- 11 -
U.S. 409, 413 (1940); Nat Harrison Associates, Inc. v.
Commissioner, 42 T.C. 601, 624 (1964). Where a lender withholds
a borrower's interest payment from the loan proceeds, the
borrower is considered to have paid interest with a note rather
than with cash or its equivalent and, therefore, is not entitled
to a deduction until the loan is repaid. Menz v. Commissioner,
supra at 1186; Cleaver v. Commissioner, 6 T.C. 452, 454, affd.
158 F.2d 342 (7th Cir. 1946). On the other hand, where a
taxpayer discharges interest payable to one lender with funds
obtained from a different lender, the interest on the first loan
is considered paid when the funds are transferred to the first
lender. Menz v. Commissioner, supra; Crown v. Commissioner, 77
T.C. 582, 593-595 (1981). With these general principles in mind,
we proceed to look at the specific transactions in issue.
Because the December 30-31, 1980, transaction presents the more
difficult issue, we address it first.
Under the terms of the 1980 credit arrangement, an interest
payment and a principal installment were due from White Tail on
January 1, 1981. In the 1980 credit arrangement, John Hancock
had agreed to lend White Tail up to 50 percent of the interest
that was due, so long as White Tail was able to provide the
remaining 50 percent. In December 1980, Mr. Esposito, one of
White Tail's general partners, approached John Hancock and
requested that it agree to modify the 1980 credit arrangement
with respect to the required interest payment, in order to
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011