- 40 -
The indebtedness generally must 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. Section 1.163-1(b), Income Tax Regs., however, 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.
The Court of Appeals for the Ninth Circuit, to which an appeal in
this case would lie, construed the foregoing regulation to permit
interest deductions in nonrecourse lending situations where the
taxpayer is not personally liable on a mortgage. See Golder v.
Commissioner, supra. Although the taxpayer is not directly liable
on the debt, 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 the regulation, is not directly liable on the
mortgage indebtedness. See id.
Relying on the same rationale underlying the interpretation
in Golder of section 1.163-1(b), Income Tax Regs., we have held
that taxpayers who do not hold legal title to property but who
establish they are equitable owners of the property are entitled
to deduct mortgage interest paid by them with respect to the
Page: Previous 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 NextLast modified: May 25, 2011