                                               FAINA BRONSTEIN, PETITIONER v. COMMISSIONER                                      OF
                                                       INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 24168–10.                           Filed May 17, 2012.

                                                   P obtained a $1 million mortgage to help finance her pur-
                                                chase of a home. Although she was married, P paid the mort-
                                                gage only with her own funds during 2007. P elected the
                                                ‘‘married filing separately’’ filing status on her 2007 tax
                                                return and deducted the interest paid on the entire $1 million
                                                of mortgage indebtedness. R issued a notice of deficiency
                                                which determined that P was limited to a deduction for

                                      382




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                                      (382)                        BRONSTEIN v. COMMISSIONER                                        383


                                                interest paid on $500,000 of home acquisition indebtedness
                                                plus interest paid on $50,000 of home equity indebtedness as
                                                a result of her filing status. Held: Under I.R.C. sec.
                                                163(h)(3)(B)(ii) and (c)(ii) P is entitled to a deduction for
                                                interest paid on only $500,000 of home acquisition indebted-
                                                ness plus interest paid on only $50,000 of home equity indebt-
                                                edness. Held, further, P is liable for an accuracy-related pen-
                                                alty under I.R.C. sec. 6662(a).

                                           Bruce Robert McElvenny, for petitioner.
                                           Molly H. Donohue, for respondent.

                                                                                  OPINION

                                         GOEKE, Judge: Respondent determined a deficiency in peti-
                                      tioner’s 2007 Federal income tax of $8,038 as a result of
                                      respondent’s determination that she improperly deducted cer-
                                      tain home mortgage interest paid. Respondent also deter-
                                      mined an accuracy-related penalty under section 6662(a) 1 of
                                      $1,608. 2 The issues remaining for decision are:
                                         (1) whether petitioner is entitled to a deduction for interest
                                      paid on $1 million of home acquisition indebtedness when
                                      she filed her tax return as ‘‘married filing separately’’. We
                                      hold that she is not; and
                                         (2) whether petitioner is entitled to a deduction for interest
                                      paid on $100,000 of home equity indebtedness when she filed
                                      her tax return as ‘‘married filing separately’’. We hold that
                                      she is not; and
                                         (3) whether petitioner is liable for a 20% accuracy-related
                                      penalty under section 6662(a). We hold that she is.

                                                                                Background
                                         At the time the petition was filed, petitioner resided in
                                      New York.
                                         Petitioner was married throughout 2007. On February 12,
                                      2007, petitioner and her father-in-law, Michael Bronstein
                                      (father-in-law), purchased real property in Brooklyn, New
                                      York (property), as joint tenants with right of survivorship.
                                      The price was $1.35 million. To obtain the necessary funds,
                                      petitioner and her father-in-law each signed and became
                                        1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect

                                      for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Proce-
                                      dure.
                                        2 All dollar amounts are rounded to the nearest dollar.




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                                      384                 138 UNITED STATES TAX COURT REPORTS                                       (382)


                                      liable on a mortgage for $1 million (mortgage) secured by the
                                      property. Petitioner paid $2,500 for a loan discount (points)
                                      at the time of closing.
                                         From February through December 31, 2007, petitioner and
                                      her husband resided at the property, which was their prin-
                                      cipal residence for tax purposes. Petitioner’s father-in-law
                                      never resided at the property. During 2007 petitioner used
                                      her own funds to make all payments on the mortgage; nei-
                                      ther her husband nor her father-in-law made any payments
                                      on the mortgage. 3 Petitioner paid $49,739 in interest on the
                                      mortgage during 2007.
                                         Petitioner timely filed her 2007 Federal income tax return
                                      and elected ‘‘married filing separately’’ filing status. On her
                                      Schedule A, Itemized Deductions, she deducted $52,239 in
                                      home mortgage interest and points paid. 4 On August 2,
                                      2010, respondent issued a notice of deficiency to petitioner
                                      for tax year 2007. Respondent’s notice allowed petitioner only
                                      $27,506 of her claimed deduction for the home mortgage
                                      interest paid. 5 Petitioner timely filed a petition contesting
                                      the deficiency and penalty, and the case is before this Court
                                      for a fully stipulated decision without trial under Rule 122.
                                      The stipulated facts are incorporated in our findings by this
                                      reference.

