T.C. Summary Opinion 2011-83
UNITED STATES TAX COURT
JULIE ANN WHEELER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 29320-09S. Filed July 6, 2011.
Julie Ann Wheeler, pro se.
David M. McCallum, for respondent.
RUWE, Judge: This case was heard pursuant to the provisions
of section 74631 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.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
- 2 -
Respondent determined a $2,600 deficiency in petitioner’s
2007 Federal income tax on the basis of respondent’s partial
disallowance of petitioner’s claimed itemized deduction for home
mortgage interest paid during the taxable year. The issue for
decision is whether petitioner is entitled to deduct home
mortgage interest in an amount greater than $5,974 for the year
in issue.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
At the time the petition was filed, petitioner resided in
North Carolina.
Beginning in 2003 and continuing throughout the year at
issue petitioner lived with her boyfriend, Adam Beeman, in a home
in Worcester, Massachusetts. Mr. Beeman purchased the home in
his individual capacity in 2002 and, until June 2007, was solely
liable for the mortgage on the property.
In early February 2003 petitioner moved into the home, and
she and Mr. Beeman agreed that petitioner would pay rent in an
amount equal to one-half of the monthly mortgage payment.
Petitioner paid rent directly to Mr. Beeman and never submitted
payment to the mortgage lender directly.
- 3 -
During 2004 Mr. Beeman returned to school after deciding to
leave his job. At that time petitioner and Mr. Beeman agreed
that petitioner would assume more responsibility for payment of
the mortgage and the couple’s remaining bills until Mr. Beeman
returned to work. In October 2006 petitioner and Mr. Beeman had
a child together, with whom they shared their home. At that time
the couple decided that Mr. Beeman would become a stay-at-home
parent rather than return to the workforce. As a result of their
decision, until June 2007 petitioner continued to be the primary
provider for payment of the family’s expenses, including the
mortgage. Before June 2007 any amounts that petitioner
contributed to the mortgage payments were paid directly to Mr.
Beeman, who then paid the mortgage lender.
When petitioner moved into the home, she and Mr. Beeman had
discussions regarding their plans to renovate the property.
Petitioner and Mr. Beeman made substantial upgrades to the home
throughout the time that they lived there. The renovations began
shortly after petitioner moved in and continued through 2007.
Some of the more substantial improvements were the installation
of wood flooring and a complete remodel of two rooms during early
2007. Petitioner paid for and performed part of the renovation
work conducted on the home.
From 2003 to 2007 petitioner thought it was best that she
not be “legally attached on the mortgage”, because she and Mr.
- 4 -
Beeman were not married. Before 2007 petitioner considered all
amounts she contributed toward the mortgage to be “rent”.
However, at some point during 2007 petitioner changed her mind
regarding ownership of the home and decided that it would be
prudent for her to become an owner. Petitioner was motivated by
her concern that she might take responsibility for payment of Mr.
Beeman’s obligations and be left without any recourse if the
couple were to “split up” or if the home were sold. Petitioner
and Mr. Beeman agreed that petitioner should have property rights
in the home because of her contributions toward the mortgage
payment, the couple’s other expenses, and the improvements to the
property. The informal agreement between petitioner and Mr.
Beeman was made orally and never reduced to a writing. The exact
date at which this agreement was reached is unclear, although it
necessarily occurred at some point before June 13, 2007, the date
on which petitioner’s name was added to the mortgage and placed
on the deed to the home.
Petitioner timely filed a Form 1040, U.S. Individual
Income Tax Return, for the taxable year 2007 with the Internal
Revenue Service. On October 13, 2009, respondent issued
petitioner a notice of deficiency for the taxable year 2007 in
which he determined a $2,600 deficiency in petitioner’s Federal
income tax. On her return petitioner claimed a home mortgage
interest deduction of $16,358. Respondent, on the basis of
- 5 -
third-party payor data, allowed petitioner a deduction of only
$5,974, which appears to be the amount of interest paid after
petitioner acquired title and became liable on the mortgage. The
issue for decision is whether petitioner is entitled to deduct
home mortgage interest in an amount greater than $5,974 for the
year in issue.
Discussion
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving entitlement to the
deductions claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
U.S. 435, 440 (1934). The taxpayer bears the burden of
substantiating the amount and purpose of any items claimed as
deductions. Hradesky v. Commissioner, 65 T.C. 87, 89 (1975),
affd. per curiam 540 F.2d 821 (5th Cir. 1976).
