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1. Use of Notes To Satisfy Interest Liability
Although limited elsewhere in the statute, in general,
section 163(a) permits a taxpayer to deduct "all interest paid or
accrued within the taxable year on indebtedness." For cash basis
taxpayers, like petitioners, the interest must be paid in cash or
its equivalent. Don E. Williams Co. v. Commissioner, 429 U.S.
569, 578-579 (1977); Eckert v. Burnet, 283 U.S. 140, 141 (1931);
Menz v. Commissioner, 80 T.C. 1174, 1185 (1983). A promissory
note is generally not considered the equivalent of cash, but
merely a promise to pay. Helvering v. Price, 309 U.S. 409, 413
(1940); Nat Harrison Associates, Inc. v. Commissioner, 42 T.C.
601, 624 (1964). If the interest obligation is satisfied through
the issuance of notes to the same lender to whom the interest
obligation is owed, as in this case, there has been no payment of
interest; rather, payment has merely been postponed. Davison v.
Commissioner, 107 T.C. 35 (1996). Accordingly, petitioners,
being cash basis taxpayers, are not entitled to an interest
deduction for the interest obligations satisfied by the issuance
of notes to the bank because the interest has not been paid
within the meaning of section 163(a).3
2. Interest Paid to Bank by Petitioner's Father
In 1991, petitioner's father made interest payments of
$409.57 and $10,521.57 to the bank on petitioner's behalf as
3See infra note 4.
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