                                               CHARLES J. SOPHY, PETITIONER v. COMMISSIONER                                    OF
                                                       INTERNAL REVENUE, RESPONDENT

                                                 BRUCE H. VOSS, PETITIONER v. COMMISSIONER                                  OF
                                                       INTERNAL REVENUE, RESPONDENT
                                                Docket Nos. 16421–09, 16443–09.                         Filed March 5, 2012.

                                                   R determined that Ps, co-owners of two residences, were
                                                together limited in deducting interest on $1 million of acquisi-
                                                tion indebtedness and $100,000 of home equity indebtedness,
                                                under I.R.C. sec. 163(h)(3)(B)(ii) and (C)(ii). Ps contend that
                                                where co-owners are not married to each other, the limita-
                                                tions apply separately to each taxpayer who is a co-owner of
                                                up to two residences. Held: The limitations of I.R.C. sec.
                                                163(h) apply to the aggregate indebtedness on up to two resi-
                                                dences, and co-owners not married to each other may not
                                                deduct more than a proportionate share of interest on $1.1
                                                million.

                                         Jeffrey L. Reuben and William Marc Weintraub, for peti-
                                      tioners.
                                         Kimberly A. Santos and Kathryn Alice Meyer, for
                                      respondent.

                                                                                  OPINION

                                        COHEN, Judge: In these consolidated cases respondent
                                      determined deficiencies of $19,613 and $6,799 in petitioner
                                      204




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                                      (204)                           SOPHY v. COMMISSIONER                                         205


                                      Charles J. Sophy’s Federal income taxes for 2006 and 2007,
                                      respectively, and deficiencies of $16,918 and $15,872 in peti-
                                      tioner Bruce H. Voss’ Federal income taxes for 2006 and
                                      2007, respectively. The deficiencies resulted from the dis-
                                      allowance of portions of petitioners’ claimed deductions for
                                      real estate taxes and qualified residence interest. All section
                                      references are to the Internal Revenue Code in effect for the
                                      years in issue, and all Rule references are to the Tax Court
                                      Rules of Practice and Procedure. After concessions with
                                      respect to the deductions for real estate taxes, the issue for
                                      decision is whether respondent properly applied the limita-
                                      tions under section 163(h)(3)(B)(ii) and (C)(ii) to reduce peti-
                                      tioners’ claimed qualified residence interest deductions.

                                                                                Background
                                         These cases were submitted fully stipulated under Rule
                                      122. The stipulated facts are incorporated in our findings by
                                      this reference. At the time their petitions were filed, peti-
                                      tioners resided in California.
                                         In 2000 petitioner Charles J. Sophy and petitioner Bruce
                                      H. Voss purchased a house together in Rancho Mirage, Cali-
                                      fornia, and financed the purchase by obtaining a mortgage
                                      that was secured by the Rancho Mirage house. Petitioners
                                      acquired the Rancho Mirage house as joint tenants and held
                                      the property as joint tenants during the years in issue.
                                         In 2002 petitioners refinanced the Rancho Mirage house
                                      with a new mortgage loan of $500,000. The proceeds of the
                                      new mortgage loan, which was secured by the Rancho Mirage
                                      house, were used to pay off the original mortgage loan. Peti-
                                      tioners were jointly and severally liable for the new mortgage
                                      on the Rancho Mirage house.
                                         In 2002 petitioners purchased a house in Beverly Hills,
                                      California. Petitioners acquired the Beverly Hills house as
                                      joint tenants and held the property as joint tenants during
                                      the years in issue. To finance the purchase, petitioners
                                      obtained a mortgage secured by the Beverly Hills house. In
                                      2003 petitioners refinanced the Beverly Hills house by
                                      obtaining a new mortgage loan of $2 million. The proceeds of
                                      this new mortgage loan, which was secured by the Beverly
                                      Hills house, were used to pay off the original mortgage loan.




