- 11 -
amount subject to the limitations of section 163(h)(3) and the
provisions of section 1.163-8T, Temporary Income Tax Regs., 52
Fed. Reg. 24999 (July 2, 1987), to the extent applicable. Priv.
Ltr. Rul. 89-28-010 (Apr. 6, 1989); see also Priv. Ltr. Rul. 90-
31-022 (May 7, 1990) (concluding that section 1041 does not apply
to characterize interest expense on loan proceeds allocable to
investment expenditures as personal interest for purposes of
section 163(h)).
Finally, the historical language of section 163(h) reveals
that section 1041, and its treatment of gain or loss on the
transfer of property incident to divorce, is disregarded in
allocating an interest expense. Prior to the amendments made by
the Omnibus Budget Reconciliation Act of 1987 (OBRA-87), Pub. L.
100-203, 101 Stat. 1330, 1330-384, that apply to the present
case, section 163(h)(3)(B) limited qualified residence interest,
in general, to an amount incurred on a debt that did not exceed
the taxpayer's basis in the residence. See Tax Reform Act of
1986, Pub. L. 99-514, sec. 511(b), 100 Stat. 2085, 2246.
The OBRA-87 amended the definition of qualified residence
interest that is treated as deductible. The provisions of the
OBRA-87 apply to taxable years beginning after December 31, 1987
and thus apply here. However, for any taxable year beginning in
1987, section 1005(c)(14) of the Technical and Miscellaneous
Revenue Act of 1988 (TAMRA), Pub. L. 100-647, 102 Stat. 3342,
3392, provided that in certain circumstances involving a transfer
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