Cleaver v. Comm'r of Internal Revenue, Docket No. 5663.
| Decision Date | 12 March 1946 |
| Docket Number | Docket No. 5663. |
| Citation | 6 T.C. 452 |
| Parties | JOHN C. CLEAVER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, who was on cash basis of accounting, borrowed, in 1941, $69,000 from a bank and executed his notes in that amount, payable in five years. The notes called for the payment of interest in advance at the rate of 2 1/4 percent. Upon the execution of the notes the bank made available to petitioner $61,000 and applied the balance of the proceeds of the loan to the payment of the interest. Held, petitioner is not entitled to deduct in 1941 the amount of such interest as ‘interest paid.‘ H. C. Hirschboeck, Esq., and Warner H. Henrickson, Esq., for the petitioner
Carroll Walker, Esq., for the respondent.
Respondent determined a deficiency in petitioner's income tax for the year 1941 in the sum of $3,060.34. This deficiency resulted from respondent's determination that interest on certain loans obtained by petitioner in 1941 from a bank which was payable in advance and was deducted by the bank from the principal of the loan made available to petitioner, was not ‘paid or incurred‘ during the taxable year by petitioner, who was on the cash receipts and disbursements basis.
Petitioner is an individual who, in 1941, resided in Milwaukee, Wisconsin, and reported his income for Federal tax purposes on the cash basis for each calendar year.
In 1941 petitioner used his personal account with Cleaver-Brooks Co. of Milwaukee, Wisconsin, to purchase three policies of single premium life insurance. To repay the company petitioner immediately went to the Marine National Exchange Bank of Milwaukee and negotiated five-year loans in the amount of the fifth year cash surrender value of each policy assigning the policies as security and delivering to the bank three negotiable promissory notes in the aggregate principal amount of $68,950, as follows: Dec. 12, 1941, $23,400; Dec. 15, 1941, $23,400; and Dec. 23, 1941, $22,150. The notes were each due five years after date. Each note expressly provided that interest should be paid ‘in advance‘ at the rate of 2 1/4 percent per annum.
The bank computed interest for five years at 2 1/4 percent on the principal amount of each note and deducted the interest so calculated from the principal amount of each note, making available to petitioner the balance as follows:
+--------------------------------------------------+
¦Amount of loan¦Interest deducted¦Net loan proceeds¦
+--------------+-----------------+-----------------¦
¦$23,400 ¦$2,632.50 ¦$20,767.50 ¦
+--------------+-----------------+-----------------¦
¦23,400 ¦2,632,50 ¦20,767.50 ¦
+--------------+-----------------+-----------------¦
¦22,150 ¦2,491.88 ¦19,658.12 ¦
+--------------+-----------------+-----------------¦
¦68,950 ¦7,756.88 ¦61,193.12 ¦
+--------------------------------------------------+
The bank on its books credited the sum of $7,756.88 to a reserve account known as ‘interest or discount collected in advance,‘ and it then each day took therefrom the amount of interest earned and credited it to its earning account.
In 1941 petitioner executed three notes by which he agreed to pay to a bank five years after the date of the notes an aggregate sum of approximately $69,000 with interest payable in advance at the rate of 2 1/4 percent per annum from date to maturity. The interest so calculated amounted to approximately $8,000. The bank, at the time of the execution of the notes, gave to petitioner the approximate sum of $61,000 which represented the principal of the notes less the amount of interest for five years. Petitioner was on the cash basis of accounting. The narrow issue before us is whether petitioner is entitled to deduct from his gross income in 1941 the amount of $8,000 as ‘interest paid or accrued within the taxable year on indebtedness * * * ‘ pursuant to section 23(b) of the Internal Revenue Code.
The respondent makes no contention that the discount figure of $8,000 does not...
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