Personal interest nondeductible.

• Author: Laffie, Lesli S.

In a case of first impression for the Fifth Circuit, it joined the Tax Court and the Fourth, Sixth, Seventh, Eighth and Ninth Circuits, in upholding the validity of Temp. Regs. Sec. 1.163-9T(b)(2)(i)(A) and denying an interest deduction for an unincorporated law practice's tax deficiency. (For background, see Barton, Tax Clinic, "Individual Income Tax Underpayment Interest is Nondeductible," TTA, December 2002, p. 765; Price and Weld, "Is the Deduction of Interest on Tax Deficiencies Finally Over?" TTA, August 2000, p. 552.)

Facts: In Daniel Alfaro, 5th Cir., 11/6/03, the taxpayer operated a law practice as a sole proprietor. The IRS audited his 1982-1988 returns and assessed deficiencies solely relating to that practice. In 1995, the taxpayer paid over $1.5 million in accrued statutory interest on his agreed income tax deficiencies for the years at issue and deducted the underpayment interest on Schedule C of his 1996 return. The IRS denied the deduction under Temp. Regs. Sec. 1.163-9T(b)(2)(i)(A).

Tax Court: The taxpayer argued that the interest was deductible under Code Sec. 163(h)(2)(A) as being properly allocable to a trade or business and that Temp. Regs. Sec. 1.163-9T(b)(2)(i)(A) was invalid. The Tax Court agreed with IRS that the regulation was...