The opinion
T.C. Summary Opinion 2017-24
UNITED STATES TAX COURT
GREGORY ALAN BROWN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7972-15S. Filed April 25, 2017.
Gregory Alan Brown, pro se.
Bartholomew Cirenza, for respondent.
SUMMARY OPINION
COLVIN, Judge: This case was heard pursuant to the provisions of section
7463 of the Internal Revenue Code in effect when the petition was filed.1
1
Other section references are to the Internal Revenue Code in effect for the
year in issue. Rule references are to the Tax Court Rules of Practice and
(continued...)
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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.
Respondent determined a deficiency in petitioner’s Federal income tax for
the taxable year 2012 of $1,491. In an amendment to answer respondent asserted
an increased deficiency in petitioner’s Federal income tax for the taxable year
2012, contending that petitioner used an incorrect filing status and failed to report
dividend income. The issues for decision are:
1. Whether as respondent contends, petitioner received but failed to report
dividend income of $5,103 from a corporation he controlled in the amount during
the taxable year 2012. We hold that he did.
2. Whether as petitioner contends, petitioner is entitled to deduct home
mortgage interest in excess of the amount that respondent conceded. We hold that
he is.
3. Whether petitioner’s correct filing status for the 2012 tax year was head
of household as reported on his return. We hold that petitioner’s filing status was,
as respondent contends, married filing separately.
1
(...continued)
Procedure. Dollar amounts are rounded to the nearest dollar.
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Background
Some of the facts have been stipulated and are so found. Petitioner resided
in Maryland when the petition was timely filed.
A. Home Mortgage Interest
In 2009 petitioner copurchased a house with Maria Payne. Petitioner and
Ms. Payne continued to coown that house during 2012. Petitioner and Ms. Payne
purchased the house with the expectation that petitioner would eventually become
the sole owner. However, until petitioner became the sole owner, petitioner and
Ms. Payne were each liable for the mortgage payments on the house.
During 2012 the house was secured by a mortgage held by GMAC
Mortgage, LLC (GMAC). GMAC identified Ms. Payne as the primary account
holder on the mortgage and petitioner as the secondary account holder. The
monthly mortgage payment was $3,396. During 2012 petitioner and Ms. Payne
collectively paid $22,530 of mortgage interest with respect to the house. GMAC
reported the interest received to respondent on Form 1098, Mortgage Interest
Statement. Because Ms. Payne was the primary account holder, the Form 1098
filed with respondent identifies her, not petitioner, as the sole payer of the home
mortgage interest.
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Ms. Payne moved out of the house in 2011. However, she remained a
coowner of the house until April 2013. Petitioner married Sherrie Brown in
December 2011, and they remained married throughout 2012. Mrs. Brown lived
in a separate residence for most of 2012 so her children could finish the year
without changing schools. Mrs. Brown moved into petitioner and Ms. Payne’s
coowned house late in 2012. Petitioner became the sole owner of that house in
April 2013.
B. Greycom, Inc.
Petitioner is the sole owner of Greycom, Inc., a Maryland C corporation.
Greycom is an electrical contracting company. Petitioner was also employed by
Greycom, which paid him wages of approximately $35,200 during 2012.
Petitioner’s personal expenses during 2012 exceeded this amount. Greycom was
profitable, and petitioner occasionally used funds from Greycom’s business
accounts to pay his personal expenses.
During 2012 petitioner made six mortgage payments totaling $20,376 on the
house he coowned from his personal bank account. Petitioner also made two
payments to GMAC totaling $5,103 on the house from Greycom’s bank account.
Petitioner filed his Federal income tax return for 2012 as a head of
household. Petitioner deducted on his return the entire $22,530 of mortgage
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interest paid with respect to the house he coowned with Ms. Payne during 2012.
Respondent examined petitioner’s return and issued a notice of deficiency
disallowing petitioner’s mortgage interest deduction in its entirety.
Respondent concedes that petitioner is entitled to a deduction of $11,265 for
mortgage interest relating to payments made from his personal bank account.
After trial the Court allowed respondent to amend the answer in this case to assert
that petitioner had received unreported dividend income from Greycom during
2012 and that petitioner’s correct filing status for 2012 was married filing
separately.
Discussion
A. Burden of Proof
In the notice of deficiency respondent determined that petitioner was not
entitled to the home mortgage interest deduction he had claimed for the taxable
year 2012. The taxpayer generally bears the burden of proving that the
Commissioner’s deficiency determination is in error. Rule 142(a)(1). The burden
of proving a factual issue relating to tax liability shifts to the Commissioner under
certain circumstances. Sec. 7491(a). Petitioner has not shown and does not
contend that section 7491 applies. Thus, petitioner bears the burden of proving
that respondent’s determinations in the notice of deficiency are in error. See Rule
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142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Respondent bears the
burden of proof with respect to the items raised in his amended answer. See Rule
142(a)(1); Foster v. Commissioner, T.C. Memo. 2012-207.
