- 25 -
borrowed from John Hancock, in order to prevent a default on the
interest obligation. In the Letter Agreement between White Tail
and John Hancock, both borrower and lender agreed that the
$1,587,310.46 advance would increase White Tail's loan and that
it would be used to satisfy the current interest obligation.
Checks were exchanged within a 2-day period to effect the
transaction. The effect was to increase the amount of White
Tail's principal loan obligation to John Hancock by the amount of
interest due. The fact that the loan proceeds were run through
White Tail's bank account does not affect the substance of the
transaction. Wilkerson v. Commissioner, 655 F.2d at 983. It
follows that White Tail, a cash basis partnership, is not
entitled to a deduction for interest paid.
The other transaction in issue also involves a situation
where an interest obligation was satisfied by borrowing funds
from the original lender. On May 7, 1980, following the
establishment of the 1980 credit arrangement, John Hancock
advanced $19,645,000 to White Tail. Of this amount, John Hancock
applied $227,647.22 to unpaid interest owed under the terms of a
previous loan to White Tail. John Hancock did this by crediting
White Tail's prior loan account to show that White Tail's
interest obligation in the amount of $227,647.22 had been
satisfied. John Hancock simultaneously increased the principal
amount due from White Tail under the new 1980 credit arrangement.
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