Discussion:Interest tracing question

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Advanced Tax Questions --> Interest tracing question
Discussion Forum Index --> Tax Questions --> Interest tracing question

DukeStudent (talk|edits) said:

24 June 2008

There is a partnership. Distributions to the members of the partnership are retained by the partnership for one year as working capital.

Thus, in the meantime, a member of the partnership wants to go out and gets a loan for the amount of what the distribution would have been. Is interest from the loan deductible?

My theory is: The interest should be deductible because if it is not, all the member has to do is receieve his distribution from the partnerships without a delay. Take out a loan for that amount and then put the money from the loan right back in the partnership as working capital. In that case, the interest would be deductible. So, to avoid all that hassle, this interest should be deductible too.

I just can't find any case law or regs. to prove my theory. Anyone faced this before?

JAD (talk|edits) said:

24 June 2008

"Thus, in the meantime, a member of the partnership wants to go out and gets a loan for the amount of what the distribution would have been. Is interest from the loan deductible? "

The deductibility of the interest isn't determined by the underlying security (except for home mortgage interest), it is determined by tracing of the use of funds. You are under Sec 163. The theoretical transfer of funds is not relevant.

DukeStudent (talk|edits) said:

24 June 2008

Sorry I am new to tax law and forgive my ignorance.

So, do you mean for purposes of 163, we have to look at what the funds are being spent on and that is the only thing that matters?

That was one of the first obstacles that I ran into. I just couldn't find any case law or something specific in Section 163 I could cite.

JAD (talk\|edits) said:	24 June 2008
search interest tracing in your research service. also I believe it is discussed extensively in the regs, although it's been a while since i've looked.

Death&Taxes (talk|edits) said:

24 June 2008

There are times under tax law where form and substance do not have to go hand-in-hand but this is not one of them.

I have a book from what was then a Big 8 firm from when TRA 86 was first passed, which explained how to make a car loan deductible. You had to buy the car for cash, take the title to the bank, borrow on the title and buy stock or a CD, which made the investment interest. Turn the situation around and use existing stock as collateral to buy the car and it became personal interest.

DukeStudent (talk|edits) said:

25 June 2008

Thanks everyone.

I found AMJUR FEDTAXN 18709 which states that:

"Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures."

I think that answers my questions.

CrowJD (talk|edits) said:

25 June 2008

If your turning in your work, make sure to cite some primary authority cuz a lot of the professors will sniff at Am Jur., even though it's in the library.

However, I am proud to report that "TaxAlmanac" is now considered authoritative by the Courts of Vermont, and in the Haight Ashbury District of San Fransisco, and this appears to be moving southward and eastward.

Oh, and I had forgotten all about his. I walked in on a Tax Court Judge around 3 weeks ago, and though he tried to cover his screen in vain, guess what? Taxalmanac. With the ads and everything. Right there in the Federal Courthouse. The guy was in a bad mood too as I think Kevin had just jumped on him for not posting his profile. He meekly knuckled under, as he knew what was good for him.