Robert W. and Janet L. Carlson - Page 8




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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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