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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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