Deduction Of Interest And Expenses

<div class="Section1">The 2017 tax reform legislation created a special rule to allow partnerships to carry forward certain disallowed business interest (the rule does not apply to S corporations or other pass-through entities, although the new law specifies that similar rules will apply).&nbsp;The general rules governing carrying forward disallowed business interest (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) do not apply to partnerships.<div class="Section1"><br /> <br /> Instead, disallowed business interest is allocated to each partner in the same manner as non-separately stated taxable income or loss of the partnership.<a href="#_ftn1" name="_ftnref1">¹</a>&nbsp;The partner is entitled to deduct his or her share of excess business interest in any future year, but only:<br /> <blockquote>(1)&nbsp;&nbsp; against excess taxable income (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) attributed to the partner by the partnership, and<br /> <br /> (2)&nbsp;&nbsp; when the excess taxable income is related to the activities that created the excess business interest carryforward.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> Such a deduction also requires a corresponding reduction in excess taxable income. Further, if excess business interest is attributed to a partner, his or her basis in the partnership interest is reduced (not below zero) by the amount of the allocation even though the carryforward does not permit a partner&rsquo;s deduction in the year of the basis reduction.&nbsp;The partner&rsquo;s deduction in a future year for the carried forward interest will <em>not</em> require another basis adjustment.<br /> <br /> If the partner disposes of the partnership interest after a basis adjustment occurred, immediately before the disposition the partner&rsquo;s basis will be increased by the amount that any basis reduction exceeds the amount of excess interest expense that has been deducted by the partner.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The IRS has released proposed regulations stating that business interest is first accounted for at the partner level, and then allocated to the partners. A partner cannot later include his or her share of the partnership&rsquo;s business interest income for the year except to the extent of the partner&rsquo;s share of the excess of (i) the partnership&rsquo;s business interest income over (ii) the partnership&rsquo;s business interest expense (excluding floor plan financing). A partner cannot include his or her share of floor plan financing interest in determining his or her individual business interest expense deduction limitation.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the general rules governing the corporate deduction for business interest.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4)(B)(iii).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Notice 2018-28.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Coordination with other provisions</em>. The deduction for qualified tuition and related expenses is not allowed for any expenses for which there is a deduction available.<a href="#_ftn1" name="_ftnref1">¹</a> Taxpayers are not eligible to claim the deduction for qualified higher education expenses and an American Opportunity, Hope, or Lifetime Learning Credit in the same year with respect to the same student.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The amount of qualified tuition and related expenses is limited by the sum of the amounts paid for the benefit of the student, such as scholarships, education assistance advances, and payments (other than a gift, bequest, devise, or inheritance) received by an individual for educational expenses attributable to enrollment.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The total amount of qualified tuition and related expenses for the deduction has to be reduced by the amount of such expenses taken into account in determining the following exclusions: (1) interest from U.S. Savings bonds used to pay for higher education expenses;<a href="#_ftn4" name="_ftnref4">⁴</a> (2) distributions from qualified tuition programs;<a href="#_ftn5" name="_ftnref5">⁵</a> and (3) distributions from a Coverdell Education Savings Account.<a href="#_ftn6" name="_ftnref6">⁶</a> For these purposes, the excludable amount under IRC Section 529 does not include that portion of the distribution that represents a return of contributions to the plan.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> <em>Eligibility</em>. If the student is claimed as a dependent on another individual&rsquo;s tax return (e.g., parents), he cannot claim the deduction for himself.<a href="#_ftn8" name="_ftnref8">⁸</a> The deduction is not available to married taxpayers filing separately.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> <em>Identification</em>. For the deduction to be permitted, the taxpayer must provide the name and the taxpayer identification (i.e., Social Security) number of the student for whom the credit is claimed.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> <em>Timing</em>. A deduction is permitted for any taxable year only to the extent that the qualified tuition and related expenses are connected with enrollment at an institution of higher education during the taxable year.<a href="#_ftn11" name="_ftnref11">¹¹</a> However, this does not apply to expenses paid during a taxable year if those expenses are connected with an academic term beginning during the taxable year, or during the first three months of the next taxable year.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> The Secretary may provide regulations necessary and appropriate to carry out these provisions, including recordkeeping and information reporting regulations.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 222(c)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 222(c)(2)(A).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC &sect;&sect; 25A(g)(2), 222(d)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC &sect; 135.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. IRC &sect; 529.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. IRC &sect; 530.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>. IRC &sect; 222(c)(2)(B).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>. IRC &sect; 222(c)(3).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>. IRC &sect; 222(d)(4).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>. IRC &sect; 222(d)(2).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>. IRC &sect; 222(d)(3)(A).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>. IRC &sect; 222(d)(3)(B).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>. IRC &sect; 222(d)(6).<br /> <br /> </div></div><br />

Late in 2019, Congress acted to extend the deduction for qualified tuition and expenses, discussed below, through 2020. However, the Section 222 deduction was repealed for later years.For taxable years beginning after 2001 and before 2021, an above-the-line deduction is available for qualified tuition and related expenses (see below) paid by the taxpayer during the taxable year, subject to certain limitations.

