Tax deductions

Tax deductions prevent the payment of school debt


Bankruptcy court ruled that by deducting interest on her tax returns, a debtor admitted her loan was taken out only to pay for graduate school fees, making it non-dischargeable in bankruptcy law.

Facts: Christine Melissa Mallett took out federal and private loans to attend several universities between 2000 and 2007. She then entered into a written loan agreement with Frances Mallett, her grandmother. sohusband, for nearly $ 71,000 to repay its private student loans. The deal required him to repay the amount at 4% interest over 25 years. Mallett stopped paying the loan after eight years.

Frances Mallett died and her son, Victor Mallett, transferred the loan. He sued Christine Mallett in state court for breach of the loan agreement, obtaining a final judgment for more than $ 61,000. Three months later, Christine Mallett filed for bankruptcy. Victor Mallett sued to have the debt declared not releasable.

Problems: Bankruptcy Code (Title 11) Section 523 (a) (8) (B) includes in non-dischargeable debt a qualified education loan, as defined in IRC Sec. 221 (d) (1), incurred by an individual, unless excluding him from discharge would impose undue hardship on the debtor and his dependents. Second. 221, which provides for the deductibility of interest paid on qualified student loans, defines them as incurred by the taxpayer only to pay for certain qualified higher education expenses.

Christine Mallett argued that it was not demonstrated that Frances Mallett’s loan was used only to pay for higher education expenses and therefore did not meet the definition.

Victor Mallett did not present in evidence copies of Christine Mallett’s original loan documents indicating their purpose, but he did produce copies of his 2009 to 2016 tax returns, on each of which Christine Mallett had deducted interest paid to Frances Mallett on the to lend.

While carrying: The bankruptcy court, relying on Conti v. Arrowood Indemnity Co., 982 F.3d 445 (6th Cir. 2020), ruled that Sec. The plain language of paragraph 221 (d) (1) only requires that an eligible student loan be engaged pay graduate fees regardless of their use. In addition, the legal definition includes “indebtedness used to refinance indebtedness that is considered a qualified student loan”, as was the case here. Thus, in deducting the interest on the loan, Christine Mallett had made an unrefuted “probative admission” that it was a qualified education loan under Sec. 221 and the Bankruptcy Code and was therefore non-discharging, the court tenuous.

  • In re Mallett, n ° 8: 19-bk-01436-MGW (Bankr. MD Fla. 03/23/21)

– By Paul Bonner, a JofA senior editor.


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