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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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