- 57 -
For example, if an individual borrows money to take a vacation in
Spain, securing her debt with a mortgage on her business, the
interest on the borrowed funds is personal interest
notwithstanding that the debt is secured by business property.
See sec. 1.163-8T(c)(1) Example, Temporary Income Tax Regs. The
bulk of section 1.163-8T, Temporary Income Tax Regs., is devoted
to prescribing rules for tracing debt to specific expenditures.
The tracing approach selected by the Secretary may at times
appear wooden and mechanical. Thus, an individual with $100 in
savings and two obligations, one to pay $100 to her employees and
one to pay $100 towards her vacation in Spain, can dictate the
tax result of borrowing $100 to pay one of those obligations by
deciding which one to pay with the borrowed $100. Nevertheless,
the tracing approach leaves little room for ambiguity as to
whether an indebtedness is business related, at least in the case
of debt financed expenditures that are clearly business or
personal.
The legislative history of section 163(h) indicates a
Congressional purpose to end the deduction for interest on debt
incurred to fund consumption, or personal, expenditures.
S. Rept. 99-313 (1985), 1986-3 C.B. (Vol. 3) 804; H. Conf. Rept.
99-841 (1986), 1986-3 C.B. (Vol. 4) 154. By requiring the manner
in which borrowed funds are expended to determine whether the
interest on those funds is deductible, the Secretary has defined
the term "properly allocable" in a way that is "reasonable in
light of the legislature's revealed design". NationsBank v.
Variable Annuity Life Ins. Co., 513 U.S. at __, 115 S. Ct. at
Page: Previous 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 NextLast modified: May 25, 2011