                         T.C. Memo. 2011-193



                       UNITED STATES TAX COURT



             JAMES AND VIRGINIA ELLINGTON, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3466-10.                 Filed August 11, 2011.



     Thomas Smidt II, for petitioners.

     Derek W. Kaczmarek, for respondent.



                          MEMORANDUM OPINION


     KROUPA, Judge:    This matter is before the Court on the

parties’ cross-motions for partial summary judgment, each under

Rule 121.1    Respondent determined deficiencies in petitioners’


     1
      All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the years at issue, unless otherwise
                                                   (continued...)
                                  -2-

Federal income taxes and accuracy-related penalties under section

6662 for 2006 and 2007.     The parties ask us to decide, as a

matter of law, whether accrued interest on a home loan is

deductible as investment interest if the taxpayer secures the

loan by pledging corporate stock.       We hold it is not.

Accordingly, we shall grant respondent’s motion for partial

summary judgment and deny petitioners’ cross-motion for partial

summary judgment.2

                              Background

     The following facts have been assumed solely for resolving

the pending motions.     Petitioners purchased a personal residence

in Albuquerque, New Mexico (the personal residence) in 1997 from

Donald and Denise Midkiff (the Midkiffs).       Petitioners paid the

Midkiffs $1,578,000 for the personal residence.

     Petitioners financed the personal residence purchase with a

$1,578,000 loan (the Merrill loan) from Merrill Lynch Credit

Corp. (Merrill).     The Merrill loan was secured by the personal

residence and 8,750 shares of Intel Corporation stock (the Intel

stock) that petitioner husband owned as an Intel employee.       The


     1
      (...continued)
indicated.
     2
      Respondent now concedes that petitioners may deduct
interest accrued on $1.1 million of indebtedness secured by their
personal residence as qualified resident interest. See sec.
163(h)(3)(B) and (C); Rev. Rul. 2010-25, 2010-44 I.R.B. 571.
Accordingly, we do not consider this issue.
                                  -3-

Intel stock was worth approximately $650,000 at the time.    The

Intel stock was pledged as security for repayment of the Merrill

loan in lieu of a down payment.

     Petitioners refinanced the Merrill loan with a loan from ABN

AMRO Mortgage Group, Inc. (ABN) of $1,605,000 (the ABN loan).

Petitioners used $1,578,000 of the ABN loan proceeds to repay the

Merrill loan.   Petitioners used $17,282 of the ABN loan proceeds

to pay ABN settlement charges.    The ABN loan was secured solely

by the personal residence.

     Petitioners deducted a portion of the interest accrued on

the Merrill loan and the ABN loan as investment interest for 2006

and 2007.   Petitioners never sold the Intel stock.   Respondent

disallowed the deductions.   Petitioners timely filed a petition

for redetermination while residing in New Mexico.

                             Discussion

     We are asked to decide whether partial summary judgment is

appropriate.    Summary judgment is intended to expedite litigation

and avoid unnecessary and expensive trials.   See, e.g., FPL

Group, Inc. v. Commissioner, 116 T.C. 73, 74 (2001).    Either

party may move for summary judgment upon all or any part of the

legal issues in controversy.   Rule 121(a).   A motion for summary

judgment or partial summary judgment will be granted if the

pleadings, answers to interrogatories, depositions, admissions

and other acceptable materials, together with any affidavits,
                                 -4-

show that there is no genuine issue as to any material fact and

that a decision may be rendered as a matter of law.     See Rule

121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238

(2002).   The moving party has the burden of proving that no

genuine issue of material fact exists and that it is entitled to

judgment as a matter of law.    See, e.g., Rauenhorst v.

Commissioner, 119 T.C. 157, 162 (2002).      We grant summary

judgment cautiously and sparingly, and only after carefully

ascertaining that the moving party has met all requirements for

summary adjudication.    See Associated Press v. United States, 326

U.S. 1, 6 (1945).

     The parties agree there is no genuine issue of material fact

but disagree, however, whether interest accrued on the Merrill

loan and the ABN loan included any deductible investment interest

under section 163(a), (d)(3)(A) and (h)(2)(B) for 2006 and 2007.

