§163 — Interest

2015-42), supplementing and overruling in part 147 T.C.

17 We overrule the Commissioner’s objection to Whatley’s introduction of evidence in support of this argument.

In Reise we thereupon overruled Aaron and reaffirmed the position we took in Polk that the interest on the tax underpayment was attributable to the taxpayer’s trade or business.

We so state because we have consistently been reluctant to conclude that Congress overruled existing case law when the statutory language does not compel such a conclusion and Congress has not otherwise expressly indicated that such a result should ensue.

Stanley acknowledged that petitioners used some ofthe loan proceeds to pay personal expenses, and petitioners made no attempt to distinguish between those loan proceeds used for personal expenses and those used for other purposes that might permit deduction. We likewise have insufficient evidence to make any reasonable allocation between payment ofpersonal expenses and other uses. See Sec. 1.163-8T(a)(3), Temporary Income Tax Regs., 52 Fed.

Unlike interest, the late fee does not accrue periodically but is instead charged only once. Regardless of whether the late fees are deductible as interest under sec. 163, because oftheir nexus to CHMD's acquisition ofequipment used in the operation ofits medical practice, they qualify as ordinary and necessary business expenses and would be deductible under sec.

This determination, unlike respondent's position on brief, is consistent with Rev. Rul. 2010-25, 2010- 44 I.R.B. 571, which holds that ifa loan that otherwise would be acquisition indebtedness exceeds the $1 million cap, the excess may be treated as home equity indebtedness. This Court has held that sec. 163(h) restricts the residential mortgage interest deduction to interest paid on $1 million ofacquisition (continued...) - 26 - [*26] acquisition indebtedness should be allocated to investmentp

- 11 - amount subject to the limitations of section 163(h)(3) and the provisions of section 1.163-8T, Temporary Income Tax Regs., 52 Fed. Reg. 24999 (July 2, 1987), to the extent applicable. Priv. Ltr. Rul. 89-28-010 (Apr. 6, 1989); see also Priv. Ltr. Rul. 90- 31-022 (May 7, 1990) (concluding that section 1041 does not apply to characterize interest expense on loan proceeds allocable to investment expenditures as personal interest for purposes of section 163(h)).

We need not decide which party bears the burden of proof because we decide this case without regard to the burden of proof .

As a result, we disagree with.petitionerthat the requirements ofsection 6664(c)(1) are satisfied because of"confusion" in the interpretation ofsection 163(h)(3)(B)(ii) and (C)(ii).

Section 163 provides that “[t]here shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.” SLS, an S corporation, claimed deductions for interest allegedly accruing on the 2014 and 2016 notes.

Petitioner must satisfy the following three requirements to be entitled to a deduction pursuant to section 163(a) and (h)(2)(D): (1) the indebtedness must be his obligation, (2) he must either be the legal or equitable owner of the property subject to the mortgage, and (3) the residence is his qualified residence.

§ 6221(a) and Tax Court Rule 240(c), we have jurisdiction to determine whether WTS and PLI were engaged in a joint venture constituting a partnership for federal income tax purposes, and we hold that they were not so engaged.

Accordingly, we hold that petitioner is not entitled to a deduction under section 163 for the $6,017.62 ofpoints paid.

Federal income tax purposes by Frito-Lay, PepsiCo, and Metro Bottling pursuant to section 163.

We hold that he is entitled to $1,950 oftae disputedtravel expenses for 2006 and $73 ofthe disputed travel expenses for 2007; (3) whetherpetitioner is entitled to disputed Schedule C deductions for meal and entertainment expenses ofS9,955 and $1,887 for 2006 and 2007, respectively.

We hold that no interest accrued on the Merrill loan is properly allocable to the Intel stock as investment property.3 Petitioners finally argue that section 1.163-8T(c) (1), Temporary Income Tax Regs., supra, is invalid because it conflicts with section 163(d) (3) (A).

6662(a) 2003 $38,020 $6,304 .00 $7,604 2004 20,705 1,983 .25 4,141 SERVED Apr 13 2010 _ 2 As an initial matter, neither party argued or briefed whether : (1) The Essex Drive trust, should have claimed th e mortgage interest deduction pursuant to section 163 (h) (4) (D) 1 and the provisions of subchapter J ; (2) petitioner could have claimed the mortgage interest deduction as investment interest, Davies v .

We hold as a matter of law that petitioners’ capital losses and capital loss carryovers are an integral part of the equation in calculating investment income under section 163(d)(4)(B).

We hold that it does.

The Parties’ Contentions The parties focus their dispute on whether section 163 prohibits allowance of petitioners’ claimed $69,617 Schedule C interest deduction; in particular whether the interest is “on indebtedness properly allocable to a trade or business”, within the meaning of section 163(h)(2)(A), and therefore exempt from the general disallowance rule of section 163(h).

The second action is a 1990 proposal of the Senate Finance Committee to amend section 163 by eliminating the deduction for corporate taxpayers of interest on income tax deficiencies.

The parties have stipulated that the "acquisition indebtedness" within the meaning ofsection 163 with respect to the Michigan property was $468,397 in 2006 and $483,095 in 2007.

Petitioner claims that section 163 and the legislative history provide both substantial authority and a reasonable basis for her treatment of the mortgage interest paid.

Permitting amortization deductions on the basis of this intangible asset does not run afoul of the interest deduction rules of section 163 or the OID rules. We cannot agree with respondent that petitioner’s claimed amortization deductions are in effect a substitute for interest. In support of his argument that petitioner is attempting to circumvent the rules for deducting interest and OID, respondent directs our attention to section 197 where Congress specifically expressed its intent that below

We sustained the Commissioner’s disallowance of - 44 - the deduction on the grounds that no indebtedness for purposes of section 163 existed, concluding instead that the 5 percent “interest” was merely part of the purchase price of the stock.

