- 18 -
980 (9th Cir. 1981); Battelstein v. IRS, 631 F.2d 1182 (5th Cir.
1980)(en banc).16 In Battelstein, the lender agreed to make
advances to cover the taxpayers' quarterly interest payments on a
$3 million loan. The taxpayers never paid interest except by way
of these advances. The lender notified the taxpayers each
quarter of the amount of interest that was due; the taxpayers
would then send a check for this amount, and the lender would
send the taxpayers a check for an identical amount.
The Court of Appeals for the Fifth Circuit concluded that
the check exchanges between the lender and borrower were plainly
for no purpose other than to finance the taxpayers' current
interest obligations and, therefore, denied the interest
deduction. In rejecting the taxpayers' reliance on the fact that
actual checks were exchanged, the Court of Appeals stated:
16In addition, judges of two other Courts of Appeals,
although not faced with the issue, have, in dicta, criticized our
application of the rule. See Burck v. Commissioner, 533 F.2d 768
(2d Cir. 1976); Goodstein v. Commissioner, 267 F.2d 127 (1st Cir.
1959), affg. 30 T.C. 1178 (1958). In Burck v. Commissioner,
supra, the Court of Appeals for the Second Circuit affirmed our
decision, but it did not consider the issue presented here. In a
portion of the opinion where he was writing "for himself only",
Judge Oakes noted that he disagreed with our decision permitting
an interest deduction. Id. at 770 n.3. Judge Oakes viewed the
transaction at issue "as having the effect of creating a
'discounted loan,'" and he concluded "that there was no payment
of interest by taxpayer within the meaning of 26 U.S.C. � 163(a)
until actual repayment of the loan." Id. Judge Oakes further
noted his agreement with the dissenting opinion in Burgess v.
Commissioner, 8 T.C. 47 (1947). Id.; see also Goodstein v.
Commissioner, supra at 131 (noting in dicta that it considers the
reasoning of the dissent in Burgess v. Commissioner, supra, to be
the "more persuasive").
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