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or business" in order for it to constitute deductible business
interest. In petitioners' view, nothing in section 163(h)(2)(A)
requires the interest to be paid by the taxpayer conducting the
trade or business.
Petitioners seek to bootstrap deductibility of their
interest expense by analogizing their interest expense to
interest on debt incurred to acquire or increase an interest in a
passthrough entity, citing a temporary regulation and several IRS
Notices. Referring to rules for allocating interest expense for
purposes of applying sections 469 (the "passive loss limitation")
and 163(d) and (h) (the "nonbusiness interest limitations"),
section 1.163-8T(a)(3), Temporary Income Tax Regs., 52 Fed. Reg.
24999 (July 2, 1987), provides:
(3) Manner of allocation. In general, interest
expense on a debt is allocated in the same manner as the
debt to which such interest expense relates is allocated.
Debt is allocated by tracing disbursements of the debt
proceeds to specific expenditures. This section prescribes
rules for tracing debt proceeds to specific expenditures.
However, section 1.163-8T(a)(2) of the same regulations cross-
refers to paragraph (b) for definitions. Paragraph (b)(7)
defines "trade or business expenditure" as "an expenditure * * *
in connection with the conduct of any trade or business other
than the trade or business of performing services as an
employee."
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