- 19 - in connection with the financing arrangement, and the Guaderramas must include interest income in connection with the financing arrangement. III. Allocation of Payments Between Principal and Interest As an alternative argument, the Guaderramas contend that the obligation owed by Benavidez was speculative and that they are entitled to first recover their costs of the financing arrangement. The Guaderramas contend that since Benavidez had insufficient assets to pay for the property, since his sole source of funds was dependent on operating the new restaurant successfully, since his liquor operation was shut down for a period of time, and since his option to buy was nonassignable, repayment by Benavidez was risky, and therefore they are entitled to first recover their costs. We disagree. The general rule is that “periodic payments are applied first to interest, with any remaining amount being applied to principal, absent any agreement of the parties to the contrary”. Estate of O’Leary v. Commissioner, T.C. Memo. 1986-212, affd. 837 F.2d 1088 (5th Cir. 1988). If, however, the obligation is speculative, periodic payments may be applied to the principal until costs are recovered. See Underhill v. Commissioner, 45 T.C. 489, 492 (1966). In Underhill we held that, in determining whether a particular obligation is “speculative”, the ultimate test is whether, at the debt’s inception, the creditor cannot bePage: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Next
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