Section 163(h)(1) generally disallows a deduction for
personal interest. An exception to this rule is qualified
residence interest. Sec. 163(h)(2)(D). Qualified residence
interest includes interest paid or accrued during the taxable
year on acquisition indebtedness. Sec. 163(h)(3)(A).
Acquisition indebtedness means any indebtedness that is incurred
in acquiring, constructing, or substantially improving any
qualified residence of the taxpayer and is secured by the
- 6 -
residence. Sec. 163(h)(3)(B)(i). A qualified residence includes
the principal residence of the taxpayer. Sec. 163(h)(4)(A).
Generally, for interest on a mortgage to be deductible the
indebtedness must be an obligation of the taxpayer and not an
obligation of another. Smith v. Commissioner, 84 T.C. 889, 897
(1985), affd. without published opinion 805 F.2d 1073 (D.C. Cir.
1986). However, section 1.163-1(b), Income Tax Regs., provides:
“Interest paid by the taxpayer on a mortgage upon real estate of
which he is the legal or equitable owner, even though the
taxpayer is not directly liable upon the bond or note secured by
such mortgage, may be deducted as interest on his indebtedness.”
Where a taxpayer has not established legal, equitable, or
beneficial ownership of property, we have disallowed the
taxpayer’s claimed mortgage interest deduction. Hynes v.
Commissioner, 74 T.C. 1266, 1288 (1980); Song v. Commissioner,
T.C. Memo. 1995-446; Bonkowski v. Commissioner, T.C. Memo.
1970-340, affd. 458 F.2d 709 (7th Cir. 1972).
In order for petitioner to be entitled to deduct the home
mortgage interest for the portion of 2007 during which she was
not actually liable on the mortgage, we must find that she was
either a legal or equitable owner of the home at that time. The
Court considers State law to determine the nature of a taxpayer’s
property rights. United States v. Natl. Bank of Commerce, 472
- 7 -
U.S. 713, 722 (1985); Aquilino v. United States, 363 U.S. 509,
513 (1960).
I. Legal Ownership
In Massachusetts the statute of frauds requires that
contracts for the purchase and sale of real property be in
writing. Johnson v. Johnson, 946 N.E.2d 157 (Mass. App. Ct.
2011); Belo, LLC v. 175 Olde Canal Drive, LLC, No. 07 MISC 356331
(Mass. Land Ct., Feb. 2, 2010). Such writing must reasonably
identify the essential terms of the purchase contract, such as a
description of the property, identification of the parties, the
purchase price, and an indication that the transaction is a sale
of the property. Simon v. Simon, 625 N.E.2d 564, 567 (Mass. App.
Ct. 1994) (citing Schwanbeck v. Federal-Mogul Corp., 592 N.E.2d
1289, 1294 (Mass. 1992), and Michelson v. Sherman, 39 N.E.2d 633
(Mass. 1942)). However, the writing requirement may be excused
when “detrimental reliance on, or part performance of, an oral
agreement to convey property may estop the defendant from
pleading the Statute of Frauds as a defense.” Nessralla v. Peck,
532 N.E.2d 685, 688 (Mass. 1989). Even so, this type of estoppel
is not available where a party relies to their detriment on an
oral agreement that leaves significant details of the contract
unresolved. See Pappas Indus. Parks, Inc. v. Psarros, 511 N.E.2d
621, 623 (Mass. App. Ct. 1987).
- 8 -
The record does not establish that petitioner was the legal
owner of the home before June 2007. Petitioner and Mr. Beeman’s
agreement was not reduced to a writing that would satisfy the
statute of frauds, as is generally necessary for the transfer of
an interest in land in Massachusetts. See Johnson v. Johnson,
supra. In addition, the doctrine of equitable estoppel is not
available to legitimate any oral agreement between petitioner and
Mr. Beeman, because there is no evidence in the record that the
parties reached agreement on several important details of the
contract, including the purchase price and type of ownership
interest involved. See Pappas Indus. Parks, Inc. v. Psarros,
supra. Furthermore, petitioner acknowledged that before 2007 it
was her intention that she not be “legally attached on the
mortgage” of Mr. Beeman’s home. This intention is consistent
with petitioner’s decision to remain off the deed and unbound by
the terms of the mortgage before her inclusion on them in June
2007. Petitioner has not provided evidence to indicate any
change in her position as it relates to legal ownership before
that time.
