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expense associated with a mere extension of credit, not a
provision of funds). Section 1.163-8T(c)(3)(ii), Temporary
Income Tax Regs., 52 Fed. Reg. 25001 (July 2, 1987), provides as
follows:
If a taxpayer incurs or assumes a debt in consideration
for the sale or use of property, for services, or for
any other purpose, or takes property subject to a debt,
and no debt proceeds are disbursed to the taxpayer, the
debt is treated for purposes of this section as if the
taxpayer used an amount of the debt proceeds equal to
the balance of the debt outstanding at such time to
make an expenditure for such property, services, or
other purpose. [Emphasis added.]
The above temporary regulation provides that in the
situations (and for any purpose) where financing and credit
transactions do not involve the disbursement of loan proceeds but
do involve the extension of credit, interest expense relating to
the extension of credit is to be allocated between the taxpayer’s
business and personal activity based on the nature of the
underlying activity giving rise to the extension of credit.
Under section 1.163-8T(c)(3)(ii), Temporary Income Tax
Regs., supra, as applicable to the instant case, even though no
loan proceeds were disbursed by the Government to petitioners,
credit was extended by the Government to petitioners, and
petitioners were charged interest with regard thereto.
Because the underlying activity in question in this case
(giving rise to the tax deficiency and to the Government’s
extension of credit to petitioners) undisputedly relates to
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