Could a taxpayer deduct mortgage interest when the deed, mortgage records, and Form 1098 did not clearly distinguish him from his identically named father?

Subject

Documentation needs to be clear and cogent evidence to substantiate ownership.

Plain-English summary

Virginia would not abate the assessment because the taxpayer had not shown that he legally or equitably owned the home. He claimed mortgage interest for 2007 and said he lived in the house, paid both mortgages, and covered maintenance. But his father shared his exact name, Form 1098 carried the father's Social Security number, and the deed and other documents did not clearly identify which man held title or owed the debt.

Federal rules generally allow mortgage interest when the debt is the taxpayer's obligation. A legal or equitable owner may also deduct interest even without direct liability on the note, but the ruling said Virginia equitable ownership required the person to be obligated to pay the secured debt.

Because the mortgage papers, bank statements, and utility bills all used the shared name, the Department could not determine actual or equitable ownership. The assessment was presumed correct, and the taxpayer carried the burden to disprove it.

The Tax Commissioner nevertheless allowed one final 30-day period to provide clear and cogent evidence. The ruling does not report whether additional documents were submitted or whether the assessment was later revised.

What this means for you

• A payment history alone may not establish the legal or equitable ownership needed for a mortgage-interest deduction.
• Keep deeds, loan obligations, Form 1098 information, and payment records that clearly identify the taxpayer.
• When relatives share a name, identifying information becomes especially important.
• This ruling left the assessment in place while allowing one last documentation period.

Citations and references

• IRC § 163(a); Treas. Reg. § 1.163-1(b).
• Va. Code §§ 58.1-205, 58.1-219, 58.1-301, and 58.1-322(D)(1).
• Smith v. Commissioner, 84 T.C. 889 (1985).
• United States v. National Bank of Commerce, 472 U.S. 713 (1985).
• Vivian L. Tiller v. Ralph D. Owen, 243 Va. 176, 413 S.E.2d 51 (1992).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-93

Original ruling text

June 3, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal an assessment of individual income tax issued to * (the "Taxpayer") for the taxable year ended December 31, 2007.

FACTS

The Taxpayer claimed an itemized deduction for mortgage interest on his 2007 Virginia individual income tax return. Under audit, the Department disallowed the mortgage interest deduction because the Taxpayer's father was listed as the owner of the home and the payer of the interest on the federal information return, Form 1098. The Taxpayer filed an appeal, contending he is entitled to deduct the mortgage interest expense because he lived in and owned the home, made the payments on both mortgages, and paid the home maintenance expenses.

DETERMINATION

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI).

As a general rule, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. However, the Department retains the authority to adjust FAGI where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Va. Code § 58.1-219.

Virginia Code § 58.1-322 D 1 allows a taxpayer to deduct from its Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes. IRC § 163(a) allows taxpayers to deduct mortgage interest paid on a principal residence. Generally, an individual may deduct interest on a mortgage if the indebtedness is an obligation of the individual and not an obligation of another. See Smith v. Commissioner , 84 T.C. 889 (1985). However, Treas. Reg. § 1.163-1(b) 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.

The United States Supreme Court considers state law to determine the nature of a taxpayer's property rights. See United States v. Natl. Bank of Commerce , 472 U.S. 713 (1985). In Virginia, an individual cannot claim equitable ownership of property when he is not obligated to pay off the debt secured by the property. See Vivian L. Tiller v. Ralph D. Owen , 243 Va. 176, 413 S.E.2d 51 (1992). Accordingly, the Taxpayer must be the obligor of the two mortgages on the house at issue in order to claim that he had equitable ownership of the residence.

In this case, the Taxpayer and his father share the exact same name. The federal information return reporting the mortgage interest bears the father's Social Security number. Based on the deed, it is unclear as to whether the Taxpayer or his father had legal title to the residence. In addition, the mortgage documents, bank statements and utility bills provided bear the name shared by the Taxpayer and the father. As such, the Department is unable to determine whether the Taxpayer had actual or equitable ownership of the residence. Accordingly, I can find no basis to abate the assessment for the 2007 taxable year at this time.

Virginia Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the Taxpayer to show that the assessment is incorrect.

Notwithstanding the above, I will allow the Taxpayer one last opportunity to provide the Department with clear and cogent evidence to substantiate his claim. This information should be mailed to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. Upon receipt, the documentation will be reviewed to determine if a revision to the assessment is appropriate. If the documentation is not provided in the manner described herein within 30 days from the date of this letter, the assessments will be considered correct as issued and collection action will resume.

The Code of Virginia section cited is available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4592301903.B