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(D) any qualified residence interest (within the
meaning of paragraph (3)), and
(E) any interest payable under section 6601 on
any unpaid portion of the tax imposed by section 2001
for the period during which an extension of time for
payment of such tax is in effect under section 6163 or
6166 or under section 6166A (as in effect before its
repeal by the Economic Recovery Tax Act of 1981).
Sec. 163(h)(2). The exception relating to investment interest is
the basis for petitioner's claim.
Interest on indebtedness must be allocated in the same
manner as its underlying debt. Sec. 1.163-8T, Temporary Income
Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987). Underlying debt is
allocated by tracing specific disbursements of the proceeds to
specific expenditures. Id. If the underlying debt is incurred
as a personal expenditure, the interest on that debt may not be
deducted under section 163 except to the extent such interest is
qualified residence interest. Sec. 1.163-8T(a)(4)(ii), Example
(1), Temporary Income Tax Regs., 52 Fed. Reg. 25000 (July 2,
1987).
But if the underlying debt is incurred to acquire investment
property, the interest on that debt is deductible under section
163 as investment interest. Sec. 163(h)(2)(B). Investment
interest is defined as any interest paid on indebtedness properly
allocable to investment property. Sec. 163(d). Investment
property includes property producing gross income from interest,
dividends, annuities or royalties not derived in the taxpayer's
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