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Section 163(h)(2)(A) exempts from the category of personal
interest (which is nondeductible for individuals) "interest paid
or accrued on indebtedness properly allocable to a trade or
business (other than the trade or business of performing as an
employee)".
In Redlark v. Commissioner, 106 T.C. 31 (1996), on appeal
(9th Cir., May 15, 1996), the taxpayers deducted the amount of
interest on the portion of a deficiency in Federal income tax
arising out of the Commissioner's adjustments that resulted from
accounting errors in the taxpayers' unincorporated business. The
Commissioner, relying on the provisions of section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, denied the
deduction, arguing that the payment at issue was the payment of
personal interest. We disagreed, holding that section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, was invalid
insofar as it applied to the taxpayers' circumstances. We
further held that the interest at issue was deductible as
interest on an "indebtedness properly allocable to a trade or
business" within the meaning of section 163(h)(2)(A).
The principle of Redlark applies here. There is no dispute
that petitioners, cash basis taxpayers, paid the interest at
issue on income tax deficiencies resulting from their operation
of Nick's Liquors, their unincorporated trade or business. Under
section 163(h)(2)(A), the interest they paid is deductible
because it was paid upon an indebtedness properly allocable to
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