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their amended 1993 and their 1994 tax returns, petitioners
claimed a deduction for accrued interest relating to the note.
On their 1994 tax return, petitioners claimed an interest
deduction and a net operating loss carryover. A portion of the
claimed carryover (i.e., $121,284) related to: (1) Deductions
for accrued interest claimed on petitioners’ 1993 tax return; (2)
legal expense deductions, purportedly related to Mr. Gregersen’s
Schedule C business, claimed in 1990 through 1993; and (3) a net
operating loss carryover from 1989. On their 1989 tax return,
petitioners reported a net operating loss, and petitioners did
not file a statement waiving carryback of this loss. Petitioners
were accrual basis taxpayers during the years in issue.
OPINION
I. Accrued Interest Deduction
Respondent determined that, because EBNI was the primary
obligor and Mr. Gregersen merely a guarantor, petitioners are not
entitled to a deduction relating to accrued interest on the note.
Petitioners contend that Mr. Gregersen was the obligor and is
entitled to the related deductions.
Section 163(a) allows as a deduction “all interest paid or
accrued within the taxable year on indebtedness.” A guarantor
who becomes the primary obligor on the liability is entitled to
deduct accrued interest. See Tolzman v. Commissioner, T.C. Memo.
1981-689. In addition, a taxpayer no longer in business may take
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Last modified: May 25, 2011