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Not until August 1992 did petitioners begin making regular
mortgage payments directly to Lomas Mortgage in connection with
the Foxbriar property. From August through December 1992,
petitioners actually paid mortgage interest and real property
taxes on the Foxbriar property. Respondent allowed petitioners
the corresponding deductions for these payments.
The Court deems it prudent to also examine petitioners'
ownership interest, if any, in the Foxbriar property during the
years at issue. State law determines the nature of property
rights, and Federal law determines the appropriate tax treatment
of those rights. See United States v. National Bank of Commerce,
472 U.S. 713, 722 (1985); United States v. Rodgers, 461 U.S. 677,
683 (1983); Aquilino v. United States, 363 U.S. 509, 513 (1960).
Thus, whatever rights or interests, if any, petitioners held in
the Foxbriar property during the years at issue must be
determined by applying applicable Texas law. It is well settled
under Texas law that legal title to real property does not pass
to a purchaser under a contract of sale until the deed to the
property is delivered. Leeson v. City of Houston, 243 S.W. 485,
488 (Tex. Commn. App. 1922, judgment adopted). The record
reflects that no deed to the Foxbriar property was delivered to
petitioners prior to August 1992. Thus, the Court finds that
petitioners had no legal title to the Foxbriar property prior to
August 1992.
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