T.C. Summary Opinion 2007-116
UNITED STATES TAX COURT
UNNI KRISHNAN NAIR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20772-05S. Filed July 9, 2007.
Unni Krishnan Nair, pro se.
Steven N. Balahtsis, for respondent.
NIMS, Judge: This case was heard pursuant to the provisions
of section 7463 of the Internal Revenue Code in effect when the
petition was filed. 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. Unless
otherwise indicated, all section references are to the Internal
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Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
This case arises from a petition for judicial review filed
in response to a notice of deficiency. The issues for decision
are: (1) Whether petitioner is entitled to a deduction for
mortgage interest; (2) whether petitioner is entitled to a
deduction for real estate taxes; and (3) whether petitioner is
entitled to a casualty loss deduction.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and related exhibits are incorporated
herein by this reference.
At the time he filed the petition on November 4, 2005,
petitioner resided in the Bronx, New York.
During 2003, the year in issue, petitioner worked as a
computer network engineer for Columbia University. Petitioner
filed a 2003 Form 1040, U.S. Individual Income Tax Return, which
was prepared by a paid tax return preparer. On the return,
petitioner claimed dependency exemption deductions for both of
his parents.
Petitioner attached to the return a Schedule A, Itemized
Deductions, claiming $39,412 in deductions. These deductions
included, among other things, $2,459 of real estate taxes, $4,418
of home mortgage interest, and a casualty loss deduction in the
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amount of $27,927. These three deductions all related to a house
located at 4026 Bronx Boulevard, Bronx, New York. The owners
listed on the title to this house were Madhu Nair, petitioner’s
father, and P.J. Sabastin, an unrelated individual. A mortgage
loan on the house had been acquired through Greenpoint Mortgage
Funding, Inc. (Greenpoint) in the names of petitioner’s parents,
Madhu Nair and Saroja Nair. Greenpoint sent to petitioner’s
parents a 2003 Mortgage Interest Statement reflecting $4,418.32
of mortgage interest received during 2003 and real estate taxes
in the amount of $2,458.89 paid in 2003.
Petitioner started making payments related to the house in
2002, when he started working, and he continued to do so beyond
2003. Petitioner provided some, but not all, of his bank account
statements for 2002, 2003, and 2004, which clearly show that
petitioner did make payments to Greenpoint. These payments were
in the following amounts: $930.16 in May 2003, $965.62 in July
2003, $965.62 in August 2003, $965.62 in September 2003, $965.62
in October 2003, $965.62 in November 2003, $965.62 in December
2003, and $965.62 in January 2004. In total, petitioner paid
$6,723.88 to Greenpoint in 2003. The mortgage interest statement
indicates that Greenpoint received $11,474.27 in payments in
2003. The record is silent as to who paid the $4,750.39
difference.
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The casualty losses that petitioner deducted were due to a
fire which severely damaged the Bronx Boulevard house on February
25, 2003. The $27,927 deduction amount reflected a $26,000 loss
for destruction of the house ($26,000 cost basis with a $112,350
fair market value before the fire) and $6,500 for petitioner’s
personal property within the house ($7,500 cost basis with a
$6,500 fair market value before the fire), after the applicable
limitations. The insurance policy covering the house was
canceled effective February 6, 2003, for nonpayment of premium.
The named insureds on this policy were petitioner’s father and
Mr. Sabastin, the record owners of the house. Petitioner
submitted some bank statements with an attached letter explaining
that he believed some of the checks were for insurance premium
payments in 2002, but the statements did not specify to whom the
checks were paid, and petitioner did not submit any canceled
checks to support his contention.
On August 8, 2005, respondent sent petitioner a statutory
notice of deficiency to his last known address. Respondent
determined a deficiency in the amount of $3,636. The deficiency
adjustments reflected $15 of unreported interest income, which
petitioner stipulated that he received, and disallowance of
petitioner’s claimed deductions for mortgage interest, real
estate taxes, and casualty loss for lack of verification.
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Discussion
The Commissioner’s determination in a notice of deficiency
is generally presumed correct, and the taxpayer has the burden of
proving that the determination is erroneous. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Tax deductions are
a matter of legislative grace, and the taxpayer bears the burden
of proving entitlement to the deductions claimed on a return.
Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992).
Under certain circumstances, the burden of proof with
respect to relevant factual issues may shift to the Commissioner
under section 7491(a). Petitioner has neither alleged that
section 7491(a) applies nor established his compliance with the
requirements of section 7491(a)(2)(A) and (B) to substantiate
items, maintain records, and cooperate fully with respondent’s
reasonable requests. Therefore, the burden of proof does not
shift to respondent.
