After several years of a difficult marriage, Donald and Marla agreed to a divorce. As part of the property settlement, Marla transferred to Donald corporate stock, a commercial building, and a personal residence. Donald transferred other property to Marla, but the fair market value of the property was $600,000 less than the fair market value of the property Marla had transferred to him. To make the settlement equal, Donald agreed to pay Marla $600,000, payable over 10 years at 8% interest. For several years, Donald deducted the interest on his Federal income tax return as investment interest. Upon audit, the IRS disallowed the interest deduction, classifying it a non-deductible personal interest. Donald believes and has asked you to find support for the deduction.

1. Discuss the different types of interests and the IRS rule related to the ability to deduct each type for tax purposes.

2. Discuss the section of the IRS code that the IRS will use to support its position of disallowing the deduction.

3. Discuss the support that Donald will need to defend his position that the interest is investment related and should be deductible for tax purposes.

4. As a tax expert, recommend a strategy for Donald to use in resolving this difference with the IRS