Respondent also argues that petitioner’s claiming of amortization deductions with respect to its financing arrangements constitutes an impermissible “loop” around the interest deductions rules of section 163 and the rules applicable to original issue discount (OID).

For example, section 163(h) provides that a taxpayer other than a corporation may not deduct personal interest.14 Sec. 163(h). Excluded from the definition of personal interest is investment interest. Sec. 163(h)(2)(B). 14 Sec. 163(h)(2) provides, in pertinent part, as follows: (2) Personal interest.--For purposes of this subsection, the

For example, section 163(h) provides that a taxpayer other than a corporation may not deduct personal interest.14 Sec. 163(h). Excluded from the definition of personal interest is investment interest. Sec. 163(h)(2)(B). 14 Sec. 163(h)(2) provides, in pertinent part, as follows: (2) Personal interest.--For purposes of this subsection, the

385, the Internal Revenue Service (IRS) announced that for debt incurred to acquire an interest in a residence incident to divorce or legal separation, regulations will provide that, in general, such debt will be eligible to be treated as debt incurred in acquiring a residence for purposes of section 163, without regard to the treatment of the transaction under section 1041.

Petitioners have not cited (and we are not aware of) any case in which a court disallowed interest deductions under section 163 and allowed them under section 212.

ues for decision are: (1) Whether certain deductions taken by petitioner in 1988 are prohibited by section 162(k); and (2) whether certain expenses incurred by petitioner in 1988 constitute a fee for services as opposed to interest deductible under section 163. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, first and second supplemental stipulations of facts, and attached exhibits are incorporated herein by this reference. During 1988, petitio

lation’s fungibility concept”. Finally, respondent argues that petitioner’s position ignores the fact that the regulations promulgated under section 861 apportion “deductions” which, in the case of interest expenses means the amount deductible under section 163. In this connection, respondent points out that section 1.861-8(a)(2), Income Tax Regs., is headed “Allocation and apportionment of deductions in general”, and that “there is nothing in the Regulations suggesting that the word ‘deduction’

Section 163 allows a deduction for interest paid or accrued on certain indebtedness, including acquisition indebtedness with respect to the taxpayer's personal residence. Sec. 163(a), (h)(2)(D), (3)(A)(i), (4)(A)(i). Section 1.163-1(b), Income Tax Regs., provides in pertinent part: "interest paid by the taxpayer on a mortgage upon real estate ofwhi

Although section 163 generally allows deductions for interest on indebtedness, the indebtedness must generally be an obligation ofthe taxpayer, and not an obligation ofanother.

163 (h) (2) (D). - Deductible interest includes interest from both acquisition and home equity indebtedness. Sec. 163(h) (3). Petitioner claimed a mortgage interest deduction of $54,356 on her return. At trial, petitioner made no argument and provided no substantiation for the portion thereof that respondent disallowed ($17,527). In view of th

of the property . As we understand his position, petitioner contends that he is entitled to claim these deductions because he paid the mortgage payments and all of the bills associated with the house . Deduction for Mortgage Interes t In general, section 163. allows a deduction for interest paid or accrued on indebtedness . For taxpayers who are not corporations, section 163(h)(1) disallows a deduction for personal interest . Interest paid on a mortgage .secured by a qualified residence, howeve

163 (h) (3) (B) (i) (II) and (C) (i) . - 16 - The amount petitioner borrowed against his insurance policy was not secured by his house. We conclude that any interest paid on this loan is not deductible. Sec. 163(h). Accordingly, we sustain respondent's determination to disallow $6,862 of petitioner's home mortgage interest deduction for 2000.

d COLI program lacked economic substance and business purpose (other than tax reduction) and is therefore a sham for tax purposes. As a result, interest on P's COLI policy - 2 - loans is not deductible interest on indebtedness within the meaning of sec. 163, I.R.C. The administrative fees associated with the COLI program are not deductible because they were incurred in furtherance of a sham. Michael J. Henke, Tegan M. Flynn, Cary D. Pugh, Thomas Crichton IV, Robert H. Cox, and Thomas P. Marinis,

r that the transactions purportedly generating the claimed amounts resulted either in any bona fide indebtedness or in any enforceable and bona fide obligation to pay compensation for use or forbearance of money on indebtedness within the meaning of I.R.C. Section 163. Furthermore, if it is established that any portion of the above disallowed "interest" is a properly 10 In some instances, respondent's notices of deficiency listed specific Kersting corporations under "Purported Payee". - 21 - all

r that the transactions purportedly generating the claimed amounts resulted either in any bona fide indebtedness or in any enforceable and bona fide obligation to pay compensation for use or forbearance of money on indebtedness within the meaning of I.R.C. Section 163. Furthermore, if it is established that any portion of the above disallowed "interest" is a properly 10 In some instances, respondent's notices of deficiency listed specific Kersting corporations under "Purported Payee". - 21 - all

r that the transactions purportedly generating the claimed amounts resulted either in any bona fide indebtedness or in any enforceable and bona fide obligation to pay compensation for use or forbearance of money on indebtedness within the meaning of I.R.C. Section 163. Furthermore, if it is established that any portion of the above disallowed "interest" is a properly 10 In some instances, respondent's notices of deficiency listed specific Kersting corporations under "Purported Payee". - 21 - all

age interest relating to properties owned by Sandew. Petitioners contend that Sandew was bankrupt, and, as guarantors of Sandew's loans, petitioners were obligated to pay Sandew's interest expenses and, therefore, entitled to a deduction pursuant to section 163. Generally, a guarantor is not entitled to an interest expense deduction with respect to payments made in fulfillment of a mere guaranty obligation. See Hynes v. Commissioner, 74 T.C. 1266, 1287-1288 - 5 - (1980). The Court of Appeals for

