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Pursuit of his medical practice is a profit generating business
activity which generates taxable income, and this, petitioner
argues, should entitle him to deductions under sections 162 or
163. The interest incurred is not related to the repayment of
medical school tuition and expenses, petitioner argues; rather,
the agreement is an entirely new contract and should be examined
independently from the original scholarship agreement with DHHS.
Even if the payments under the agreement do not constitute
repayment of student loans, respondent argues they are repayments
of a qualified scholarship under section 117, meaning that
interest payments incurred during repayment are not deductible
because they are directly related to the production of tax-exempt
income and are subject to the nondeductibility limitations of
section 265.
The issue for decision is whether petitioner may deduct the
interest portion of the payments he made pursuant to the
settlement agreement with DHHS in 1987. Deductions are strictly
a matter of legislative grace, and petitioner must prove his
entitlement to any deductions claimed. Rule 142(a); INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice
Co. v. Helvering, 292 U.S. 435, 440 (1934). If petitioner can
prove the interest payments were an expense incurred in carrying
on his trade or business, he may be entitled to business expense
deductions under section 162. Alternatively, if petitioner can
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