                                                                                 Discussion
                                      I. Burden of Proof
                                         Generally, taxpayers bear the burden of proving, by a
                                      preponderance of the evidence, that the determinations of the
                                      Commissioner in a notice of deficiency are incorrect. Rule
                                      142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deduc-
                                      tions are a matter of legislative grace, and taxpayers bear
                                      the burden of proving entitlement to any claimed deductions.
                                      Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
                                        3 During 2007 petitioner’s husband did not have a legal ownership interest in the property

                                      and he did not have a legally enforceable obligation to pay the mortgage.
                                        4 Neither petitioner’s husband nor her father-in-law deducted any amounts resulting from her

                                      payment of the mortgage interest or points.
                                        5 Respondent admits on brief that the notice of deficiency was in error in that it should have

                                      allowed petitioner an additional deduction resulting from the $2,500 in points paid under secs.
                                      163(h)(3)(A) and 461(g)(2). Accounting for this error reduces the deficiency to $7,589 and the
                                      accuracy-related penalty to $1,518.




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                                      (382)                        BRONSTEIN v. COMMISSIONER                                        385


                                      84 (1992). Petitioner has not argued that respondent should
                                      bear the burden of proof.
                                      II. Qualified Residence Interest Deduction and Indebtedness
                                          Limitations
                                        Section 163(a) allows a deduction for all interest paid or
                                      accrued within the taxable year on indebtedness. As an
                                      exception, section 163(h) generally disallows a deduction for
                                      personal interest. Personal interest, however, does not
                                      include qualified residence interest. Sec. 163(h)(2)(D).
                                        In general, a qualified residence is defined as a taxpayer’s
                                      principal residence and one other home that is used as a resi-
                                      dence by the taxpayer. Sec. 163(h)(4)(A)(i). Qualified resi-
                                      dence interest means any interest paid or accrued during a
                                      tax year on acquisition indebtedness or home equity indebt-
                                      edness with respect to the taxpayer’s qualified residence. Sec.
                                      163(h)(3)(A).
                                        Section 163(h)(3)(B) provides:
                                        (i) IN GENERAL.—The term ‘‘acquisition indebtedness’’ means any indebt-
                                      edness which—
                                           (I) is incurred in acquiring, constructing, or substantially improving
                                        any qualified residence of the taxpayer, and
                                           (II) is secured by such residence.
                                      Such term also includes any indebtedness secured by such residence
                                      resulting from the refinancing of indebtedness meeting the requirements
                                      of the preceding sentence (or this sentence); but only to the extent the
                                      amount of the indebtedness resulting from such refinancing does not
                                      exceed the amount of the refinanced indebtedness.
                                         (ii) $1,000,000 LIMITATION.—The aggregate amount treated as acquisi-
                                      tion indebtedness for any period shall not exceed $1,000,000 ($500,000 in
                                      the case of a married individual filing a separate return).

                                      Section 163(h)(3)(C) provides:
                                        (i) IN GENERAL.—The term ‘‘home equity indebtedness’’ means any
                                      indebtedness (other than acquisition indebtedness) secured by a qualified
                                      residence to the extent the aggregate amount of such indebtedness does
                                      not exceed—
                                           (I) the fair market value of such qualified residence, reduced by
                                           (II) the amount of acquisition indebtedness with respect to such resi-
                                        dence.
                                        (ii) LIMITATION.—The aggregate amount treated as home equity indebt-
                                      edness for any period shall not exceed $100,000 ($50,000 in the case of a
                                      separate return by a married individual).




