TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, November 7, 2017

A 1st Pique At The Tax Bill: Passive Voice On Mortgage Interest

Tax Cuts And Jobs ActThis is the first of what I hope to be a series of small posts about small annoyances in the Tax Cuts and Jobs Act.  Thus the pun.  So if you think these posts resemble an Andy Rooney whine or a Seinfeldian rant please remember that I’m just a simple tax professor from West Texas, and a proceduralist to boot.

My first pique is with the proposed mortgage interest reform.  It completely ignores a great opportunity to fix a problem in the current statute.  The problem is with how the debt limit applies.  Current law uses the passive voice to limit the size of the loans that can generate the mortgage interest deduction.  For example, the $1,000,000 limit for acquisition indebtedness is written like this:  “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)” § 163(h)(3)(B)(ii).  The language limiting home equity indebtedness is similar.    

The problem with the passive voice is that you cannot tell whether the limit applies to each qualified residence or to each taxpayer.  In Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), the 9th Circuit complained that “Discerning an answer ... requires considerable effort on our part because the statute is silent as to how the debt limits should apply in co-owner situations.”  When Andy Rooney says it, it’s a whine, but when the 9th Circuit says it, it’s a problem.

The 9th Circuit decided to interpret the language as imposing a per-taxpayer limit.  So the two unmarried taxpayers in that case could each deduct the interest on each taxpayer’s separate acquisition indebtedness up to the limit of $1 million.  But it turns out that married taxpayers could not do so because of the parenthetical language that cut the limits in half “in the case of a married individual filing a separate return.”  As the dissent in Voss pointed out, the 9th Circuit’s solution to the passive voice problem created a not insignificant marriage penalty problem.  In an Action on Decision, the Service acquiesced in Voss and will follow it.  

Now you may ask why the tax writers here should fix the passive voice when the current language is now “settled.”  Because it’s a substantive problem, that’s why.  The reform lowers the limit of qualifying debt to $500,000.  Sure, that’s an easy sell here in West Texas where home prices are low.  How low?  My wife and I paid $265,000 in 2010 for our 3,000 sq.ft. 4 BR, 3 BR, 2 car garage home on a .25 acre lot in an upscale neighborhood 2 miles from my office.  So no, you won’t find a lot of sympathy in this part of the country for the new $500,000 mortgage limit. 

But my middle-class home would sell for over $1 million in many areas of the country (and not just the coasts) and for many taxpayers the deductibility of mortgage interest could mean the difference between affording home ownership and not.  Thus this “reform” puts greater pressure on taxpayers to find creative ways to avoid the limit.  The old limit was not so bad.  But the new limit could push more middle-class taxpayers into avoiding marriage for tax reasons.  How ironic that this “family friendly” tax reform effort contains a reform that actually increases a marriage penalty!  

Congress should revise the limiting language to something like this: “The aggregate amount of indebtedness taken into account under subparagraph (A) for any qualified residence for any period shall not exceed $500,000....” (bolded language added).  That should fix the problem.  Does anyone see that the fix create any other problems? 

My post assumes the continuation of the mortgage deduction as a deduction.  So it still has the upside-down feature of any deduction:  it favors those in higher tax brackets.  If you are going to subsidize home ownership, I agree with those who believe the better policy is to extend that subsidy to all taxpayers whether or not they have enough expenditures to itemize.  Why should the federal government help only high-end taxpayers achieve the American Dream of home ownership? 

Make the sucker a credit. 

But that's too deep for a pique.  So I leave to other, better qualified, commentators to explain.   My point here is that if you are going to the bother of reforming § 163(h), at least fix known problems with current law. 

http://taxprof.typepad.com/taxprof_blog/2017/11/a-1st-pique-at-the-tax-bill-passive-voice-on-mortgage-interest-.html

Bryan Camp, News, Tax | Permalink

Comments

I wholeheartedly agree on the problem and solution--but what about making your proposed language "for any qualified residence" plural? That way it's clear that if you have 2 qualifying residences, their combined debt cannot exceed $500k.

