebtedness and home equity indebtedness

secured by the property.

In his notice of deficiency respondent allowed petitioner to

deduct home mortgage interest on a total of $550,000 of

indebtedness ($500,000 in acquisition indebtedness under

section 163(h)(3)(B)(ii) plus $50,000 of home equity indebted-

ness under section 163(h)(3)(C)(ii)). 6 Petitioner claims that

she should be allowed to deduct interest paid on the entire

$1 million of indebtedness.

Petitioner correctly asserts that the parenthetical indebted-

ness limitations of section 163(h)(3)(B)(ii) and (C)(ii) are

$550,000 for each spouse filing a separate return. However,

petitioner further claims that these limitations were enacted

so that, collectively, a married couple filing separately can

claim $1.1 million of aggregate indebtedness across both of

their returns and is not limited to claiming a maximum of

$550,000 on any one return. We disagree.

When we interpret a statute, our purpose is to give effect

to Congress’ intent. To accomplish this we begin with the

statutory language, which is the most persuasive evidence of

the statutory purpose. See United States v. Am. Trucking

Ass’ns, Inc., 310 U.S. 534, 542–543 (1940); Sophy v. Commis-

sioner, 138 T.C. 206, 212–213 (2012). The words of the

statute should be construed in their ‘‘ordinary, everyday’’,

and plain meaning. Crane v. Commissioner, 331 U.S. 1, 6

(1947). Usually the meaning of the statutory language is

conclusive. See United States v. Ron Pair Enters., Inc., 489

U.S. 235, 242 (1989); Woodral v. Commissioner, 112 T.C. 19,

23 (1999). If a statute is silent or ambiguous, we may look

to the statute’s legislative history in an attempt to determine

congressional intent. See Burlington N. R.R. v. Okla. Tax

Comm’n, 481 U.S. 454, 461 (1987); United States v. Harrell,

637 F.3d 1008, 1012 (9th Cir. 2011). When a statute appears

clear on its face, however, there must be unequivocal evi-

6 In Pau v. Commissioner, T.C. Memo. 1997–43, we held that sec. 163(h) restricts the residen-

tial mortgage interest deduction to interest paid on $1 million of acquisition indebtedness and

that excess acquisition indebtedness could not be treated as home equity indebtedness. See also

Catalano v. Commissioner, T.C. Memo. 2000–82, rev’d on other grounds, 279 F.3d 682 (9th Cir.

2002). The IRS took the contrary position in Rev. Rul. 2010–25, 2010–44 I.R.B. 571. Given re-

spondent’s concession of the issue, we do not address it.

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(382) BRONSTEIN v. COMMISSIONER 387

dence of legislative purpose before the statute is interpreted

in a way that overrides the plain meaning of the words used

therein. See Burlington, 481 U.S. at 461; Harrell, 637 F.3d

at 1012; Pallottini v. Commissioner, 90 T.C. 498, 503 (1988);

Huntsberry v. Commissioner, 83 T.C. 742, 747–748 (1984).

We believe section 163(h)(3)(B)(ii) clearly states that a

married individual filing a separate return is limited to a

deduction for interest paid on $500,000 of home acquisition

indebtedness. Similarly, we believe section 163(h)(3)(C)(ii)

clearly states that a married individual filing a separate

return is limited to a deduction for interest paid on $50,000

of home equity indebtedness.

Petitioner has not offered any unequivocal evidence of

legislative purpose which would allow us to override the

plain language of section 163(h)(3)(B)(ii) and (C)(ii). 7 As a

result, we agree with respondent that petitioner is not enti-

tled to a deduction for the interest paid on the entire $1 mil-

lion of acquisition indebtedness incurred in purchasing the

property. Rather, petitioner is entitled to deduct interest paid

on only $550,000 of the mortgage indebtedness.

III. Accuracy-Related Penalty

Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-

related penalty if any part of an underpayment of tax

required to be shown on a return is due to, among other

things, negligence or disregard of rules or regulations or a

substantial understatement of income tax. The penalty is

20% of the portion of the underpayment of tax to which the

section applies. Sec. 6662(a).

The Commissioner bears the burden of production on the

applicability of an accuracy-related penalty in that he must

come forward with sufficient evidence indicating that it is

proper to impose the penalty. See sec. 7491(c); see also Higbee

v. Commissioner, 116 T.C. 438, 446 (2001). Once the

Commissioner meets this burden, the burden of proof

7 Petitioner claims that respondent’s interpretation of the statute would result in married cou-

ples filing separately receiving disparate treatment compared to married couples filing jointly.

Petitioner argues that ‘‘If Congress had a purpose for treating married couples filing separately

different from married couples filing joint returns, they would have expressed their intent in

the legislative record’’, then notes ‘‘that none of the legislative proposals or committee reports

mentioned limiting the indebtedness amount for married couples filing separate returns.’’ Peti-

tioner argues that various other statutes demonstrate a legislative purpose different from the

plain language of sec. 163(h)(3)(B)(ii) and (C)(ii). After considering petitioner’s arguments, we

find them unconvincing.

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388 138 UNITED STATES TAX COURT REPORTS (382)

remains with the taxpayer, including the burden of proving

that the penalty is inappropriate because of reasonable cause

and good faith. See Higbee v. Commissioner, 116 T.C. at 446–

447.

