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(Dec. 22, 1987), outstanding now for 15 years, petitioners’
interest expense is nondeductible regardless of the fact that it
was incurred by petitioners in connection with the business.
Respondent’s temporary regulation and position herein should be
rejected as an erroneous attempt to redefine the substantive
provision of section 163(h)(2)(A).
Respondent’s temporary regulation may provide reasonable
methods for allocating interest between a taxpayer’s business and
a taxpayer’s other activities, but if there is no question as to
what an item of interest expense relates to, then the statute is
clear and requires an allocation between the business and the
nonbusiness portions thereof, and the portion allocable to the
taxpayer’s business is to be allowed as a deduction.
Respondent’s temporary regulation, in a situation involving a
sole proprietorship trade or business and a related income tax
deficiency, improperly and contrary to the statute, establishes a
per se interest expense disallowance rule and would leave no
interest expense to be allocated.
Respondent’s temporary regulation is also inconsistent with
section 1.163-9T(b)(1)(i), Temporary Income Tax Regs., 52 Fed.
Reg. 48409 (Dec. 22, 1987), and with the allocation rule provided
in the sister regulation relating to situations where no loan
proceeds are involved in an underlying transaction or activity
(namely, where a seller or provider of goods or services provides
financing to a taxpayer or where a transaction involves interest
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