B. Dividend Income
At trial petitioner testified that he had made mortgage payments on the
house he coowned during 2012 from Greycom’s business accounts. The parties
stipulated that these payments totaled $5,103. Respondent contends that this
amount constitutes a taxable dividend to petitioner.
A dividend is a distribution of property made by a corporation to its
shareholders from its earnings and profits. Sec. 316(a). A shareholder may
receive a dividend even though the corporation has not formally declared a
distribution. Truesdell v. Commissioner, 89 T.C. 1280, 1295 (1987). If a
corporation makes a noncompensatory payment on behalf of a shareholder without
a business purpose or expectation of repayment, then this amount constitutes a
constructive dividend to the shareholder. Benjamin v. Commissioner, 66 T.C.
1084, 1115 (1976), aff’d, 592 F.2d 1259 (5th Cir. 1979).
Greycom’s payments of petitioner’s personal mortgage expenses are
distributions to him. See id. Petitioner’s testimony indicated that his personal
expenses during 2012 far exceeded the $35,200 salary he received from Greycom.
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Petitioner also indicated that Greycom was profitable during the taxable years
2010 and 2011. We hold that respondent has proven by a preponderance of the
evidence that Greycom had sufficient earnings and profits that these distributions
were dividends to petitioner. See sec. 301(c)(1).
C. Home Mortgage Interest
Section 163(h)(2)(D) generally allows a deduction for “any qualified
residence interest” paid during the taxable year. In the case of a mortgage loan for
which the taxpayer is jointly liable with another person, a deduction for mortgage
interest is allowable to the persons or person who pays the interest out of his or her
own funds in proportion to the payment. See Higgins v. Commissioner, 16 T.C.
140, 142-144 (1951); Jolson v. Commissioner, 3 T.C. 1184, 1186-1187 (1944).
The parties stipulated that during the taxable year 2012 petitioner made six
mortgage payments totaling $20,376 on the house from his personal bank account.
We find that petitioner also constructively made payments totaling $5,103 from
Greycom’s bank account, which were constructive dividends to him. See Peters,
Gamm, West & Vincent, Inc. v. Commissioner, T.C. Memo. 1996-186, 71 T.C.M.
(CCH) 2789, 2795; see also Broad v. Commissioner, T.C. Memo. 1990-317, 59
T.C.M. (CCH) 997, 1000 (holding that a shareholder was allowed a deduction
after receiving a constructive dividend from the C corporation’s payment of his
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personal obligations); Berlin v. Commissioner, T.C. Memo. 1961-194, 20 T.C.M.
(CCH) 969, 975 (holding that a shareholder was allowed to deduct the accrued
interest following the C corporation’s payment of his loans). Petitioner did not
present any credible evidence showing that he made mortgage payments in excess
of the amounts described above. See Whitehead v. Commissioner, T.C. Memo.
2001-317, 82 T.C.M. (CCH) 976, 992-993 (declining to rely on taxpayer’s
testimony to determine portion of mortgage interest paid).
The monthly mortgage payment on the house was $3,396 for an annual total
of $40,752. The interest portion of the mortgage payments totaled $22,530. We
find that petitioner is entitled to deduct $14,086 (i.e., $20,376 + $5,103 ÷ $40,752
= 0.62522; 0.62522 × $22,530 = $14,086) for mortgage interest paid during 2012.
D. Filing Status
Petitioner filed his 2012 Federal income tax return as a head of household.
In the amendment to answer respondent asserted that petitioner’s correct filing
status was married filing separately.
Generally, to qualify as a head of household, a taxpayer, among other
requirements, may not be married at the close of the taxable year. Sec. 2(b).
Petitioner agrees that he was married throughout 2012. However, an individual is
not considered married for the purpose of determining head of household filing
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status if he or she is legally separated from his or her spouse under a decree of
divorce, if his or her spouse is a nonresident alien, or if (inter alia) he or she lives
apart from his or her spouse for the last six months of the taxable year. Secs.
2(b)(3), (c), 7703(b). As relevant here, petitioner testified that Mrs. Brown lived
with him for at least part of the second half of 2012. Thus, petitioner’s correct
filing status is married filing separately, not head of household.
To reflect the foregoing,
Decision will be entered under
Rule 155.