<div class="Section1"><br /> <br /> If amounts are borrowed or indebtedness is continued in order to purchase or carry a bond issued <em>after</em> July 18, 1984 at a market discount, or a bond issued <em>before</em> July 19, 1984 and purchased on the market at a discount after April 30, 1993, the interest expense is deductible to the extent that stated interest (or original issue discount) paid or accrued on it is includable in income for the year. (For the income tax treatment of market discount upon disposition of such bonds, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7645">7645</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7648">7648</a>.) If interest expense exceeds that amount, it will be deductible to the extent that it exceeds the market discount allocable to the days on which the bond was held during the tax year. Interest expense that is allocable to the market discount accruing in the year is not currently deductible; the deduction is deferred.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Amounts so disallowed in one year may be deductible in a later year in which includable interest on the obligation is greater than the interest expense for that year. Generally, the taxpayer may elect, on a bond by bond basis, to deduct an amount of previously disallowed interest expense up to the difference.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Any deferred interest expense not previously deducted under that election becomes deductible in the year in which the bond is sold or redeemed. If the bond is disposed of in a transaction in which part or all of the gain is not recognized (e.g., a gift), the deferred interest is allowed as a deduction at that time only to the extent that gain is recognized. (See, e.g., Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7646">7646</a> with respect to gain that is recognized on a gift.) To the extent deferred interest expense is not allowed as a deduction upon the disposition of the bond in such a nonrecognition transaction, the disallowed interest expense will be treated as disallowed interest expense of the transferee of transferred basis property, or the transferor who receives exchanged basis property in the transaction.<a href="#_ftn3" name="_ftnref3">³</a> (Transferred basis property is property having a basis determined in whole or in part by the basis of the transferor.<a href="#_ftn4" name="_ftnref4">⁴</a> Exchanged basis property is property having a basis determined in whole or in part by other property held at any time by the person for whom the basis is being determined.)<a href="#_ftn5" name="_ftnref5">⁵</a> Thus, in the case of a market discount bond that is transferred basis property (a gift, for example), the transferee will be entitled to deduct the previously disallowed interest expense as if it were his own.<br /> <br /> On the other hand, interest expense allocable to market discount is currently deductible, not deferred, if the taxpayer has elected to treat the market discount as current income as it accrues under either the straight line or constant interest rate method.<a href="#_ftn6" name="_ftnref6">⁶</a> This election is discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7644">7644</a>.Unless the interest expense on borrowing is greater than the sum of (1) interest income on the bond that would be includable in gross income in the absence of the election plus (2) the amount of market discount accruing over the days the bond was held in the year, the election will merely result in a wash; in other words, the deduction and the included interest will offset each other.<br /> <br /> Whether amounts are borrowed or loans continued in order to purchase or carry market discount bonds depends on the taxpayer&rsquo;s purpose for borrowing. In determining the individual&rsquo;s purpose, the IRS will, presumably, apply the same principles applied in determining if indebtedness is incurred or continued to purchase or carry tax-exempt bonds (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8044">8044</a>).<br /> <br /> Noncapitalized expenses incurred in short sales of securities are treated as interest expenses subject to the deferred deduction rules if the proceeds of the short sales are used to purchase or carry a market discount bond.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> During the time the deduction of interest is deferred because it is on indebtedness incurred or continued to purchase or carry market discount bonds (or is an expense of a short sale the proceeds of which are used to purchase or carry market discount bonds), the interest (or short sale) expense is not counted as interest expense for other purposes (for example, in disallowing interest on amounts borrowed to buy tax-exempt bonds).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 1277.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 1277(b)(1)(A).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC &sect; 1277(b)(2).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC &sect; 7701(a)(43).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. IRC &sect; 7701(a)(44).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. IRC &sect; 1278(b).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>. IRC &sect; 1277(c). See General Explanation&ndash;TRA &rsquo;84, p. 98.<br /> <br /> </div></div><br />

<p> An above-the-line deduction (see Q <a href="javascript:void(0)">715</a>) is available to lower and middle income taxpayers for interest paid on a qualified education loan (i.e., college loans – see below) subject to certain limitations.<a href="#_ftn1">¹</a> The 2017 tax reform legislation did not change the rules governing the deductibility of student loan interest. However, the Act does provide that income resulting from the discharge of student loan debt because of the death or permanent and total disability of the borrower is not included in taxable income.<a href="#_ftn2">²</a> This provision is effective for loans that are discharged after December 31, 2017. </p><p> The amount of the deduction is limited to a maximum of $2,500.<a href="#_ftn3">³</a> The deduction is phased out ratably for taxpayers with modified adjusted gross income (MAGI–see below) between $100,000 and $130,000 (married filing jointly) or $50,000 and $65,000 (single).<a href="#_ftn4">⁴</a> The $50,000 and the $100,000 amounts are adjusted for inflation (as rounded to the next lowest multiple of $5,000).<a href="#_ftn5">⁵</a> In 2025-2026 projected, the indexed levels are $170,000-$200,000 (married filing jointly) and $85,000-$100,000 (single filers) and in 2024, the indexed levels are $165,000-$195,000 (married filing jointly) and $80,000-$95,000 (single filers).<a href="#_ftn6">⁶</a> The phaseout is accomplished by reducing the otherwise deductible amount by the ratio that the taxpayer's MAGI over the applicable limit bears to $15,000 ($30,000 for a couple filing jointly) (the deduction cannot be reduced below zero).