Individual income tax underpayment interest is nondeductible.

• Author: Barton, Peter C.

In Robinson, 119 TC No. 4 (2002) the Tax Court ruled that interest paid on income tax underpayments and deficiencies is nondeductible personal interest, even though the tax resulted from the taxpayers' trade or business. This decision applies to over 20 million noncorporate businesses. It overrules Redlark, 141 F3d 936 (9th Cir. 1998), rev'g and rem'g 106 TC 31 (1996), and follows the rulings of the Fourth, Sixth, Seventh, Eighth and Ninth Circuits. Robinson is appealable to the Fifth Circuit.

Sec. 162(a) allows a deduction for all ordinary and necessary business expenses paid or incurred in carrying on a trade or business. Sec. 62(a) specifies that deductions attributable to a trade or business are deductions from gross income. Sec. 163(a) specifies that all interest paid or accrued within a tax year is deductible. However, Sec. 163(h)(1), enacted as part of the Tax Reform Act of 1986, disallows the deduction under chapter 1 of personal interest for individual (noncorporate) taxpayers. Sec. 163(h)(2)(A) defines personal interest as any deductible interest other than interest on debt "properly allocable to a trade or business" (other than the trade or business of being an employee). Also, Sec. 163(h)(2)(E) exempts interest on certain estate tax payments from the personal interest category.

Temp. Regs. Sec. 1.163-9T(b)(2)(i)(A), issued Dec. 22, 1987, specifies that personal interest includes interest paid on underpayments of individual Federal, state or local income tax and on debt incurred to pay such tax, regardless of the source of the income generating the tax liability. The Conference Committee report, after noting the trade or business exception to the personal interest category, states that personal interest "generally includes interest on tax deficiencies." The report adds that personal interest does not include interest on certain estate tax payments (1986-3 CB (vol. 4)).

In Redlark, the Tax Court ruled that Temp. Regs. Sec. 1.163-9T(b)(2)(i)(A) is invalid and interest on income tax deficiencies from the operation of an unincorporated business was properly allocable to the business under Sec. 163(h)(2)(A). Relying on pre-Sec. 163(h) cases, the court reasoned that the interest expense satisfied the Sec. 162(a) "carrying on" and the Sec. 62(a) "attributable to" requirements and that Congress did not indicate it was overruling prior case law in enacting Sec. 163(h).

In Robinson, the Service issued a deficiency to Edward and Diana...