Cathcart v. Commissioner

Brief Fact Summary. Petitioners obtained a home loan a portion of which was used to pay points. Petitioners attempted to deduct this full amount in the first tax year of the loan.

Synopsis of Rule of Law. Interest paid or accrued on debt may be deducted within the tax year.

Facts. Petitioners received a mortgage loan on January 15, 1973 for $57,600 for 29 years with 7% interest. The bank withheld $2,560.08 which was used to pay services and points of $1,086.60. The points represented an interest charge. Petitioners claimed the full amount paid for points was deductible. Respondent claimed the points should have been deducted over the life of the mortgage for 29 years, which would be a deduction of $34.34 for 1973.

Issue. Are Petitioners allowed to deduct the full amount paid for points in the same year?

Held. The Tax Court ruled that Petitioners may not take the full deduction because the points were withheld from the loan proceeds.

Discussion. The Tax Court found that since the points were withheld from the mortgage proceeds and not paid for with their own funds disallowed the full deduction in one year. Thus, Petitioners will be required to prorate the deduction over the life of the loan.