John L. Seymour - Page 14

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          8T(m)(3), Temporary Income Tax Regs., 52 Fed. Reg. 25005 (July 2,           
          1987), provides:                                                            

               Qualified residence interest (within the meaning of                    
               section 163(h)(3)) is allowable as a deduction without                 
               regard to the manner in which such interest expense is                 
               allocated under the rules of this section.  In                         
               addition, qualified residence interest is not taken                    
               into account in determining the income or loss from any                
               activity for purposes of section 469 or in determining                 
               the amount of investment interest for purposes of                      
               section 163(d).  * * *                                                 

          Because qualified residence interest is not taken into account in           
          determining passive interest or investment interest, we must                
          first determine what amount, if any, of petitioner's interest               
          expense is properly characterized as qualified residence interest           
          under section 163(h)(3).                                                    
               Section 163(h)(3)(A) defines qualified residence interest as           
          any interest which is paid or accrued during the taxable year on            
          acquisition indebtedness or home equity indebtedness with respect           
          to any qualified residence of the taxpayer.  The term acquisition           
          indebtedness includes any indebtedness which is secured by a                
          qualified residence and which is incurred in acquiring,                     
          constructing, or substantially improving such residence.  Sec.              
          163(h)(3)(B).  The total amount treated as acquisition                      


               9(...continued)                                                        
          the indebtedness satisfies the definition of "secured debt" under           
          sec. 1.163-10T(o), Temporary Income Tax Regs., 52 Fed. Reg. 48417           
          (Dec. 22, 1987), or that petitioner's residence meets the                   
          definition of "qualified residence" under sec. 1.163-10T(p),                
          Temporary Income Tax Regs., 52 Fed. Reg. 48418 (Dec. 22, 1987).             



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