Miller case is affirmed.

On Schedule F, "Farm Income and Expenses," accompanying their 1988 form 1040, the Millers deducted $367,000 in interest paid on income tax deficiencies for prior years.

The IRS disallowed the deduction, claiming it was "personal interest" under IRC section 163(h), which prohibits noncorporate taxpayers from deducting such interest. The IRS relied on temporary regulations section 1.163-9T, which says personal interest includes interest paid on underpayments of income taxes, regardless of the type of income involved.

In a pretrial motion, the district court ruled the regulation was too broad and thus invalid and that the interest would be deductible under section 162 if the Millers could prove the expense was "ordinary and necessary." In a second pretrial motion, the IRS claimed the interest was not deductible. The district court ruled for the IRS.

To qualify for a business deduction of tax deficiency interest, the district court said the taxpayer must show the underlying deficiency is ordinarily and necessarily an expected occurrence in the taxpayer's line of business. That is, the error that led to the tax deficiency must be typical of and reasonably anticipated in the taxpayer's field.

The district court said this could not have been true of the Millers' deficiency. They had engaged in a tax-deferral scheme, which could not be said to be an ordinary and necessary element of conducting a farming business. The Millers appealed the judgment to the Eighth Circuit Court of Appeals.

Result: For the IRS. The district court decision in the IRS's favor was upheld. Further, the appellate court ruled that temporary regulations section 1.163-9T was valid, rejecting the district court's ruling.

* David Miller (8th Cir., 1995).