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511(b), 100 Stat. 2246. Under the provision, 1986 was the last
taxable year in which taxpayers could deduct 100 percent of such
personal interest. TRA sec. 511(e), 100 Stat. 2246. For the
next year, 1987, only 65 percent of personal interest was
deductible, and the deduction for personal interest was phased
out entirely by the end of 1989. Sec. 163(h)(6).
In a news release issued October 23, 1986, the IRS advised:
“Since under the Tax Reform Act of 1986 interest on most tax
deficiencies of individual taxpayers will not be fully deductible
after 1986, taxpayers may wish to pay actual or contested
deficiencies now to obtain the full interest deduction on 1986
tax returns.” The news release accordingly included, as an
attachment, Announcement 86-108 (Ann. 86-108), 1986-45 I.R.B. 20,
which provided guidance to taxpayers wishing to obtain the full
deductibility of deficiency interest in 1986.
Under paragraph 4, “General Considerations”, Ann. 86-108
states: “In general, a taxpayer may not pay interest on a
contested deficiency without simultaneously paying, or agreeing
to pay, the underlying tax deficiency with respect to which the
interest is being paid.” The “Detailed Instructions” of Ann. 86-
108 describe two situations that arguably apply here. Respondent
argues that the Thompsons’ situation was governed by section
C.1.b. (“Taxpayers Desiring to Settle Their Tax Court Cases”).
Under this provision a taxpayer whose case is pending before this
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