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Secretary followed that suggestion; and the Congress later
amended the relevant language of sections 163(d) and 163(h) to
conform to the relevant language of section 469. In light of
these circumstances, we conclude that the tracing regime that
section 1.163-8T, Temporary Income Tax Regs., supra, imposes is a
permissible construction of section 163(h)(2)(A).
In addition to providing rules for the allocation of
interest expense, section 1.163-8T, Temporary Income Tax Regs.,
supra, also provides rules for the treatment of interest expense
so allocated. Section 1.163-8T(a)(4)(A), Temporary Income Tax
Regs., supra, provides that “Interest expense allocated to a
trade or business expenditure (as defined in paragraph (b)(7) of
this section) is taken into account under section 163(h)(2)(A)”.
Section 163(h)(2)(A) is the provision that petitioners contend
applies to their payment of interest on their 1987 Federal
individual income tax deficiency. Section 1.163-8T(b)(7),
Temporary Income Tax Regs., supra, defines the term “trade or
business expenditure” to mean “an expenditure (other than a
passive activity expenditure or an investment expenditure) in
connection with the conduct of any trade or business other than
the trade or business of performing services as an employee.” If
an expenditure “is not a trade or business expenditure, a passive
activity expenditure, or an investment expenditure”, then section
1.163-8T(a)(4)(D), Temporary Income Tax Regs., supra, treats the
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