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                                      386                 138 UNITED STATES TAX COURT REPORTS                                       (382)


                                         There is no dispute that the property meets the definition
                                      of a qualified residence and that the mortgage interest peti-
                                      tioner paid is qualified residence interest because it was paid
                                      on acquisition indebtedness and home equity indebtedness
                                      secured by the property.
                                         In his notice of deficiency respondent allowed petitioner to
                                      deduct home mortgage interest on a total of $550,000 of
                                      indebtedness ($500,000 in acquisition indebtedness under
                                      section 163(h)(3)(B)(ii) plus $50,000 of home equity indebted-
                                      ness under section 163(h)(3)(C)(ii)). 6 Petitioner claims that
                                      she should be allowed to deduct interest paid on the entire
                                      $1 million of indebtedness.
                                         Petitioner correctly asserts that the parenthetical indebted-
                                      ness limitations of section 163(h)(3)(B)(ii) and (C)(ii) are
                                      $550,000 for each spouse filing a separate return. However,
                                      petitioner further claims that these limitations were enacted
                                      so that, collectively, a married couple filing separately can
                                      claim $1.1 million of aggregate indebtedness across both of
                                      their returns and is not limited to claiming a maximum of
                                      $550,000 on any one return. We disagree.
                                         When we interpret a statute, our purpose is to give effect
                                      to Congress’ intent. To accomplish this we begin with the
                                      statutory language, which is the most persuasive evidence of
                                      the statutory purpose. See United States v. Am. Trucking
                                      Ass’ns, Inc., 310 U.S. 534, 542–543 (1940); Sophy v. Commis-
                                      sioner, 138 T.C. 206, 212–213 (2012). The words of the
                                      statute should be construed in their ‘‘ordinary, everyday’’,
                                      and plain meaning. Crane v. Commissioner, 331 U.S. 1, 6
                                      (1947). Usually the meaning of the statutory language is
                                      conclusive. See United States v. Ron Pair Enters., Inc., 489
                                      U.S. 235, 242 (1989); Woodral v. Commissioner, 112 T.C. 19,
                                      23 (1999). If a statute is silent or ambiguous, we may look
                                      to the statute’s legislative history in an attempt to determine
                                      congressional intent. See Burlington N. R.R. v. Okla. Tax
                                      Comm’n, 481 U.S. 454, 461 (1987); United States v. Harrell,
                                      637 F.3d 1008, 1012 (9th Cir. 2011). When a statute appears
                                      clear on its face, however, there must be unequivocal evi-
                                         6 In Pau v. Commissioner, T.C. Memo. 1997–43, we held that sec. 163(h) restricts the residen-

                                      tial mortgage interest deduction to interest paid on $1 million of acquisition indebtedness and
                                      that excess acquisition indebtedness could not be treated as home equity indebtedness. See also
                                      Catalano v. Commissioner, T.C. Memo. 2000–82, rev’d on other grounds, 279 F.3d 682 (9th Cir.
                                      2002). The IRS took the contrary position in Rev. Rul. 2010–25, 2010–44 I.R.B. 571. Given re-
                                      spondent’s concession of the issue, we do not address it.




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                                      (382)                        BRONSTEIN v. COMMISSIONER                                        387


                                      dence of legislative purpose before the statute is interpreted
                                      in a way that overrides the plain meaning of the words used
                                      therein. See Burlington, 481 U.S. at 461; Harrell, 637 F.3d
                                      at 1012; Pallottini v. Commissioner, 90 T.C. 498, 503 (1988);
                                      Huntsberry v. Commissioner, 83 T.C. 742, 747–748 (1984).
                                         We believe section 163(h)(3)(B)(ii) clearly states that a
                                      married individual filing a separate return is limited to a
                                      deduction for interest paid on $500,000 of home acquisition
                                      indebtedness. Similarly, we believe section 163(h)(3)(C)(ii)
                                      clearly states that a married individual filing a separate
                                      return is limited to a deduction for interest paid on $50,000
                                      of home equity indebtedness.
                                         Petitioner has not offered any unequivocal evidence of
                                      legislative purpose which would allow us to override the
                                      plain language of section 163(h)(3)(B)(ii) and (C)(ii). 7 As a
                                      result, we agree with respondent that petitioner is not enti-
                                      tled to a deduction for the interest paid on the entire $1 mil-
                                      lion of acquisition indebtedness incurred in purchasing the
                                      property. Rather, petitioner is entitled to deduct interest paid
                                      on only $550,000 of the mortgage indebtedness.
                                      III. Accuracy-Related Penalty
                                        Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-
                                      related penalty if any part of an underpayment of tax
                                      required to be shown on a return is due to, among other
                                      things, negligence or disregard of rules or regulations or a
                                      substantial understatement of income tax. The penalty is
                                      20% of the portion of the underpayment of tax to which the
                                      section applies. Sec. 6662(a).
                                        The Commissioner bears the burden of production on the
                                      applicability of an accuracy-related penalty in that he must
                                      come forward with sufficient evidence indicating that it is
                                      proper to impose the penalty. See sec. 7491(c); see also Higbee
                                      v. Commissioner, 116 T.C. 438, 446 (2001). Once the
                                      Commissioner meets this burden, the burden of proof
                                         7 Petitioner claims that respondent’s interpretation of the statute would result in married cou-

