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Sun elected to report the income from the installment sales using
the installment method, as permitted under section 453(l)(2)(B).
During each year at issue, petitioner, in his capacity as a
shareholder, paid an additional tax equal to the interest on the
tax deferred as a result of Aqua Sun's election of the
installment method. The amount of interest was determined with
reference to petitioners' tax liability for the previous tax
year, so that the interest paid in 1993, 1994, 1995, and 1996
related to petitioners' Federal income tax liability on Aqua
Sun's installment sales of timeshare units, as reported on
petitioners' returns for 1992, 1993, 1994, and 1995,
respectively.
Petitioners computed the interest on the deferred tax
liability in accordance with section 453(l)(3)(B) and reported
the interest as a business deduction on Schedule E, Part II, of
Forms 1040 for 1993, 1994, 1995, and 1996, in the following
amounts:
Year Interest Paid
1993 $382,127
1994 563,169
1995 536,124
1996 501,077
In the notices of deficiency, respondent disallowed
petitioners' interest deductions in full because petitioners had
failed to establish that said interest payments were allowable
business interest expense deductions.
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Last modified: May 25, 2011