Shigenori Kudo and Motomi Kudo, et al. - Page 48

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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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