From Our Readers
| Jurisdiction | United States,Federal |
| Citation | Vol. 8 No. 9 Pg. 1708 |
| Pages | 1708 |
| Publication year | 1979 |
1979, September, Pg. 1708. From Our Readers
In connection with the Tax Tips published in the July 1979 issue of The Colorado Lawyer [p. 1231], I think some consideration should have been given to the effects of section 461(g)(2) of the Internal Revenue Code on the treatment of "points" paid to lenders in connection with the purchase of a principal residence. The Tax Tips article implies that deductibility of points is determined by the source of funds used to pay the points. I think that the Tax Reform Act of 1976 changed this when section 461(g) was enacted to provide for the current deductibility of "points" in connection with the purchase of a principal residence in almost all cases.
Very truly yours,
William L. Neff
Crowell & Moring
Dear Mr. Neff:Washington, D.C.
I am in receipt of your letter to the Editor of The Colorado Lawyer, dated July 20, 1979. I agree with you that Section 461(g)(2) of the Internal Revenue Code should have been discussed in my Tax Tips article. However, your conclusion that this section provides for the current deductibility of points in "almost all cases" is refuted in Cathcart v. Commissioner, 36 TCM 1321 (1977). The Tax Court initially discusses cases which were decided prior to the Tax Reform Act of 1976, which held that prepayments of interest caused material distortions of income. The Tax Court continued as follows:
The Internal Revenue Service, and subsequently Congress, recognized an administrative exception to the material distortion of income argument when dealing with taxpayers who prepaid interest or points on a home mortgage. See Rev. Rule 69-582, 1969-2 C.B. 29; Sec. 461(g) (2), added by Sec. 208(a), Tax Reform Act of 1976, 90 Stat. 1541. Consequently, cash method taxpayers who prepaid points on their home mortgages with funds not obtained from the lender are entitled to deduct the entire amount in the year paid. This rule, however, does not settle the case before us.
Apparently, it is the view of the Tax Court that Section 461(g)(2) applies only to the prepayment of points with funds not obtained from the lender. As a result of the foregoing, it is my opinion that the source of the funds used to pay points, loan origination fees or loan commitment fees remains very important in determining the deductibility of such fees in the year of closing...
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