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was applied only to interest assessed as a result of the 1987
audit deficiency in tax and additions. Petitioners deducted this
$69,617 as “Interest: * * * Other” on line 16b of the Schedule C
(Edward’s law practice) on their 1995 tax return.
On their 1995 tax return, petitioners reported $359,915 net
profit from Edward’s law practice (Sched. C), $1,410 royalty
income (Sched. E), and a $1,702 loss on sales of business
property (Form 4797). On the 1995 Schedule C, petitioners
reported $523,480 gross receipts, $26,340 cost of goods sold, and
$137,225 deductions (including the disputed $69,617 other
interest item), leading to the $359,915 net profit. On the 1995
Form 1040, petitioners reported $108,735 chapter 1 income tax,
$17,228 chapter 2 self-employment tax, $59 addition for
underpayment of estimated tax, and $110,000 estimated tax
payments, for a total of $16,022 owed.
________________________________
The $69,617 was interest paid in 1995, but it was not on
indebtedness properly allocable to Edward’s law practice,
petitioners’ only relevant trade or business.
OPINION
A. The Parties’ Contentions
The parties focus their dispute on whether section 163
prohibits allowance of petitioners’ claimed $69,617 Schedule C
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