</p><p>Example: In 2025, Mr. and Mrs. Green paid $900 The phaseout is accomplished by reducing the otherwise deductible amount by the ratio that the taxpayer's MAGI over the applicable limit bears to $15,000 ($30,000 for a couple filing jointly) (the deduction cannot be reduced below zero). </p><p> <em>Modified adjusted gross income</em> is the taxpayer's adjusted gross income as determined <em>before</em> the deduction for qualified tuition and related expenses<a href="#_ftn7">⁷</a> (see Q <a href="javascript:void(0)">8054</a>) and the exclusions for income derived from certain foreign sources or sources within United States possessions,<a href="#_ftn8">⁸</a> and <em>after</em> the inclusion of any taxable Social Security benefits,<a href="#_ftn9">⁹</a> any deductible IRA contributions,<a href="#_ftn10">¹⁰</a> adjustments for passive activity losses or credits<a href="#_ftn11">¹¹</a> (see Q <a href="javascript:void(0)">8010</a>), the exclusion for savings bond interest used for education expenses<a href="#_ftn12">¹²</a> (see Q <a href="javascript:void(0)">7686</a>), and the exclusion for certain adoption expenses.<a href="#_ftn13">¹³</a></p><p> <em>Eligibility.</em> The individual claiming the deduction must be legally obligated to make the interest payments under the terms of the loan.<a href="#_ftn14">¹⁴</a> Despite this, if a third party who is not legally obligated to make a payment of interest on a qualified education loan makes an interest payment on behalf of a taxpayer who is legally obligated to make the payment, that taxpayer is treated as receiving the payment from the third party and, in turn, paying the interest.<a href="#_ftn15">¹⁵</a> Note, however, that the CARES Act provides that student loan interest paid by an employer after March 27, 2020 and before January 1, 2021 is excluded from income. Interest paid by an employer is not deductible.<a href="#_ftn16">¹⁶</a></p><p> The deduction may not be taken: (1) by an individual who may be claimed as a dependent on another's tax return; (2) if the expense can be claimed as a deduction elsewhere on the return; or (3) by married taxpayers filing separate returns.<a href="#_ftn17">¹⁷</a> No deduction is allowed for which an exclusion is allowed under IRC Section 127 to the taxpayer because of a qualified payment made by the taxpayer's employer under the 2020 CARES Act. </p><p> A <em>qualified education loan</em> is any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses (see below) that are: (1) incurred on behalf of the taxpayer, a spouse, or a dependent at the time the indebtedness was incurred; (2) paid or incurred within a reasonable period of time (see below) before or after the indebtedness was incurred, and (3) attributable to education furnished in an academic period during which the recipient was an eligible student (see below).<a href="#_ftn18">¹⁸</a></p><p> The determination of whether qualified higher education expenses are paid or incurred within a "reasonable period of time" generally is made based on all the relevant facts and circumstances. However, qualified higher education expenses are treated as paid or incurred within a reasonable period of time before or after the taxpayer incurs the indebtedness if: (1) the expenses are paid with the proceeds of education loans that are part of a federal postsecondary education loan program; or (2) the expenses relate to a particular academic period and the loan proceeds used to pay the expenses are disbursed within a period that begins 90 days prior to the start of the academic period and ends 90 days after the end of that academic period.<a href="#_ftn19">¹⁹</a></p><p> The term qualified education loan does not include indebtedness owed to certain related persons. In addition, a loan from a qualified plan – including an IRC Section 403(b) plan or from a life insurance or annuity contract held by such a plan – is not a qualified education loan.<a href="#_ftn20">²⁰</a></p><p> A loan does not have to be issued or guaranteed under a federal postsecondary education loan program to be a qualified education loan.<a href="#_ftn21">²¹</a></p><p> A qualified education loan includes indebtedness incurred solely to refinance a qualified education loan. A qualified education loan includes a single, consolidated indebtedness incurred solely to refinance two or more qualified education loans of a borrower.<a href="#_ftn22">²²</a></p><p> <em>Qualified higher education expenses</em> means the cost of attendance at an eligible education institution (see below) reduced by the sum of: (1) the amounts excluded from gross income under IRC Section 127 (employer educational assistance programs), IRC Section 135 (income from U.S. Savings bonds used to pay for higher education expenses – see Q <a href="javascript:void(0)">7686</a>), IRC Section 529 (distributions from qualified tuition programs – see Q <a href="javascript:void(0)">689</a>), or IRC Section 530 (distributions from a Coverdell Education Savings Account, formerly known as an Education IRA – see Q <a href="javascript:void(0)">681</a>) by reason of such expenses; (2) the amount of any excludable scholarship, allowance or payments (other than a gift, bequest, devise or inheritance) received by an individual for expenses attributable to enrollment; and (3) certain educational assistance allowances provided to veterans or members of the armed forces.<a href="#_ftn23">²³</a></p><p> An <em>eligible education institution</em> generally includes any accredited postsecondary institution (i.e., college, university, or vocational school) offering an educational program for which it awards a bachelor's degree or a two-year degree, as well as those that conduct an internship or residency program leading to a degree or certificate awarded by an institute of higher learning, a hospital, or a health care facility that offers postgraduate training. The term also includes those institutions offering at least a one-year program that trains students for gainful employment in a recognized profession.<a href="#_ftn24">²⁴</a></p><p> An <em>eligible student</em> means any student who is enrolled in a degree, certificate, or other program leading to a recognized credential at an eligible education institution, and who is carrying at least half of a normal full-time work load in the course of study.<a href="#_ftn25">²⁵</a></p><p> <em>Interest.</em> Amounts paid on a qualified education loan are deductible if the amounts are interest for federal income tax purposes. Interest includes qualified stated interest and original issue discount, which generally includes capitalized interest (i.e., any accrued and unpaid interest on a qualified education loan that, in accordance with the terms of the loan, is added by the lender to the outstanding principal balance of the loan).