- 24 -
relevant to this issue. Once it is determined that the borrowed
funds were the same funds used to satisfy the interest
obligation, the purpose of the loan plays a decisive role.
In light of the foregoing analysis, we hold that a cash
basis borrower is not entitled to an interest deduction where the
funds used to satisfy the interest obligation were borrowed for
that purpose from the same lender to whom the interest was owed.
This test is consistent with our traditional approach of
characterizing transactions on a substance-over-form basis by
looking at the economic realities of the transaction. We agree
with the Courts of Appeals in Wilkerson and Battelstein that
there is no substantive difference between a situation where a
borrower satisfies a current interest obligation by simply
assuming a greater debt to the same lender and one where the
borrower and lender exchange checks pursuant to a plan whose net
result is identical to that in the first situation. In both
situations, the borrower has simply increased his debt to the
lender by the amount of interest. The effect of this is to
postpone, rather than pay, the interest.
In the instant case, it is clear that the purpose of the
$1,587,310.46 advance on December 30, 1980, from John Hancock to
White Tail was to provide White Tail with funds to satisfy its
interest obligation to John Hancock. White Tail's general
partner had requested modification of the original 1980 credit
arrangement so that the entire amount of interest could be
Page: Previous 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 NextLast modified: May 25, 2011