Respondent satisfies his burden of production by showing

that the understatement meets the definition of ‘‘substan-

tial’’. See Janis v. Commissioner, T.C. Memo. 2004–117,

aff ’d, 461 F.3d 1080 (9th Cir. 2006), and aff ’d, 469 F.3d 256

(2d Cir. 2006). An understatement of income tax is ‘‘substan-

tial’’ if it exceeds the greater of 10% of the tax required to

be shown on the return or $5,000. Sec. 6662(d)(1)(A). An

‘‘understatement’’ is defined as the excess of the tax required

to be shown on the return over the tax actually shown on the

return, less any rebate. Sec. 6662(d)(2)(A). The understate-

ment of income tax in this case is $7,589, which exceeds the

greater of 10% of the tax required to be shown on the

return 8 or $5,000 and is thus ‘‘substantial’’. Respondent has

therefore met his burden of production.

The amount of an understatement shall be reduced by that

portion of the understatement which is attributable to: (1)

the tax treatment of any item by the taxpayer if there is or

was substantial authority for such treatment; or (2) any item

if the taxpayer adequately disclosed relevant facts affecting

the item’s tax treatment in the return or in a statement

attached to the return and there is a reasonable basis for the

tax treatment of the item by the taxpayer. Sec. 6662(d)(2)(B).

Petitioner claims that section 163 and the legislative his-

tory provide both substantial authority and a reasonable

basis for her treatment of the mortgage interest paid. How-

ever, as stated supra p. 387, we believe section

163(h)(3)(B)(ii) and (C)(ii) clearly limits deductions for

interest paid on a home mortgage to the interest paid on

$500,000 of home acquisition indebtedness and $50,000 of

home equity indebtedness in the case of a married taxpayer

filing separately. We therefore do not believe petitioner has

any substantial authority or reasonable basis for the position

she took on her 2007 tax return.

Petitioner also argues that the accuracy-related penalty

does not apply because she meets the reasonable cause

defense of section 6664(c)(1). Pursuant to that section,

8 The amount of tax required to be shown on petitioner’s return was approximately $36,000.

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(382) BRONSTEIN v. COMMISSIONER 389

accuracy-related penalties under section 6662 do not apply to

any portion of an underpayment for which a taxpayer estab-

lishes that he or she: (1) had reasonable cause; and (2) acted

in good faith. Whether a taxpayer has acted with reasonable

cause and in good faith depends on the pertinent facts and

circumstances, including efforts to assess the proper tax

liability, the taxpayer’s knowledge and experience, and the

extent to which the taxpayer relied on the advice of a tax

professional. Sec. 1.6664–4(b)(1), Income Tax Regs. ‘‘Gen-

erally, the most important factor is the extent of the tax-

payer’s effort to assess the taxpayer’s proper tax liability.’’ Id.

Petitioner asserts that ‘‘Confusion over the interpretation

of sections 163(h)(3)(B)(ii) and 163(h)(3)(C)(ii) should be suffi-

cient to establish that under section * * * [6664(c)(1)] and

Treasury Regulations section 1.6664–4(c), the accuracy-

related penalty should not be imposed.’’ Petitioner also

claims that ‘‘there was no reason for the Petitioner to ques-

tion the conclusions of her tax advisor that Petitioner was

acting properly in filing the Petitioner’s return.’’

As stated supra p. 387, we believe that section

163(h)(3)(B)(ii) and (C)(ii) clearly limits deductions for

interest paid on a home mortgage to the interest paid on

$500,000 of home acquisition indebtedness and $50,000 of

home equity indebtedness in the case of a married taxpayer

filing separately. As a result, we disagree with petitioner

that the requirements of section 6664(c)(1) are satisfied

because of ‘‘confusion’’ in the interpretation of section

163(h)(3)(B)(ii) and (C)(ii).

Although petitioner claims to have followed the advice

given to her by her tax adviser, 9 she has made no attempt

to establish that the reliance was reasonable. See Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), aff ’d on another

issue, 904 F.2d 1011 (5th Cir. 1990), aff ’d, 501 U.S. 868

(1991); sec. 1.6664–4(b)(1), Income Tax Regs. We have pre-

viously held that

for a taxpayer to rely reasonably upon advice so as possibly to negate a

section 6662(a) accuracy-related penalty determined by the Commissioner,

the taxpayer must prove * * * that the taxpayer meets each requirement

of the following three-prong test: (1) The adviser was a competent profes-

9 Petitioner’s tax return reflects that it was prepared by Bruce McElvenny of McElvenny &

Associates, P.C.

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390 138 UNITED STATES TAX COURT REPORTS (382)

sional who had sufficient expertise to justify reliance, (2) the taxpayer pro-

vided necessary and accurate information to the adviser, and (3) the tax-

payer actually relied in good faith on the adviser’s judgment. * * *

[Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff ’d,

299 F.3d 221 (3d Cir. 2002).]

Petitioner has failed to prove that she satisfied any of these

three requirements.

Petitioner has failed to show substantial authority or a

reasonable basis for the position she took on her 2007 tax

return. Petitioner has also failed to prove she meets the

reasonable cause defense of section 6664(c)(1). As a result,

we hold petitioner is liable for the 20% accuracy-related pen-

alty.

IV. Conclusion

We hold that petitioner is not entitled to a deduction for

home mortgage interest paid on $1 million of acquisition

indebtedness when she filed her tax return as ‘‘married filing

separately’’. Rather, petitioner is entitled to a deduction for

the interest paid on only $500,000 of home mortgage indebt-

edness plus the interest paid on $50,000 of home equity

indebtedness, as conceded by respondent. We further hold

that petitioner is liable for a 20% accuracy-related penalty

under section 6662(a).

In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

f

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