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within the meaning of section 163(a) on which to base a claim of
interest. Respondent, after reviewing the evidence adduced at
trial, has abandoned the stakeholder position assumed in the
notices and now argues on brief in support of the Polskys’
position and against Indeck’s, on the grounds that the requisite
“indebtedness” for purposes of an interest deduction under
section 163(a) is lacking and that the substance of the parties’
agreement did not include interest. For the reasons discussed
below, we agree with the Polskys and respondent and hold that
Indeck has failed to show entitlement to an interest deduction
for any portion of the $19,886,922 payment it made to Mr.
Polsky.8
Allocation in Written Agreement
Indeck argues that $4,856,922 of the settlement payment
constitutes interest because Indeck and Mr. Polsky in substance
agreed to an interest payment in that amount in settlement of
their dispute. In support, Indeck points to the Settlement
Agreement’s description of the settlement payment in components
that correspond to the arbitrator’s $15,030,000 value for the
8 Deductions are a matter of legislative grace, and Indeck
bears the burden of proof with respect to the interest deduction
at issue in its case. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). Sec. 7491(a), shifting the
burden of proof to the Commissioner in certain circumstances, is
not applicable here because the examination of Indeck’s return
commenced prior to July 22, 1998. See Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(c)(1), 112 Stat. 726.
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