Ronald R. Armacost and Cathy L. Armacost - Page 7
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trade or business, or property held in the course of the
taxpayer's trade or business which is neither a passive activity
nor an activity in which the taxpayer materially participates.
Sec. 163(d)(5)(A), 469(e)(1).
To determine whether the promissory note signed by
petitioner is indebtedness traceable to investment property, we
look at the nature of the underlying assets acquired by
petitioner as a result of the divorce. To the extent the note
was made to acquire Linda Armacost's community interest in their
investment property, the interest paid on that note will be
properly characterized as investment interest and will be
deductible under section 163. To the extent, however, the note
was made to acquire her interest in noninvestment property, the
interest will not be deductible as investment interest under
section 163. Respondent's determinations are presumed correct,
and petitioner has the burden of proving them erroneous. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
The Separation Agreement is silent as to which properties
received by petitioner are attributable to the $250,000 note.
But the lack of such designation in the Settlement Agreement does
not affect the underlying character of the assets. The value
differential between what petitioner received and what Linda
Armacost received may appear to be equal to the total property
distribution upon the divorce. However, examination of the total
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