James E. Redlark and Cheryl L. Redlark - Page 14

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          legislative history and approve a regulation denying such a                 
          deduction.  See Tanner v. Commissioner, 45 T.C. at 148-149, 151.            
               Against the foregoing background, we consider the regulatory           
          framework and legislative history that relate to the                        
          deductibility of interest on income tax deficiencies.  Section              
          1.163-9T(b)(1)(I), Temporary Income Tax Regs., 52 Fed. Reg. 48409           
          (Dec. 22, 1987), specifically references section 1.163-8T,                  
          Temporary Income Tax Regs., by providing that interest is not               
          personal interest if it is "paid or accrued on indebtedness                 
          properly allocable (within the meaning of � 1.163-8T) to the                
          conduct of a trade or business".  Additionally, paragraph (b)(3)            
          of section 1.163-9T, Temporary Income Tax Regs., 52 Fed. Reg.               
          48410, further references section 1.163-8T, Temporary Income Tax            
          Regs., "for rules for determining the allocation of interest                
          expense to various activities".  Such being the case, we deal               
          first with the impact of section 1.163-8T, Temporary Income Tax             
          Regs., noting that respondent makes only a passing reference to             
          the regulation without advancing any argument as to its                     
          application to this case, and that petitioners completely ignore            
          it.                                                                         
               Section 1.163-8T, Temporary Income Tax Regs., establishes an           
          allocation method based on the expenditure, i.e., the use, of the           
          debt proceeds.  It provides in paragraph (c)(1):                            
                    (c)  Allocation of debt and interest expense--(1)                 
               Allocation in accordance with use of proceeds.  Debt is                
               allocated to expenditures in accordance with the use of                
               the debt proceeds and, * * *.  * * * debt proceeds and                 
               related interest expense are allocated solely by                       
               reference to the use of such proceeds, and the                         




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