Respondent’s position is that petitioner cannot claim any of
the deductions related to the Bronx Boulevard house because he
was not the owner of the property. As we understand his
position, petitioner contends that he is entitled to claim these
deductions because he paid the mortgage payments and all of the
bills associated with the house.
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Deduction for Mortgage Interest
In general, section 163 allows a deduction for interest paid
or accrued on indebtedness. For taxpayers who are not
corporations, section 163(h)(1) disallows a deduction for
personal interest. Interest paid on a mortgage secured by a
qualified residence, however, is excluded from the definition of
personal interest and is therefore deductible. See sec.
163(h)(2) and (3).
To meet the requirements of section 163, the mortgage must
be the obligation of the taxpayer claiming the deduction, not the
obligation of another. Golder v. Commissioner, 604 F.2d 34, 35
(9th Cir. 1979), affg. T.C. Memo. 1976-150. However, section
1.163-1(b), Income Tax Regs., provides that even if a taxpayer is
not directly liable on a mortgage, the taxpayer may nevertheless
deduct the mortgage interest paid if he or she is the legal or
equitable owner of the property subject to the mortgage. Where
the taxpayer does not establish legal, equitable, or beneficial
ownership of mortgaged property, we have disallowed the deduction
for mortgage interest. See Daya v. Commissioner, T.C. Memo.
2000-360; Song v. Commissioner, T.C. Memo. 1995-446.
Petitioner is not directly liable on the mortgage, as the
mortgage interest statement was directed to his parents alone.
Petitioner acknowledged that he did not have legal title to the
Bronx Boulevard house. Title was in his father’s and Mr.
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Sabastin’s names. Therefore, petitioner must establish
beneficial or equitable ownership in the Bronx Boulevard house in
order to be entitled to deduct any mortgage interest payments.
See Daya v. Commissioner, supra; Trans v. Commissioner, T.C.
Memo. 1999-233; Uslu v. Commissioner, T.C. Memo. 1997-551.
State law determines the nature of property rights, and
Federal law determines the tax consequences of those rights.
United States v. Natl. Bank of Commerce, 472 U.S. 713, 722
(1985); Blanche v. Commissioner, T.C. Memo. 2001-63, affd. 33
Fed. Appx. 704 (5th Cir. 2002). Under New York law, a purchaser
of property becomes the equitable owner upon entering into a
contract for sale of the property. Dubbs v. Stribling &
Associates, 712 N.Y.S.2d 19 (App. Div. 2000), affd. 752 N.E.2d
850 (2001); Edwards v. Van Skiver, 681 N.Y.S.2d 893 (App. Div.
1998). Petitioner has not alleged, and we find no evidence in
the record, that petitioner ever gained an equitable ownership
interest in the Bronx Boulevard house. Petitioner offered no
evidence that his father or Mr. Sabastin ever entered into an
agreement that would entitle petitioner to an ownership interest
in the house. Therefore, we find that petitioner was not an
equitable owner of the Bronx Boulevard house during 2003.
Furthermore, petitioner’s situation is not similar to cases
where we have held that even though the taxpayer’s family member
secured the mortgage as an accommodation, the deduction was
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appropriate because the taxpayer exclusively had, and was
intended to have, the benefits and burdens of ownership. See
Trans v. Commissioner, supra; Uslu v. Commissioner, supra. In
Trans and Uslu, the taxpayers lived in the houses, made all of
the mortgage payments, and paid all other expenses for
maintenance and improvements. In addition, the taxpayers in
Trans made the downpayment on the purchase.
In the present case, petitioner has not offered evidence
that the benefits and burdens he had from the Bronx Boulevard
house rose to the level accepted by this Court in Uslu and Trans.
Petitioner stated that he made payments related to the house on
behalf of his parents, whom he testified were his dependents and
had no bank accounts. Petitioner’s bank statements show that he
made only eight mortgage payments, none before May 2003.
Petitioner did not claim he contributed to the downpayment on the
house. We have no evidence to support petitioner’s claim that he
paid the premiums on the insurance policy covering the house.
The record is also unclear as to what extent petitioner even
lived in the house. Overall, we cannot say that petitioner’s
actions with respect to the house indicate that he treated the
house as his own or that he was intended to have the full
benefits and burdens of ownership.
