IRS now agrees that carryover of disallowed investment interest not limited by taxable income.

Sec. 163(d)(1) limits the amount of investment interest deductible by a noncorporate taxpayer to the amount of the taxpayer's net investment income for that tax year. Sec. 163(d)(2) provides that the excess investment interest may be carried over to the succeeding tax year.

Rev. Rul. 86-70 held that a taxpayer may not carry over disallowed investment interest to the extent that it exceeded the taxpayer's taxable income in the year the interest was paid or accrued. This ruling interpreted Sec. 163(d) before its modification by the Tax Reform Act of 1986 (TRA).

Four Federal appellate courts and the Tax Court have rejected Rev. Rul. 86-70. (For instance, see Tax Trends, "Carryover of Disallowed Investment Interest Not Limited by Taxable Income," TTA, Mar. 1994, at 185.) Although those cases involved former Sec. 163(d), the IRS believes that the same result is appropriate under current Sec. 163(d).

In accordance with these judicial decisions, Rev. Rul. 95-16 revoked Rev. Rul. 86-70 and now allows taxpayers to carry over disallowed investment interest even though it exceeds taxable income. This new revenue ruling applies to interest incurred both before and after Sec. 163(d) was modified by the TRA. From Stuart R. Josephs, CPA, San Diego, Cal.