     Petitioners argue that they may deduct interest accrued on

the Merrill loan and ABN loan as investment interest to the

extent it is not qualified resident interest and is attributable

to the Intel stock.    Generally, investment interest is deductible

up to the amount of net investment income.     Sec. 163(d)(1).

Investment interest is interest allowable as a deduction which is

paid or accrued on indebtedness properly allocable to property

held for investment.    Sec. 163(d)(3)(A).   We now consider whether
                                  -5-

any interest accrued on the Merrill loan and the ABN loan is

properly allocable to property held for investment.

      Debt and interest are allocated to expenditures according to

the use of the debt proceeds.    Sec. 1.163-8T(c)(1), Temporary

Income Tax Regs., 52 Fed. Reg. 25000 (July 2, 1987).      Here,

petitioners purchased the personal residence using the proceeds

from the Merrill loan.    All of the Merrill loan proceeds were

disbursed by Merrill directly to the Midkiffs, the sellers.

Because the Midkiffs received all of the Merrill loan proceeds,

petitioners are treated as using all of the Merrill loan proceeds

to purchase the personal residence.      See sec. 1.163-8T(c)(3),

Temporary Income Tax Regs., 52 Fed. Reg. 25001 (July 2, 1987).

Thus, the full amount of petitioners’ debt is allocated to the

personal residence.    See sec. 1.163-8T(c)(1), Temporary Income

Tax Regs., supra.     Moreover, all of the interest expense accrued

on the Merrill loan is allocated to the personal residence.       See

id.

      Petitioners argue that interest accrued on the Merrill loan

is allocable to the Intel stock because the Merrill loan was

partly secured by the Intel stock.      We disagree.   The allocation

of debt and related interest is not affected by the use of

property to secure repayment.     Id.   The temporary regulations

under section 163 provide an example of a taxpayer who finances a

car purchase for personal use with a loan and pledges corporate
                                -6-

stock held for investment as security.    Sec. 1.163-8T(c)(1),

Example, Temporary Income Tax Regs., supra.     The example treats

the interest expense as personal interest and not investment

interest, even though the loan is secured by investment property.

Id.

      Here, petitioners used investment property to secure

repayment of a loan for a personal residence rather than a car.

This distinction is without a difference.    The use of investment

property to secure repayment of indebtedness has no effect on the

allocation of debt and interest.   Rather, it is the “use” of the

debt proceeds that determines the allocation.    Sec. 1.163-

8T(c)(1), Temporary Income Tax Regs., supra.     We hold that no

interest accrued on the Merrill loan is properly allocable to the

Intel stock as investment property.3

      Petitioners finally argue that section 1.163-8T(c)(1),

Temporary Income Tax Regs., supra, is invalid because it

conflicts with section 163(d)(3)(A).     We disagree.   We previously

held that the tracing regime for allocating debt and interest

under section 1.163-8T(c)(1), Temporary Income Tax Regs., supra,

and the regulation itself are valid as applied under section


      3
      Petitioners argue that a portion of the interest accrued on
the ABN loan is deductible as investment interest to the extent
that the Merrill loan included deductible investment interest.
We have determined that no interest accrued on the Merrill loan
is deductible investment interest. This argument is of no
moment.
                                 -7-

163(h)(2)(A).   See Robinson v. Commissioner, 119 T.C. 44, 66-77

(2002).   The validity analysis developed in Robinson applies with

equal force here.   Accordingly, we hold petitioners’ regulation

invalidity argument lacks merit and that no interest accrued on

the Merrill loan or the ABN loan is deductible as investment

interest for 2006 and 2007.

     We have considered all arguments the parties made in

reaching our holdings, and, to the extent not mentioned, we find

them irrelevant or without merit.

     To reflect the foregoing,


                                            An appropriate order will

                                       be issued granting

                                       respondent’s motion for

                                       partial summary judgment and

                                       denying petitioners’ cross-

                                       motion for partial summary

                                       judgment.
