Shilgevorkyan v. Comm’r, T.C. Memo. 2023-12| January 23, 2023 | Ashford, J. | Dkt. No. 9247-15

Summary: This is a deficiency case involving taxpayer Hrach Shilgevorkyan (Petitioner) and the IRS’s disallowance of a mortgage interest deduction for tax year 2012. In 2005 Edvard, Petitioner’s brother, purchased the property in issue in Paradise Valley, Arizona for $1,525,000, making a $392,896 down-payment and obtaining a $1,143,750 bank loan from Wells Fargo. Edvard and his wife, Lusine, were the borrowers. Edvard, Lusine, and Artur (Petitioner’s other brother) took out a $1,200,000 construction loan. Both loans were secured by the Paradise Valley property. The construction loan funds were used to construct a house and a separate guest house on the property. In 2006 and again in 2008, Edvard, Lusine, and Artur refinanced with Wells Fargo. The disclosures and deed of trust contained representations and prohibitions of transfers made without Wells Fargo’s consent, and the deed of trust further stated that the Paradise Valley property would be the borrower’s principal residence for at least one year unless the lender agreed. Artur executed a quitclaim deed in 2010, which conveyed all his interest in the property to Petitioner. No request was made to Wells Fargo to approve the conveyance. Petitioner did not pay Artur in exchange for the quitclaim deed. During 2012 Petitioner made no payments to Wells Fargo related to the loan secured by the property. Wells Fargo did not issue Petitioner a Form 1098, Mortgage Interest Statement, for 2012. With limited exceptions, Petitioner did not reference the Paradise Valley property as being his place of residence or address, even though he lived in the guest house for a time. On his 2012 federal income tax return Petitioner deducted $66,354 for mortgage interest paid related to the Paradise Valley property. This deduction was for one-half the total mortgage interest paid in 2012 on the Paradise Valley loan as reported by Wells Fargo on the Form 1098 that was issued to Edvard and Lusine.

Key Issues: Whether the IRS’s disallowance of the mortgage interest deduction was appropriate?

Primary Holdings: Yes. Petitioner did not prove that the indebtedness on the Paradise Valley property was his obligation (even though the Tax Court made an assumption that it was), (2) Petitioner did not show ownership (legal or equitable) in the property, and the quitclaim deed did not, under state law, convey title to Petitioner, and (3) the residence is the taxpayer’s qualified residence, and (3) Petitioner failed to show that the property was his “qualified residence.”

Key Points of Law:

Burden of Proof. In general, the IRS’s determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). If the taxpayer produces credible evidence with respect to any factual issue relevant to ascertaining his federal income tax liability and meets certain other requirements, the burden of proof shifts from the taxpayer to the IRS as to that factual issue. § 7491(a)(1) and (2). That burden-shifting mechanism is not applicable in this case.
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