- 5 -
the taxpayer's interest as personal interest under section
163(h). In that case, the taxpayer prevailed because we
concluded that section 1041 does not require indebtedness to a
former spouse incident to divorce to be characterized as personal
interest for purposes of section 163(h)(1). Seymour v.
Commissioner, supra at 286. If the taxpayer can satisfy the
requirements of section 163(h)(2)(A) through (E), the interest
will be properly deductible under section 163(a). Id.
Generally, section 163 provides that interest on
indebtedness is deductible by the taxpayer in the year it is
paid. Sec. 163(a). However, substantial limitations are placed
on this general rule which may limit or prohibit the taxpayer
from deducting indebtedness interest at all.
Section 163(h) provides that for an individual taxpayer,
personal interest is nondeductible. Personal interest is defined
in section 163(h)(2) as the residual of what remains after
considering five enumerated exceptions. These exceptions are as
follows:
(A) interest paid or accrued on indebtedness
properly allocable to a trade or business (other than
the trade or business of performing services as an
employee),
(B) any investment interest (within the meaning
of subsection (d)),
(C) any interest which is taken into account
under section 469 in computing income or loss from a
passive activity of the taxpayer,
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
Last modified: May 25, 2011