- 7 - view possible gaps in the evidence. 2. Deductibility of Interest Turning to the main issue in the case--Murphy’s attempted $225,000 deduction for interest--we begin with the law. Section 163(a) states as a general rule that “there shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.” In First Natl. Co. v. Commissioner, 32 T.C. 798, 807 (1959), revd. and remanded on other grounds 289 F.2d 861 (6th Cir. 1961), we defined indebtedness as “an existing, unconditional, and legally enforceable obligation for the payment of money.” Recognizing this, the Commissioner argues first that the disputed check couldn’t have gone to pay interest on Hamseh and Desert Spice because Murphy had already paid off those notes, meaning there was no underlying valid debt between Murphy and Hunt. The Commissioner’s strongest argument is the presence of the legend “paid in full” marked on the promissory notes for both Hamseh and Desert Spice. If Murphy had paid these notes according to their original terms, they would both have been paid off by December 1997. The problem, however, is that neither party introduced documentary or expert evidence of when the notes were marked as “paid in full.” Murphy himself testified that the promissory notes were marked “paid in full” only much later. At the end of 1997, he said he still had not ponied up enough moneyPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 Next
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