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Unreported Interest Income
The next issue is whether petitioners had $40,188 of
unreported interest income in 1986. Petitioners presented no
credible evidence to rebut the presumption of correctness afforded
the notice of deficiency. (We were not impressed with the
credibility of petitioner's testimony.) Accordingly, we sustain
respondent's determination that petitioners are liable for
unreported interest income of $40,188 in 1986.
Interest Deduction
The third issue is whether petitioners' deduction of $122,605
in 1986 for interest paid to EPIC should be disallowed. Interest
is not deductible "if the underlying transaction is a sham * * *.
Nor is interest deductible if it is incurred in a transaction 'that
can not with reason be said to have purpose, substance, or utility
apart from their anticipated tax consequences.'" Sheldon v.
Commissioner, 94 T.C. 738, 760 (1990) (citations omitted).
In view of our finding that the sale of the BTG stock to EPIC
was a sham transaction, the interest payments to EPIC are not
deductible.
Negligence
The final issue is whether petitioners are liable for
additions to tax under sections 6653(a)(2) and 6653(a)(1)(B) on the
portion of the underpayment attributable to the transfer of the
Escondido property to Balmac. Petitioners have conceded the
application of all additions to tax raised in respondent's notice
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