- 38 -
fee is deductible in 1999. Petitioners calculate that to equal
$5,862.10
Respondent apparently concedes that the “loan origination
fee” represents prepaid interest, and that such interest
constitutes “home equity indebtedness with respect to * * * [a]
qualified residence” under section 163(h)(3)(A)(ii).11 However,
respondent argues that the proper method of allocating prepaid
interest requires a taxpayer to look to the stated term of the
loan--in this case, 30 years--to determine the amount attributable
to a particular tax year. Respondent argues that the effect of a
subsequent refinancing is that a taxpayer may deduct in the year
of the refinancing any prepaid interest not previously deducted.
Respondent accordingly conceded that petitioners are entitled to a
deduction of $250 for prepaid interest in 1999.12
Respondent’s approach to the deductibility of prepaid
interest is correct. Section 461(g)(1) provides:
10 $7,500 divided by the 467-day existence of the loan,
multiplied by the 365 days of 1999.
11 In some instances, “loan origination fees” may include
charges for services, and not prepaid interest. See, e.g.,
Goodwin v. Commissioner, 75 T.C. 424, 440-442 (1980), affd.
without published opinion 691 F.2d 490 (3d Cir. 1982); Lange v.
Commissioner, T.C. Memo. 2005-176; Rev. Proc. 87-15, 1987-1 C.B.
624.
12 For interest of $7,500 on a loan with a stated term of
360 months, the interest allocable to 12 months is $250.
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