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Reg. §1.163-9T: provides for allocation to be accomplished by tracing interest expensesto specific debts, and by tracing the debts to specific expenditures based on use of thedebt proceeds. An interest expense allocated to an “investment expenditure” would thusconstitute investment interest subject to the § 163( d) limitation rule.Revenue Ruling 2010-25: An unmarried Taxpayer purchased a principal residence for its fairmarket value. Taxpayer paid a portion of the price and financed the remainder through a loansecured by the residence. The IRS ruled that debt incurred by a taxpayer to acquire, construct,or substantially improve a qualified residence could constitute home equity debt to the extentit exceeded $1 million (subject to the dollar and fair market value limitations imposed onhome equity indebtedness by § 163(h)(3)(C)). Thus, Taxpayer could deduct, as interest onacquisition debt under § 163(h)(3)(B), interest paid on the debt on up to $1 million of theindebtedness used to acquire the residence. Taxpayer could also deduct, as interest on homeequity indebtedness under § 163(h)(3)(C), interest on $ 100,000 of the remaining debt. Thatexcess was secured by the qualified residence, was not acquisition debt under § 163(h)(3)(B),and did not exceed the fair market value of the residence reduced by the acquisition debtsecured by the residence. Thus, $100,000 of the excess was treated as home equity debt under§ 163(h)(3)(C).Copeland v Commissioner: Issue was whether petitioners were entitled to mortgageinterest deduction under § 163(a) and (h)(2)(d) for interest that was capitalized into theprincipal of their mortgage note but not actually paid during 2010. Through a loanmodification agreement, $30,273 in past-due interest on petitioners’ mortgage loan was addedto the principal. No money changed hands; petitioners simply promised to pay the past-dueinterest, along with the rest of the principal, at a later date. Because petitioners did not pay
this interest during 2010 in cash or its equivalent, they cannot claim a deduction for it for2010. They will be entitled to a deduction if and when they actually discharge this portion oftheir loan obligation in a future year. [P]etitioners ask us to recharacterize their loanmodification transaction. Instead of having modified the terms of their existing loan,petitioners say they should be treated as if they had obtained a new loan from a differentlender and used the proceeds of that loan to pay both the principal of the Bank of Americaloan and the past-due interest. In any event, it is well established that taxpayers must acceptthe tax consequences of the transaction in which they actually engaged, even if alternativearrangements might have provided more desirable tax results.Sophy v Commissioner: R determined that Ps, co-owners of two residences, were togetherlimited in deducting interest on $1 million of acquisition indebtedness and $100,000 of homeequity indebtedness, under § 163(h)(3)(B)(ii) and (C)(ii). Ps contend that where co-owners