Gary E. and Rebecca L. Hurley - Page 7

                                        - 6 -                                         
          amortizable over 15 years rather than 30 years.  The issue,                 
          however, is whether petitioners should have been allowed to                 
          deduct the entire $4,400 in 1999.                                           
               Section 163(a) allows a deduction in full for interest paid            
          or accrued within the taxable year on indebtedness.  For Federal            
          income tax purposes, interest generally is defined as                       
          “compensation for the use or forbearance of money”.  Deputy v.              
          duPont, 308 U.S. 488, 498 (1940).  With regard to prepaid                   
          interest, however, section 461(g) provides in part:                         

               SEC. 461(g).  Prepaid Interest.                                        
                    (1) In general.  If the taxable income of the                     
               taxpayer is computed under the cash receipts and                       
               disbursements method of accounting, interest paid by                   
               the taxpayer which * * * is properly allocable to any                  
                         (A) with respect to which the interest                       
                    represents a charge for the use or forbearance of                 
                    money, and                                                        
                         (B) which is after the close of the taxable                  
                    year in which paid,                                               
               shall be charged to capital account and shall be                       
               treated as paid in the period to which so allocable.                   

          Therefore, a cash basis taxpayer must amortize prepaid interest             
          over the life of his loan just as if he were on the accrual                 
          method of accounting.  There is an exception, however, that                 
          allows a taxpayer to deduct the full amount of points paid “in              
          respect of any indebtedness incurred in connection with the                 

Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  Next

Last modified: May 25, 2011