Academic journal article Journal of Accountancy

Regulation Denying Deduction for Interest on Tax Deficiency Is Void

Academic journal article Journal of Accountancy

Regulation Denying Deduction for Interest on Tax Deficiency Is Void

Article excerpt

In 1987 and 1990, the Redlarks paid interest on income tax deficiencies for prior years. On their schedules C for those years they deducted part of that interest, claiming it was allocable to business debt--that is, to tax adjustments relating to their unincorporated business.

The Internal Revenue Service disallowed the interest deduction, claiming that under temporary regulations section 1.163-9T(b)(2)(A), interest on individual income tax deficiencies is personal and nondeductible.

Under Internal Revenue Code section 163(h), personal interest is not deductible. Section 163(h)(2)(A) says interest on debt that is "properly allocable to a trade or business" is not included in the personal interest category. However, temporary regulations section 1.163-9T(b)(2)(A) says interest on a federal individual income tax deficiency is nondeductible personal interest.

The Redlarks argued the regulation was invalid because it disallowed a deduction for interest that they believed constituted an ordinary and necessary business expense.

Result: For the taxpayers. The regulation is invalid as it applies to this case. The interest deducted by the Redlarks is on debt "properly allocable to a trade or business" under section 163(h)(2) (A). Therefore, they are entitled to deduct the allocated portion of interest paid to the IlkS.

Note: This is the first time the Tax Court has considered the validity of this regulation. …

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