II. Equitable Ownership
Before the time at which petitioner’s name was added to the
mortgage, petitioner contends that she and Mr. Beeman had agreed
that they would share in any profits if the home were sold.
Petitioner claims that this understanding was reached by early
- 9 -
2007 and led to her eventual addition to the mortgage in June of
that year. Petitioner’s contention is that by paying portions of
the mortgage payment throughout the first half of 2007 and by
paying for improvements to the home, she gained equitable
ownership in the property. Petitioner contends that she and Mr.
Beeman reached their agreement on the basis of their
understanding that it would be unjust for petitioner to pay a
considerable portion of the mortgage but not share in any of the
benefits of ownership.
In many States the purchaser of an interest in real property
is treated as the equitable owner of real estate from the date
the purchase and sale agreement is reached; the rents and profits
belong to him and the losses fall on him. Laurin v. DeCarolis
Constr. Co., 363 N.E.2d 675, 677 (Mass. 1977); see Beal v.
Attleboro Sav. Bank, 142 N.E. 789, 790 (Mass. 1924). However,
Massachusetts has taken a different approach. Under
Massachusetts law, where an agreement to transfer an ownership
interest in real property exists, the transferor retains the
legal title to the property “subject to an equitable obligation
to convey” it to the transferee on payment of the purchase money
price. Laurin v. DeCarolis Constr. Co., supra at 677. Until the
deed is delivered, the vendor bears all the risks of ownership
should the property be destroyed. Id. at 678; Libman v.
Levenson, 128 N.E. 13, 13-14 (Mass. 1920). He also has the
- 10 -
exclusive right to possession of the property and the right to
its rents and profits. Beal v. Attleboro Sav. Bank, supra at
790-791. Thus, the rights of the purchaser are merely contract
rights and do not amount to the rights of an ownership interest
in real property. Laurin v. DeCarolis Constr. Co., supra at 677.
On the record before us, we find that petitioner does not
have an equitable ownership interest in the home under
Massachusetts law. Even if we were to assume that the vague and
undefined agreement between petitioner and Mr. Beeman regarding
her interest in the home amounted to a valid contractual
agreement for the transfer of an interest in real property under
Massachusetts law, it would be insufficient to confer an
equitable interest upon petitioner. This is because even after a
purchase agreement is reached, the title to real property remains
with the seller and he retains all of the benefits and burdens
associated with ownership until the point at which the deed is
actually delivered and the purchase money paid. Id. at 677-678.
Here, the deed was not delivered until petitioner was added to it
in June, and it is uncertain that any definite purchase price was
ever agreed upon so that it could have been paid. Therefore,
under Massachusetts law, equitable ownership of the home remained
solely in the hands of Mr. Beeman before petitioner’s possession
of the deed and inclusion on the mortgage.
- 11 -
In addition to State law, this Court also considers certain
factors to determine whether a taxpayer is an equitable or
beneficial owner of property, including whether the taxpayer:
(1) Has a right to possess the property and to enjoy the use,
rents, or profits thereof; (2) has a duty to maintain the
property; (3) is responsible for insuring the property; (4) bears
the property’s risk of loss; (5) is obligated to pay the
property’s taxes, assessments, or charges; (6) has the right to
improve the property without the owner’s consent; and (7) has the
right to obtain legal title at any time by paying the balance of
the purchase price. Blanche v. Commissioner, T.C. Memo. 2001–63,
affd. 33 Fed. Appx. 704 (5th Cir. 2002).
Several of these factors weigh against petitioner for the
period before her addition to the mortgage. Specifically,
petitioner did not have legal right to any rents or profits from
the home, nor did she bear any of the risk of loss associated
with it. Furthermore, petitioner has not shown that she was
legally responsible for insuring the property or paying any
taxes, assessments, or charges. There is also no indication that
petitioner had the right to obtain legal title by paying the
balance of the purchase price. Accordingly, we find that
petitioner was not an equitable owner of the home before her name
- 12 -
was added to the mortgage and deed in June 2007 and sustain
respondent’s determination in the notice of deficiency.
To reflect the foregoing,
Decision will be entered
for respondent.