r that the transactions purportedly generating the claimed amounts resulted either in any bona fide indebtedness or in any enforceable and bona fide obligation to pay compensation for use or forbearance of money on indebtedness within the meaning of I.R.C. Section 163. Furthermore, if it is established that any portion of the above disallowed "interest" is a properly 10 In some instances, respondent's notices of deficiency listed specific Kersting corporations under "Purported Payee". - 21 - all

r that the transactions purportedly generating the claimed amounts resulted either in any bona fide indebtedness or in any enforceable and bona fide obligation to pay compensation for use or forbearance of money on indebtedness within the meaning of I.R.C. Section 163. Furthermore, if it is established that any portion of the above disallowed "interest" is a properly 10 In some instances, respondent's notices of deficiency listed specific Kersting corporations under "Purported Payee". - 21 - all

st paid on the promissory note in the amounts of $7,249, $5,220, and $5,409, respectively. Respondent disallowed these deductions on the - 5 - grounds that they were neither business expenses under section 162 nor deductible interest expenses under section 163. OPINION Respondent contends that the interest payments on the promissory note are nondeductible personal expenses. The interest accrued on funds that were characterized in the promissory note as petitioner's "medical school tuition and ex

Generally, section 163 provides that interest on indebtedness is deductible by the taxpayer in the year it is paid.

Petitioner argues that such amount, to the extent substantiated,6 should be allowed pursuant to section 163 as interest incurred in the conduct of a trade or business.

30 Deficiency 1987 $175,870 1988 17,909 1989 15,048 1990 187,808 1991 289,879 1992 15,402 The issue on which petitioner has moved for partial summary judgment is whether petitioner is entitled to deductions for interest pursuant to section 163 for taxable years ending September 30, 1990, through September 30, 1992.

Other provisions of section 163 limit such deductions.

The taxpayer argued that the economic substance doctrine did not apply to the deduction of interest payments pursuant to section 163 if the taxpayer's obligation to pay the interest is binding and enforceable.

interest deduction was properly taken for 1987. The deduction in issue stems from the $13,167.96 interest payment Betsy made to Markette. We agree with respondent’s conclusion. - 149 - For 1987, section 16336 allowed a deduction, subject to the 36 Sec. 163 provides, in pertinent part, as follows: SEC. 163. INTEREST. (a) General Rule.--There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness. * * * * * * * (d) Limitation on Investment Interest.--

rantee fees paid on the commercial paper "did not exceed the amounts that would be charged by an unrelated party, those fees were reasonable for purposes of section 162(a) and consistent with arm's-length amounts for purposes of section 482." Respondent contends that there was no genuine indebtedness underlying the interest payment, as required by section 163, and, therefore, the transactions were shams.

small business corporation (as defined in section 1371(b))” was struck from section 183(a) and “an S corporation” was inserted in its place. Subchapter S Revision Act of 1982, Pub. L. No. 97-354, § 5(a)(23), 96 Stat. 1669, 1694. 22 [*22] interest (sec. 163), and taxes (sec. 164). Viewed in the context of its position in part VI, section 183 is simply a statute that allows certain deductions attributable to “activities not engaged in for profit” in computing taxable income under section 63(a). S

Section 163 is unambiguous in providing that the mortgage interest deduction is allowed only for interest paid on the outstanding mortgage balance secured by the taxpayer’s home. See § 163(h)(3)(A) (providing a deduction for interest paid on debt incurred to buy, build/improve, or borrow against a taxpayer’s home when the debt is secured by the hom

estate would eventually owe tax on what it got back from the Insurance Trust through the receivable the Estate held, and that tax would shrink if Levine’s basis in the receivable increased.16 15 While interest paid can be deducted from income under section 163, section 264 denies this deduction to the extent that the money is borrowed to fund a life- insurance policy, and in effect defers the deduction until the policy matures.

Petitioner has failed, however, to provide any explanation for the business nature of this interest expense or any substantiation that it was actually paid. He has failed to meet his burden of proof, see Hradesky v. Commissioner, 65 T.C. at 90 (disallowing claimed deductions when there was “no substantiation at all”), or provide a reasona

Mortgage interest¹² 1. General principles Section 163(h)(3) provides that interest on a qualified residence is deductible by non-corporate taxpayers. Qualified residence interest encompasses interest payments on two types ofdebt: acquisition indebtedness and home equity indebtedness. Sec. 163(h)(3)(A). "Acquisition indebtedness" genera

d bills for utilities and insurance. Petitioners apparently had an option to acquire the Wingate property, but they never exercised that option. They cannot deduct rent, substitutes for rent, or per- sonal living expenses as "mortgage interest." See sec. 163; Puentes v. Commis- sioner T.C. Memo. 2013-277, 106 T.C.M. (CCH) 646, 647 ("We have disallowed the deduction for mortgage interest where the taxpayer does not establish legal or - 16 - [*16] equitable ownership ofmortgaged property."); sec.

2015-42; see also Graev v.

To meet the requirements ofsection 163, the mortgage must be the obligation ofthe taxpayer claiming the deduction, not the obligation ofanother.

After concessions, the issues for decision are whether petitioner for tax year 2010: (1) is liable for self-employmenttax under section 1401; (2) is entitled to an interest expense deduction under section 163; (3) is entitled to a business expense deduction under section 162;² and (4) is liable for additions to tax under sections 6651(a)(1) and (2) and 6654(a).3 FINDINGS OF FACT Some ofthe facts are stipulated and are so found.

A "qualified residence" for purposes ofsection 163 includes the taxpayer's primary residence and one other home "which is used by the taxpayer as a resi- dence (within the meaning ofsection 280A(d)(1))." To meet the latter require- ment the taxpayer must use the home "for personal purposes for a period exceed- ing the greater of 14 days or 10% ofthe number ofdays during the year for whi

losed tax years related to accrued interest; (5) whether alternativelypetitioner is entitled to reduce income by the amount ofinterest income accrued but unpaid; (6) whether petitioner is entitled to an unrelated-partybad debt deduction under section 166 for tax year 2007; and (7) whether petitioner is entitled to interest expense deductions under section 163 for tax years 2009-13.¹ FINDINGS OF FACT Some ofthe facts have been stipulated and are so found.

losed tax years related to accrued interest; (5) whether alternativelypetitioner is entitled to reduce income by the amount ofinterest income accrued but unpaid; (6) whether petitioner is entitled to an unrelated-partybad debt deduction under section 166 for tax year 2007; and (7) whether petitioner is entitled to interest expense deductions under section 163 for tax years 2009-13.¹ FINDINGS OF FACT Some ofthe facts have been stipulated and are so found.

