IRS investment interest expense ruling applies a very broad interpretation of property held for investment.

• Author: Wiesner, Philip J.

In Letter Ruling (TAM) 9209004, the IRS recently held that interest expense incurred to purchase stock in a worker's cooperative was property characterized as investment interest expense because producing regular corporate dividends; actual payment of regular dividends as not required. This memorandum illustrates the Service's very broad interpretation of "property held for investment" under Sec. 163(d)(5)(A). Although the ruling addresses only the issue of investment interest expense, this broad definition could provide for taxpayers.

Interest expense incurred by noncorporate taxpayers that is allocable to property held for investment ("investment interest expense") is generally allowed as a deduction only to the extent of that taxpayer's net investment income. The interest tracing regulations prescribe the methodology under which taxpayers generally must allocate interest expense for this purpose. interest expense allocated to property held for investment (within the meaning of Sec. 163(d)(5)(a)), or to expenditures in connection with holding such property, is treated as investment interest expense.

Sec. 163(d)(5)(A) defines "property held for investment" for this purpose (as well as for determining "net investment income"). Property held for investment includes property that produces the type of income described in Sec. 469(e)(1), and any of a taxpayer's nonpassive trade or business activities in which he does not materially participate. The type of income described in Sec. 469(e)(1) includes interest, dividends, annuities or royalties not derived in the ordinary course of a trade or business gains or losses from property producing the type of income or property that is held for investment. Sec. 469(e)(1) indicates that property held for investment does not include any interest in a passive activity. However, no further guidance is provided.

The language in Sec. 163(d)(5)(A) is not char as to whether the property must actually produce the type of income described in Sec. 469(e)(1), or whether the property merely must be able to produce that type of income. In...