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business loan) and Ms. Finkelstein (for the restaurant acquisition
financing).
Section 163 generally allows the deduction of interest paid on
indebtedness during the taxable year. Section 163(d)(1) limits the
deduction for investment interest to the extent of net investment
income. Investment interest means interest paid on indebtedness
allocable to property held for investment. Sec. 163(d)(3)(A).
Property held for investment includes any interest held by the
taxpayer involving the conduct of a trade or business which is not
passive activity and with respect to which the taxpayer did not
materially participate. Sec. 163(d)(5)(A)(ii). Net investment
income means investment income (gross income from property held for
investment and net gain from the disposition of property held for
investment) over investment expenses. Sec. 163(d)(4)(A) and (B).
Petitioners have not shown that they received any offsetting
investment income during 1992 or 1993. Thus, they are not entitled
to a deduction for investment interest expenses for those years.
Cf. Scott v. Commissioner, T.C. Memo. 1997-507. Arguably, the
interest expenses paid by petitioners were not for investment
interest, but were instead for interest indebtedness incurred in
the operation of a trade or business and which is not subject to
limitation under section 163. See King v. Commissioner, 89 T.C.
445, 463 (1987); Paoli v. Commissioner, T.C. Memo. 1988-23. But if
the interest expenses were for trade or business indebtedness, such
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