Gary E. and Rebecca L. Hurley - Page 9

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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                   
               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          (1994), superseded by legislation and supplemented by 107 T.C.              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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