Background of the Shilgevorkyan Family and Property Acquisition
The Tax Court upheld mortgage fee deductions under Section 163(a) because the taxpayer failed to prove he was the lawful possessor of the property and that it was his qualifying abode. In the 1980s, Hrach Shilgevorkyan and his siblings Artur and Edvard left Armenia for the US. The brothers ran several successful businesses in the US, notably Shilgevorkyan LLC, which held and managed a portfolio of Phoenix condominiums for rent (Geiszler et al., 2023). Edvard used a $1,140,000 loan from Wells Fargo to help finance the purchase of a home in Paradise Valley, Arizona, in 2005.
Mortgage Deduction Claim on the Paradise Valley Home
From September 2010 until he moved into his new Phoenix home in April 2013, Hrach occupied the detached lodge on the Paradise Valley property. Hrach deducted $66,000 in mortgage interest on the Paradise Valley home on Schedule A of his 2012 personal income tax return. After reviewing Hrach’s 2012 tax return, the IRS first determined a deficiency of approximately $23,000 and a $4,600 accuracy-associated charge, neither of which he was ultimately held responsible for paying. Hrach requested a review by the Tax Court.
Tax Court Review and Legal Considerations
The issue at the Tax Court was whether the mortgage payments on the Paradise Valley house qualified as interest on a primary or secondary home. According to the Tax Court, Hrach must check three sections before claiming the qualifying residence interest deduction. The Tax Court’s initial inquiry was whether Hrach was legally responsible for the debt (Geiszler et al., 2023). Hrach failed to provide any documentation demonstrating he had paid either Wells Fargo or his brother Edvard back for their share of the mortgage. When both a primary and secondary obligor sign the same instrument, an accommodation party is created under Arizona law.
Court Ruling and Implications for Tax Deductions
The Tax Court ruled that Hrach did not provide sufficient evidence that the guesthouse met the definition of a qualified home or that he was the legal possessor of the property. Therefore, the $66,000 in mortgage interest that he represented as a deduction on his 2012 Schedule A was not qualified home interest, and he was not entitled to the deduction.
Reference
Geiszler, M., Richardson, L., & McKinley, J. (2023). Mortgage interest deduction denied. Journal of Accountancy. Web.