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the distribution pertaining to the VAP policy is taxable, then
the interest incurred on the borrowed funds is investment
interest which should be netted against the interest income
petitioner received via the settlement.
Section 163(a) generally allows as an interest deduction all
interest paid or accrued within the taxable year on indebtedness.
Section 163(d)(1), however, limits a noncorporate taxpayer's
deduction for investment interest to "the net investment income
of the taxpayer for the taxable year". Furthermore, section
163(d)(2) allows the taxpayer to carry forward any investment
interest expense disallowed under the general limitation for the
taxable year and deduct it as an investment expense paid or
accrued in the succeeding taxable year to the extent that the
taxpayer has net investment income in that 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).
Petitioner would have to have investment interest expenses
incurred in or carried forward to 1999 in order to have something
to offset against the interest income he received from the 1999
settlement. A "Statement of Policy Loan" from Prudential to
petitioner shows that petitioner made an interest payment of
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Last modified: May 25, 2011