## Facts

- On October 5, 2005, Pat and Mon Ela purchased a residence in Oakland, California for $2.150 million.
- The Elas paid about $570,000 as a down payment and financed the remainder with a mortgage loan of about $1,612,500; the mortgage and legal obligation were in the Elas’ names.
- Although title and the mortgage were not in Conrad Y. Edosada’s name, the Elas and Edosada treated the property as the family home.
- Edosada contributed $70,000 toward the down payment and agreed he would be responsible for the mortgage payments with the understanding he would later receive a legal ownership interest.
- Edosada moved into the property around January 10, 2007, and lived there for the rest of 2007.
- From January 23 to December 26, 2007, Edosada made mortgage payments totaling $67,003.
- During 2007, the loan’s principal balance increased from $1,663,410.90 (January 23) to $1,721,110.92 (December 26).
- Pursuant to the family’s oral agreement, on December 3, 2007, the Elas deeded a small percentage of the property to Edosada (adding him to title late in 2007).
- On his 2007 federal income tax return, Edosada claimed an $87,003 home mortgage interest deduction.
- On August 30, 2010, the IRS issued a notice of deficiency disallowing the deduction in full and determining a $20,640 income tax deficiency and a $4,128 accuracy-related penalty under I.R.C. § 6662(a).
- Edosada petitioned the United States Tax Court, and the case was heard as a small tax case under I.R.C. § 7463 (Summary Opinion).

## Issues

1. Whether Edosada was entitled to a home mortgage interest deduction under I.R.C. § 163(h) for 2007 where the mortgage and most record title were in his parents’ names, but he lived in the home, paid the mortgage, and obtained a fractional legal interest in December 2007.
2. Whether Edosada was liable for the I.R.C. § 6662(a) accuracy-related penalty for 2007.

## Decision

- The Tax Court rejected the IRS’s complete disallowance and held that Edosada could deduct home mortgage interest to the extent he proved he paid interest on debt secured by the residence and he was an owner for tax purposes (including as an equitable owner and later as a fractional legal owner).
- The court did not allow the full $87,003 claimed; the deduction was limited based on what was substantiated and properly treated as deductible interest rather than other components of the payments.
- The court did not sustain the § 6662(a) accuracy-related penalty, concluding that Edosada had reasonable cause and acted in good faith under I.R.C. § 6664(c).

## Legal Principles

- I.R.C. § 163(h) generally disallows personal interest but permits a deduction for “qualified residence interest” that meets the requirements of § 163(h)(3).
- A taxpayer claiming a mortgage-interest deduction must show the amount paid was interest on qualifying debt secured by a qualified residence and must substantiate the deductible amount.
- A taxpayer need not hold full record title for the entire year to claim the deduction if the taxpayer establishes equitable ownership by showing the benefits and burdens of ownership (such as making a substantial financial contribution, living in the home, and assuming responsibility for payments with an agreement to obtain title).
- The deduction is limited to the interest actually paid and properly allocable to the taxpayer’s ownership interest and the statutory requirements; amounts not shown to be deductible interest are not allowed.
- The § 6662(a) penalty does not apply if the taxpayer shows reasonable cause and good faith under § 6664(c), evaluated from the taxpayer’s conduct and the surrounding facts.
- As a small tax case decided under I.R.C. § 7463, the Summary Opinion is not reviewable by another court and is not treated as precedent for other cases.

## Conclusion

The Tax Court held that Edosada was not automatically barred from deducting home mortgage interest merely because his parents were the borrowers and record owners for most of 2007; based on his financial contribution, residence in the home, payment of the mortgage, and later receipt of a fractional deeded interest, he qualified as an owner in substance for purposes of § 163(h) and could deduct a limited, substantiated amount of interest, while the IRS’s full disallowance and the accuracy-related penalty were not sustained.


Edosada v. Commissioner of Internal Revenue, 2012 WL 685757 (2012)