Stephen L. and Colleen Atwood - Page 7




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          corporation, section 163(h) generally disallows any deduction for           
          “personal interest”, defined to include any interest expense that           
          does not fall within one of the five categories listed in section           
          163(h)(2).  These categories may be described generally as (1)              
          trade or business interest; (2) investment interest; (3) interest           
          used to compute passive income or loss; (4) qualified residence             
          interest; and (5) interest payable on certain deferred estate tax           
          payments.  Petitioners have presented no evidence to show that              
          the interest expenses in question fall within any of these five             
          enumerated categories.  To the contrary, petitioner husband                 
          testified at trial that he borrowed against his life insurance              
          policy “for no other reason than to live in the absence of a                
          job.”  On brief, petitioners reiterate that this was their reason           
          for borrowing against their policies.  We conclude, therefore,              
          that the interest expense in question was nondeductible personal            
          interest.                                                                   
               Relying on an exception in section 264(c)(3), petitioners              
          argue that their interest expenses are not subject to                       
          disallowance under section 264(a)(2), which generally disallows             
          interest deductions on indebtedness incurred or continued to                
          purchase or carry a single premium life insurance, endowment, or            
          annuity contract.3  It appears that neither the general rule of             

               3 SEC. 264.  CERTAIN AMOUNTS PAID IN CONNECTION WITH                   
          INSURANCE CONTRACTS.                                                        
                                                             (continued...)           




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