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Deposit Guaranty in 1991. The check represented petitioner's
balance in the plan, $85,455.49, less the amount of unpaid funds
borrowed from the plan, $49,031.42. Thus, the check included a
deemed distribution of the loan's outstanding balance. See
Murtaugh v. Commissioner, supra.
To conclude, the entire $85,455.49 is includable in
petitioner's 1991 gross income as a taxable distribution from
Heidelberg & Woodliff's salary reduction plan, and petitioner,
having failed to show that any of the exceptions in section
72(t)(2) apply, is liable for the additional 10-percent tax for
early distributions imposed by section 72(t).
Issue 3. Interest Expense Deduction
The third issue for decision is whether petitioner is entitled
to deduct $33,943 for interest expenses. Petitioner argues that
such amount, to the extent substantiated,6 should be allowed
pursuant to section 163 as interest incurred in the conduct of a
trade or business. Respondent asserts that petitioner's interest
expense deductions are for investment interest and therefore are
limited to net investment income pursuant to section 163(d).
Section 163 generally allows the deduction of interest paid on
indebtedness during the taxable year. Section 163(d)(1) limits the
deduction for investment interest to the extent of net investment
6 Respondent determined in the notice of deficiency that
petitioner had substantiated $29,443 of the interest expenses.
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