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The principal amount of the loans, for which the 12 future
lottery payments served as collateral, was $186,000, $100,000 of
which was used to construct or improve petitioners’ personal
residence. There is no evidence in the record as to petitioners’
use of the other $86,000. Petitioners’ residence did not serve
as additional collateral or security for the loans, and that
property was not mortgaged in connection with the loans. The
$250,000 loan discharge payment consisted of $186,000 in
repayment of the loans and $64,000 of interest or of a
combination of interest plus penalties for early repayment.3
Petitioners seek to deduct the $64,000 payment, which, if
allowable, would partially offset the inclusion of the $400,000
paid by Woodbridge as consideration for the 12 future lottery
payments in gross income.
2(...continued)
asset, its transfer would give rise to long-term capital gain.
See sec. 1222(3).
3 During the hearing, Peter acknowledged that some portion
of the $64,000 additional payment constituted a penalty for
prepayment of the loans. In his brief, respondent characterizes
the entire $64,000 as accrued interest. The distinction is of no
consequence because loan prepayment penalties are generally
treated as interest for Federal income tax purposes. See 12701
Shaker Blvd. Co. v. Commissioner, 36 T.C. 255, 257-259 (1961),
affd. 312 F.2d 749 (6th Cir. 1963) (loan prepayment penalty
deductible as interest in the year of payment); see also Lewis v.
Commissioner, 65 T.C. 625, 630 (1975); Gen. Am. Life Ins. Co. v.
Commissioner, 25 T.C. 1265, 1268 (1956); Rev. Rul. 57-198, 1957-1
C.B. 94. Therefore, we shall treat the issue as solely involving
the deductibility of a $64,000 interest payment.
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