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view possible gaps in the evidence.
2. Deductibility of Interest
Turning to the main issue in the case--Murphy’s attempted
$225,000 deduction for interest--we begin with the law. Section
163(a) states as a general rule that “there shall be allowed as a
deduction all interest paid or accrued within the taxable year on
indebtedness.” In First Natl. Co. v. Commissioner, 32 T.C. 798,
807 (1959), revd. and remanded on other grounds 289 F.2d 861 (6th
Cir. 1961), we defined indebtedness as “an existing,
unconditional, and legally enforceable obligation for the payment
of money.”
Recognizing this, the Commissioner argues first that the
disputed check couldn’t have gone to pay interest on Hamseh and
Desert Spice because Murphy had already paid off those notes,
meaning there was no underlying valid debt between Murphy and
Hunt. The Commissioner’s strongest argument is the presence of
the legend “paid in full” marked on the promissory notes for both
Hamseh and Desert Spice. If Murphy had paid these notes
according to their original terms, they would both have been paid
off by December 1997. The problem, however, is that neither
party introduced documentary or expert evidence of when the notes
were marked as “paid in full.” Murphy himself testified that the
promissory notes were marked “paid in full” only much later. At
the end of 1997, he said he still had not ponied up enough money
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