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As stated above, we hold that interest is not deductible
under the cash method of accounting where the funds used to
satisfy the interest obligation were borrowed for that purpose
from the same lender to whom the interest obligation was owed.
That is clearly what happened on May 7, 1980, when, pursuant to
the terms of the 1980 credit arrangement, John Hancock credited
White Tail's prior loan account for interest due and
simultaneously increased the principal due on White Tail's new
loan for the same amount.
Petitioners argue that the $227,647.22 should be considered
as interest "paid", because the 1980 credit arrangement and the
1979 loan from John Hancock were "bona fide separate loans, with
different interest rates and terms, and different security
arrangements." Under our holding, the fact that funds used to
satisfy an interest obligation to a lender are borrowed from the
same lender in a second loan is irrelevant. Indeed, this Court
has previously rejected the argument presented by petitioners.
In Cleaver v. Commissioner, 6 T.C. at 454, we stated:
where a taxpayer on the cash basis who is indebted on a
note for past due interest borrows from his creditor an
amount in excess of this past due interest on a second
note, and the creditor gives to the taxpayer the
principal amount of the second note less the amount of
past due interest on the first note and marks this
interest "paid," we have held that no cash payment has
been made which would warrant a deduction.
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