<a href="#_ftn26">²⁶</a></p><p> The Preamble to the final regulations states: "generally, fees such as loan origination fees or late fees are interest if the fees represent a charge for the use or forbearance of money. Therefore, if the fees represent compensation to the lender for the cost of specific services performed in connection with the borrower's account, the fees are not interest for federal income tax purposes.<a href="#_ftn27">²⁷</a> The Tax Court found that certain fees, including insurance fees, were similar to payments for services rendered and not deductible as interest."<a href="#_ftn28">²⁸</a></p><p> In general, a payment is treated first as a payment of interest to the extent of the interest that has accrued and remains unpaid as of the date the payment is due, and second as a payment of principal.<a href="#_ftn29">²⁹</a></p><p> The 60-month limit on the student loan interest deduction was permanently repealed under PPA 2006. </p><p> <em>Reporting requirements</em>. Certain reporting requirements must be met by a payee who receives interest totaling $600 or more with respect to a single payor on one or more covered student loans. Generally, the payee must file Form 1098-E (Student Loan Interest Statement) with respect to that interest, and provide the payor with the same information. For the final regulations relating to the information reporting requirements for payments of interest on qualified education loans (including the filing of information returns in an electronic format in lieu of a paper format), see Treasury Regulation Sections 1.6050S-3, 1.6050S-4.<a href="#_ftn30">³⁰</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 221(a). </p><p> <a href="#_ftnref2">2</a>. IRC § 108(f)(5). </p><p> <a href="#_ftnref3">3</a>. IRC § 221(b)(1); Treas. Reg. § 1.221-1(c). </p><p> <a href="#_ftnref4">4</a>. IRC § 221(b)(2); Treas. Reg. § 1.221-1(d)(1). </p><p> <a href="#_ftnref5">5</a>. IRC § 221(f); Treas. Reg. § 1.221-1(d)(3). </p><p> <a href="#_ftnref6">6</a>. Rev. Proc. 2023-34, Rev. Proc. 2024-40. </p><p> <a href="#_ftnref7">7</a>. IRC § 222. </p><p> <a href="#_ftnref8">8</a>. IRC §§ 911, 931, 933. </p><p> <a href="#_ftnref9">9</a>. IRC § 86. </p><p> <a href="#_ftnref10">10</a>. IRC § 219. </p><p> <a href="#_ftnref11">11</a>. IRC § 469. </p><p> <a href="#_ftnref12">12</a>. IRC § 135. </p><p> <a href="#_ftnref13">13</a>. IRC §§ 137; Treas. Reg. § 1.221-1(d)(2). </p><p> <a href="#_ftnref14">14</a>. Treas. Reg. § 1.221-1(b)(1). </p><p> <a href="#_ftnref15">15</a>. Treas. Reg. § 1.221-1(b)(4)(i). See, e.g., Treas. Reg. § 1.221-1(b)(4)(ii), Example 1 (payment by employer) and Example 2 (payment by parent). </p><p> <a href="#_ftnref16">16</a>. CARES Act § 2206. </p><p> <a href="#_ftnref17">17</a>. IRC §§ 221(e), 221(c); Treas. Reg. §§1.221-1(b)(2), 1.221-1(b)(3); 1.221-1(g)(2). </p><p> <a href="#_ftnref18">18</a>. IRC § 221(d)(1); Treas. Reg. § 1.221-1(e)(3)(i). </p><p> <a href="#_ftnref19">19</a>. Treas. Reg. § 1.221-1(e)(3)(ii). </p><p> <a href="#_ftnref20">20</a>. IRC § 221(d)(1); Treas. Reg. § 1.221-1(e)(3)(iii). </p><p> <a href="#_ftnref21">21</a>. Treas. Reg. § 1.221-1(e)(3)(iv). </p><p> <a href="#_ftnref22">22</a>. Treas. Reg. § 1.221-1(e)(3)(v). </p><p> <a href="#_ftnref23">23</a>. IRC § 221(d)(2); Treas. Reg. § 1.221-1(e)(2). </p><p> <a href="#_ftnref24">24</a>. IRC §§ 221(d)(2), 25A(f)(2); Treas. Reg. § 1.221-1(e)(1). </p><p> <a href="#_ftnref25">25</a>. IRC §§ 221(d)(3), 25A(b)(3). </p><p> <a href="#_ftnref26">26</a>. Treas. Reg. § 1.221-1(f)(1). </p><p> <a href="#_ftnref27">27</a>. See Rev. Rul. 69-188, 1969-1 CB 54, amplified by Rev. Rul. 69-582, 1969-2 CB 29; see also, e.g., <em>Trivett v. Comm.</em>, TC Memo 1977-161, <em>aff'd</em> <em>on other grounds,</em> 611 F.2d 655 (6th Cir. 1979). </p><p> <a href="#_ftnref28">28</a>. Preamble, TD 9125, 68 Fed. Reg. 25489, 25490 (May 7, 2004). </p><p> <a href="#_ftnref29">29</a>. Treas. Reg. § 1.221-1(f)(3). </p><p> <a href="#_ftnref30">30</a>. See Treas. Reg. §§ 1.6050S-3, 1.6050S-4. </p>

<div class="Section1"><br /> <br /> Any expense that would otherwise be deductible under any Internal Revenue Code section is not deductible if it is allocable to tax-exempt income other than tax-exempt interest.<a href="#_ftn1" name="_ftnref1">¹</a> Expenses allocable to tax-exempt interest may be deductible if they are trade or business expenses, taxes, or depreciation, but the same expenses allocable to tax-exempt income other than interest are not deductible.<br /> <br /> If an expense is allocable to both nonexempt income and exempt income, a reasonable proportion, determined in the light of all the facts and circumstances, is allocated to each.<a href="#_ftn2" name="_ftnref2">²</a> Legal fees incurred to collect Social Security benefits have been held deductible only to the extent that they were allocable to the portion of benefits that were includable in the taxpayer&rsquo;s gross income.<a href="#_ftn3" name="_ftnref3">³</a> In the absence of evidence showing a more reasonable basis for allocation, the expense has been allocated between taxable and tax-exempt income in the proportion that each bears to the total taxable and nontaxable income in the year.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 265(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Treas. Reg. &sect; 1.265-1(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. Rev. Rul. 87-102, 1987 CB 78.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. <em>Jamison v. Comm.</em>, 8 TC 173 (1947); <em>Ellis v. Comm.</em>, 6 TCM 662 (1947); <em>Mallinckrodt v. Comm.</em>, 2 TC 1128 (1943), <em>acq.,</em> Rev. Rul. 59-32, 1959-1 CB 245, as clarified by Rev. Rul. 637, 1963-1 CB 57.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> The 2017 tax reform legislation suspended all miscellaneous itemized deductions subject to the 2 percent floor for tax years beginning after 2017 and before 2026.<br /> <br /> The amount of the deduction for expenses incurred in carrying on a trade or business depends upon whether the individual is an independent contractor or an employee. Independent contractors may deduct all allowable business expenses from gross income (generally on Schedule C) to arrive at adjusted gross income.<a href="#_ftn1" name="_ftnref1">¹</a> The business expenses of an employee are deductible from adjusted gross income if itemized, but only to the extent that they exceed 2 percent of adjusted gross income when aggregated with other miscellaneous itemized deductions (described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="733">733</a>).<br /> <br /> A full-time life insurance salesperson will not be treated as an &ldquo;employee&rdquo; for purposes of IRC Sections 62 and 67 merely because the individual is a &ldquo;statutory employee&rdquo; for Social Security tax purposes.