Michael D. and Christine R. Alexander - Page 10

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          in connection with the conduct of any trade or business other               
          than the trade or business of performing services as an employee.           
          Sec. 1.163-8T(b)(7), Temporary Income Tax Regs., 52 Fed. Reg.               
          25000.                                                                      
               Petitioners incurred credit card debt to purchase equipment            
          for the tree farm.  The credit card debt therefore was allocable            
          to a trade or business expenditure.  See sec. 1.163-8T(b)(7) and            
          (c)(1), Temporary Income Tax Regs., supra.  The temporary                   
          regulations provide that to the extent proceeds of any debt (the            
          “replacement debt”) are used to repay any portion of a previously           
          existing debt, the replacement debt is allocated to the                     
          expenditures to which the repaid debt was allocated.  Sec. 1.163-           
          8T(e)(1), Temporary Income Tax Regs., 52 Fed. Reg. 25004.  Mr.              
          Alexander credibly testified, and we so find, that petitioners              
          used the proceeds from the home equity loan to repay the credit             
          card debt.  The home equity loan therefore is “replacement debt”            
          and the interest accruing thereon is properly allocable to a                
          trade or business expenditure.  See sec. 1.163-8T(c)(1),                    
          Temporary Income Tax Regs., supra.  We hold for petitioners on              
          this issue to the extent of $5,871.                                         
          2.   Payments to Petitioners’ Son                                           
               Compensation is deductible as a trade or business expense              
          only if it is (1) reasonable in amount, (2) based on services               
          actually rendered, and (3) paid or incurred.  See O’Connor v.               






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