Originally published on Forbes.com.
So how are you supposed to refer to the other half of a couple that lives together with neither the burdens nor benefits of marriage? At the suggestion of my friend Jonathan Schwartz, I have decided to go with covivant to refer to my, well, covivant. The Tax Court looks at it differently. Judge Guy refers to James David Jackson’s covivant, Julie Furney, as his girlfriend. Really, that just seems so high schoolLike you take your girlfriend to the prom. You need something stronger if you are going to try to take the interest deductions on her mortgage, which is what Mr. Jackson was in Tax Court about.
A Deduction For A Debt That Is Not Yours?
When I read about this case I was thinking that it was like the saying “Not my circus. Not my monkeys.” That is “Not my mortgage. Not my deduction.” Not much to it. But it turns out that there actually are circumstances under which you can deduct the interest even though your name is not on the mortgage.
Thus, if the taxpayer can establish legal, equitable, or beneficial ownership of mortgaged property, the taxpayer may be entitled to a deduction for qualified residence interest. In Uslu v. Commissioner, T.C. Memo. 1997-551, for example, the taxpayers could not qualify for a mortgage loan because of a recent bankruptcy. Consequently, the taxpayer husband and his brother agreed that the brother would obtain the loan for the property and the taxpayers would pay the mortgage and all other expenses for maintenance and improvements. The Court held that although the taxpayers did not hold legal title to the property, they were the equitable owners and were entitled to deduct mortgage interest they paid with respect to the property. The Court reached a similar result in Trans v. Commissioner, T.C. Memo. 1999-233.
Sadly, Mr. Jackson did not really have much of that going on. He claimed that he gave Ms. Furney $1,000 in cash each month. Nonetheless, he deducted $15,720 in mortgage interest in both 2011 and 2012. That’s a pretty hefty deduction given that he had wage income of $39,292 and $33,022 in those two years. The Form 1098, which was as you would expect addressed to Ms. Furney showed $13,794 in each year. So the $15,720 appears to be what my first managing partner, Herb Cohan, would refer to as “You know. A figure.”
How About A Little Evidence?
Reading the decision, I catch some level of frustration on the part of Judge Guy, as he seems to go out of his way to make Mr. Jackson’s argument for him, noting:
The Supreme Court of Nevada recognizes that unmarried cohabiting adults may expressly or impliedly agree to hold property as though it were community property.
This Court has long recognized that a taxpayer may become the equitable owner of property when he or she assumes the benefits and burdens of ownership.
But Mr. Jackson needs to have something more than his just his word. This is the Tax Court, not West Point.
To prevail, he was obliged to establish that he paid the mortgage interest and that he held beneficial or equitable ownership of the residence during the years in issue. As explained below, he failed to show either.
Petitioner did not provide any objective evidence that he paid the mortgage interest in issue or that he was the equitable or beneficial owner of the property in question. He did not produce any bank statements, receipts, or similar records to show that he transferred any amounts to Ms. Furney to pay the mortgage or other expenses related to the residence. 3Petitioner testified that Ms. Furney paid all of the homeowners insurance premiums and property taxes on the residence. There was no showing that petitioner could make improvements to the property without Ms. Furney’s consent or that he could obtain legal title to the property by paying the balance due on the mortgage.
If Ms. Furney had showed up to testify that might have helped, but no luck there either.
The Moral
Mr. Jackson represented himself in Tax Court, which is understandable given the relatively low stakes. If you expect to win on something like this, you really need to have at least some documentation not just a barely plausible story.
Other Coverage
Joe Kristan gave this case a pretty thorough treatment – Tax Court locks boyfriend out of interest deductions. Joe’s moral was a bit different than mine as he seems to celebrate traditional values a bit.
If you want to deduct mortgage interest payments, you should be on the debt. If you can’t be on the debt with the bank, get it in writing with your girlfriend. Or just marry her already.
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