                                      ples filing separately receiving disparate treatment compared to married couples filing jointly.
                                      Petitioner argues that ‘‘If Congress had a purpose for treating married couples filing separately
                                      different from married couples filing joint returns, they would have expressed their intent in
                                      the legislative record’’, then notes ‘‘that none of the legislative proposals or committee reports
                                      mentioned limiting the indebtedness amount for married couples filing separate returns.’’ Peti-
                                      tioner argues that various other statutes demonstrate a legislative purpose different from the
                                      plain language of sec. 163(h)(3)(B)(ii) and (C)(ii). After considering petitioner’s arguments, we
                                      find them unconvincing.




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                                      388                   138 UNITED STATES TAX COURT REPORTS                                      (382)


                                      remains with the taxpayer, including the burden of proving
                                      that the penalty is inappropriate because of reasonable cause
                                      and good faith. See Higbee v. Commissioner, 116 T.C. at 446–
                                      447.
                                         Respondent satisfies his burden of production by showing
                                      that the understatement meets the definition of ‘‘substan-
                                      tial’’. See Janis v. Commissioner, T.C. Memo. 2004–117,
                                      aff ’d, 461 F.3d 1080 (9th Cir. 2006), and aff ’d, 469 F.3d 256
                                      (2d Cir. 2006). An understatement of income tax is ‘‘substan-
                                      tial’’ if it exceeds the greater of 10% of the tax required to
                                      be shown on the return or $5,000. Sec. 6662(d)(1)(A). An
                                      ‘‘understatement’’ is defined as the excess of the tax required
                                      to be shown on the return over the tax actually shown on the
                                      return, less any rebate. Sec. 6662(d)(2)(A). The understate-
                                      ment of income tax in this case is $7,589, which exceeds the
                                      greater of 10% of the tax required to be shown on the
                                      return 8 or $5,000 and is thus ‘‘substantial’’. Respondent has
                                      therefore met his burden of production.
                                         The amount of an understatement shall be reduced by that
                                      portion of the understatement which is attributable to: (1)
                                      the tax treatment of any item by the taxpayer if there is or
                                      was substantial authority for such treatment; or (2) any item
                                      if the taxpayer adequately disclosed relevant facts affecting
                                      the item’s tax treatment in the return or in a statement
                                      attached to the return and there is a reasonable basis for the
                                      tax treatment of the item by the taxpayer. Sec. 6662(d)(2)(B).
                                         Petitioner claims that section 163 and the legislative his-
                                      tory provide both substantial authority and a reasonable
                                      basis for her treatment of the mortgage interest paid. How-
                                      ever, as stated supra p. 387, we believe section
                                      163(h)(3)(B)(ii) and (C)(ii) clearly limits deductions for
                                      interest paid on a home mortgage to the interest paid on
                                      $500,000 of home acquisition indebtedness and $50,000 of
                                      home equity indebtedness in the case of a married taxpayer
                                      filing separately. We therefore do not believe petitioner has
                                      any substantial authority or reasonable basis for the position
                                      she took on her 2007 tax return.
                                         Petitioner also argues that the accuracy-related penalty
                                      does not apply because she meets the reasonable cause
                                      defense of section 6664(c)(1). Pursuant to that section,
                                           8 The   amount of tax required to be shown on petitioner’s return was approximately $36,000.




