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computed income or loss of an S corporation is defined as gross
income minus the deductions allowed to the corporation under
Chapter 1 of the Internal Revenue Code. Thus, for example,
assuming Aqua Sun were entitled to a deduction for interest on an
indebtedness incurred to finance the construction of timeshares,
Aqua Sun's gross income would be reduced by the amount of the
deduction, before the passthrough to petitioner. The interest
which petitioners seek to deduct as a trade or business expense
is not an item which passes through from Aqua Sun to petitioner,
since the tax on which the interest must be paid is not imposed
on Aqua Sun, but directly on petitioner.
Section 163(h)(1) provides that in the case of a taxpayer
other than a corporation, no deduction is allowed for "personal
interest". Among other things, personal interest is defined as
any interest allowable as a deduction under Chapter 1 of the
Internal Revenue Code other than, as we have said, interest paid
or accrued on indebtedness "allocable to a trade or business."
Sec. 163(h)(2)(A). The quoted language was substituted for
interest paid or accrued on indebtedness "incurred or continued
in connection with the conduct of" a trade or business, by the
Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647,
sec. 1005(c)(1), 102 Stat. 3342. Petitioners argue that while
the previous language may have referred to a trade or
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Last modified: May 25, 2011