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V. Petitioners' Interest Deduction
On or about February 10, 1992, respondent assessed
petitioners additional income tax of $286,147.50 for their 1986
tax year and $272,146 for their 1987 tax year. The assessments
for 1986 and 1987 resulted from respondent's increase in
petitioners' reported gross business profits for those years,
based upon respondent's use of a bank deposits analysis. In
1992, petitioners paid $393,024 in interest on the additional
amounts assessed for 1986 and 1987. Petitioners deducted the
amount of the interest payment on their 1992 Federal income tax
return.
Respondent disallowed this deduction, alleging that it was
personal interest under section 1.163-9T(b)(2)(i)(A), Temporary
Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987). We
disagree.5
4(...continued)
repay $3,004 of the amount stolen in lotto money and beer
deposits that they were holding for others. This repayment gave
them a basis in that amount. See Reis v. Commissioner, T.C.
Memo. 1996-469.
5 Sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax. Regs.,
52 Fed. Reg. 48409 (Dec. 22, 1987), provides in part:
(2) Interest relating to taxes--(i) In general.
Except as provided in paragraph (b)(2)(iii) of this
section, personal interest includes interest--
(A) Paid on underpayments of individual
Federal, State or local income taxes * * *
regardless of the source of the income
generating the tax liability * * *.
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