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Commissioner, T.C. Memo. 1988-180. In the present case, there is
no evidence that petitioner Brody operated a trade or business
during the 1999 taxable year. He was instead the chairman of the
board, chief executive officer, and shareholder of KOA. We also
note that, while petitioners claimed Schedule C deductions for
repairs and maintenance and for “Office Space & Expenses paying
for kidsOA [sic] Employees”, KOA also claimed deductions on its
1999 corporate return for repairs and maintenance and for rents.
As indicated earlier, petitioners claimed a Schedule C
deduction of $5,016 for “Interest on funds borrowed to pay KidsOA
bills”. In general, a taxpayer is entitled to a deduction on all
interest paid or accrued within the taxable year on indebtedness.
Sec. 163(a). An exception arises with respect to personal
interest. Sec. 163(h)(1). Interest paid or accrued on
indebtedness properly allocable to the trade or business of
performing services as an employee constitutes personal interest
and thus may not be deducted. See sec. 163(h)(2)(A). With
certain limitations, an individual taxpayer may deduct investment
interest.7 Sec. 163(d), (h)(2)(B). To qualify as investment
interest, however, the interest must be paid on indebtedness
allocable to an interest held by the taxpayer in an activity
7 Under sec. 163(d)(1), an individual taxpayer can deduct
investment interest only to the extent of net investment income.
Unless petitioners reported investment income, no investment
interest would be deductible in any event.
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