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. 16084-19S

Opinion

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.

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