We conclude based on the record that petitioner made
payments on his parents’ mortgage merely as a way to provide
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support for them. While admirable, this moral obligation to
support his parents does not entitle him to deduct the mortgage
interest. See Daya v. Commissioner, supra; Tuer v. Commissioner,
T.C. Memo. 1983-441.
Because he was not liable on the Greenpoint mortgage and
because he was not the legal or equitable owner of the Bronx
Boulevard house, we hold that petitioner was not entitled to a
deduction for mortgage interest on his 2003 income tax return.
Deduction for Real Property Taxes
Section 164 permits a deduction for certain types of taxes,
including real property taxes. Sec. 164(a)(1). In general,
taxes are deductible only by the person upon whom they are
imposed. Sec. 1.164-1(a), Income Tax Regs. As with mortgage
interest, we have held that taxpayers who do not have legal title
to property may nevertheless deduct property taxes paid with
respect to the property if they establish equitable ownership of
the property. See Trans v. Commissioner, supra; Uslu v.
Commissioner, supra.
As previously discussed, petitioner was not a legal or
equitable owner of the Bronx Boulevard house in 2003. Therefore,
petitioner is not entitled to deduct property taxes paid on the
property.
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Casualty Loss Deduction
On his 2003 tax return, petitioner claimed a casualty loss
deduction in the amount of $27,927. This claimed loss deduction
resulted from a fire that severely damaged the Bronx Boulevard
house on February 25, 2003. Petitioner also deducted the loss of
his personal property that was inside the house at the time of
the fire.
Section 165(a) allows a deduction for any loss sustained
during the taxable year and not compensated for by insurance or
otherwise. For individuals, section 165(c)(3) allows a taxpayer
to deduct a loss from fire, storm, shipwreck, or other casualty,
or from theft. The deduction is only allowed to the extent the
loss exceeds $100 and the net casualty loss exceeds 10 percent of
the taxpayer’s adjusted gross income. Sec. 165(h). The amount
allowed as a deduction is the lesser of: (1) The difference
between the fair market value of the property immediately before
and immediately after the casualty; and (2) the adjusted basis in
the property. Helvering v. Owens, 305 U.S. 468 (1939); sec.
1.165-7(b), Income Tax Regs.
Inherent in section 165 is the requirement that to claim a
deduction for the loss of property, the taxpayer must have been
the owner of the property at the time of the loss. Draper v.
Commissioner, 15 T.C. 135 (1950); Miller v. Commissioner, T.C.
Memo. 1975-110. If the taxpayer is not the owner of the
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property, the taxpayer generally cannot claim a deduction for a
casualty loss relating to that property. Blanche v.
Commissioner, T.C. Memo. 2001-63; see Wayno v. Commissioner, T.C.
Memo. 1992-53, affd. without published opinion 12 F.3d 1111 (9th
Cir. 1993). In our discussion regarding the mortgage interest
deduction, we held that petitioner had no legal or equitable
ownership interest in the Bronx Boulevard house during 2003 when
the fire loss occurred.
In addition, in order to determine entitlement to a casualty
loss deduction, a taxpayer’s basis in the damaged or destroyed
property must be known. Where a taxpayer fails to prove his
basis, we are unable to determine the amount of loss that is
deductible. Zmuda v. Commissioner, 79 T.C. 714, 727 (1982),
affd. 731 F.2d 1417 (9th Cir. 1984); Millsap v. Commissioner, 46
T.C. 751, 760 (1966), affd. on other issues 387 F.2d 420 (8th
Cir. 1968); see, e.g., sec. 1.165-1(c), Income Tax Regs.
Petitioner has not proven any tax basis in the Bronx Boulevard
house.
Because petitioner did not own the Bronx Boulevard house or
establish a tax basis in the house, we hold that petitioner is
not entitled to a casualty loss deduction for the fire damage to
the house.
Turning to petitioner’s personal property allegedly
destroyed in the Bronx Boulevard house fire, petitioner has not
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adequately proven entitlement to this deduction. The only
documentation he provided for this loss was a list of property
allegedly destroyed along with dollar amounts representing the
value petitioner assigned to each item. This list neither
substantiates the loss of the personal property, nor establishes
petitioner’s tax basis in the property. We therefore hold that
petitioner may not deduct any amount for the loss of personal
property in the Bronx Boulevard house fire.
Since we have held that petitioner is not entitled to the
deductions claimed for mortgage interest, real property taxes, or
casualty losses, and since petitioner stipulated that he received
the unreported interest income, we uphold respondent’s
determination in the notice of deficiency.
Decision will be entered
for respondent.