                       T.C. Memo. 1997-551



                     UNITED STATES TAX COURT



               SAFFET AND ANA USLU, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 9317-96.                      Filed December 16, 1997.


     Saffet and Ana Uslu, pro se.

     Timothy F. Salel, for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge:       This case was heard
                                  1
pursuant to section 7443A(b)(3)       and Rules 180, 181, and 182.

     Respondent determined a deficiency of $2,869 in petitioners'

Federal income tax for 1992.


1
      Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
                                 - 2 -


     Following settlement of various issues by the parties, the

sole issue for decision is whether petitioners are entitled to a
                                                                   2
deduction for qualified residence interest under section 163(a).

     Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioners'

legal residence was Covina, California.

     Saffet Uslu (petitioner husband) immigrated to the United

States from Turkey and, during the early 1980's, studied for a

graduate degree in petroleum engineering at the University of

Southern California (USC).   In 1983, while petitioner husband was

attending graduate school, petitioner husband's brother, Haluk

Uslu (Haluk), immigrated to the United States from Turkey and

lived with petitioner husband.    As an immigrant, Haluk was unable

2
     The parties agreed to the following: (1) Petitioners are
entitled to an automobile expense deduction of $2,559 on the
Schedule C of petitioner husband; (2) petitioners are not
entitled to a repair expense deduction of $908 claimed on the
Schedule C of petitioner husband; (3) petitioners are not
entitled to deduct $1,550 of the $2,509 meals and entertainment
expense deduction claimed on the Schedule C of petitioner
husband; (4) petitioners are not entitled to deduct $1,802 of the
$5,267 "other expenses" claimed on the Schedule C of petitioner
husband; (5) petitioners are not entitled to deduct "other
expenses" of $1,254 claimed on the Schedule C of petitioner wife;
and (6) petitioners are entitled to an additional self-employment
tax deduction of $120 due to a change in net earnings from self-
employment resulting from the aforementioned adjustments. The
remaining adjustments to petitioners' child and dependent care
credit and to petitioners' itemized deductions for charitable
contributions and unreimbursed employee business expenses are
computational and will be resolved by the Court's holding on the
mortgage interest deduction issue.
                               - 3 -


to open a bank account in his name.    Petitioner husband and Haluk

opened a joint checking account (joint account) at California

Federal Bank.   Both petitioner husband and Haluk deposited money

into and wrote checks out of this joint account.

     Upon receiving his graduate degree from USC, petitioner

husband returned to work briefly in Turkey.   After working in

Turkey for approximately 1 year, petitioner husband returned to

the United States and began working in areas other than the field

of engineering.   Petitioner husband married Ana Uslu (petitioner

wife), and two children were born of their marriage.   During the

year at issue, petitioner husband was employed as a real estate

broker, and petitioner wife was employed as a registered nurse.

In 1989, Haluk married Aysun S. Aslancirit (Aysun), and, at the

time of his marriage, Haluk ceased making deposits into or

writing checks out of the joint account.   Petitioners assumed

this account as their own.

     In 1990, petitioners' unfortunate financial situation forced

them to file for a Chapter 7 bankruptcy.   Shortly thereafter,

through petitioner husband's work as a real estate broker,

petitioners located a house that they desired to purchase as a

residence.   The house was located at 733 East Alisal Street in

Covina, California (Alisal property).   Because of their

bankruptcy and poor credit rating, petitioners were unable to

qualify for financing to purchase the Alisal property.
                                - 4 -


Petitioner husband discussed this problem with Haluk, and the two

agreed that Haluk and his wife, Aysun, would obtain financing, in

their names, for the purchase of the Alisal property, and that

legal title to the property would be transferred to Haluk and

Aysun.   They further agreed that, upon the purchase of the Alisal

property, petitioners and their children would occupy the Alisal

property, and petitioners would make all mortgage payments on the

property as well as paying all expenses for repairs, maintenance,

and improvements.   Basically, they agreed that Haluk and Aysun

would execute documents necessary to procure title to and

financing for the Alisal property, and petitioners would

exclusively occupy the property and perform all the obligations

pursuant to ownership of the property, financial and otherwise.

All of these agreements were oral but are undisputed.

     On April 9, 1990, a Grant Deed was issued to Haluk and Aysun

for the Alisal property.   Initially, the Alisal property was sold

by an assumption of the existing mortgage on the property.

Petitioners made mortgage payments directly to the mortgagee.     In

October 1990, Haluk and Aysun refinanced the loan, and, pursuant

thereto, a Deed of Trust was executed on October 5, 1990, listing

Haluk and Aysun as borrowers.   The Deed of Trust was in the

amount of $202,500 and was in favor of Southern California

Federal Savings and Loan Association (Southern California

Federal).   The Deed of Trust on the Alisal property served as
                               - 5 -


security for the loan.   Due to extensive repairs needed on the

Alisal property, petitioners and their children were unable to

occupy the property until June 1991.