Section 163 allows taxpayers a deduction for "qualified residence interest" paid on the mortgage on their first or secondaryhome. Sec. 163(a), (h)(2)(D); sec. 1.163-10T(b), Temporary Income Tax Regs., 52 Fed. Reg. 48410 (Dec. 22, 1987). Qualified residence interest is either "acquisition indebtedness" or "home equity indebtedness." Sec. 163(h)(3)(A

Section 163 allows a taxpayerto deduct interest paid or incurred within the taxable year on indebtedness. Respondent argues that we should not allow ADI its interest deduction since it paid the $772 in furtherance ofa tax-motivated transaction lacking economic substance. See, e.g., Winn-Dixie Stores, Inc. v. Commissioner, 113 T.C. 254, 294 (1999),

For purposes ofsection 163, "property held for investment" includes property which produces income such as interest, dividends, annuities, and - 7 - [*7] royalties, and is not derived in the ordinary course ofa trade or business.

For purposes ofsection 163, "property held for investment" includes property which produces income such as interest, dividends, annuities, and - 7 - [*7] royalties, and is not derived in the ordinary course ofa trade or business.

For purposes ofsection 163, "property held for investment" includes property which produces income such as interest, dividends, annuities, and - 7 - [*7] royalties, and is not derived in the ordinary course ofa trade or business.

Section 163 allows taxpayers a deduction for "qualified residence interest" paid on the mortgage on their first or secondaryhome. Sec. 163(a), (h)(2)(D); sec. 1.163-10T(b), Temporary Income Tax Regs., 52 Fed. Reg. 48410 (Dec. 22, 1987). Qualified residence interest is either "acquisition indebtedness" or "home equity indebtedness." Sec. 163(h)(3)(A

o borrowed repeatedly and regularly against the annuity's cash value, such that "the net cash value, on which any annuity or insurance payments would depend," remained negligible. E at 366. He claimed a deduction for interest paid on the loans under sec. 163. Id. at 363- 364. Quoting Gregory, the Court asked "'whetherwhat was done, apart from the tax motive, was the thing which the statute intended'" and concluded the answer was no. E at 365 (quoting Gregory v. Helvering, 293 U.S. at 469). The a

Section 163 allows a taxpayerto deduct interest paid or incurred within the taxable year on indebtedness. Respondent argues that we should not allow ADI its interest deduction since it paid the $772 in furtherance ofa tax-motivated transaction lacking economic substance. See, e.g., Winn-Dixie Stores, Inc. v. Commissioner, 113 T.C. 254, 294 (1999),

borrowed repeatedly and regularly against the annuity’s cash value, such that “the net cash value, on which any annuity or insurance payments would depend,” remained negligible. Id. at 366. He claimed a deduction for interest paid on the loans under sec. 163. Id. at 363-364. Quoting Gregory, the Court asked “‘whether what was done, apart from the tax motive, was the thing which the statute intended’” and concluded the answer was no. Id. at 365 (quoting Gregory v. Helvering, 293 U.S. at 469). The

Section 163(h)(1), however, provides that, in the case ofa taxpayer other than a corporation, no deduction shall be allowed for personal interest.

' Section 163(h)(3)(A) defines qualified residence interest as any interest paid or accrued during the taxable year on: (i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or (ii) home equity indebtedness with respect to any qualified residence of the taxpayer. Acquisition indebtedness is debt!incur

Section 163 generally allows a d duction for all interest paid or accrued within the taxable year on indebtedness Sec. 163(a). However, no deduction is allowed for personal interest paid·or ac rued during the taxable year·únless specifically allowed by statute. Sec. 16 (h). Among the enumerated items of deductible personal interest is qualified esi

ioner, T.C. Memo. 1978- 474, 1978 Tax Ct. Memo LEXIS 39, at *8, aff'd without published opinion, 618 F.2d 98 (4th Cir. 1980); Phillips v. Commissioner, T.C. Memo. 1972-21, 1972 Tax - 25.- [*25] Ct:Memo LEXIS 235, at *4. Interest paid is deductible, sec. 163,:but Azimzadeh didn't show that any part ofthe payihent was for interest. . Section 274(d) also imposes stricter substäntiation requirements for travel expenses.uA taxpayer has to show, with records or with sufficient records corroborating th

And again, ifthe issue was not clear enough from the ruling itself, it was further emphasized by the major heading in the Cumulative Bulletin under which the ruling was printed: "Section 163.--Interest".

Year Deficiency 6651(a)(1) 6651(a)(2) 6654 2002 $10,672 $2,401.20 $2,668.00 $356.63 2003 10,871 2,445.98 2,717.75 280.51 2004 11,488 2,584.80 2,872.00 329.24 2005 12,957 (cid:16)042 2,915.33 2,461.83 519.75 2006 14,132 3,179.70 1,837.16 668.81 2007 24,122 5,427.45 1,668.54 1,097.84 Respondent conceded at trial that petitioner was entitled to section 163 deductions for mortgage interest as well as section 164 deductions for real estate taxes paid for the years at issue.

Section 163 allows a deduction for "all interest paid or accrued within the taxable year on indebtedness." Sec. 163(a). To be deductible, however, the interest must be on a genuine debt owed by the taxpayer. Knetsch v. United - 28 - [*28] States, 364 U.S. 361, 365 (1960); Midkiffv. Commissioner, 96 T.C. 724, 735 (1991), aff'd sub nom. Noguchi v. C

Print 2005) ("The additional first-year depreciation deduction is subject to the general rules regarding whether an item is deductible under section 162 or subject to capitalization under section 163 or section 263A.").