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                                      206                 138 UNITED STATES TAX COURT REPORTS                                       (204)


                                      Petitioners were jointly and severally liable for the mortgage
                                      on the Beverly Hills house.
                                         Also in 2003 petitioners obtained a home equity line of
                                      credit of $300,000 for the Beverly Hills house, on which peti-
                                      tioners were jointly and severally liable. For the years in
                                      issue, petitioners used the Beverly Hills house as their prin-
                                      cipal residence and the Rancho Mirage house as their second
                                      residence.
                                         In 2006 Sophy paid mortgage interest of $94,698 for the
                                      two residences, and Voss paid $85,962. The total average bal-
                                      ance in 2006 for the Beverly Hills house mortgage and home
                                      equity loan and the Rancho Mirage house mortgage was
                                      $2,703,568. In 2007 Sophy paid mortgage interest of $99,901,
                                      and Voss paid $76,635. The total average balance in 2007 for
                                      the two mortgages and the home equity loan was $2,669,136.
                                         On their individual Federal income tax returns for 2006
                                      and 2007, petitioners each claimed deductions for qualified
                                      residence interest. The Internal Revenue Service (IRS)
                                      audited petitioners’ 2006 and 2007 individual income tax
                                      returns and disallowed portions of petitioners’ deductions for
                                      qualified residence interest. In relevant part, the notice of
                                      deficiency for 2006 and 2007 sent to Sophy stated:
                                      It is determined that you are allowed as a deduction for Schedule A—
                                      Home Mortgage Interest Expense of $38,530.00 for tax year 2006 and
                                      $41,171.00 for tax year 2007 rather than $95,396.00 and $65,614 for tax-
                                      able years 2006 and 2007 respectively. The amounts of $56,866.00 and
                                      $24,443.00 for tax years 2006 and 2007 respectively are not allowed
                                      because your deduction for home mortgage interest exceeds the limits per
                                      the provisions of the Internal Revenue Code. The excess amount is not
                                      deductible.

                                      In relevant part, the notice of deficiency for 2006 and 2007
                                      sent to Voss stated:
                                      It is determined that you are allowed as a deduction for Schedule A—
                                      Home Mortgage Interest Expense of $34,975.00 for tax year 2006 and
                                      $31,583.00 for tax year 2007 rather than $95,396.00 and $88,268.00 for
                                      taxable years 2006 and 2007 respectively. The amounts of $60,421.00 and
                                      $56,685.00 for tax years 2006 and 2007 respectively are not allowed
                                      because your deduction for home mortgage interest exceeds the limits per
                                      the provisions of the Internal Revenue Code. The excess amount is not
                                      deductible.

                                        These determinations followed the reasoning of advice
                                      issued in 2009 in which the IRS dealt with the question of




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                                      (204)                           SOPHY v. COMMISSIONER                                          207


                                      how to apply the acquisition indebtedness limitation in a
                                      situation where the total acquisition indebtedness was more
                                      than $1 million and the taxpayer was one of two unmarried
                                      co-owners of the residence. See C.C.A. 200911007 (Mar. 13,
                                      2009). This Chief Counsel Advice states:
                                      [T]he $1,000,000 limitation on acquisition indebtedness under §
                                      163(h)(3)(B)(ii) is used to determine the portion [of] Taxpayer’s interest
                                      payments that may be deducted. In particular, the amount of interest Tax-
                                      payer may deduct is determined by multiplying the amount of interest
                                      actually paid by Taxpayer on Taxpayer’s qualified residence by a fraction
                                      the numerator of which is $1,000,000 and the denominator of which is
                                      * * * the average balance of the outstanding acquisition indebtedness
                                      during the years in question.

