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in connection with the conduct of any trade or business other
than the trade or business of performing services as an employee.
Sec. 1.163-8T(b)(7), Temporary Income Tax Regs., 52 Fed. Reg.
25000.
Petitioners incurred credit card debt to purchase equipment
for the tree farm. The credit card debt therefore was allocable
to a trade or business expenditure. See sec. 1.163-8T(b)(7) and
(c)(1), Temporary Income Tax Regs., supra. The temporary
regulations provide that to the extent proceeds of any debt (the
“replacement debt”) are used to repay any portion of a previously
existing debt, the replacement debt is allocated to the
expenditures to which the repaid debt was allocated. Sec. 1.163-
8T(e)(1), Temporary Income Tax Regs., 52 Fed. Reg. 25004. Mr.
Alexander credibly testified, and we so find, that petitioners
used the proceeds from the home equity loan to repay the credit
card debt. The home equity loan therefore is “replacement debt”
and the interest accruing thereon is properly allocable to a
trade or business expenditure. See sec. 1.163-8T(c)(1),
Temporary Income Tax Regs., supra. We hold for petitioners on
this issue to the extent of $5,871.
2. Payments to Petitioners’ Son
Compensation is deductible as a trade or business expense
only if it is (1) reasonable in amount, (2) based on services
actually rendered, and (3) paid or incurred. See O’Connor v.
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