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reasonable interpretation of section 163(h)(2)(A) would include
the interest here in question. First, it is reasonable to treat
a deficiency in tax as giving rise to an indebtedness to the
Government in the amount of the deficiency and to treat the
interest allocable to the deficiency as interest paid or accrued
on that indebtedness. See discussion infra sec. III.C.2.a.
Second, any tax paid with respect to income is an expense
associated with that income, at least in the sense that the
income is causal of the expense. Interest on a deficiency in
income tax (hereafter, deficiency interest), or interest on a
borrowing to pay an income tax, likewise is an expense associated
with the income subject to tax. With respect to both such tax
and such interest, only the after-tax-after-interest amount is
available for consumption or as an addition to savings. Whether
such aftercosts themselves constitute consumption is the real
question here at issue. In the absence of any exposition in the
statute of the term "properly allocable", and in light of
Congress' history (explained infra) of treating Federal income
taxes as not a consumption expense, I think that it is reasonable
to conclude that deficiency interest attributable to nonemployee
trade or business income (hereafter, simply trade or business
income) is properly allocable to such income and, thus, is not
personal interest. However, because Congress changed its mind,
and now treats Federal income taxes as a consumption expense
(i.e., Federal income taxes are not deductible), I think that it
is equally reasonable to conclude that deficiency interest
attributable to trade or business income is personal interest.
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