                                        In these cases, the IRS computed the applicable limitation
                                      ratio as $1.1 million ($1 million for acquisition indebtedness
                                      plus $100,000 for home equity indebtedness) over the entire
                                      average balance of the qualifying loans. This limitation ratio
                                      was then multiplied by the amount of interest paid by each
                                      petitioner to arrive at the amount of deductible qualified
                                      residence interest that each petitioner could claim for each
                                      year in issue.
                                        The IRS determined the deductible qualified residence
                                      interest for Sophy for each year in issue as follows:

                                                                                                         2006               2007

                                            Total qualified loan limit                                 $1,100,000          $1,100,000
                                            Total average balance of all mortgages
                                              on all qualified loans                                   $2,703,568      $2,669,136
                                            Limitation ratio                                           0.4068697       0.41211838
                                            Total amount of interest paid by Sophy                        $94,698         $99,901
                                            Deductible mortgage interest                                  $38,530         $41,171

                                        The IRS determined the deductible mortgage interest for
                                      Voss for the years in issue as follows:

                                                                                                         2006               2007

                                            Total qualified loan limit                                 $1,100,000          $1,100,000
                                            Total average balance of all mortgages
                                              on all qualified loans                                   $2,703,568      $2,669,136
                                            Limitation ratio                                           0.4068697       0.41211838
                                            Total amount of interest paid by Voss                         $85,962          $76,635
                                            Deductible mortgage interest                                  $34,975         $31,583




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                                      208                 138 UNITED STATES TAX COURT REPORTS                                       (204)


                                                                                 Discussion
                                        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).

                                         There is no dispute that petitioners’ homes meet the defini-
                                      tion of a qualified residence and that the mortgage interest
                                      paid by petitioners is qualified residence interest because it




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                                      (204)                           SOPHY v. COMMISSIONER                                         209


                                      was paid on acquisition and home equity indebtedness
                                      secured by their homes.
                                         Petitioners’ sole contention is that the section 163(h)(3)
                                      limitations on indebtedness (indebtedness limitations) are
                                      properly applied on a per-taxpayer basis with respect to resi-
                                      dence co-owners who are not married to each other. Peti-
                                      tioners argue that they should each be allowed a deduction
                                      for interest paid on up to $1.1 million of acquisition and
                                      home equity indebtedness with respect to the residences that
                                      they jointly own. Under their interpretation, because these
                                      cases involve two unmarried co-owners, together they should
                                      be able to deduct interest paid on up to $2.2 million of
                                      acquisition and home equity indebtedness.
                                         Respondent’s position, on the other hand, is that the
                                      indebtedness limitations are properly applied on a per-resi-
                                      dence basis, regardless of the number of residence owners
                                      and whether co-owners are married to each other. Under
                                      respondent’s interpretation, co-owners should collectively be
                                      limited to a deduction for interest paid on a maximum of $1.1
                                      million of acquisition and home equity indebtedness.
                                         We must decide whether the statutory limitations on the
                                      amount of acquisition and home equity indebtedness with
                                      respect to which interest is deductible under section 163(h)(3)
                                      are properly applied on a per-residence or per-taxpayer basis
                                      where residence co-owners are not married to each other.
                                         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). 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-
                                      dence of legislative purpose before interpreting the statute in




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                                      210                 138 UNITED STATES TAX COURT REPORTS                                       (204)


