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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
Deduction
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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