Section 163 generally allows a deduction for "all interest paid or accrued within the taxable year on indebtedness." Sec. 163(a). Section 163(a) has its own exceptions, and one of them, section 163(h), says that an individual taxpayer may not deduct personal interest. See sec. 163(h) (1). The exception has its own exception, and.excludes from the d

e corporation under section 164 which are paid or incurred by the corporation on the houses or apartment building and on the land on which such houses (or building) are situated, or (2) the interest allowable as a deduction to the corporation under section 163 which is paid or incurred by the corporation on its indebtedness contracted-- (A) in the acquisition, construction, alteration, rehabilitation, or maintenance of the houses or apartment building, or ()B) in the acquisition of the land on w

hich the taxpayer himself doesn' t materially participate, interest he pays on the loan is "investment interest." The term also. includes the interest someone pays on a loan whose proceeds he uses to buy an asset that yields- "portfolio income." See sec. 163 (d) (3) (A)v, (5) (A) . "Portfolio income" includes most types of passive income, such as interest and dividends. - 7 - On August 4, 2010, the Commissioner reported that Thompson's communication was minimal. To his credit, Thompson then did

Home Interest and Property Taxes Petitioner claims section 163 deductions for interest paid on the loan financing the construction of the house petitioner planned to live in with Ms.

Qualified residence interest is any interest that is paid or accrued during the taxable year on acquisition indebtedness or home equity indebtedness. See sec. 163(h) (3) (A). Acquisition indebtedness is any indebtedness secured by the qualified residence of the taxpayer and incurred in acquiring, constructing, or substantially

itution of documents causing someone to sign an instrument without knowing the consequences of his act.'" Id. at 1186-1187 (quoting Meyers v. Johanningmeier, 11 Brief Times Reporter 122 (Feb. 6, 1987)). Quoting the Restatement (Second) of Contracts, sec. 163 Illustration 2 (1981), the court explained by way of example: A and B reach an understanding that they will execute a written contract containing terms on which they have agreed.. It is properly prepared and is read by B, but A substitutes a

hich the taxpayer himself doesn' t materially participate, interest he pays on the loan is "investment interest." The term also. includes the interest someone pays on a loan whose proceeds he uses to buy an asset that yields- "portfolio income." See sec. 163 (d) (3) (A)v, (5) (A) . "Portfolio income" includes most types of passive income, such as interest and dividends. - 7 - On August 4, 2010, the Commissioner reported that Thompson's communication was minimal. To his credit, Thompson then did

163 (h) (3) (A). Acquisition indebtedness means any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by the - 6 - residence. Sec. 163(h) (3) (B) (i). A qualified residence includes the principal residence of the taxpayer. Sec. 163(h) (4) (A). Generally,

he corporation under section 164 which are paid or incurred by the corporation on the houses or apartment building and on the land on which such houses (or building) are situated, or (2) the interest allowable as a deduction to the corporation under section 163 which is paid or incurred by the corporation on its indebtedness contracted— (A) in the acquisition, construction, alteration, rehabilitation, or maintenance of the houses or apartment building, or (B) in the acquisition of the land on wh

redemption elections if they received payments resembling the interest payments . P deducted these payments, and R disallowed the deductions for 2004 and 2005. Held: The payments in question were not interest and therefore were not deductible under sec. 163, I.R.C. Held, further, all payments in 2004 were deductible under sec. 162, I.R.C., and the 12-month rule of sec. 1.263(a)-4(f) (5) (i), Income Tax Regs. However, payments in 2005 were not deductible to the - 2 - extent that sec. 1.263(a)-4(

After concessions, the issues for decision are : (i) whether amounts paid by the Nelsons' limited liability companies are deductible, either as fees pursuant to section 162 or as interest expenses pursuant-to section 163 ; and (ii) whether the Nelsons are liable for the accuracy-related penalty pursuant to .-section 6662(a) .

Schedule A--Home Mortgage Interest Section 163 allows a tax deduction for interest paid on the mortgage of.a taxpayer's primary or secondary residence.

Y 4 - 3 - payments t taling $31,709 under section 163 as either interest accrued in connection with a trade or business or as qualified residence nterest .

Petitioner deducted the 2004 forbearance payment on its 2004 corporate tax return as an interest expense under section 163 and deducted the 2005 amount on its 2005 return as a forbearance expense under section 162.

The "indebtedness" for-purposes of section 163 must., in general, be an obligation of the taxpayer and not an obligation of another .

Section 163 ( h) provides that .no deduction „shall , be allowed for personal- inter'est' .paid or accrued during the.-taxable year .

Section 163 allows as a deduction all interest paid within the taxable year on indebtedness . Section 163(h)(1), .however; provides : "In the case~of a taxpayer other than a corporation, no deduction shall .be .allowed under this chapter for personal interest paid *,* * during the taxable year ." For this purpose, personal interest d-oes not-includ

Interest, Expense s Section 163 allows a deduction for interest on indebtedness paid or accrued within the+taxable year .

The "indebtedness" for-purposes of section 163 must., in general, be an obligation of the taxpayer and not an obligation of another .

The "indebtedness" for purposes of section 163 must, in general, be an obligation of the taxpayer and not an obligation of another .

tion 404(k), their deduction should be disallowed as evasions of taxation under section 404(k)(5); and (3) even if the redemption dividends are otherwise allowable as deductions under section 404(k), they are disallowed as amounts paid by a corporation in connection with the redemption of its stock within the meaning of section 162(k).

"Qualified residence" within the meaning of section 163 is the taxpayer's principal place of residence .

— Any— (i) deduction allowable under section 163 (relating to interest), or (ii) deduction for dividends paid (within the meaning of section 561).

