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income. See H. Rept. 103-111, at 641-642 (1993), 1993-3 C.B.
167, 217-218; H. Conf. Rept. 103-213, at 578 (1993), 1993-3 C.B.
393, 456. To that end, Congress intended to account for
“taxable” capital gains for purposes of section 163(d). To
accept a broader reading to include nontaxable capital gains
would thus defeat the purpose of the section 163(d)(1)
limitation.
C. Analysis
For the reasons stated below, we conclude that petitioners’
loss carryover is an item of investment income under section
163(d)(4)(B) and, accordingly, that it serves to limit
petitioners’ investment interest expense deduction to $5,044.
Petitioners contend that respondent mischaracterized their
investment income by including the loss carryover. Petitioners
argue that section 163(d)(4)(ii) requires inclusion of only their
short-term capital gains and, furthermore, that net gain and net
capital gain do not require inclusion of their loss carryover.
On brief, petitioners argue that Zohoury v. Commissioner, T.C.
Memo. 1983-597, and section 4940(c)(4)(C) support their
contention. We reject petitioners’ arguments.
First, petitioners’ reliance on Zohoury is misplaced. The
issue in Zohoury involved whether interest paid on an intra-
family indebtedness constituted investment interest. After
concluding that the taxpayers’ intrafamily indebtedness interest
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