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finance their improvements. Respondent does not dispute or
challenge the fact that improvements were both made and paid for
by petitioners. Respondent contends that, because the cost of
their improvements exceeded the amount saved from the
refinancing, section 461(g)(2) does not apply. The Court
disagrees.
Section 461(g)(2) applies if the taxpayer pays points to
refinance “in connection with” the improvement of his principal
residence. The Court has never specifically addressed under what
facts or circumstances section 461(g)(2) allows a taxpayer to
deduct points paid during refinancing; however, the Court has
addressed how narrowly the phrase “in connection with”, as used
in section 461(g)(2) and other Internal Revenue Code sections,
should be construed. Based on the intent of Congress, the Court
applies a broad interpretation of the phrase “in connection
with”. Fort Howard Corp. & Subs. v. Commissioner, 103 T.C. 345
(1994), superseded by legislation and supplemented by 107 T.C.
187 (1996).
In Fort Howard Corp. & Subs., the Court defined the meaning
of the phrase “in connection with” as pertaining to a redemption
deduction under section 162(k)(1). The Court, id. at 353-354,
cited congressional reports that stated: “the phrase ‘in
connection with’ is intended to be construed broadly” and would
extend to “any other expenditure that is necessary or incident to
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