- 31 - 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 toPage: Previous 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Next
Last modified: May 25, 2011