The history of the dispute over the proper timing of prepaid interest deductions by a cash basis taxpayer has been one of abrupt changes of position by the courts and the Internal Revenue Service. The United States Tax Court's recent decisions in S. Rex Lewis and Lewis's twin case Jackson B. Howard continue this practice by taking an approach different from what was felt to be an essentially correct position set out in Revenue Ruling 68-643. Lewis and Howard establish as the prepaid interest deduction standard a deposit distortion test, thus marking a change from the approach used in previous prepaid interest case law. The purpose of this Note is threefold: (1) to give a brief history of the law in the prepaid interest area, (2) to discuss the facts and the court's analysis in S. Rex Lewis, and (3) to discuss the effect the case will have on prepaid interest deductions.
Ronald C. Jensen,
Material Distortion of Income: A New Approach?,
55 Neb. L. Rev. 491
Available at: http://digitalcommons.unl.edu/nlr/vol55/iss3/7