Posted by: Margaret Ryznar | Nov 7, 2017 1:14:46 PM

Cleaning up the Tax Codes language is truly a noble task. We guessed that the Code and even more particularly the regs were written by people for whom English was a 3rd language.

Posted by: aircav65 | Nov 7, 2017 2:36:34 PM

@Margaret: The reason for the singular is that the term “qualified residence” is a term of art, defined separately both in the current statute (which permits taxpayers to designate both their principal residence and one other home as a qualified residence) and in the proposed Bill (which would allow taxpayers to treat only their “principle residence” as their qualified residence). So under the proposed Bill, a taxpayer will no longer be able to have more than one qualified residence.

Posted by: Bryan Camp | Nov 7, 2017 3:12:51 PM

@aircav65: I agree on the nobleness of the task. At the same time I don’t think the failure to put in the fix I advocate is unreasonable. It is just unfortunate. When I was working in the IRS Office of Chief Counsel in D.C. in the 1990’s it was my impression that most of the tax writing was done by members of the staff of the Joint Committee On Taxation. I invite others to give a fuller picture of who writes the language in these bills. But I will tell you that the staff members of the Joint Committee on Taxation are wicked smart and extremely careful. That carefulness, however, may be one of the difficulties. They are very, very, very careful not to change any wording unless they have a very good reason to do so. The thinking is that is better to stick with awkward wording that has been interpreted by the courts than to create new wording that would then be subject to more litigation. While that is an admirable first impulse, I think it causes the tax writers to miss many opportunities such as this one.

Posted by: Bryan Camp | Nov 7, 2017 3:13:10 PM

Clean up the language of the Code & Regs? It would be far easier to clean up the Augean stables.

Posted by: Hercules | Nov 7, 2017 10:17:26 PM

How about this for an idea? Let's do away with all itemized deductions.

Posted by: Dale Spradling | Nov 8, 2017 5:37:43 AM

Bryan Camp - so the people who wrote the bills were "wicked smart." It makes me think of Orwell's comment about some ideas being so stupid only intellectuals could believe them.

Another "smart is stupid" example. My Catholic Diocese has changed the language of our Mass that explains how God the Father is the same being as God the Son. So we go from "one in being" - which I believe that some parishioners have a shot at - to "consubstantial" which, while I am sure is "wicked smart, less than 1% of the people in church understand.

One of the brightest tax attorneys I knew had the ability be clear. And we all know to be really smart you must be hard to understand.

Posted by: aircav65 | Nov 8, 2017 6:26:13 AM

Bryan - a cynical take on all the bad language. A group of us knew the fellow who wrote the old FIRPTA regs. He was also wicked smart and when he went back to his firm made a small fortune interpreting the regs he had written. Just a coinkey-dink we surmised.

Posted by: aircav65 | Nov 8, 2017 6:33:06 AM

I'm not sure why so much is being made of the use of the passive voice in the statute but the quoted section is not in the passive voice. "Shall" is simply being used to express mandatory action in typical bureaucracy-speak.

Posted by: Nick Decosimo | Nov 8, 2017 6:49:45 AM

"Let's do away with all itemized deductions."

Bingo. In the Golden State, my household income is right at the Median for all Californians. Any we've never paid $10,000 in state income or county property taxes, not even close. I'd love to see my blue neighbors, who I know make more than I do, get soaked a lot more by the Feds. They should enjoy it, honestly, they're always voting to raise my taxes!

Posted by: MM | Nov 8, 2017 7:27:44 AM

Last but not least - Guns Up!

Posted by: Pedestrian Accountant | Nov 8, 2017 7:27:58 AM

Not actually passive voice, tho.

http://www.lel.ed.ac.uk/grammar/passives.html#passivepostlist

Posted by: T S-J | Nov 8, 2017 8:41:49 AM

Most of the stat language is written by the legislative counsel office. At least on the Senate side. The specs are cleared by Joint Tax.

Posted by: TheTurk | Nov 8, 2017 9:37:42 AM