                                      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 begin our analysis by looking closely at the definitions
                                      of acquisition indebtedness and home equity indebtedness in
                                      section 163(h)(3)(B)(i) and (C)(i). The acquisition indebted-
                                      ness definition uses the phrase ‘‘any indebtedness which is
                                      incurred’’ in conjunction with ‘‘acquiring, constructing, or
                                      substantially improving any qualified residence of the tax-
                                      payer and is secured by such residence.’’ We note that the
                                      word ‘‘taxpayer’’ in this context is used only in relation to the
                                      qualified residence, not the indebtedness. Similarly, the
                                      operative language in the definition of home equity indebted-
                                      ness is ‘‘any indebtedness’’ that is secured by a qualified resi-
                                      dence     (other   than     acquisition   indebtedness).     Sec.
                                      163(h)(3)(C)(i). Once again, the phrase ‘‘any indebtedness’’ is
                                      not qualified by language relating to an individual taxpayer.
                                         Qualified residence interest is defined as ‘‘any interest
                                      which is paid or accrued during the taxable year on acquisi-
                                      tion indebtedness with respect to any qualified residence of
                                      the taxpayer, or home equity indebtedness with respect to
                                      any qualified residence of the taxpayer.’’ Sec. 163(h)(3)(A)
                                      (emphasis added). The definition of ‘‘home equity indebted-
                                      ness’’ also includes the phrase ‘‘reduced by the amount of
                                      acquisition indebtedness with respect to such residence’’
                                      (referring to a qualified residence). Sec. 163(h)(3)(C)(i)(II)
                                      (emphasis added). The definitions of the terms ‘‘acquisition
                                      indebtedness’’ and ‘‘home equity indebtedness’’ in section
                                      163(h)(3)(B)(i) and (C)(i) establish that the indebtedness
                                      must be related to a qualified residence, and the repeated
                                      use of the phrases ‘‘with respect to a qualified residence’’ and
                                      ‘‘with respect to such residence’’ in the provisions discussed
                                      above focuses on the residence rather than the taxpayer.
                                         From Congress’ use of ‘‘any indebtedness’’ in the definition
                                      of acquisition indebtedness, which is not qualified by lan-
                                      guage regarding an individual taxpayer, it appears that this
                                      phrase refers to the total amount of indebtedness with
                                      respect to a qualified residence and which is secured by that
                                      residence. The focus is on the entire amount of indebtedness
                                      with respect to the residence itself. Thus when the statute
                                      limits the amount that may be treated as acquisition indebt-




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                                      (204)                           SOPHY v. COMMISSIONER                                         211


                                      edness, it appears that what is being limited is the total
                                      amount of acquisition debt that may be claimed in relation
                                      to the qualified residence, rather than the amount of acquisi-
                                      tion debt that may be claimed in relation to an individual
                                      taxpayer.
                                         Our analysis of the term ‘‘home equity indebtedness’’ is
                                      similar. The use of the phrase ‘‘any indebtedness’’, unquali-
                                      fied by language relating to an individual taxpayer, appears
                                      to limit the total amount of home equity indebtedness that
                                      may be claimed in relation to the qualified residence itself,
                                      rather than the amount of home equity indebtedness that
                                      may be claimed in relation to an individual taxpayer.
                                         Because of references to an individual taxpayer in other
                                      provisions of section 163(h), petitioners would have us inter-
                                      pret the indebtedness limitations as applying on a per-tax-
                                      payer basis, rather than a per-residence basis. Such an
                                      interpretation, however, reads too much into the indebted-
                                      ness limitations. While Congress references ‘‘a taxpayer’’ and
                                      ‘‘the taxpayer’’ several times in section 163(h), any reference
                                      to an individual taxpayer is conspicuously absent in the lan-
                                      guage of the indebtedness limitations. Moreover, as noted
                                      above, the ‘‘taxpayer’’ references in the definitions of acquisi-
                                      tion indebtedness and home equity indebtedness are in rela-
                                      tion to the qualified residence, rather than to the indebted-
                                      ness. ‘‘[W]hen ‘Congress includes particular language in one
                                      section of a statute but omits it in another section of the
                                      same Act, it is generally presumed that Congress act[ed]
                                      intentionally and purposely’ in so doing.’’ Consol. Freightways
                                      Corp. of Del. v. Aetna, Inc. (In re Consol. Freightways Corp.
                                      of Del.), 564 F.3d 1161, 1165 (9th Cir. 2009) (citing Barnhart
                                      v. Sigmon Coal Co., 534 U.S. 438, 452 (2002)).
                                         With respect to Congress’ repeated use of phrases such as
                                      ‘‘with respect to any qualified residence’’ and ‘‘with respect to
                                      such residence’’ in conjunction with terms that by their own
                                      definitions must already be in relation to a qualified resi-
                                      dence, these phrases appear to be superfluous. However, ‘‘ ‘a
                                      statute ought, upon the whole, to be so construed that, if it
                                      can be prevented, no clause, sentence, or word shall be
                                      superfluous, void, or insignificant.’ ’’ TRW, Inc. v. Andrews,
                                      534 U.S. 19, 31 (2001) (quoting Duncan v. Walker, 533 U.S.
                                      167, 174 (2001)). In addition, we must construe a provision
                                      not in isolation, but as part of the statutory scheme in which




