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accrual basis to cash basis for tax purposes. The adjustments
involved the timing of the reporting of business income.
In 1989 and 1990, petitioners paid interest on the Federal
income tax deficiencies for the 1982, 1984, and 1985 years.
On Schedule C of their 1989 and 1990 Federal income tax
returns, petitioners claimed an allocable portion of such
interest as a business expense.
Respondent disallowed a business deduction for the interest
but did allow 20 percent of the interest paid in 1989 and 10
percent of the interest paid in 1990 as a deduction under the
phase-in provisions of section 163(h)(5).1
Petitioners assert that the amount of the interest expense
which they have calculated as being attributable to Carrier
Communications is an ordinary and necessary expense of a trade or
business under section 162, deductible in computing adjusted
gross income under section 62(a), and is therefore not personal
interest under section 163(h).
Respondent argues that petitioners are not entitled to a
deduction because, under section 1.163-9T(b)(2)(I)(A), Temporary
Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), interest on
a Federal individual income tax deficiency is nondeductible
personal interest under section 163(h).
Petitioners reply that section 1.163-9T(b)(2)(I)(A),
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
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