## Facts

- Faina Bronstein filed a 2007 federal income tax return as married filing separately.
- In February 2007, Bronstein and her father-in-law purchased a Brooklyn residence as joint tenants with right of survivorship for $1.35 million.
- Bronstein and her father-in-law each signed and were liable on a $1 million mortgage secured by the property.
- Bronstein paid $2,500 in points at closing and made all 2007 mortgage payments from her own funds; neither her husband nor her father-in-law made mortgage payments.
- Bronstein and her husband lived in the home during 2007 as their principal residence; her father-in-law did not live there.
- Bronstein paid $49,739 of mortgage interest in 2007 and deducted $52,239 on Schedule A for home mortgage interest and points.
- The IRS allowed $27,506 of the claimed deduction, determined an $8,038 deficiency, and asserted a $1,608 accuracy-related penalty under I.R.C. § 6662(a).
- The case was submitted fully stipulated under Tax Court Rule 122.

## Issues

1. Whether a married individual filing separately may deduct qualified residence interest attributable to $1,000,000 of acquisition indebtedness when she paid all the interest, or is limited to interest attributable to $500,000 under I.R.C. § 163(h)(3)(B)(ii).
2. Whether such a taxpayer may deduct interest attributable to $100,000 of home-equity indebtedness, or is limited to $50,000 under I.R.C. § 163(h)(3)(C)(ii).
3. Whether the taxpayer is liable for the accuracy-related penalty under I.R.C. § 6662(a).

## Decision

- The court held that, because Bronstein filed married filing separately, her deductible qualified residence interest was limited to interest attributable to $500,000 of acquisition indebtedness under § 163(h)(3)(B)(ii).
- The court held that, under the same filing status, any allowable home-equity indebtedness limit was $50,000 under § 163(h)(3)(C)(ii).
- The court sustained the IRS’s deficiency determination and upheld the § 6662(a) accuracy-related penalty.

## Legal Principles

- Interest is generally deductible under § 163(a), but personal interest is disallowed under § 163(h) unless an exception applies, including qualified residence interest.
- For married individuals filing separate returns, § 163(h)(3) reduces the acquisition-indebtedness cap from $1,000,000 to $500,000 and the home-equity-indebtedness cap from $100,000 to $50,000.
- The separate-return caps apply mechanically based on filing status, regardless of which spouse (or co-obligor) actually pays the mortgage interest or whether any other person claims a related deduction.
- Tax deductions are allowed only when the taxpayer shows statutory entitlement; the taxpayer bears the burden of proving the claimed deduction.
- A § 6662(a) accuracy-related penalty may be imposed for an underpayment attributable to a substantial understatement, unless the taxpayer establishes an applicable defense such as reasonable cause and good faith under § 6664(c).

## Conclusion

The Tax Court enforced the plain statutory debt limits for married taxpayers filing separately, limiting Bronstein’s mortgage-interest deduction to amounts attributable to $500,000 of acquisition debt (and $50,000 of any home-equity debt) and sustaining the accuracy-related penalty for the resulting underpayment.


Bronstein v. Commissioner, 138 T.C. 382 (2012)