IRS now agrees that carryover of disallowed investment interest not limited by taxable income.

• Author: Josephs, Stuart R.
• Position: Brief Article

Sec. 163(d)(1) limits the amount of investment interest deductible by a noncorporate taxpayer to the amount of the taxpayer's net investment income for that tax year. Sec. 163(d)(2) provides that the excess investment interest may be carried over to the succeeding tax year.

Rev. Rul. 86-70 held that a taxpayer may not carry over disallowed investment interest to the extent that it exceeded the taxpayer's taxable income in the year the interest was paid or accrued. This ruling interpreted Sec. 163(d) before its modification by the Tax Reform Act of 1986 (TRA).

Four Federal appellate courts and the Tax Court have rejected Rev. Rul. 86-70. (For instance, see Tax Trends, "Carryover of Disallowed Investment Interest Not Limited by Taxable...