When a lender withholds interest from a borrower's loan, does that affect the deduction of the borrower's interest payments?

1. The tax court disallowed the deduction of the loan points in the year they were withheld by the lender. Our circuit law is clear that when points are withheld from loan proceeds, the cash-basis taxpayer is not considered to have paid the interest. "A cash-basis taxpayer 'pays' interest only when he pays cash or its equivalent to his lender." Wilkerson v. C.I.R., 655 F.2d 980, 982 (9th Cir.1981). When interest is withheld from loan proceeds, it is considered to have been paid by a note, not cash or its equivalent. Id.