<a href="#_ftn2" name="_ftnref2">²</a> The IRS has frequently challenged insurance agents&rsquo; claims of independent contractor status; however, its position has been struck down by at least two circuit courts of appeals, both of which held that the fact that an insurance agent received certain employee benefits did not preclude his being considered an independent contractor based on all the other facts and circumstances of the case.<a href="#_ftn3" name="_ftnref3">³</a> The IRS has instructed its attorneys to discontinue the practice of challenging certain independent contractor status claims of insurance agents who were treated as statutory employees by the companies for whom they worked.<a href="#_ftn4" name="_ftnref4">⁴</a> However, industrial agents (or &ldquo;debit agents&rdquo;) are treated as employees for tax purposes.<a href="#_ftn5" name="_ftnref5">⁵</a> Thus, as in the case of any employee, a debit agent can deduct transportation and away-from-home traveling expenses from adjusted gross income if he itemizes, only to the extent that the aggregate of these and other miscellaneous itemized deductions exceeds 2 percent of adjusted gross income.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Self-employed taxpayers are permitted a deduction equal to one-half of their self-employment (i.e., Social Security) taxes for the taxable year. This deduction is treated as attributable to a trade or business that does not consist of the performance of services by the taxpayer as an employee; thus it is taken &ldquo;above-the line.&rdquo;<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> In a legal memorandum concerning the deductibility of medical insurance costs, the Service ruled as follows:<br /> <p style="padding-left: 40px">(1) A sole proprietor who purchases health insurance in his individual name has established a plan providing medical care coverage with respect to his trade or business, and therefore may deduct the medical care insurance costs for himself, his spouse, and dependents under IRC Section 162(l), but only to the extent the cost of the insurance does not exceed the earned income derived by the sole proprietor from the specific trade or business with respect to which the insurance was purchased.</p><br /> <p style="padding-left: 40px">(2) A self-employed individual may deduct the medical care insurance costs for himself and his spouse and dependents under a health insurance plan established for his trade or business up to the net earnings of the specific trade or business with respect to which the plan is established, but a self-employed individual may not add the net profits from all his trades and businesses for purposes of determining the deduction limit under IRC Section 162(l)(2)(A). However, if a self-employed individual has more than one trade or business, he may deduct the medical care insurance costs of the self-employed individual and his spouse and dependents under each specific health insurance plan established under each specific business up to the net earnings of that specific trade or business.<a href="#_ftn8" name="_ftnref8">⁸</a></p><br /> Later, with respect to the same taxpayer, the Service ruled that a self-employed individual cannot deduct the costs of health insurance on Schedule C; instead, the deduction under IRC section 162(l) must be claimed as an adjustment to gross income on the front of Form 1040.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The Service has provided rules under which a 2 percent shareholder-employee in an S corporation is entitled to the deduction (under IRC Section 162(l)) for health insurance premiums that are paid or reimbursed by the S corporation and included in the 2 percent shareholder-employee&rsquo;s gross income.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> The Tax Court has held that a taxpayer could deduct his expenses ($15,745) incurred in earning a master&rsquo;s degree in business administration to the extent those expenses were substantiated and education-related. The court based its decision on the fact that the taxpayer&rsquo;s MBA did not satisfy a minimum education requirement of his employer, nor did the MBA qualify the taxpayer to perform a new trade or business.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> <em>Editor&rsquo;s Note:</em> The deduction for business entertainment expenses was suspended for 2018025.<br /> <br /> Expenses for business meals and entertainment must meet one of two tests, as defined in regulations, to be deductible. The meal must be: (1) directly related to the active conduct of the trade or business, or (2) associated with the trade or business. Generally, the deduction for business meal and entertainment expenses is limited to 50 percent of allowable expenses.<a href="#_ftn12" name="_ftnref12">¹²</a> The 50 percent otherwise allowed as a deduction is then subject to the 2 percent floor which applies to miscellaneous itemized deductions.<a href="#_ftn13" name="_ftnref13">¹³</a> (The 50 percent limitation was increased to 100 percent for 2021 and 2022 if the expenses were incurred in a restaurant). The taxpayer or his employee generally must be present for meal expenses to be deductible, and expenses that are lavish or extravagant may be disallowed. Substantiation is required for lodging expenses and for most expenditures of $75 or more.<a href="#_ftn14" name="_ftnref14">¹⁴</a> An employee must generally provide an adequate accounting of reimbursed expenses to his employer.<a href="#_ftn15" name="_ftnref15">¹⁵</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 62(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Rev. Rul. 90-93, 1990 CB 33.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. <em>Ware v. U.S.,</em> 67 F.3d 574 (6th Cir. 1995); <em>Butts v. Comm.,</em> TC Memo 1993-478, <em>aff&rsquo;d</em>, 49 F.3d 713 (11th Cir. 1995).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. Notice N(35)000-141 (Doc. 96-31376).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. Rev. Rul. 58-175, 1958-1 CB 28.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. IRC &sect; 67.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>. IRC &sect; 164(f).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>. CCA 200524001.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>. CCA 200623001.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>. Notice 2008-1, 2008 IRB 251.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>. <em>Allemeier v. Commissioner</em>, TC Memo 200507.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>. IRC &sect; 274(n)(1).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>. Temp. Treas. Reg. &sect; 1.67-1T(a)(2).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>. IRC &sect; 274; Treas. Reg. &sect; 1.274-5(c)(2)(iii).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>. Treas. Reg. &sect; 1.274-5(f)(4).