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A taxpayer may deduct as interest on its indebtedness
interest paid by the taxpayer on a mortgage upon real estate of
which the taxpayer is the legal or equitable owner even though
the taxpayer is not directly liable upon the bond or note secured
by such mortgage. Sec. 1.163-1(b), Income Tax Regs. However,
only interest paid or accrued on a mortgage on property for the
period after the taxpayer becomes the legal or equitable owner of
the property is deductible under section 163. Hyde v.
Commissioner, 64 T.C. 300, 306 (1975) (interest accruing before,
but paid by the taxpayer, must be capitalized).
We are unconvinced that Good Shepherd either made any
payments of interest during the years in question or had any
genuine indebtedness that would entitle it a tax deduction for
interest paid or accrued. No schedule particularizes the
interest deducted on the Good Shepherd returns. Petitioners have
not introduced into evidence any check or other direct evidence
that shows that Good Shepherd paid either principal or interest
on any indebtedness. Indeed, journal entries made by Good
Shepherd regarding 1985, 1986, and 1987 indicate that no payments
of principal were made on either the first or second Kasa
obligations during such periods.
We assume that the indebtedness with regard to which
petitioners claim interest deductions are (1) the Salesian
obligation, (2) the first Kasa obligation, and (3) the second
Kasa obligation.
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