Peter S. Pau and Susanna H. Pau - Page 27

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          tax laws but chose to ignore them in their effort to evade the              
          payment of income tax.                                                      
               Thus, we find that respondent has clearly and convincingly             
          proven fraud on the part of petitioners for both items of                   
          unreported income for the year in issue, and we so hold.  Our               
          conclusion is premised on the record as a whole and reasonable              
          inferences therefrom, taking into account our determination as to           
          the credibility of petitioners and the other witnesses presented            
          at trial.  Therefore, we sustain respondent's determination that            
          petitioners are liable for the penalty for 1990 pursuant to                 
          section 6663.                                                               
          Issue 2.  Section 163(h)(3) Restriction on Home Mortgage Interest           
               Section 163(a) states the general rule for deductions for              
          interest paid or incurred on indebtedness within the taxable                
          year.  Other provisions of section 163 limit such deductions.               
          Section 163(h) disallows personal interest deductions unless they           
          fit within certain narrowly prescribed categories.  Among these             
          narrow exceptions is the deduction for interest on a qualified              
          residence.  Sec. 163(h)(2)(D).  The parties agree that the                  
          interest paid on the mortgage for petitioners' home was qualified           
          residence interest, because the Paus paid it on acquisition                 
          indebtedness pursuant to section 163(h)(3)(A)(i) and (B)(i).  The           
          parties dispute only the amount of acquisition indebtedness                 
          petitioners may use in computing their deduction.                           

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