Interest on overdue tax deductible for business deficiency

Article Abstract:

The Tax Court decided in the 'Redlark' case that interest on an income tax deficiency that is attributable to the business of an individual was deductible. It invalidated a contrary Regulation that treats all interest on the tax underpayment of an individual as personal interest. The case involved a sole proprietor who changed accounting methods, resulting in the underreporting of income and prompting the IRS to assert deficiency. The taxpayer settled the deficiency in 1989 and 1990 but the IRS did not allow deduction for interest as personal interest under Sec. 163(h), save for a minor amount allowed under the phase-in rules. Temp. Reg. 1.163-9T(b)(2)(i)(A) holds that interest paid on the tax deficiency of an individual is always personal interest without regarding the source of income that generated the tax liability. The Tax Court found that the Regulation was excessively broad.

Interest deductions

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Profit motive breeds deductible losses

Article Abstract:

The Tax Court ruled in 'Morley' that a dentist and his wife can make deductions on the losses they incurred from horse breeding since this activity was profit-oriented and not for pleasure. The court found that the taxpayers engaged in horse breeding for business purposes, as evidenced by the fact that they kept records and formulated a business plan while the dentist consulted with experts and educated himself on the business. As provided by Internal Revenue Code Sec 183, deductions cannot be made on activities that are not entered into for profit to the gross income from the same activity. Therefore, net losses incurred from these activities cannot be deducted against income from other sources. The Tax Court ruled that the taxpayers can claim expenses exceeding income from horse breeding without being restricted by Sec 183.

Horses and other equines, Horses, Horse and Other Equine Production, Loss deductions, Horse breeders

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LL.M. not deductible when new job is different career

Article Abstract:

The Tax Court found in the 'Hudgens III' case that a taxpayer could not deduct the expenses of his master of law education after termination of his employment at a major accounting firm since his new employment was not connected to his previous duties. After graduating from a law school with a doctor of jurisprudence degree, the taxpayer worked on the tax department of a large accounting firm. Subsequently, he quit his job and completed a master of law (LL.M.) in taxation program. He then worked for a state-chartered trust company. He deducted the cost of the LL.M. degree as an employee business expense, which was not allowed because the expense was not related to business. According to Reg. 1.162-5, deduction of educational expenses are allowable only if the education is job-related.

Law students, College costs, Higher education costs

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