Michael D. and Christine R. Alexander - Page 9

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          reduces itemized deductions once a taxpayer’s adjusted gross                
          income (AGI) exceeds the “applicable amount”.  See Chu v.                   
          Commissioner, T.C. Memo. 2005-110.  Trade or business expenses              
          are not subject to this limitation.  See Bishop v. Commissioner,            
          T.C. Memo. 2001-82 n.5.  In addition, trade or business expenses            
          reduce the taxpayer’s AGI, thereby reducing the itemized                    
          deductions lost under section 68(a).  Id.                                   
               For petitioners to prevail on this issue, the interest                 
          expense must be “properly allocable to a trade or business”.  See           
          sec. 163(h)(2)(A).  Section 1.163-8T, Temporary Income Tax Regs.,           
          52 Fed. Reg. 24999 (July 2, 1987), provides the rules for the               
          allocation of interest expense for purposes of section 163(h).6             
          Robinson v. Commissioner, 119 T.C. 44, 70 (2002).  Debt is                  
          allocated to expenditures in accordance with the use of the debt            
          proceeds.  Sec. 1.163-8T(c)(1), Temporary Income Tax Regs., 52              
          Fed. Reg. 25000.  In general, interest expense accruing on a debt           
          during any period is allocated to expenditures in the same manner           
          as the debt is allocated.  Id.  Subject to exceptions not                   
          relevant here, the allocation is not affected by the use of an              
          interest in any property to secure the repayment of such debt or            
          interest.  Id.  A trade or business expenditure is an expenditure           

               6 Temporary regulations are entitled to the same weight as             
          final regulations.  See Peterson Marital Trust v. Commissioner,             
          102 T.C. 790, 797 (1994), affd. 78 F.3d 795 (2d Cir. 1996); Truck           
          & Equip. Corp. v. Commissioner, 98 T.C. 141, 149 (1992).                    

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