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                                      (382)                        BRONSTEIN v. COMMISSIONER                                        389


                                      accuracy-related penalties under section 6662 do not apply to
                                      any portion of an underpayment for which a taxpayer estab-
                                      lishes that he or she: (1) had reasonable cause; and (2) acted
                                      in good faith. Whether a taxpayer has acted with reasonable
                                      cause and in good faith depends on the pertinent facts and
                                      circumstances, including efforts to assess the proper tax
                                      liability, the taxpayer’s knowledge and experience, and the
                                      extent to which the taxpayer relied on the advice of a tax
                                      professional. Sec. 1.6664–4(b)(1), Income Tax Regs. ‘‘Gen-
                                      erally, the most important factor is the extent of the tax-
                                      payer’s effort to assess the taxpayer’s proper tax liability.’’ Id.
                                         Petitioner asserts that ‘‘Confusion over the interpretation
                                      of sections 163(h)(3)(B)(ii) and 163(h)(3)(C)(ii) should be suffi-
                                      cient to establish that under section * * * [6664(c)(1)] and
                                      Treasury Regulations section 1.6664–4(c), the accuracy-
                                      related penalty should not be imposed.’’ Petitioner also
                                      claims that ‘‘there was no reason for the Petitioner to ques-
                                      tion the conclusions of her tax advisor that Petitioner was
                                      acting properly in filing the Petitioner’s return.’’
                                         As stated supra p. 387, we believe that section
                                      163(h)(3)(B)(ii) and (C)(ii) clearly limits deductions for
                                      interest paid on a home mortgage to the interest paid on
                                      $500,000 of home acquisition indebtedness and $50,000 of
                                      home equity indebtedness in the case of a married taxpayer
                                      filing separately. As a result, we disagree with petitioner
                                      that the requirements of section 6664(c)(1) are satisfied
                                      because of ‘‘confusion’’ in the interpretation of section
                                      163(h)(3)(B)(ii) and (C)(ii).
                                         Although petitioner claims to have followed the advice
                                      given to her by her tax adviser, 9 she has made no attempt
                                      to establish that the reliance was reasonable. See Freytag v.
                                      Commissioner, 89 T.C. 849, 888 (1987), aff ’d on another
                                      issue, 904 F.2d 1011 (5th Cir. 1990), aff ’d, 501 U.S. 868
                                      (1991); sec. 1.6664–4(b)(1), Income Tax Regs. We have pre-
                                      viously held that
                                      for a taxpayer to rely reasonably upon advice so as possibly to negate a
                                      section 6662(a) accuracy-related penalty determined by the Commissioner,
                                      the taxpayer must prove * * * that the taxpayer meets each requirement
                                      of the following three-prong test: (1) The adviser was a competent profes-

                                        9 Petitioner’s tax return reflects that it was prepared by Bruce McElvenny of McElvenny &

                                      Associates, P.C.




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                                      390                 138 UNITED STATES TAX COURT REPORTS                                       (382)


                                      sional who had sufficient expertise to justify reliance, (2) the taxpayer pro-
                                      vided necessary and accurate information to the adviser, and (3) the tax-
                                      payer actually relied in good faith on the adviser’s judgment. * * *
                                      [Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff ’d,
                                      299 F.3d 221 (3d Cir. 2002).]

                                      Petitioner has failed to prove that she satisfied any of these
                                      three requirements.
                                        Petitioner has failed to show substantial authority or a
                                      reasonable basis for the position she took on her 2007 tax
                                      return. Petitioner has also failed to prove she meets the
                                      reasonable cause defense of section 6664(c)(1). As a result,
                                      we hold petitioner is liable for the 20% accuracy-related pen-
                                      alty.
                                      IV. Conclusion
                                        We hold that petitioner is not entitled to a deduction for
                                      home mortgage interest paid on $1 million of acquisition
                                      indebtedness when she filed her tax return as ‘‘married filing
                                      separately’’. Rather, petitioner is entitled to a deduction for
                                      the interest paid on only $500,000 of home mortgage indebt-
                                      edness plus the interest paid on $50,000 of home equity
                                      indebtedness, as conceded by respondent. We further hold
                                      that petitioner is liable for a 20% accuracy-related penalty
                                      under section 6662(a).
                                        In reaching our holdings herein, we have considered all
                                      arguments made, and, to the extent not mentioned above, we
                                      conclude they are moot, irrelevant, or without merit.
                                        To reflect the foregoing,
                                                                          Decision will be entered under Rule 155.

                                                                               f




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