For more than a decade, same-sex couples have challenged the constitutionality of The Defense of Marriage Act (DOMA), which prohibits the federal government from recognizing marriages other than those between one man and one woman. Although same-sex couples may receive benefits and protections equivalent to those afforded heterosexual married couples at the state level, at the federal level they are denied each and every benefit (and burden) of heterosexual marriage. Nowhere is the confusion generated by the varying state and federal treatment of same-sex couples more evident than in the field of taxation, where same-sex couples are subject to myriad state rules that are often in conflict with federal tax law.
In Sophy v. Commissioner, the Tax Court denied two individual taxpayers, Registered Domestic Partners (RDPs) in California and the co-owners as joint tenants of two homes in that state, the full value of their claimed home mortgage interest deduction for the years 2006 and 2007. Section 163 of her adjusted gross income the interest payments made on up to $1.1 million of qualifying home acquisition and home equity indebtedness. The total debt at issue in Sophy, for which the taxpayers were jointly and severally liable, was $2.704 million in 2006 and $2.669 million in 2007. Each taxpayer deducted interest payments related to $1.1 million of the total debt, resulting in aggregate deductions for interest paid on $2.2 million of qualifying debt. The Service argued, and the court agreed, that the $1.1 million limitation applied on a per-residence, rather than a per-taxpayer, basis. Under that interpretation, the taxpayers were together limited to a deduction for interest payments related to $1.1 million of the combined debt on both homes, rather than each being allowed a deduction for interest paid on $1.1 million of debt.
This Note argues that the section 163(h) indebtedness limitation is properly applied on a per-taxpayer, rather than a per-residence, basis. The court’s ruling to the contrary in Sophy was the result of a strained and faulty statutory analysis that ostensibly imposed a per-residence indebtedness cap, but it can be more accurately seen as having imposed upon a same-sex couple the rules applicable to married couples. The Tax Court misapplied DOMA by effectively treating the taxpayers in Sophy as a married couple for the purpose of applying the section 163 debt limit. Part II of this Note presents a brief background on both the mortgage interest deduction and the tax confusion that DOMA has caused same-sex couples in the United States. Part III describes the facts of Sophy and summarizes the court’s analysis. Part IV demonstrates the logical perils of a per-residence application of the debt limit and argues that section 163, to the extent that it supports the court’s reasoning, is ambiguous. Furthermore, Part IV shows that the legislative history behind the mortgage interest deduction favors a per-taxpayer application of the debt limit. Part V concludes the Note by advocating for congressional action to impose a per-taxpayer limitation in section 163 and to prevent the Service from applying the married taxpayer rule to same-sex couples.