Q. A couple of months ago, you wrote an article on the question of whether mortgage refinancing points are deductible. I remember that you suggested there was a possibility that these points could be deducted. Recently, the Internal Revenue Service issued a press release in which it stated that refinancing points are not deductible. Who is right?

A. In my earlier column, I suggested that the Internal Revenue Service and the tax courts are the only ones that can give you a definitive answer. Having read the IRS press release, I want to modify my earlier statement and suggest that only the tax court ultimately will give you the final answer.

In my opinion, the press release issued by the IRS, dated May 13, was misleading. In that release, the IRS stated categorically that "points paid in refinancing a mortgage are not deductible in full in the year paid, regardless of how the taxpayer arranges to pay for them. . . . "

The IRS further stated that "the Internal Revenue Code provides that points representing payment of interest must be deducted over the loan period unless they are paid in connection with the purchase or improvement of the taxpayer's principal residence, or secured by the residence and meet certain other requirements. . . . "

But the IRS failed to spell out some of the "certain other requirements." As I pointed out in my earlier column, while the tax code specifically limits certain interest deductions, this limitation does not apply to points paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the principal residence of the taxpayer.

Thus, Congress, when it enacted the Internal Revenue Code, specifically authorized homeowners to deduct points paid to obtain a mortgage (deed of trust) when the loan was obtained to purchase or improve the principal residence of the taxpayer. Each point is equal to 1 percent of a mortgage.

Logic suggests -- and most tax lawyers agree -- that these are two separate concepts. You can deduct points either if the loan you are paying is in connection with the purchase of your prinicipal residence or, alternatively, if the loan is obtained for the improvement of your principal residence.

If you read the IRS press release carefully, it seems to suggest the points paid to refinance an existing home mortgage have nothing to do with the improvement of the home.

But we all know this is untrue. Many people have refinanced their existing mortgages, merely to reduce the older rate of interest. Thus, you could have had an old $100,000 mortgage at 13 percent and are refinancing to take out a new mortgage in the same amount, at a considerably lower rate. No new money is being taken out of this transaction. In this case, perhaps the IRS is correct, in that this type of refinancing does not permit the homeowner to deduct the points in the year they are paid.

However, many homeowners, seeing that interest rates have dropped considerably from the early 1980s, have decided to refinance, pull out some of the dead equity from the house, and use this money to improve their home. For example, if you have a current loan of $100,000 and you refinance by taking out $130,000, the additional money that you now have could be used for such improvements as an addition, fixing up the roof, landscaping or other improvements. As I read the Internal Revenue Service Code, those situations permit the homeowner to deduct the points in the year they are paid -- contrary to what the IRS press release suggests.

When Congress enacted this portion of the tax code, they gave no guidelines for the meaning of the word "improvement." Thus, if you are satisfied that all -- or even a portion -- of your refinance proceeds will be used for the improvement of your house, I believe the tax code permits you to deduct your points.

Needless to say, there are other limitations, which include: The points must reflect the established business practice in the geographical area where the loan is made. Because lenders in the Washington area charge points, in my opinion you meet this test if you pay the points. The deduction may not exceed the number of points charged in your area for this type of transaction. Thus, if the amount of points charged in your area is three, and you try to buy down the interest rate by paying six or seven points, presumably the IRS could argue that only the three points are deductible this year. The remaining points will have to be capitalized -- which means you can deduct these as interest, but must spread them over the life of your loan. For example, if a taxpayer paid $2,400 in The IRS apparently was in a tremendous hurry to issue a press release, to respond to columnists such as myself, who were suggesting that refinancing points could perhaps be deductible. The IRS has promised to issue definite regulations on the question of the deductibility of mortgage points, and hopefully when those regulations are issued, they will reflect the true status of the law. points on a 20-year loan involving 240 monthly payments, the taxpayer may deduct $10 for each payment that was due during the tax year. And because of some recent tax court opinions, in order for the points to be deductible, they must be paid separately when you obtain your mortgage loan.

The IRS apparently was in a tremendous hurry to issue a press release, to respond to columnists such as myself, who were suggesting that refinancing points could perhaps be deductible. The IRS has promised to issue definite regulations on the question of the deductibility of mortgage points, and hopefully when those regulations are issued, they will reflect the true status of the law.

In the meantime, as I have indicated on several occasions, any legitimate and creative method of obtaining deductions will be permitted by the courts of the United States.