     Nevertheless, petitioners made all the required mortgage

payments to Southern California Federal, with respect to the

Alisal property, from the commencement of the mortgage up until

trial of this case, including the entire year at issue.   During

1992, petitioners paid a total of $18,980 to Southern California

Federal as interest on the mortgage of the Alisal property.

Petitioners also paid all repairs, improvements, and maintenance

on the Alisal property since the time of its purchase in 1990.

Up to the date of trial, Haluk and Aysun had never occupied the

Alisal property; they never made any payments on the Alisal

property, either as to mortgage, repairs, maintenance,

improvements, or otherwise, and they never agreed to or ever

intended to spend their money on the property.

     On their Federal income tax return for 1992, petitioners

claimed on Schedule A, Itemized Deductions, a deduction of

$18,980 for home mortgage interest, representing the mortgage

interest paid on the Alisal property during 1992.   In the notice

of deficiency, respondent disallowed the home mortgage interest

deduction for the reason that "The interest expense you claimed

is not deductible since you are not legally liable for the debt."

Haluk and Aysun did not claim a Federal income tax deduction for
                               - 6 -


the Alisal property mortgage interest for the year 1992, nor did

they ever claim deductions on their tax returns for interest or

taxes attributable to this property.

     The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the burden is on the

taxpayer to prove that the determinations are in error.   Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).   Moreover,

deductions are a matter of legislative grace, and the taxpayer

bears the burden of proving entitlement to any claimed deduction,

and that such deduction fits squarely within the ambit of the

statute providing the deduction.   New Colonial Ice Co. v.

Helvering, 292 U.S. 435 (1934).

     Section 163(a) provides that there shall be allowed as a

deduction all interest paid or accrued within the taxable year on

indebtedness.   Section 163(h)(1), however, provides that, in the

case of a taxpayer other than a corporation, no deduction shall

be allowed for personal interest paid or accrued during the

taxable year.   Section 163(h)(2) defines "personal interest" to

mean any interest allowable as a deduction other than, inter

alia, "any qualified residence interest".   Sec. 163(h)(2)(D).

Thus, qualified residence interest is deductible under section

163(a).   The term "qualified residence interest" is defined, in

pertinent part, in section 163(h)(3)(A)(i), as any interest paid

or accrued during the taxable year on "acquisition indebtedness
                                - 7 -


with respect to any qualified residence of the taxpayer".    The

parties do not dispute that the Alisal property was petitioners'

qualified residence.   The dispute is whether petitioners'

payments constituted interest on "acquisition indebtedness" with

respect to the Alisal property.

     The "acquisition indebtedness" in section 163(h)(3)(A)(i)

must, in general, be an obligation of the taxpayer and not an

obligation of another.    See Golder v. Commissioner, 604 F.2d 34,

35 (9th Cir. 1979), affg. T.C. Memo. 1976-150; Smith v.

Commissioner, 84 T.C. 889, 897 (1985), affd. without published

opinion 805 F.2d 1073 (D.C. Cir. 1986); Hynes v. Commissioner, 74

T.C. 1266, 1287 (1980).   However, section 1.163-1(b), Income Tax

Regs., provides, in pertinent part:


     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. * * *


In Golder v. Commissioner, supra, the Court of Appeals for the

Ninth Circuit, to which an appeal in this case would generally

lie, indicated that section 1.163-1(b), Income Tax Regs., allows

the deduction of interest by the taxpayer, even though the

taxpayer is not personally liable for the mortgage as, for

example, where the mortgage is nonrecourse, or where the taxpayer

purchases property subject to a mortgage.   In such situations,
                                - 8 -


although the taxpayer is not directly liable on the debt, since

the mortgage creditor may look only to the mortgaged property for

payment, and the taxpayer stands to lose the property if the

mortgage is not paid, the taxpayer must pay the mortgage to avoid

foreclosure.    Thus, section 1.163-1(b), Income Tax Regs.,

recognizes the economic substance of nonrecourse borrowing and

allows an interest deduction to a taxpayer, who, in the

situations contemplated in that regulation, is not directly

liable on the mortgage indebtedness.

     Respondent contends that petitioners may not deduct the

subject mortgage interest payments because they had no legal

obligation to Southern California Federal with respect to such

mortgage.   Respondent cites Golder v. Commissioner, supra, for

the proposition that section 1.163-1(b), Income Tax Regs., does

not create an exception to the rule of section 163(a) that

interest is deductible only with respect to the indebtedness of

the taxpayer.    In other words, respondent contends that section

1.163-1(b), Income Tax Regs., applies only to situations in which

the taxpayer has procured nonrecourse debt, and does not apply to

a situation, such as in the instant case, where a person other

than the taxpayer is legally obligated on a mortgage.    Respondent

also cites Loria v. Commissioner, T.C. Memo. 1995-420, and Song

v. Commissioner, T.C. Memo. 1995-446, in which this Court held

that the taxpayers could not deduct mortgage interest payments
                               - 9 -


made by them on residences of which legal title was held by a

sibling of the taxpayer.   These cases, however, are

distinguishable from the instant case.

