Should Investment-Related Interest Be Deductible for Tax Purposes - Essay Example

In order to reduce the debt with the interest amount paid upon one's tax return one must be legitimately liable for that debt and as such has to be in a position to itemize one’s deductions for tax on the return. Deductions of interest upon tax are categorized into six:

Home mortgage (publication 936),
Business or trade,
Investment (publication 550),
Passive activity,
Personal and
Student loan interests

For interest to be deductible upon one’s return of tax, it is determined by how money was borrowed and how much money was utilized. Form 1040’s schedule A upon the tax return shows the kinds of interest one can deduct on the return regarding investment interest, points, and home mortgage interest. This is with regards to the Internal Revenue Service. (wwwebtax.com, 2011)

Section of the IRS code that the IRS will use to support its position of disallowing the deduction
Section 506 of the House Bill talks about the revaluation of gifts and the same House Bill extends its special rule for such gifts as provided by Chapter 14 of gifts in entirety. (rpifs.com, 2011) Starting August 1997, subsequent to Taxpayer Relief Act’s implementation, revaluation of gifts was considered as follows with regards to the tax return. After 1997 August, IRS is no longer in a position to revalue gifts and this is following the expiry of the statute of the duration of the limitation. For this provision to apply, though, the gift’s value must be finally determined. For that reason of the valuation, the methods used are (a) the gift’s value is reflected upon the return of the gift, (b) IRS determined if the taxpayer does not challenge, (c) court determined or (d) determined by the agreement reached by the taxpayer and IRS.

There must be adequate disclosure with regards to the description of the property transferred. Also, the fair market value has to be determined, unless the regulations have not made it a requirement to state the market value of the whole entity if the interest value in that entity is reached without utilizing the entity’s net asset value. An explanation of how the fair market value was reached has to be included, the relationship existing between the recipient and the donor, and lastly, the description of the taxpayer’s position he/she is taking contrary to the regulation of the treasury or a ruling of revenue. (Mitchell, 2008 p6-10)


Support that Donald will need to defend his position that the interest is investment-related and should be deductible for tax purposes
Mitchell gives an example, where the recipient of a gift may challenge a decision reached by the IRS. According to the example given by Mitchell, a lady by the name of Smith, Grace gave out a gift six years prior to her demise and which was valued at 1,000,000USD ( Assuming that Smith was supposed to pay the IRS a rate of tax on a gift of 55%). The statute that governs this gift passed this without carrying out an audit of the return of the gift. The IRS went through the return by Smith and decided on the correct value, though. This led to a scenario where the estate was supposed to have a credit for the taxes on the gift that was previously payable of an amount of 825,000USD instead of 550,000USD gift tax that was actually paid upon the filing of the return.

This would result in an estate tax increase since such revaluation pushes that estate to an upper bracket of tax. In a case where the estate was in the top-most tax bracket, such a revaluation would not have any impact, though.

In case the IRS gives a final notice with regards to the redetermination in accordance to the statute governing gifts’ limitations, a taxpayer involved is in a position to challenge the determination by IRS through a filing of a motion targeting the judgment of declaration in the court of tax within a period of ninety days subsequent to the mailing of the notice. This is under IRC & 7477(b). (Mitchell, 2008 p6-10) The court has a jurisdiction to make an issue of a declaratory type of judgment upon the value of that particular gift as Posner puts it in her book. (Posner, p3-6) Read More