"Qualified residence" within the meaning of section 163 may be either the taxpayer's principal residence or another residence selected by the taxpayer and used as a residence .

nd find it to be sufficient to sustain the deduction because the exhibit in the record establishes the $1,000 payment . The largest amounts in dispute in 2000 and 2001 are for investment interest . The deduction of investment interest is governed by section 163 . Petitioner deducted $17,358 and $46,792, respectively . Respondent allowed $4,007 and $3,731, respectively. Section 163(d)(1) limits the investment interest deduction to the net investment income for the year, which would come into play

On the basis of third party information returns, respondent also concedes that under section 163 petitioner is entitled to Schedule A deductions for mortgag interest expenses in the amounts of $22,000, $18,933, $17,909, nd $16,661 for taxable years 2000, 2001, 2002, and 2003, res ectively .

Respondent concedes that petitioners are entitled to deduct the following expenses totaling $243,363 as itemized deductions: (1) $37,738, identified by petitioners as "Option Int" for "US Bank Corp.", as investment interest expenses under section 163; (2) $186,370, idenhified by petitioners as "Option Int" for "Merrill Lynch", as investment interest expenses under section 163; and (3) $19,255 of the $20,164 identified by petitioners as "Opt.int" for "Merrill Lynch", as investment interest expens

- 4 - Mortgage Interest Deduction Section 163 allows a deduction for interest paid or accrued on certain indebtedness, including acquisition indebtedness on a qualified residence.

OPINION Interest and Property Tax Payments (cid:16)042 Under section 163, interest paid on a mortgage relating to a qualified residence generally is deductible.

Neither section 163 (relating to interest) nor section 165 (relating to losses) shall apply with respect to such a payment. (b) Payment treated as worthless nonbusiness debt. This paragraph applies to taxpayers (other than corporations) who, after December 31, 1975, enter into a transaction for profit, but not in the course of their trade or business, to a

claim” to characterize the transfer of the contract for deed as alimony. 10This general rule does not apply to those expenses that are deductible regardless of any connection with a trade or business, such as mortgage interest on the residence under sec. 163, real estate taxes under sec. 164, or casualty losses under sec. 165. Sec. 280A(b). - 11 - of the number of days the unit is rented at fair rental value, no deduction is allowed. Sec. 280A(a), (d)(1). Nor may taxpayers deduct expenses for th

mpensation acts as compensation for personal injuries or 3The term “points” refers to a fee, generally equal to a percentage of the total loan, which is paid to the lending institution to lower the interest rate. They are classified, for purposes of sec. 163, as “prepaid interest”. - 5 - sickness.” Petitioners argue that, since Mr. Hurley was only 70 percent capable for the work that he was once 100 percent able to do, it followed that 30 percent of the wages he received was attributable to work

Respondent agrees that petitioners are entitled to deduct, under section 163, $4,796 of the claimed deduction for home mortgage interest.

has offered no evidence concerning whether this amount represents prepaid interest or instead a payment for services rendered by (cid:16)04t2he financial institution that provided the financing. Thus, this amount is not deductible as interest under section 163. Goodwin v. Commissioner, 75 T.C. 424, 440-442 (1980), affd. 691 F.2d 490 (3d Cir. 1982); Wilkerson v. Commissioner, 70 T.C. 240, 253 (1978), revd. on another issue 655 F.2d 980 (9th Cir. 1981); Enoch v. Commissioner, 57 T.C. 781, 794-795

f claim” to characterize the transfer of the contract for deed as alimony. This general rule does not apply to those expenses that are deductible regardless of any connection with a trade or business, such as mortgage interest on the residence under sec. 163, real estate taxes under sec. 164, or casualty losses under sec. 165. Sec. 280A(b). Petitioners vaguely assert that she stayed on a “single occasion.” Nor have petitioners carried their burden to prove that they rented the unit for at least

nder section 2(b) for the year 2000; (2) whether petitioner is entitled to claim a child care credit under section 21 for the year 2000; (3) whether petitioner is entitled to itemized deductions of $6,766 and $8,100 for home mortgage interest under section 163 for the years 2000 and 2001, respectively; (4) whether petitioner is entitled to itemized deductions of $10,307 and $16,680 for charitable contributions under section 170 for the years 2000 and 2001, respectively; (5) whether petitioner is

Cutts is entitled to deduct the portion of constructive interest payments allocable to ATV’s payments on the Landmark Hall mortgage to the extent allowable under section 163, which is to be determined in the Rule 155 computation.

ar, to the extent that the amounts represent the tenant-stockholder's proportionate share of (1) the real estate taxes deductible by the corporation under section 164, sec. 216(a)(1), and (2) the mortgage interest deductible by the corporation under section 163, sec. 216(a)(2).3 2 Sec. 164(a) provides in pertinent part: SEC. 164. TAXES. (a) General Rule.--Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or ac

The "indebtedness" for purposes of section 163 must, in general, be an obligation of the taxpayer and not an obligation of another.

Cutts is entitled to deduct the portion of constructive interest payments allocable to ATV’s payments on the Landmark Hall mortgage to the extent allowable under section 163, which is to be determined in the Rule 155 computation.

