Max M. and Joan E. Greenberg - Page 11

                                        -11-                                          
               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         




Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  Next

Last modified: May 25, 2011