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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, the pertinent part of section 1.163-1(b), Income Tax
Regs., provides:
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 stated 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 but, rather, simply recognizes the economic
substance of nonrecourse borrowing. Additionally, 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, the courts generally have disallowed the
taxpayer a deduction for the mortgage interest. Song v.
Commissioner, T.C. Memo. 1995-446; Bonkowski v. Commissioner,
T.C. Memo. 1970-340, affd. 458 F.2d 709 (7th Cir. 1972).
State law determines the nature of property rights, and
Federal law determines the appropriate tax treatment of those
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