Lauro G. and Gayle W. Guaderrama - Page 19




                                         - 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 be               






Page:  Previous  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  Next

Last modified: May 25, 2011