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Where indebtedness is incurred or continued by a cash basis investor to purchase or carry Treasury bills, other short-term taxable government obligations, or taxable corporate short-term obligations (i.e., obligations with a fixed maturity date not more than one year from the date of issue), the current deductibility of interest expenses will be subject to limitation and deferral. However, if the taxpayer is required to or elects to include interest and acquisition discount or original issue discount as it accrues (as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7625">7625</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7627">7627</a>), the otherwise allowable deduction of interest will not be limited or deferred except by any limit on deductibility applicable under the interest tracing rules (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8043">8043</a>).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If the taxpayer does not include discount and interest as it accrues, the deductibility of interest expense incurred to purchase or carry the obligation is subject to certain limitations. Such interest will be deductible to the extent of includable interest income from the obligation. Interest expenses in excess of that amount will be deductible only to the extent that the interest expense exceeds the total amount of discount and interest accrued (but not includable) while the taxpayer held the bond during the year.<a href="#_ftn2" name="_ftnref2">²</a> Thus, the excess interest expense that is equal to the discount and interest accruing in the year (but is not currently includable in income) is not currently deductible. The deduction is deferred to a later year when includable interest income on the obligation exceeds interest expense for the year, or to the year of disposition.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> In the case of short sales of securities, expenses that are not required to be capitalized (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7529">7529</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7530">7530</a>) are treated as interest expenses subject to these limitation and deferral rules if the proceeds of the short sale are used to purchase or carry Treasury bills or other taxable short-term government or corporate obligations.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Whether amounts are borrowed or are loans continued to purchase or carry short-term obligations depends on the taxpayer&rsquo;s purpose for borrowing. In determining the individual&rsquo;s purpose, the IRS will, apparently, apply the same principles applied in determining if indebtedness is incurred or continued to purchase or carry tax-exempt bonds (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8044">8044</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect;&sect; 1281, 1282.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 1282(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC &sect;&sect; 1282, 1277(b).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC &sect;&sect; 1282(c), 1277(c).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If a market discount bond was issued before July 19, 1984 and acquired on the market after that date but before May 1, 1993, the taxpayer generally will not be required to treat any part of the gain on disposition that is attributable to market discount as interest income (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7645">7645</a>). However, if deferred interest expense on such a bond is deducted on disposition, an equal amount of any gain on the disposition must be treated as interest income.<a href="#_ftn1" name="_ftnref1">¹</a> Similarly, if the bond is disposed of in a nonrecognition transaction, an interest characterization rule will apply at the time gain is recognized and the deferred interest expense is deducted by the transferee.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> If amounts are borrowed or indebtedness is continued to purchase or carry bonds that were issued and acquired on or before July 18, 1984 at a market discount, the interest expense paid in the year is not disallowed simply because market discount is not recognized until disposition of the bond. Furthermore, when gain attributable to the market discount is recognized it is treated as capital gain (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a> for the treatment of capital gain).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 1277(d), prior to repeal by OBRA &rsquo;93.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. See General Explanation&ndash;TRA &rsquo;84, p. 98.<br /> <br /> </div></div><br />

<div class="Section1">The IRC allows individuals a deduction for ordinary and necessary expenses paid in the year for the production or collection of income, or paid for the management, conservation, or maintenance of property held for the production of income, whether or not, in either case, they are business expenses.<a href="#_ftn1" name="_ftnref1">¹</a> Personal management of one&rsquo;s investments is not the conduct of a trade or business.<a href="#_ftn2" name="_ftnref2">²</a> This is so without regard to the amount of time spent managing the investments or to the size of the portfolio.<a href="#_ftn3" name="_ftnref3">³</a><div class="Section1">The deduction applies to expenses in connection with both income and gain from sales. The deduction is taken by a cash method taxpayer in the year the expense is paid. This deduction is limited to expenses related to the production of income that is subject to federal income tax.<a href="#_ftn4" name="_ftnref4">⁴</a> However, it may be income realized in a prior year or anticipated in a subsequent year (as, for example, defaulted bonds bought with the expectation of gain on resale). The expenses are deductible even if no income is realized in the year.<a href="#_ftn5" name="_ftnref5">⁵</a> Expenses not for the production of income or the management, conservation, or maintenance of property held for the production of income, but paid in connection with activities carried on primarily as a sport or hobby, may be limited (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8023">8023</a>).<a href="#_ftn6" name="_ftnref6">⁶</a> Whether a transaction is carried on primarily for the production of income or for the management, conservation, or maintenance of property held for the production of income, rather than primarily as a sport or hobby or recreation, depends on the facts and circumstances involved (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8023">8023</a>).To be deductible, expenses must be reasonable in amount and bear a reasonable and proximate relation to the production or collection of taxable income or the management, conservation, or maintenance of property held for the production of income.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Expenses that enter into the determination of income or loss of a passive activity are subject to the limitations of the passive loss rule and are not deducted as investment expenses. In general, a passive activity is any activity involving the conduct of a trade or business in which the taxpayer does not materially participate and any rental activity.