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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
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