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deficiencies, and in 1996, petitioners paid to respondent a total
of $1,527,695 in accrued statutory interest relating thereto.
The parties have stipulated and we find that petitioners’
above income tax liabilities for 1982 through 1988 are properly
allocable to petitioner’s law practice. The stipulation reads as
follows:
The tax compromised by * * * [petitioners and respondent]
was tax on income received by Petitioner in his Schedule C
law practice for legal fees earned in connection with the
settlement of a personal injury lawsuit. As such, the tax
arose entirely from Petitioner’s trade or business.
On petitioners’ joint Federal individual income tax return
for 1996, petitioners claimed an interest expense deduction on
Schedule C, Profit or Loss From Business, relating to the above
$1,527,695 in interest that petitioners paid to respondent in
1996.
After an audit relating to petitioners’ 1996 Federal income
tax return, on July 6, 2000, respondent issued to petitioners a
notice of deficiency for 1996 in which respondent disallowed the
above claimed $1,527,695 interest expense deduction.
Discussion
Section 163(a) provides generally that taxpayers may deduct
interest paid on an indebtedness. Section 163(h)(1), however,
provides that individual taxpayers may not deduct “personal”
interest.
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Last modified: May 25, 2011