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corporation, section 163(h) generally disallows any deduction for
“personal interest”, defined to include any interest expense that
does not fall within one of the five categories listed in section
163(h)(2). These categories may be described generally as (1)
trade or business interest; (2) investment interest; (3) interest
used to compute passive income or loss; (4) qualified residence
interest; and (5) interest payable on certain deferred estate tax
payments. Petitioners have presented no evidence to show that
the interest expenses in question fall within any of these five
enumerated categories. To the contrary, petitioner husband
testified at trial that he borrowed against his life insurance
policy “for no other reason than to live in the absence of a
job.” On brief, petitioners reiterate that this was their reason
for borrowing against their policies. We conclude, therefore,
that the interest expense in question was nondeductible personal
interest.
Relying on an exception in section 264(c)(3), petitioners
argue that their interest expenses are not subject to
disallowance under section 264(a)(2), which generally disallows
interest deductions on indebtedness incurred or continued to
purchase or carry a single premium life insurance, endowment, or
annuity contract.3 It appears that neither the general rule of
3 SEC. 264. CERTAIN AMOUNTS PAID IN CONNECTION WITH
INSURANCE CONTRACTS.
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