<a href="#_ftn8" name="_ftnref8">⁸</a> Generally, an individual may deduct aggregate losses for the year from a passive activity only to the extent that they do not exceed aggregate income from passive activities in that year. The passive loss rules are explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8010">8010</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8021">8021</a>.<br /> <br /> Expenses of a passive activity that are allocable to income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business are not treated as passive activity expenses, but rather are treated under the general rules applicable to other investment expenses.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> <em>Editor&rsquo;s Note:</em> All miscellaneous itemized deductions subject to the 2 percent floor were suspended for 2018025.<br /> <br /> Investment expenses are generally treated as miscellaneous itemized deductions (which also include certain non-investment expenses&ndash;see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="733">733</a>). These expenses are, therefore, deductible from adjusted gross income only to the extent that the aggregate of all miscellaneous itemized deductions for the taxable year exceeds 2 percent of adjusted gross income.<a href="#_ftn10" name="_ftnref10">¹⁰</a> Only those investment expenses that are deductible (i.e., those remaining after the 2 percent floor has been applied) are considered in the calculation of net investment income. (See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8040">8040</a>.) For purposes of this calculation, the 2 percent floor is applied against all other miscellaneous itemized deductions before it is applied against investment expenses.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> The more common expenses, provided they have the required relationship to the production of income (and deductible prior to 2018 only to the extent that they exceed the 2 percent floor) include: (a) rental expense of a safe deposit box used to store taxable securities; (b) subscriptions to investment advisory services; (c) investment counsel fees; (d) custodian&rsquo;s fees; (e) services charged in connection with a dividend reinvestment plan; (f) service, custodian, and guarantee fees charged by the issuer of mortgage-backed securities ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7691">7691</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7693">7693</a>);<a href="#_ftn12" name="_ftnref12">¹²</a> (g) bookkeeping services; (h) office expenses in connection with investment activities, such as rent, water, telephone, stamps, stationery, etc.;<a href="#_ftn13" name="_ftnref13">¹³</a> and (i) premiums paid for indemnity bonds required for issuance of new stock certificates to replace certificates that have been mislaid, lost, stolen, or destroyed.<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> The Tax Court has denied a deduction for mutual fund shareholders&rsquo; pro rata share of the annual operating expenses incurred by the mutual funds in which they owned shares. Because publicly offered mutual funds pass through income to shareholders on a net basis (i.e., gross income minus expenses), the Tax Court concluded that the shareholders had already received the benefit of a reduction in income for these costs and, therefore, were not entitled to deduct the operating expenses as investment expenses.<a href="#_ftn15" name="_ftnref15">¹⁵</a><br /> <br /> Partners in an investment club partnership formed solely to invest in securities and whose income is derived solely from taxable dividends, interest, and gains from security sales may deduct their distributive shares of the partnership&rsquo;s reasonable operating expenses incurred in its tax year that are proximately related to the partnership&rsquo;s investment activities. Operating expenses include postage, stationery, safe deposit box rentals, bank charges, fees for accounting and investment services, rent, and utility charges. Investment partnerships are not engaged in business because management of activities with respect to one&rsquo;s own account is not a trade or business.<a href="#_ftn16" name="_ftnref16">¹⁶</a><br /> <br /> The Tax Court has held that fees withheld from a trust beneficiary&rsquo;s distribution to repay, under a court order, expenses incurred by the trustee and other beneficiaries in dealing with her frivolous objections to the trust&rsquo;s accounting were deductible under IRC Section 212. Citing <em>Ostrom v. Comm.</em>,<a href="#_ftn17" name="_ftnref17">¹⁷</a> the court reasoned that if the origin and character of the claim arise out of a taxpayer&rsquo;s position as a seeker after profit (which in this case was the motivation underlying her objections to the accounting), then it did not matter that the taxpayer&rsquo;s expenditures were made because of the imposition of a court sanction to compensate the victims of the taxpayer&rsquo;s improper actions.<a href="#_ftn18" name="_ftnref18">¹⁸</a><br /> <br /> Expenses may be nondeductible because they are personal in nature, or because they are not ordinary and necessary. Examples of such expenses would include: newspaper and magazine costs, where it is not clear that the publications were used principally for investment activities rather than personal activities;<a href="#_ftn19" name="_ftnref19">¹⁹</a> travel to attend shareholders&rsquo; meetings;<a href="#_ftn20" name="_ftnref20">²⁰</a> fees paid for maintenance of interest paying checking accounts where the fee is charged for the privilege of writing checks instead of maintaining the interest bearing account and the checks written are personal;<a href="#_ftn21" name="_ftnref21">²¹</a> travel expenses going to watch a broker&rsquo;s ticker tape regularly but not directly related to any particular transactions entered into for profit;<a href="#_ftn22" name="_ftnref22">²²</a> maintenance of an art collection where personal pleasure, not investment, was the most important purpose for the collection;<a href="#_ftn23" name="_ftnref23">²³</a> and expenses of maintaining a personal residence.<a href="#_ftn24" name="_ftnref24">²⁴</a> An expense not otherwise deductible that is paid in contesting a liability against an individual does not become deductible simply because property held for production of income might have to be used or sold to satisfy the liability.<a href="#_ftn25" name="_ftnref25">²⁵</a><br /> <br /> Expenses may be nondeductible because of other Internal Revenue Code sections. For example, expenses that are capital in nature are not deductible, such as broker&rsquo;s commissions and fees incurred in connection with acquiring property.