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amortizable over 15 years rather than 30 years. The issue,
however, is whether petitioners should have been allowed to
deduct the entire $4,400 in 1999.
Section 163(a) allows a deduction in full for interest paid
or accrued within the taxable year on indebtedness. For Federal
income tax purposes, interest generally is defined as
“compensation for the use or forbearance of money”. Deputy v.
duPont, 308 U.S. 488, 498 (1940). With regard to prepaid
interest, however, section 461(g) provides in part:
SEC. 461(g). Prepaid Interest.
(1) In general. If the taxable income of the
taxpayer is computed under the cash receipts and
disbursements method of accounting, interest paid by
the taxpayer which * * * is properly allocable to any
period–-
(A) with respect to which the interest
represents a charge for the use or forbearance of
money, and
(B) which is after the close of the taxable
year in which paid,
shall be charged to capital account and shall be
treated as paid in the period to which so allocable.
Therefore, a cash basis taxpayer must amortize prepaid interest
over the life of his loan just as if he were on the accrual
method of accounting. There is an exception, however, that
allows a taxpayer to deduct the full amount of points paid “in
respect of any indebtedness incurred in connection with the
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