Cain: In Defense of the Consensus on CCA 200911007

Pat Cain (Santa Clara) reacts to this morning's post, McMahon: In Defense of CCA 200911007:

1. I agree that spouses have always been treated as separate taxpayers (and I think they should be so treated as long s they both have income).
2. I worried about the $1M limitation and the two home limitation when the 1987 amendment was first adopted creating these limits (and by parentheticals treating a married couple filing separately as one taxpayer).
3. There is nothing in the statute that says a married couple filing jointly should be limited to $1M and only two homes.
4. However, the IRS basically ruled that way in a 2001 FSA – see until FSA 200137033..
5. The FSA seems to adopt the one limit per taxpayer rule but conclude that spouse (no matter how they file) should be treated as one taxpayer.
6. I happen to think that makes no sense.
7. I can see no reason for extending a bad rule as to jointly filing spouses to non-spouses who co-own property.
8. One possible distinction is that spouses, because of 1041, can transfer property ownership back and forth with no tax consequences and so maybe taxing their ownership costs (including mortgages) are justifiably taxed differently from non-spouses.
9. I can see no justification for telling partner A when he buys a house for more than $1 million acquisition debt that so long as he owns it alone he can deduct 100% of the interest, but if he gifts or sells a portion of it to another, he cannot – even though he is still paying interest on $1 million acq debt. (Even under the CCA analysis A could then incur additional, aggregate, acq debt on another property and deduct the interest on the new property. So if the purpose is to encourage home ownership up to $1M why should we in this instance only encourage such ownership if you acquire more than one home?)
10. We do not treat non-spouses as spouses in other provisions of the Code with spouse specific rules – that is what causes the marriage penalty/bonus problem. If you want to take away the benefit from non-spouses here, why isn’t the same argument available for other provisions that distinguish between spouses and non-spouses.
11. The provision requires a taxpayer (or taxpaying unit in the case of a joint return) to allocate interest paid to types of debt before we can determine deductibility. There is deductible business interest, partially deductible investment interest, fully deductible home mortgage interest, and non deductible home mortgage interest that is allocable to “excess” acquisition and home equity debt. Since it is the taxpayer’s payment of the interest that triggers the deduction, it seems to me that we should allocate those payments to the various types of debt and test the amount paid on excess home acq indebtedness at the taxpayer level. If the home mortgage is 1.5M and A pays interest on 2/3rds of the mortgage (because that is the agreement with his co-owner who owns only 1/3rd interest in the property) then isn’t that interest allocable to 2/3rds of the mortgage ($1M) and thus not an excess mortgage?
12. I agree the statute could have been written more clearly.
13. Bottom line, the deduction for mortgage interest is hard to justify in the first place – so it is particularly hard in this case to determine how much interest anyone should be allowed to deduct, But I can’t accept a rule that says unmarried co-owners must be treated the same as spouses (who may not even be co-owners) because of something called marriage neutrality – the Code is not based on marriage neutrality.