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issue with respect to the $47,555 at issue.2 Respondent's basis
for disallowance of the $47,555 interest deduction is that
petitioners had no investment income in excess of the dividend
and interest income of $225 since their short-term and long-term
capital gains for 1999 were totally offset by capital loss
carryovers from 1998.
Section 163(d)(1) limits a noncorporate taxpayer's deduction
for investment interest to "the net investment income of the
taxpayer for the taxable year". Section 163(d)(4)(A) defines
"net investment income" as the excess of investment income over
investment expenses. Investment income includes interest,
dividends, annuities, or royalties not derived in the ordinary
course of a trade or business. Secs. 163(d)(5)(A)(i), 469(e)(1).
Respondent, therefore, correctly characterized petitioners'
interest and dividend income as investment income and allowed
petitioners an investment interest expense deduction equal to
that amount, $225. Investment income also includes "net gain
attributable to the disposition of property held for investment".
Sec. 163(d)(4)(B)(ii)(I). Although petitioners realized capital
gains during 1999, which they reported on Schedule D of their
return, petitioners also sustained capital losses in prior years,
2 Since the sole issue is based on a question of law, the
Court decides this case without regard to the burden of proof.
Sec. 7491(a).
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Last modified: May 25, 2011