T.C. Memo. 2002-309
UNITED STATES TAX COURT
DANIEL V. ALFARO AND IRMA L. ALFARO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8940-00. Filed December 23, 2002.
Kenton E. McDonald, for petitioners.
Elizabeth Owen and Bruce M. Wilpon, for respondent.
MEMORANDUM OPINION
SWIFT, Judge: Respondent determined a deficiency in
petitioners’ Federal income tax for 1996 in the amount of
$31,717.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
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all Rule references are to the Tax Court Rules of Practice and
Procedure.
After concessions, the remaining issue for decision is
whether petitioners for 1996 are entitled to deduct as
nonpersonal business interest $1,527,695 in interest that
petitioners paid to respondent in 1996 with respect to
petitioners’ Federal individual income tax liabilities for 1982
through 1988.
Background
The facts of this case were submitted fully stipulated under
Rule 122, and are so found.
At the time the petition was filed, petitioners resided in
Corpus Christi, Texas. Hereinafter, all references to petitioner
in the singular are to Daniel V. Alfaro.
During 1982 through 1996 (1996 being the year in issue
herein), petitioner operated a law practice as a sole
proprietorship.
After an audit by respondent with respect to petitioners’
Federal individual income tax liabilities for 1982 through 1988,
respondent determined and assessed against petitioners tax
deficiencies for those years relating solely to additional income
from petitioner’s law practice. In 1995, petitioners entered
into an agreement with respondent with respect to the above tax
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deficiencies, and in 1996, petitioners paid to respondent a total
of $1,527,695 in accrued statutory interest relating thereto.
The parties have stipulated and we find that petitioners’
above income tax liabilities for 1982 through 1988 are properly
allocable to petitioner’s law practice. The stipulation reads as
follows:
The tax compromised by * * * [petitioners and respondent]
was tax on income received by Petitioner in his Schedule C
law practice for legal fees earned in connection with the
settlement of a personal injury lawsuit. As such, the tax
arose entirely from Petitioner’s trade or business.
On petitioners’ joint Federal individual income tax return
for 1996, petitioners claimed an interest expense deduction on
Schedule C, Profit or Loss From Business, relating to the above
$1,527,695 in interest that petitioners paid to respondent in
1996.
After an audit relating to petitioners’ 1996 Federal income
tax return, on July 6, 2000, respondent issued to petitioners a
notice of deficiency for 1996 in which respondent disallowed the
above claimed $1,527,695 interest expense deduction.
Discussion
Section 163(a) provides generally that taxpayers may deduct
interest paid on an indebtedness. Section 163(h)(1), however,
provides that individual taxpayers may not deduct “personal”
interest.
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Section 163(h)(2)(A) provides that interest paid on
indebtedness properly allocable to a trade or business does not
constitute personal interest. 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 source of the income or other
adjustments to which the tax liabilities relate, is to be treated
as personal interest. Sec. 1.163-9T(b)(2)(i)(A), Temporary
Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987).
Respondent argues that because the $1,527,695 in interest
that petitioners paid to respondent in 1996 relates to
petitioners’ individual income tax liabilities, under section
1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, that
interest should be treated as nondeductible personal interest.
Petitioners contend that section 1.163-9T(b)(2)(i)(A),
Temporary Income Tax Regs., supra, is invalid, that section
163(h)(2)(A) calls for an allocation of interest paid between
business and nonbusiness interest without discrimination against
taxpayers who are individuals, and that because the income giving
rise to petitioners’ tax liabilities for 1982 through 1988 is
indisputably allocable to petitioner’s trade or business (namely,
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to petitioner’s law practice), under section 163(a) and (h), the
related $1,527,695 in interest paid on those tax liabilities is
likewise allocable to petitioner’s trade or business and should
be deductible.
Petitioners cite Redlark v. Commissioner, 106 T.C. 31
(1996), revd. and remanded 141 F.3d 936 (9th Cir. 1998), and
Kikalos v. Commissioner, T.C. Memo. 1998-92, revd. 190 F.3d 791
(7th Cir. 1999), and a body of presection 163(h) caselaw (see
Reise v. Commissioner, 35 T.C. 571 (1961), affd. 299 F.2d 380
(7th Cir. 1962), Polk v. Commissioner, 31 T.C. 412 (1958), affd.
276 F.2d 601 (10th Cir. 1960), and Standing v. Commissioner,
28 T.C. 789 (1957), affd. 259 F.2d 450 (4th Cir. 1958)), in which
cases it was held that individual taxpayers were entitled to
deduct interest on their Federal income tax liabilities relating
to income from a sole proprietorship business.
After trial and the filing of briefs in this case, we
decided Robinson v. Commissioner, 119 T.C. 44 (2002), which also
involved the deductibility of interest paid by an individual
taxpayer to respondent with respect to the taxpayer’s Federal
income tax liability relating to income from the taxpayer’s law
practice. In Robinson, we concluded that section 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., supra, is valid, that
presection 163(h) caselaw was inapplicable, that we would no
longer follow our opinion in Redlark v. Commissioner, 106 T.C. 31
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(1996), and that interest paid on individual tax liabilities
relating to income from a sole proprietorship is to be treated as
nondeductible personal interest. Robinson v. Commissioner, supra
at 46-49, 62, 75. Our conclusion in Robinson is in accord with
opinions of the Courts of Appeals for the Fourth, Sixth, Seventh,
Eighth, and Ninth Circuits and is controlling herein. See
Kikalos v. Commissioner, 190 F.3d 791, 798-799 (7th Cir. 1999),
revg. T.C. Memo. 1998-92; McDonnell v. United States, 180 F.3d
721, 723 (6th Cir. 1999); Allen v. United States, 173 F.3d 533,
538 (4th Cir. 1999); Redlark v. Commissioner, 141 F.3d 936, 937-
938, 942 (9th Cir. 1998), revg. and remanding 106 T.C. 31 (1996);
Miller v. United States, 65 F.3d 687, 691 (8th Cir. 1995).
Although strong arguments are available in support of the
claimed deductions at issue herein (see the dissenting opinions
in Robinson v. Commissioner, supra at 96-121), we are compelled
to conclude in the instant case that the $1,527,695 in interest
petitioners paid on their individual income tax liabilities
relating to income from petitioner’s law practice is to be
treated as nondeductible personal interest.
For the foregoing reasons,
Decision will be entered for
respondent.