The issues for decision are whether petitioner is entitled to a deduction under section 166 for a bad debt loss in 1999; whether petitioner is entitled to an interest expense deduction under section 163; whether petitioner is liable for the addition to tax for failure to file under section 6651(a)(1); and whether a penalty should be awarded to the United States under section 6673 by reason of petitioner’s failure to exhaust his administrative remedies.

ar, to the extent that the amounts represent the tenant-stockholder’s proportionate share of (1) the real estate taxes deductible by the corporation under section 164, sec. 216(a)(1), and (2) the mortgage interest deductible by the corporation under section 163, sec. 216(a)(2). Section 55 provides for an alternative minimum tax (AMT). In computing alternative minimum taxable income (amti), no deduction is allowed to an individual for, inter alia, miscellaneous itemized deductions (as defined in

in control, if the Retained Executives continued to work for petitioner until the vesting of their rights to these payments. Further, the parties have stipulated that the interest component of the 1991 SRP Benefits is deductible by petitioner under sec. 163 in 1992 and does not constitute a "parachute payment" within the meaning of sec. 280G. For convenience, we hereinafter refer to the portion of the 1991 SRP Benefits whose deductibility remains in dispute as the "disputed 1991 SRP Benefits" a

in control, if the retained executives continued to work for petitioner until the vesting of their rights to these payments. Further, the parties have stipulated that the interest component of the 1991 SRP Benefits is deductible by petitioner under sec. 163 in 1992 and does not constitute a “parachute payment” within the meaning of sec. 280G. For convenience, we hereinafter refer to the portion of the 1991 SRP Benefits whose deductibility remains in dispute as the “disputed 1991 SRP Benefits” a

The “indebtedness” for purposes of section 163 must, in general, be an obligation of the taxpayer and not an obligation of another.

In section 163 no distinction is made between interest paid on business-related indebtedness owed by individual taxpayers and interest paid on business-related indebtedness owed by other types of taxpayers. Respondent’s temporary regulation, however, provides that interest paid specifically on income tax liabilities of individuals, regardless of the s

On the record before us, we find that petitioner has failed to carry his burden of establishing that he is entitled under section 163 to deduct (1) for 1991 and 1992 interest payments of $1,632.18 and $1,176.48, respectively, that he made during those years on petitioner’s equity line account and (2) for 1992 the claimed interest payment of $1,250.

The "indebtedness" for purposes of section 163 must, in general, be an obligation of the taxpayer and not an obligation of another.

taxpayer must establish the 3 At trial, near the conclusion of petitioner's case-in- chief, petitioner’s counsel stated that petitioner would not be relying on the alternative theory that petitioner was entitled to interest expense deductions under sec. 163. As a result, respondent limited his cross-examination of at least one of petitioner's witnesses and rested without offering any witnesses of his own. Thereafter, petitioner resurrected and argued the sec. 163 issue on brief in spite of its

(Petitioners did not elect to itemize deductions on their 1994 return.) Nevertheless, because of the amount of gross income earned by petitioners in - 11 - their horse racing activity, mortgage interest is not allowable as a trade or business deduction on the Schedule F. In general no deduction is allowed for “any amount paid out for

1998-92, the Court of Appeals for the Seventh Circuit sua sponte raised the issue of the degree of deference owed to temporary interpretive regulations issued by respondent under section 163 without notice and comment procedures.

The Court of Appeals for the Second Circuit declined to accept the taxpayers' argument and held that in order for an interest deduction to be valid under section 163, the underlying transaction must have economic substance.

Mortgage Interest Deductions Section 163 allows a deduction for certain qualified interest.

rovides that “There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.” Court opinions have clearly established that a lack of economic substance may operate to bar interest deductions arising under section 163. See Knetsch v. United States, 364 U.S. 361 (1960); United States v. Wexler, supra; Goldstein v. Commissioner, 364 F.2d 734 (2d Cir. 1966), affg. 44 T.C. 284 (1965). Interest payments are not deductible if they arise from transactions “th

. Commissioner, 190 F.3d 791 (7th Cir. 1999), revg. in part T.C. Memo. 1998-92, the Court of Appeals for the Seventh Circuit sua sponte raised the issue of the degree of deference owed to temporary interpretive regulations issued by respondent under sec. 163 without notice and comment procedures. Because both parties assumed that Chevron deference applied in this circumstance, the court reserved judgment on whether a lesser degree of deference was appropriate. Prior to amendment in 1984, sec. 26

- 20 - Petitioner next argues that she is entitled to claim a deduction under section 163 of $1,250 for prepaid interest (points) that she paid in connection with the purchase of her house, and that she is entitled to amortize and deduct a portion of the remaining $1,250 payment of points as a rental expense on Schedule E.

Section 1.166-9(b), Income Tax Regs., further provides that neither section 163 nor section 165 will apply with respect to such a payment.

t the limitations of sec. 163(d) would apply to petitioners’ interest payments on the Branch property. Because of the manner in which the issue was posed by the parties and the limited scope of our inquiry, we must assume that respondent agrees that sec. 163 would not limit petitioners’ deduction if we decide the issue, as framed, in petitioners’ favor. - 7 - Respondent argues that the absence of a rental agreement between petitioners and the corporation is a factor that supports a finding that

Section 163 generally allows the deduction of interest paid on indebtedness during the taxable year. Section 163(d)(1) limits the deduction for investment interest to the extent of net investment income. Investment interest means interest paid on indebtedness allocable to property held for investment. Sec. 163(d)(3)(A). Property held for investment

Petitioner theorizes that we must look to section 163 for the deduction, and in turn, the section 267 limitations would then apply.

years in question. Respondent allowed petitioners a full deduction for interest expenses identified from "investment sources" in the KPMG analysis, and a partial deduction for interest expenses identified from "personal sources", in accordance with section 163. Discussion We must decide whether respondent properly imputed dividends to petitioners in 1987 and 1988 under section 7872 where no evidence indicates that interest had accrued or was otherwise paid on the loans in those years. (Petitione

ed approximately 70 days prior to the expiration of the normal 3-year period of limitations applicable to the assessment of Federal income taxes. Sec. 6501(a). - 4 - compensation for use or forbearance of money on indebtedness within the meaning of I.R.C. Section 163. Furthermore, if it is established that any portion of the above disallowed "interest" is a properly allowable deduction, it is further determined that such interest constitutes interest in investment indebtedness and deduction of s

1991 -- Claimed Investment Interest Expense Section 163 allows taxpayers a deduction for the payment of interest on indebtedness allocable to property held for investment.

tem, or any part thereof, are determined to be "section 38 property", as defined in section 48(a)(1), then petitioner is entitled to: (1) An ITC with respect to such section 38 property (or part thereof); (2) a 5-year depreciation schedule under section 168(b)(1) with respect to such section 38 property (or part thereof); and (3) a deduction under section 163 for interest accrued during the construction period with respect to such section 38 property (or part thereof).

tem, or any part thereof, are determined to be "section 38 property", as defined in section 48(a)(1), then petitioner is entitled to: (1) An ITC with respect to such section 38 property (or part thereof); (2) a 5-year depreciation schedule under section 168(b)(1) with respect to such section 38 property (or part thereof); and (3) a deduction under section 163 for interest accrued during the construction period with respect to such section 38 property (or part thereof).

