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2. Section 1.163-9T(b)(2)(i)(A), Temporary Income Tax
Regs., Also Is Valid
a. Are Petitioners' Tax Payments Made in Connection
With Their Trade or Business?
The majority invalidates section 1.163-9T(b)(2)(i)(A),
Temporary Income Tax Regs. Subdivision (A) of section 1.163-
9T(b)(2)(i), Temporary Income Tax Regs., provides that personal
interest includes interest:
Paid on underpayments of individual Federal, State or
local income taxes and on indebtedness used to pay such
taxes (within the meaning of �1.168-8T), regardless of
the source of the income generating the tax liability;
The obligation to pay deficiency interest arises if a
taxpayer fails to make a timely payment of her tax liability, as
finally determined. See sec. 6601(a). For there to be any
possibility that deficiency interest is deductible under section
163(h)(2)(A), we must assume that the underpayment giving rise to
deficiency interest is an indebtedness of the taxpayer. See sec.
163(h)(2)(A). Moreover, the tracing rules of section 1.163-8T,
Temporary Income Tax Regs., require the taxpayer to identify
(1) the proceeds resulting from any indebtedness and (2) the
disbursement of those proceeds to specific expenditures.
Sec. 1.163-8T(a)(3), Temporary Income Tax Regs. Only if the
specific expenditures so identified are business expenditures
within the meaning of section 1.163-8T(b)(7), Temporary Income
Tax Regs., would the related deficiency interest be deductible
under section 163(h)(2)(A). Sec. 1.163-8T(a)(4)(i)(A), Temporary
Income Tax Regs., 52 Fed. Reg. 25000 (July 2, 1987). Of course,
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