-10-
Petitioners attached a statement to their 1990 tax return
which read:
The taxpayers are holders of notes receivable,
whose principal repayment is in doubt due to
bankruptcy proceedings; therefore, the taxpayers are
allocating payments received in 1990 to repayment of
principal. The amount of the payments is $46,249.
Notice of Deficiency
Respondent disallowed the $46,249 negative income on
petitioners’ 1990 return on the premise that petitioners failed to
establish "that any amount is deductible under the provisions of
the Internal Revenue Code." This disallowance resulted in a
$46,249 increase in petitioners’ 1990 taxable income.
OPINION
Respondent claims that because the trustee in bankruptcy
labeled the payments to petitioners as interest on Forms 1099-INT,
such payments constitute income. Petitioners posit that the money
they received from Pioneer Mortgage in 1990 does not represent
interest income, but rather payments made to conceal a fraud. As
such, petitioners take the position that the payments constitute a
return of their capital.
The issue involved is purely factual. In their post-trial
briefs, petitioners argue:
Beginning on or about May 1, 1989 and continuing
until approximately January 9, 1991, G. Naiman and others
devised a scheme to defraud and obtain money and property
from investors by means of false and fraudulent
pretenses, representations and promises, and the
concealment of material facts. As part of the scheme to
defraud in the year preceding Pioneer Mortgage's
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