Rev. Rul. 69-582

A taxpayer, on the cash receipts and disbursements method of accounting, obtained a mortgage loan of $20,000 for the purchase of a personal residence costing $25,000. The taxpayer agreed to pay to the lender, in addition to interest at the stated annual interest rate of 8%, a "loan processing fee" (sometimes referred to as "points") such as that held to be interest under the facts of Revenue Ruling 69-188, C.B. 1969-1, 54, where it was established that the fee was paid as compensation to the lender solely for the use or forbearance of money. The loan processing fee was $1,200 (six points), and the taxpayer paid the full amount of the fee in the year the loan originated. The taxpayer did not obtain the funds to pay the fee from the lender. Payments on the mortgage and interest thereon were made monthly as they became due.

Revenue Ruling 68-643, C.B. 1968-2, 76, concludes that the deduction of prepaid interest in the year of payment by a taxpayer employing the cash receipts and disbursements method of accounting may not result in a clear reflection of income for the taxable year of payment. The Revenue Ruling holds that where a material distortion of income has been found to result from the deduction of prepaid interest, the Service will require the taxpayer to change his method of accounting with respect to such prepaid interest in order to allocate it over the taxable years involved.

Held, under the facts in the instant case, the deduction for the payment of the $1,200 loan processing fee (points) determined to be interest is not considered to cause a material distortion of income. Therefore, it is allowable as a current deduction without the need for proration as would be required by Revenue Ruling 68-643 in other situations involving prepaid interest.

Revenue Ruling 68-643 modified; Revenue Ruling 69-188 amplified.