Tax Court in Brief | Pressman v. Comm’r | Deductibility of Home Mortgage Interest and Penalties

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The Tax Court in Brief – August 29th – September 2nd, 2022

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Tax Litigation:  The Week of August 29th, 2022, through September 2nd, 2022

Pressman v. Comm’r, T.C. Summ. Op. 2022-15 | August 29, 2022 | Panuthos, S.T.J. | Dkt. No. 16084-19S

Opinion

Short Summary: This case involves a taxpayer’s entitlement to deduct home mortgage interest and the taxpayer’s obligation to substantiate that the expense to which the deduction related was paid or incurred. In 2012 Robert Pressman (Pressman) purchased a home in New York and titled the property in the name of his wholly owned corporation, Sambob, Inc. (Sambob). Pressman, through Sambob, financed the purchase of the property through a mortgage with Putnam Bridge Funding (Putnam Bridge). Pressman refinanced the mortgage several times with Putnam Bridge after 2012. The property was used as Pressman’s primary residence until it was sold in 2017. Pressman’s tax return for 2016 was prepared by a certified public accountant. On his Schedule A, Itemized Deductions, Pressman claimed an itemized deduction of $75,000 for home mortgage interest. On June 10, 2019, the IRS issued a notice of deficiency disallowing the home mortgage interest deduction and determined that Pressman was liable for an accuracy related penalty under section 6662(a) and (b)(2) due to substantial understatement of income tax for the 2016 tax year. The parties’ dispute was whether the taxpayer adequately substantiated payment of the home mortgage interest payments for the tax year at issue. The issues for decision were: (i) whether the taxpayer was entitled to deduct home mortgage interest of $75,000 for the year in issue; and (ii) whether the taxpayer was liable for an accuracy-related penalty under section 6662(a) for the year in issue.

Primary Holdings:

Key Points of Law:

Insights:  This case illustrates the importance of maintaining proper documentation for deductible expenses that are claimed on a return. The taxpayer provided the court with limited documentation that he paid the claimed $75,000 of home mortgage interest. The taxpayer’s documentation was comprised of emails from Putnam Bridge and a handwritten Form 1098, Mortgage Interest Statement. The Putnam Bridge emails stated that the interest was accrued and charged but they did not reference actual payments. In addition, neither party could confirm that the handwritten Form 1098, Mortgage Interest Statement, was actually filed by Putnam Bridge. As a result, the Court was unable to determine when payments were made, from what accounts, and the amounts of any such payments. A taxpayer seeking to deduct home mortgage interest should ensure that it receives a proper Form 1098, Mortgage Interest Statement, from the mortgage holder and that the mortgage holder files the Form 1098 with the IRS. If a taxpayer receives a handwritten Form 1098, Mortgage Interest Statement, one that does not conform to the IRS’s form, or does not receive a Form 1098, Mortgage Statement from the mortgage holder, the taxpayer should ensure that he or she can provide the Court with documentation as to the dates of payments, from which accounts they were made, and the amounts of any such payments. Such information may allow the Court to reasonably estimate the amount of the deductible expense that was paid or incurred and allow a deduction in the amount of the estimate.