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bankruptcy filing on January 9, 1991, G. Naiman and
others created and maintained the illusion that Pioneer
Mortgage was financially stable when in fact it was not.
Pioneer Mortgage maintained this illusion in order to
attract new investor funds. These new funds were applied
to the monthly interest payments due previous Pioneer
Mortgage investors, prior financial obligations of the
various Pioneer Mortgage companies and bank over-drafts
at several financial institutions.
Due to the nature of the fraud perpetrated on
petitioners, there was no agreement between petitioners
and Pioneer Mortgage. Petitioners believed that they
were investing directly in specific promissory notes
which were adequately secured by trust deeds. However,
as the facts in this case clearly indicate, what
petitioners ended up with was instead some sort of
undivided interest as a creditor of Pioneer Mortgage's
successor which is being liquidated via a bankruptcy
proceeding.
The payments received by petitioners during 1990 did
not originate from investments of a character and quality
in which petitioners believed they had invested. Rather,
the evidence clearly demonstrates that the petitioners
were defrauded as to the character and quality of the
investment instruments owned by them.
We agree with petitioners' characterization of the payments
in question. Interest is compensation for the use or forbearance
of money. Deputy v. duPont, 308 U.S. 488, 498 (1940). We conclude
that the payments petitioners received through their investment
with Pioneer Mortgage in 1990 were not for the use and forbearance
of their money, but rather such payments were made to conceal G.
Naiman's fraudulent misappropriation of petitioners' investment.
Accordingly, the payments represented a return of petitioners'
investment and should not be included in income as interest simply
because the payments were reported as interest on Forms 1099-INT.
Cf. Burnet v. Logan, 283 U.S. 404 (1931). The interest label given
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