Gary E. and Rebecca L. Hurley - Page 5

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               On April 1, 1999, petitioners refinanced the mortgage on               
          their primary residence and paid points of $4,400.3  They                   
          deducted the entire $4,400 on their 1999 Federal income tax                 
          return.  Petitioners used the money saved from their reduced                
          monthly payments for various improvements on their home.                    
          Petitioners’ new mortgage payment was $300 a month less than                
          their prior mortgage payments.  Petitioners’ home improvements              
          consisted of replacing their roof, kitchen and bathroom floors,             
          and a door.  Respondent disallowed the $4,400 deducted for points           
          and allowed an amortization of that amount based on a 30-year               
          mortgage.  At trial, respondent conceded petitioners were                   
          entitled to a 15-year amortization.                                         
               With respect to the first issue, petitioners contend that              
          they excluded 30 percent of Mr. Hurley’s wages from gross income            
          on their 1998 and 1999 Federal income tax returns because they              
          were informed by their tax preparer and some of Mr. Hurley’s                
          colleagues that this was an accepted practice among partially               
          disabled law enforcement officers.  Petitioners cite section                
          104(a)(1) in support of this exclusion which provides, in part:             
          “Gross income does not include amounts received under workmen’s             
          compensation acts as compensation for personal injuries or                  

               3The term “points” refers to a fee, generally equal to a               
          percentage of the total loan, which is paid to the lending                  
          institution to lower the interest rate.  They are classified, for           
          purposes of sec. 163, as “prepaid interest”.                                

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