[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.163-9T]

[Page 858-859]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.163-9T  Personal interest (temporary).

    (a) In general. No deduction under any provision of Chapter 1 of the 
Internal Revenue Code shall be allowed for personal interest paid or 
accrued during the taxable year by a taxpayer other than a corporation.
    (b) Personal interest--(1) Definition. For purposes of this section, 
personal interest is any interest expense other than--
    (i) Interest paid or accrued on indebtedness properly allocable 
(within the meaning of Sec. 1.163-8T) to the conduct of trade or 
business (other than the trade or business of performing services as an 
employee),
    (ii) Any investment interest (within the meaning of section 
163(d)(3)),
    (iii) Any interest that is taken into account under section 469 in 
computing income or loss from a passive activity of the taxpayer,
    (iv) Any qualified residence interest (within the meaning of section 
163(h)(3) and Sec. 1.163-10T), and
    (v) Any interest payable under section 6601 with respect to the 
unpaid portion of the tax imposed by section 2001 for the period during 
which an extension of time for payment of such tax

[[Page 859]]

is in effect under section 6163, 6166, or 6166A (as in effect before its 
repeal by the Economic Recovery Tax Act of 1981).
    (2) Interest relating to taxes--(i) In general. Except as provided 
in paragraph (b)(2)(iii) of this section, personal interest includes 
interest--
    (A) Paid on underpayments of individual Federal, State or local 
income taxes and on indebtedness used to pay such taxes (within the 
meaning of Sec. 1.163-8T), regardless of the source of the income 
generating the tax liability;
    (B) Paid under section 453(e)(4)(B) (interest on deferred tax 
resulting from certain installment sales) and section 1291(c) (interest 
on deferred tax attributable to passive foreign investment companies); 
or
    (C) Paid by a trust, S corporation, or other pass-through entity on 
underpayments of State or local income taxes and on indebtedness used to 
pay such taxes.
    (ii) Example. A, an individual, owns stock of an S corporation. On 
its return for 1987, the corporation underreports its taxable income. 
Consequently, A underreports A's share of that income on A's tax return. 
In 1989, A pays the resulting deficiency plus interest to the Internal 
Revenue Service. The interest paid by A in 1989 on the tax deficiency is 
personal interest, notwithstanding the fact that the additional tax 
liability may have arisen out of income from a trade or business. The 
result would be the same if A's business had been operated as a sole 
proprietorship.
    (iii) Certain other taxes. Personal interest does not include 
interest--
    (A) Paid with respect to sales, excise and similar taxes that are 
incurred in connection with a trade or business or an investment 
activity;
    (B) Paid by an S corporation with respect to an underpayment of 
income tax from a year in which the S corporation was a C corporation or 
with respect to an underpayment of the taxes imposed by sections 1374 or 
1375, or similar provision of State law; or
    (C) Paid by a transferee under section 6901 (tax liability resulting 
from transferred assets), or a similar provision of State law, with 
respect to a C corporation's underpayment of income tax.
    (3) Cross references. See Sec. 1.163-8T for rules for determining 
the allocation of interest expense to various activities. See Sec. 
1.163-10T for rules concerning qualified residence interest.
    (c) Effective date--(1) In general. The provisions of this section 
are effective for taxable years beginning after December 31, 1986. In 
the case of any taxable year beginning in calendar years 1987 through 
1990, the amount of personal interest that is nondeductible under this 
section is limited to the applicable percentage of such amount.
    (2) Applicable percentages. The applicable percentage for taxable 
years beginning in 1987 through 1990 are as follows:

1987: 35 percent
1988: 60 percent
1989: 80 percent
1990: 90 percent

[T.D. 8168, 52 FR 48409, Dec. 22, 1987; 68 FR 13226, Mar. 19, 2003]