Private bridge loan interest

[cajcrv]

Hi All, I am a consultant working primarily in private business debt structures in the U.S. My question is this: a client borrows short-term bridge capital, interest only, with payments for a year rolled into the loan proceeds (so basically, the borrower never makes a payment). When a property sells 100% of the loan is repaid in full, including accrued interest. Often, these loans are rolled over for several years before being paid off. If the "interest paid", which again is made solely with loan proceeds, is booked as an expense and deducted in the tax return, would the borrower not be obligated to show the source of those payments (loan proceeds) as Income for tax return purposes? Thanks for any direction.