Mark Hancock is a self-employed attorney who operates his law practice as an unincorporated sole proprietorship. In 2012, the IRS disallowed several business deductions he took in 2009 and 2010. In addition to paying the deficiency and assessed penalties, he also pays $18,000 in interest on the tax owed. Can he deduct that interest in the current year
In Kikalos v Comm., 84 AFTR 2d 99-5933 the petitioners Nick and Helen Kikalos were determined to have deficiencies and penalties in the tax years from 1990 ??“ 1992. They petitioned the court to ask if they could deduct an interest payment of $393,024 made in connection with their liability for deficiencies in the tax years of 1986 and 1987. The courts disallowed it alleging that it was the personal interest under section 1.163-9T for Temporary Income Tax Regulations. However Section 163 exempts the category of personal interest ???interest paid or accrued on indebtedness propery allocable to a trade or business.??? In their rebuttal the case of Redlark v Commissioner gave another view of the case such that there was no dispute that the Kikalos??™ paid the interest at issue on income tax deficiencies that resulted from their operation of Nick??™s Liquors, which is their trade. So it was ruled in conclusion that the interest is deductible because it was paid upon an indebtedness that was properly allocable to their trade or business.
In the case of Mr. Hancock, he would be allows to deduct the interest in the current year on the taxes that were owed. The money is a direct reflection of his self-employed attorney law practice.