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an underpayment of income tax does not give rise to identifiable
proceeds received from the Government. The temporary regulations
address the situation of unidentifiable debt proceeds under the
heading "Debt assumptions not involving cash disbursements."
Section 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., provides:
If a taxpayer incurs or assumes a debt in consideration
for the sale or use of property, for services, or for
any other purpose, or takes property subject to a debt,
and no debt proceeds are disbursed to the taxpayer, the
debt is treated for purposes of this section as if the
taxpayer used an amount of the debt proceeds equal to
the balance of the debt outstanding at such time to
make an expenditure for such property, services, or
other purpose. [Emphasis added.]
An individual making an underpayment of tax is thus treated as if
she incurred an indebtedness equal to the amount of such
underpayment and used the proceeds of the indebtedness to
eliminate the underpayment. Such an individual is treated the
same as an individual who avoided any underpayment by borrowing
from a third party the funds necessary to make a full payment.
Indeed, it is difficult to see a tracing system distinguishing
between those two cases without getting into the type of
apportionment that tracing is designed to avoid. The majority
does not distinguish between those two cases.
The real question, of course, is whether interest on
borrowed funds expended to discharge an individual's income tax
liability is personal interest within the meaning of section
163(h)(2)(A). It is not, on the facts of our case, if
petitioners' payments of their 1989 and 1990 Federal income taxes
are expenditures made in connection with the conduct of their
unincorporated business. See sec. 1.163-8T(a)(4)(i)(A), (b)(7),
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