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percentage reduction in Kersting deficiencies that will apply to
all affected taxpayers. See infra Part II.G.2.
5. The Thompsons’ Deduction of Prepaid
Interest on Their 1986 and 1987 Returns
1986
The Thompsons paid $25,545 of deficiency interest on
December 30, 1986.62 Because the Thompsons’ adjusted gross
income for 1986 was relatively low, they ultimately were able to
use only $16,251 of deficiency interest as a deduction on their
1986 return. Petitioners maintain that respondent should have
disallowed that deduction in its entirety because the Thompsons
did not pay the corresponding amount of the proposed deficiencies
in 1986.
Petitioners’ argument requires us to examine the state of
the tax law as of December 30, 1986. At that time, interest on
Federal income tax deficiencies was treated as “personal
interest”, which was fully deductible by the taxpayer making the
payment. See Robinson v. Commissioner, 119 T.C. 44, 54 (2002).
During 1986, however, the Internal Revenue Code was amended,
prospectively, to add a new section 163(h), which repealed the
deduction for personal interest. See TRA, Pub. L. 99-514, sec.
62Although the Thompsons purported to pay $59,545 of
deficiency interest on that date (and reported that amount as
deficiency interest expense on Schedule A, Itemized Deductions,
of their 1986 return), the larger of the two checks issued for
that purpose (in the amount of $34,000) was dishonored, and the
Thompsons did not send a replacement check until February 1987.
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