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check on this account in the amount of $4,219.33 to cover
$4,136.44 of interest due on the original loan plus $82.89 of
prepaid interest on the $4,000 loan. At the time the taxpayer's
check was drawn, the taxpayer had $3,180.79 in his account in
addition to the $4,000 borrowed on December 20, 1941.
In a Court-reviewed opinion, we allowed the deduction. We
rejected the Commissioner's argument that the taxpayer had simply
substituted a note in place of the interest payable. We found
that the taxpayer did not apply for the loan for the sole purpose
of obtaining funds to pay interest, and the lender did not grant
the loan for that exclusive purpose. We also found that the
taxpayer had several bills that were due, needed sufficient funds
to pay them as well as the interest, and commingled the loan
proceeds with other funds in his account, causing them to lose
their identity. As a result, we found that the loan proceeds
could not be traced to the payment of interest. Id. at 50.
Six judges dissented from the majority's holding. They
believed that the facts demonstrated that the taxpayer borrowed
the $4,000 for the purpose of paying interest. They believed
that the substance of what occurred was no different than where a
taxpayer simply executes a note to the lender in satisfaction of
the current interest obligation.
In Burgess v. Commissioner, supra, the purpose of the second
loan was obviously an important factor. However, our subsequent
opinions relying on Burgess began to focus mostly on whether the
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