In Part II, we provided the backdrop to the Voss vs. Commissioner case, and the Tax Court’s reasoning why the mortgage interest limitations under IRC 163(h)(3) should be applied on a per residence basis. Following an in-depth analysis of IRC 163(h)(3)(B) and (C), the Ninth Circuit came to the opposite conclusion.
Note that the statute reads as follows:
IRC 163(h)(3)(B)(ii): “The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return).”
IRC 163(h)(3)(C)(ii): “The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual).”
The Ninth Circuit had three main reasons for interpreting the statute differently than the Tax Court:
- The Ninth Circuit looked at the use of the parentheticals and use of the phrase “in case of,” which apply to married taxpayers filing separately and thus “clearly speak in per-taxpayer terms.” The court stated that Congress could have clearly drafted language stating that the deduction limits should apply per residence, but it did not do so.
- The parentheticals provide each spouse filing separately a debt limit of $550,000, so that together they are effectively entitled to a debt limit on $1.1 million. The statute thus operates in a per-taxpayer manner.
- By interpreting the statute on a per-residence basis, there would be no need to provide that spouses filing separately have a debt limit of $550,000 each. This would be rendering the language in the parentheticals superfluous, which is contrary to the well-established rule of statutory construction not to do so. The language in the parentheticals clarifies that married couples filing separately should be treated in the same manner as married couples filing jointly, which means they should be treated as if they were a single taxpayer with a $1.1 million debt limit and shouldn’t get “double the credit” for filing separately. If Congress wanted this to apply to unmarried co-owners, it could have said so as it did in the first-time homebuyer credit provisions of IRC 36(C).
The Ninth Circuit thus reversed the Tax Court decision, stating that when unmarried taxpayers co-own a qualifying residence, they are each entitled to deduct interest on up to $1.1 million of debt. This decision will have far-reaching implications on many single taxpayers who happen to co-own qualifying residences (as well as on domestic partners who now have the option of getting married), and we will monitor the reaction of the IRS following this case.
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