United States Tax Court
107 T.C. 35 (1996)
Charles Davison (plaintiff) was the head partner of White Tail, an accounting firm. In December 1980, White Tail notified John Hancock Life Insurance Company (Hancock) that White Tail could not pay a January 1981 installment that was due on the repayment of a loan from Hancock. The installment included charges for the repayment of the loan’s principal and for interest on the loan. In response, Hancock agreed to loan White Tail the exact amount that White Tail needed to pay the January interest charge, and to add this second loan’s amount to the first loan’s principal. White Tail agreed to use the proceeds from the second loan to pay the January installment. On December 30, 1980, Hancock wired the second loan’s proceeds to White Tail, and White Tail deposited the proceeds into its checking account. On December 31, 1980, White Tail wired the full amount of the January 1981 installment from its account to Hancock. On White Tail’s 1980 federal tax return, Davison claimed the interest portion of the December 31 payment as an interest deduction. The commissioner of internal revenue (commissioner) (defendant) ruled that the December 31 payment was not tax deductible, and disallowed the deduction. Davison filed a petition challenging the commissioner’s ruling.
Rule of Law
Holding and Reasoning (Ruwe, J.)
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