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before January 1, 1988. We find that $20,000 of the cash for the
Mercedes Benz came from Akiko's cash hoard accumulated before the
beginning of the years in issue; therefore, unreported income
should be reduced accordingly. With regard to the remaining
unreported income from cash purchases, we sustain respondent.
Investment Interest Deduction
In the notices of deficiency respondent determined that the
Takaos were not entitled to deductions for investment interest
they claimed on Schedules A of their tax returns in the following
amounts:
Year Amount
1988 $49,299
1989 38,355
1990 30,000
1991 13,850
Petitioners contend that for each of the years in issue the
Takaos are entitled to investment interest deductions for
interest payments they made during those years on bona fide
debts. Respondent contends that petitioners have failed to
establish that the Takaos paid interest to qualified creditors
for those years. Additionally, respondent contends that the
Takaos did not have any qualified investment income against which
any qualified investment interest expenses could be offset.
Section 163(a) provides the general rule that there shall be
allowed as a deduction all interest paid or accrued within the
taxable year on indebtedness. Limitations on that general rule,
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