James v. And Esther R. Cole, and Clifford M. And Elizabeth A. Cole v. Commissioner of Internal Revenue

James and Esther Cole and Clifford and Elizabeth Cole (Coles) appeal a Tax Court decision upholding the disallowance of prepaid interest deductions by the Commissioner of Internal Revenue (Commissioner). The Commissioner required the Coles to deduct interest ratably over the 40-month period for which it was paid. We affirm.

I.

FACTS

In October 1968, James and his son Clifford each received $46,463.80 in a settlement between the Alaska Department of Highways and their construction business partnership in which each had a one-third interest.

On November 22,1968, James and Esther Cole offered to buy an apartment building through a broker. They persuaded Clifford and Elizabeth to provide 40% of the capital. On November 25, 1968, James and the broker entered into an earnest money agreement which provided for prepayment of 40 months’ interest totalling $100,010. On December 23, 1968, the parties closed the sale.

Prior to November 26, 1968, the Commissioner allowed a cash basis taxpayer to deduct up to five years prepaid interest under I.R.C. § 163. James relied on this policy when he entered into the sale. On November 26, however, after the Coles signed the earnest money agreement…