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on the basis of timeliness. Therefore, we shall consider
petitioners’ argument on the merits.
On the basis of the record before us, we decline to hold
that any portion of the $64,000 interest payment is deductible
pursuant to section 163(h)(2)(A). In order to fall within that
provision, an interest payment must qualify as “[i]nterest
expense allocated to a trade or business expenditure”. Sec.
1.163-8T(a)(4)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg.
24999 (July 2, 1987). A “trade or business expenditure” is one
that has been incurred “in connection with the conduct of * * *
[a] trade or business”. Sec. 1.163-8T(b)(7), Temporary Income
Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987). There is nothing
in the record to indicate that any portion of the loans was used
to modify or improve that portion of petitioners’ residence
devoted to the conduct of Mary’s business. In fact, the Forms
8829 attached to the returns for the audit years indicate that
none of the proceeds of the loans was used for such purpose.6
Therefore, we find that no portion of the $64,000 interest
6 The Form 8829 for 1995 states that, out of a total area
of 3,240 square feet, 1,230 square feet were used “regularly and
exclusively” for business. According to the Form 8829 filed for
1996, the comparable figures are 4,090 square feet (total area)
and 630 square feet (business use area). Thus, while total area
increased between 1995 and 1996, presumably as a result of the
improvement paid for by a portion of the proceeds of the loans,
the amount devoted to business use decreased by almost 50 percent
during that same period.
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