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                                      212                 138 UNITED STATES TAX COURT REPORTS                                       (204)


                                      it is embedded. Consol. Freightways, 564 F.3d at 1165. In the
                                      light of the language in section 163(h)(3) taken as a whole,
                                      it appears that Congress used these repeated references to
                                      emphasize the point that qualified residence interest and the
                                      related indebtedness limitations are residence focused rather
                                      than taxpayer focused.
                                         Further support regarding application of the indebtedness
                                      limitations is found in the parenthetical language addressing
                                      married taxpayers filing separate returns. The parenthetical
                                      language in the acquisition indebtedness limitation in section
                                      163(h)(3)(B)(ii) provides that married taxpayers who file
                                      separate returns are limited to acquisition indebtedness of
                                      $500,000 each, or one-half of the otherwise allowable amount
                                      of acquisition indebtedness. Similarly, the home equity
                                      indebtedness limitation in section 163(h)(3)(C)(ii) includes
                                      parenthetical language that provides that married taxpayers
                                      who file separate returns are limited to home equity indebt-
                                      edness of $50,000 each, which is one-half of the otherwise
                                      allowable amount of home equity indebtedness. Thus the lan-
                                      guage used in these provisions suggests, without expressly
                                      stating, that co-owners who are married to each other and
                                      file a joint return are limited to a deduction of interest on $1
                                      million of acquisition indebtedness and $100,000 on home
                                      equity indebtedness. Accordingly, in a case involving acquisi-
                                      tion indebtedness of more than $1 million, this Court has
                                      limited a married couple’s qualified residence interest deduc-
                                      tion on a joint return to the interest paid on $1 million of
                                      acquisition indebtedness. See Pau v. Commissioner, T.C.
                                      Memo. 1997–43. (See also Rev. Rul. 2010–25, 2010–44 I.R.B.
                                      571, with respect to the amount of acquisition indebtedness
                                      that can be treated as home equity indebtedness for purposes
                                      of the section 163(h) limitations. This ruling does not vary
                                      from the holding in Pau as to the application of the limita-
                                      tions to co-owners who are married to each other.)
                                         Petitioners argue that Congress, in using this particular
                                      language in the indebtedness limitations, intended to create
                                      a special rule for married couples—a ‘‘marriage penalty’’—
                                      that does not apply to co-owners who are not married to each
                                      other. However, in the light of the residence-focused lan-
                                      guage used throughout section 163(h)(3) and the absence of
                                      any reference to an individual taxpayer in the indebtedness
                                      limitations themselves, this argument is not persuasive.




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                                      (204)                           SOPHY v. COMMISSIONER                                         213


                                      Rather than setting out a marriage penalty, this language
                                      simply appears to set out a specific allocation of the limita-
                                      tion amounts that must be used by married couples filing
                                      separate tax returns, thus implying that co-owners who are
                                      not married to one another may choose to allocate the limita-
                                      tion amounts among themselves in some other manner, such
                                      as according to percentage of ownership.
                                         Although we have reached our conclusion by reviewing the
                                      language of the statute, nothing in the legislative history of
                                      the section 163(h)(3) indebtedness limitations suggests that
                                      Congress had any other intention than what we have deter-
                                      mined from an examination of the language. We conclude
                                      that the limitations in section 163(h)(3)(B)(ii) and (C)(ii) on
                                      the amounts that may be treated as acquisition and home
                                      equity indebtedness with respect to a qualified residence are
                                      properly applied on a per-residence basis.
                                         We have considered the arguments of the parties not
                                      specifically addressed in this Opinion. They are either with-
                                      out merit or irrelevant to our decision. To reflect concessions
                                      and our foregoing conclusion,
                                                                        Decisions will be entered under Rule 155.

                                                                               f




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