Petitioner theorizes that we must look to section 163 for the deduction, and in turn, the section 267 limitations would then apply.

(2) Exceptions.--Paragraph (1) shall not apply to-- (A) Certain specific deductions--Any-- (i) deduction allowable under section 163 (relating to interest), (ii) deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness, or (iii) deduction for dividends (continued...) - 4 - section 162(k) applies to the period in which the costs and fees at issue in this case were paid or incurred and changes the tax treatmen

rantee fees paid on the commercial paper "did not exceed the amounts that would be charged by an unrelated party, those fees were reasonable for purposes of section 162(a) and consistent with arm's-length amounts for purposes of section 482." Respondent contends that there was no genuine indebtedness underlying the interest payment, as required by section 163, and, therefore, the transactions were shams.

's business. Sec. 280A(c)(1); Commissioner v. Soliman, 506 U.S. 168 (1993); Cao v. 9 Under sec. 280A(b), deductions which are otherwise allowable without regard to any connection with a trade or business include the deduction for: (1) Interest under sec. 163, subject to the sec. 163(h)(1) personal interest restriction, (2) real estate taxes under sec. 164, and (3) casualty losses under sec. 165. - 24 - Commissioner, T.C. Memo. 1994-60, affd. without published opinion 78 F.3d 594 (9th Cir. 1996).

For the years 1979, 1980, and 1981 petitioner claimed interest expenses paid to the Mirhosseini family in the amounts of $15,000, $44,879, and $36,000, respectively. On or about September 10, 1979, three members of the Mirhosseini family each - 233 - lent petitioner $80,000. He agreed to invest the total sum of $240,000 in his operating

For the years 1979, 1980, and 1981 petitioner claimed interest expenses paid to the Mirhosseini family in the amounts of $15,000, $44,879, and $36,000, respectively. On or about September 10, 1979, three members of the Mirhosseini family each - 233 - lent petitioner $80,000. He agreed to invest the total sum of $240,000 in his operating

3(b) which provides in pertinent part that in the case of an activity which is not for profit, the deductions allowable are those allowable "without regard to whether or not such activity is engaged in for profit." Respondent has agreed that petitioner substantiated $1,849 of mortgage interest paid in 1991, and that this amount is deductible under section 163 without regard to whether the activity is engaged in for profit and is to be added to his itemized deductions.

rantee fees paid on the commercial paper "did not exceed the amounts that would be charged by an unrelated party, those fees were reasonable for purposes of section 162(a) and consistent with arm's-length amounts for purposes of section 482." Respondent contends that there was no genuine indebtedness underlying the interest payment, as required by section 163, and, therefore, the transactions were shams.

rantee fees paid on the commercial paper "did not exceed the amounts that would be charged by an unrelated party, those fees were reasonable for purposes of section 162(a) and consistent with arm's-length amounts for purposes of section 482." Respondent contends that there was no genuine indebtedness underlying the interest payment, as required by section 163, and, therefore, the transactions were shams.

— Any— (i) deduction allowable under section 163 (relating to interest), (ii) deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness, or (iii) deduction for dividends paid (within the meaning of section 561).

tgage interest. It provides no guidance in determining whether the interest is deductible on Schedule A or Schedule C. As mentioned above, mortgage interest expense is not disallowed by section 280A and may be deducted as an itemized deduction under section 163. See sec. 280A(b). Further, if any part of the interest is an ordinary and necessary business expense within the meaning of section 162, it may be deducted from gross income. See sec. 62(a)(1). Otherwise, at least as relevant herein, mort

the bond or note secured by such mortgage. Sec. 1.163-1(b), Income Tax Regs. However, only interest paid or accrued on a mortgage on property for the period after the taxpayer becomes the legal or equitable owner of the property is deductible under section 163. Hyde v. Commissioner, 64 T.C. 300, 306 (1975) (interest accruing before, but paid by the taxpayer, must be capitalized). We are unconvinced that Good Shepherd either made any payments of interest during the years in question or had any g

the bond or note secured by such mortgage. Sec. 1.163-1(b), Income Tax Regs. However, only interest paid or accrued on a mortgage on property for the period after the taxpayer becomes the legal or equitable owner of the property is deductible under section 163. Hyde v. Commissioner, 64 T.C. 300, 306 (1975) (interest accruing before, but paid by the taxpayer, must be capitalized). We are unconvinced that Good Shepherd either made any payments of interest during the years in question or had any g

tgage interest. It provides no guidance in determining whether the interest is deductible on Schedule A or Schedule C. As mentioned above, mortgage interest expense is not disallowed by section 280A and may be deducted as an itemized deduction under section 163. See sec. 280A(b). Further, if any part of the interest is an ordinary and necessary business expense within the meaning of section 162, it may be deducted from gross income. See sec. 62(a)(1). Otherwise, at least as relevant herein, mort

Where mortgaged property is jointly owned and the co-owners are jointly liable on the mortgage each owner is entitled to a deduction for the mortgage interest that he actually pays out of his own funds. Castaneda-Benitez v. Commissioner, T.C. Memo. 1981-157. Section 6001 and the regulations promulgated thereunder require a taxpayer to mai