     In Golder v. Commissioner, supra, the taxpayers were

guarantors of a debt of their corporation, which debt was also

secured by the taxpayers' home.   The Court of Appeals for the

Ninth Circuit held that the indebtedness in that case was not

that of the taxpayers but, rather, was that of the corporation,

and that the taxpayers had merely guaranteed that debt.   That is

not the situation in this case.

     In Loria v. Commissioner, supra, and Song v. Commissioner,

supra, the taxpayers made mortgage payments on residences upon

which legal title was held in each case by the taxpayer's

brother.   In both cases, the taxpayer's brother was also indebted

to a third party commercial mortgage lender in connection with

such residence.   In both cases, the Court denied mortgage

interest deductions to the taxpayers for the reason that the

taxpayers had failed to prove that they held any equitable or

beneficial ownership in the residences.   In the cases relied on

by respondent, the Court held that the subject indebtedness was

not that of the taxpayer, and that the taxpayer did not have an

ownership interest in the mortgaged property.

     In the instant case, petitioners' agreement with Haluk and

Aysun coupled with petitioners' continued occupancy of the Alisal
                               - 10 -


property and the performance by petitioners of all of the

obligations under the Alisal property mortgage are sufficient to

render petitioners' obligation to pay off the mortgage, an

enforceable debt, to Haluk and Aysun for the amount of the

mortgage at the interest rate specified in the mortgage.     See

Amundson v. Commissioner, T.C. Memo. 1990-337; Belden v.

Commissioner, T.C. Memo. 1995-360.      On this record, the Court

finds that the mortgage payments made by petitioners to Southern

California Federal with respect to the Alisal property were, in

effect, payments of principal and interest to Haluk and Aysun.

See id.   In other words, the payments by petitioners constituted

payments on an indebtedness of petitioners.

     To be sure, as required by section 1.163-1(b), Income Tax

Regs., the taxpayer must be the "legal or equitable owner" of the

property.   Where the taxpayer has not established legal,

equitable, or beneficial ownership of mortgaged property, this

Court has disallowed the taxpayer a deduction for the mortgage

interest.   See Bonkowski v. Commissioner, T.C. Memo. 1970-340,

affd. 458 F.2d 709 (7th Cir. 1972); Song v. Commissioner, supra.

     Legal title to the Alisal property was held in the names of

Haluk and Aysun during 1992.   Nevertheless, since the time of the

purchase of the Alisal property, petitioners have made each and

every mortgage payment on the property and have paid all expenses

for repairs, maintenance, and improvement in connection with such
                               - 11 -


property from their own income.       The real property taxes and

insurance on the Alisal property were paid from an escrow account

at Southern California Federal that was funded with a portion of

petitioners' mortgage payments.       Furthermore, petitioners and

their children have been the sole occupants of the Alisal

property since the time of its purchase in 1990.

     Haluk and Aysun have made no payments, either directly or

indirectly, in connection with the Alisal property for the

mortgage, repairs, maintenance, or otherwise.       They have not

acted in such a manner that would be consistent with an ownership

interest in the Alisal property.       Haluk and Aysun have made no

claim of ownership interest in the Alisal property since the time

of its purchase.    Furthermore, Haluk testified at trial that the

sole reason he and Aysun procured legal title to the Alisal

property and obtained a mortgage loan secured by such property

was to assist petitioners in obtaining the Alisal property for

petitioners' residence.   Additionally, during 1995, Haluk and

Aysun executed a quitclaim deed transferring legal title to the
                                  3
Alisal property to petitioners.       This quitclaim deed, however,

was not recorded.   At trial, Haluk testified unequivocally that,

even though he and Aysun recognized their liability on the


3
     The face of this quitclaim deed stated that it was "Ratified
4/9/90", which the Court surmises was intended to make the
quitclaim deed retroactive to the date of the initial purchase of
the property.
                             - 12 -


indebtedness, if he and Aysun were ever called upon to pay the

indebtedness (arising from a default by petitioners), they would

look to petitioners for payment of whatever amounts that Haluk

and Aysun paid to the mortgage lender.   The Court is satisfied

that, should that situation ever arise, Haluk and Aysun would

have a cause of action against petitioners.

     The Court is satisfied, from all the evidence presented,

that petitioners have continuously treated the Alisal property as

if they were the owners, and that they, exclusively, held the

benefits and burdens of ownership thereof.    On this record, the

Court holds that petitioners established equitable and beneficial

ownership of the Alisal property, and that they were liable to

Haluk and Aysun in respect of the mortgage indebtedness.   As

such, the Court holds that petitioners are entitled to a

deduction for the $18,980 home mortgage interest paid by them

during 1992.



                                         Decision will be entered

                                   under Rule 155.
