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Tax Court In Brief | Pressman v. Comm’r | Deductibility Of Home Mortgage Interest And Penalties – Financial Services

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The Tax Court in Brief – August 29th – September
2nd, 2022

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Tax Litigation: The Week of August 29th, 2022, through
September 2nd, 2022

Pressman v. Comm’r, T.C. Summ. Op. 2022-15
| August 29, 2022 | Panuthos, S.T.J. | Dkt. No.


Short Summary: This case involves a
taxpayer’s entitlement to deduct home mortgage interest and the
taxpayer’s obligation to substantiate that the expense to which
the deduction related was paid or incurred. In 2012 Robert Pressman
(Pressman) purchased a home in New York and titled the property in
the name of his wholly owned corporation, Sambob, Inc. (Sambob).
Pressman, through Sambob, financed the purchase of the property
through a mortgage with Putnam Bridge Funding (Putnam Bridge).
Pressman refinanced the mortgage several times with Putnam Bridge
after 2012. The property was used as Pressman’s primary
residence until it was sold in 2017. Pressman’s tax return for
2016 was prepared by a certified public accountant. On his Schedule
A, Itemized Deductions, Pressman claimed an itemized deduction of
$75,000 for home mortgage interest. On June 10, 2019, the IRS
issued a notice of deficiency disallowing the home mortgage
interest deduction and determined that Pressman was liable for an
accuracy related penalty under section 6662(a) and (b)(2) due to
substantial understatement of income tax for the 2016 tax year. The
parties’ dispute was whether the taxpayer adequately
substantiated payment of the home mortgage interest payments for
the tax year at issue. The issues for decision were: (i) whether
the taxpayer was entitled to deduct home mortgage interest of
$75,000 for the year in issue; and (ii) whether the taxpayer was
liable for an accuracy-related penalty under section 6662(a) for
the year in issue.

Primary Holdings:

  • The taxpayer was not entitled to deduct mortgage home interest
    for the year in issue because he did not substantiate that the
    expense to which the deduction related was pair or incurred.

  • The taxpayer was liable for the section 6662(a) and (b)(2)
    accuracy-related penalty because the total tax due exceeded both
    $5,000 and alternatively, 10 percent of the amount required to be
    shown on the return.

  • The taxpayer was unable to meet the section 6664(c)(1)
    reasonable cause exception to the underpayment of tax penalty
    because he “did not keep adequate books and records or
    properly substantiate the reported expenses.”

Key Points of Law:

  • A taxpayer claiming a deduction in a federal income tax return
    must demonstrate that the deduction is allowable pursuant to the
    Internal Revenue Code and must further substantiate that the
    expense to which the deduction relates has been paid or incurred.
    See 6001; Treas. Reg. § 1.6001-1(a).

  • Under section 163(a) a taxpayer may claim a deduction “for
    all interest pair or accrued within the taxable year on
    indebtedness.” Section 163(h)(1) provides that in the case of
    a taxpayer other than a corporation, no deduction is allowed for
    “personal interest.” Personal interest does not include
    qualified interest paid on acquisition indebtedness or home equity
    indebtedness with respect to a qualified residence. See
    163(h)(2)(d), (3). A qualified residence includes the
    taxpayer’s primary residence and one other home which is used
    by the taxpayer as a residence (within the meaning of section
    280A(d)(1)). See § 163(h)(4)(A)(i).

  • If a taxpayer establishes that he has paid or incurred a
    deductible expense but cannot adequately substantiate the amount,
    the Court may estimate the amount and allow a deduction to the
    extent there is a reasonable basis to support the estimate.
    See Cohan v. Commissioner, 39 F.2d 540,
    543–44 (2d Cir. 1930).

Insights: This case illustrates the importance
of maintaining proper documentation for deductible expenses that
are claimed on a return. The taxpayer provided the court with
limited documentation that he paid the claimed $75,000 of home
mortgage interest. The taxpayer’s documentation was comprised
of emails from Putnam Bridge and a handwritten Form 1098, Mortgage
Interest Statement. The Putnam Bridge emails stated that the
interest was accrued and charged but they did not reference actual
payments. In addition, neither party could confirm that the
handwritten Form 1098, Mortgage Interest Statement, was actually
filed by Putnam Bridge. As a result, the Court was unable to
determine when payments were made, from what accounts, and the
amounts of any such payments. A taxpayer seeking to deduct home
mortgage interest should ensure that it receives a proper Form
1098, Mortgage Interest Statement, from the mortgage holder and
that the mortgage holder files the Form 1098 with the IRS. If a
taxpayer receives a handwritten Form 1098, Mortgage Interest
Statement, one that does not conform to the IRS’s form, or does
not receive a Form 1098, Mortgage Statement from the mortgage
holder, the taxpayer should ensure that he or she can provide the
Court with documentation as to the dates of payments, from which
accounts they were made, and the amounts of any such payments. Such
information may allow the Court to reasonably estimate the amount
of the deductible expense that was paid or incurred and allow a
deduction in the amount of the estimate.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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