## Facts

- Kenneth A. Cathcart and Joan A. Cathcart were cash-method individual taxpayers.
- On January 15, 1973, they obtained a 29-year home mortgage loan with a face amount of $57,600 at 7% interest.
- The lender structured the transaction as a net-proceeds loan, withholding $2,560.08 from the face amount and disbursing $55,039.92 to the taxpayers.
- Of the withheld amount, $1,086.60 was characterized as “points” and treated as an interest charge.
- The taxpayers claimed a full $1,086.60 interest deduction on their 1973 return.
- The Commissioner disallowed the full deduction and allowed only $34.34 for 1973 by amortizing the points over the 29-year loan term.
- The taxpayers petitioned the United States Tax Court to redetermine the asserted deficiency.

## Issues

1. Whether points (prepaid interest) withheld from the face amount of a net-proceeds home mortgage loan are “paid” in the year of the loan for a full current deduction by cash-method taxpayers.
2. Whether such points must be deducted ratably over the life of the mortgage rather than entirely in the year the loan closes.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determination.
- The court held the points were interest and were not fully “paid” in 1973 when withheld from loan proceeds.
- The court required the $1,086.60 to be amortized over the 29-year mortgage term.
- The court allowed only the prorated 1973 deduction of $34.34.

## Legal Principles

- Interest is deductible only in the year it is actually paid or properly accrued, depending on the taxpayer’s accounting method.
- For cash-method taxpayers, prepaid interest that relates to future periods is generally not currently deductible in full.
- Points treated as interest and financed through a reduction in loan proceeds are, in substance, interest attributable to the loan term and must be deducted ratably over that term.

## Conclusion

Because the points were withheld from the mortgage proceeds rather than paid from the taxpayers’ separate funds, the Tax Court treated the points as prepaid interest attributable to the entire loan period and limited the deduction to a prorated amount over the mortgage term rather than allowing a full deduction in the year of the loan.


Cathcart v. Commissioner, 36 T.C.M. (CCH) 1321 (T.C. 1977)