<a href="#_ftn26" name="_ftnref26">²⁶</a> These types of expenses are instead added to the basis of property. Similarly, selling expenses are offset against the selling price used in determining capital gains and losses, not deducted as expenses.<a href="#_ftn27" name="_ftnref27">²⁷</a> A safe purchased to store property used in the production of income was ruled to be a capital expenditure.<a href="#_ftn28" name="_ftnref28">²⁸</a> Expenses to defend, acquire, or perfect title to property are capital in nature.<a href="#_ftn29" name="_ftnref29">²⁹</a> Legal expenses incurred to recover taxable interest and dividends are deductible, but portions allocable to the recovery of a capital asset (e.g., stock) are not deductible, but rather are capitalized.<a href="#_ftn30" name="_ftnref30">³⁰</a> No deduction is allowed for expenses allocable to attending a convention, seminar, or similar meeting unless the expenses are ordinary and necessary expenses of carrying on a trade or business.<a href="#_ftn31" name="_ftnref31">³¹</a><br /> <br /> Note that the 2017 tax reform legislation substantially limited the deductibility of various business expenses for 2018025. The law disallowed a deduction for any activity generally considered to be entertainment, amusement or recreation, as well as certain transportation benefits provided to employees.<a href="#_ftn32" name="_ftnref32">³²</a><br /> <br /> The Service has determined that a flat fee (representing a specified percentage of the market value of the assets in a taxpayer&rsquo;s account) that is paid to a stockbroker for investment services is not a carrying charge (under IRC Section 266) and, thus, cannot be capitalized. Instead, the Service stated, a flat fee is better viewed as a currently deductible investment expense.<a href="#_ftn33" name="_ftnref33">³³</a><br /> <br /> A federal district court has held that payments made to discharge a preexisting lien on property (e.g., stock) are part of the purchase price of the property and, as such, must be capitalized. The court further held that the attorney&rsquo;s fees incurred in connection with discharging the lien should also be included in the purchaser&rsquo;s basis under IRC Section 1012, again as costs of acquiring the stock.<a href="#_ftn34" name="_ftnref34">³⁴</a><br /> <br /> Where purchasers of a hotel incurred legal fees maintaining a lawsuit to recover damages from the seller for misrepresentations that caused the taxpayers to pay an inflated price for the property, the Tax Court held that the litigation arose out of, was incurred in connection with, and was directly related to the acquisition of the property; accordingly, the legal fees were required to be capitalized.<a href="#_ftn35" name="_ftnref35">³⁵</a><br /> <br /> With regard to deduction of loan premiums and amounts equal to cash dividends to cover short sales, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7529">7529</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7530">7530</a>.<br /> <br /> Deduction of interest in connection with investments may be limited to the amount of net investment income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8040">8040</a>), or otherwise limited if the purpose of borrowing is to acquire or keep tax-exempt obligations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8044">8044</a>), market discount bonds ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8046">8046</a>), or taxable short-term obligations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8045">8045</a>).<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 212.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. <em>Higgins v. Comm.</em>, 312 U.S. 212 (1941).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. <em>Moller v. U.S.</em>, 721 F.2d 810, 83 USTC &para; 9698 (Fed. Cir. 1983).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC &sect; 265(a)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. Treas. Reg. &sect; 1.212-1(b).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. IRC &sect; 183(b)(2); Treas. Reg. &sect;&sect; 1.183-1, 1.212-1(c).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>. Treas. Reg. &sect; 1.212-1(d); <em>Bingham&rsquo;s Trust v. Comm.</em>, 325 U.S. 365 (1945).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>. IRC &sect; 469(c).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>. IRC &sect; 469(e)(1).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>. IRC &sect; 67.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>. Conference Report (TRA &rsquo;86) at pp. 153-154.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>. See <em>Loew v. Comm.</em>, 7 TC 363 (1946).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>. See <em>Scott v. Comm.</em>, TC Memo 1979-109.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>. See Rev. Rul. 621, 1962-1 CB 37.<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>. <em>Tokh v. Comm.</em>, TC Memo 2001-45.<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>. Rev. Rul. 75-523, 1975 CB 257.<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>. 77 TC 608 (1991).<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>. <em>Di Leonardo v. Comm</em>., TC Memo 2000-120.<br /> <br /> <a href="#_ftnref19" name="_ftn19">19</a>. <em>Tokh v. Comm.</em>, TC Memo 2001-45.<br /> <br /> <a href="#_ftnref20" name="_ftn20">20</a>. Rev. Rul. 56-511, 1956 CB 170.<br /> <br /> <a href="#_ftnref21" name="_ftn21">21</a>. Rev. Rul. 82-59, 1982-1 CB 47.<br /> <br /> <a href="#_ftnref22" name="_ftn22">22</a>. <em>Walters v. Comm.</em>, TC Memo 1969-5.<br /> <br /> <a href="#_ftnref23" name="_ftn23">23</a>. <em>Wrightsman v. U.S.</em>, 428 F.2d 1316 (Ct. Cl. 1970).<br /> <br /> <a href="#_ftnref24" name="_ftn24">24</a>. Treas. Reg. &sect; 1.212-1(h).<br /> <br /> <a href="#_ftnref25" name="_ftn25">25</a>. Treas. Reg. &sect; 1.212-1(m).<br /> <br /> <a href="#_ftnref26" name="_ftn26">26</a>. <em>Vestal v. U.S.</em>, 498 F.2d 487 (8th Cir. 1947).<br /> <br /> <a href="#_ftnref27" name="_ftn27">27</a>. <em>Milner v. Comm.</em>, 1 TCM 513 (1943).<br /> <br /> <a href="#_ftnref28" name="_ftn28">28</a>. Let. Rul. 8218037.<br /> <br /> <a href="#_ftnref29" name="_ftn29">29</a>. Treas. Reg. &sect; 1.212-1(k); <em>Collins v. Comm.</em>, 54 TC 1656 (1970); <em>Kelly v. Comm.</em>, 23 TC 682 (1955), <em>aff&rsquo;d,</em> 228 F.2d 512 (7th Cir. 1956).<br /> <br /> <a href="#_ftnref30" name="_ftn30">30</a>. Treas. Reg. &sect; 1.212-1(k); <em>Nickell v. Comm.</em>, 831 F.2d 1265 (6th Cir. 1987).<br /> <br /> <a href="#_ftnref31" name="_ftn31">31</a>. IRC &sect; 274(h)(7).<br /> <br /> <a href="#_ftnref32" name="_ftn32">32</a>. IRC &sect; 274(a).<br /> <br /> <a href="#_ftnref33" name="_ftn33">33</a>. See IRS CCA 200721015.<br /> <br /> <a href="#_ftnref34" name="_ftn34">34</a>. <em>Lobato v. U.S.</em>, 2002-1 USTC &para; 50,332 (N.D. Okla. 2002).<br /> <br /> <a href="#_ftnref35" name="_ftn35">35</a>. <em>Winter v. Comm</em>., TC Memo 2002-173.<br /> <br /> </div></div><br />