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It is only in respondent’s trial memorandum that respondent
raised the reclassification of home mortgage interest to
investment interest, and the section 265(a)(2) disallowance, and
not until trial did respondent rely on the limitation of
investment interest under section 163(d). The notice of
deficiency does not reflect any of those theories. Accordingly,
such theories are a “new matter”. See Achiro v. Commissioner, 77
T.C. 881, 889-891 (1981); Wayne Bolt & Nut Co. v. Commissioner,
93 T.C. 500, 507-508 (1989). Petitioner is required to present
different evidence to rebut respondent’s new theories. Although
it is not clear from the notice, the payment of interest does not
appear to be at issue. Rather, to contest respondent’s theories,
petitioners would be required to present evidence relating to
motives of investment and the relationship of petitioners’ total
investments and respective borrowing. Further, petitioners would
be required to establish that their intent in securing the loans
was not to purchase or carry tax-exempt securities. See, e.g.,
Mariorenzi v. Commissioner, T.C. Memo. 1973-141, affd. 490 F.2d
92 (1st Cir. 1974). Therefore, respondent has the burden of
proof as to the interest issue. We address each of respondent’s
theories below.
1. Classification of Interest
In the case of a cash basis taxpayer, section 163(a) allows
for a deduction of all interest paid during the taxable year.
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