Deductibility of fees paid to postpone property settlement.

• Jurisdiction: United States
• Author: Abramovitz, Michael S.
• Date: 01 May 1997

What is the proper treatment of a fee paid to postpone a property closing? Must the fee be capitalized as a cost of acquiring the property or may it be currently expensed? In some circumstances, it is possible to deduct the payments made to defer a property's closing as interest, rather than capitalize them, according to Halle, 4th Cir., 1996, rev'g and rem'g TC Memo 1994-630.

Halle, a developer, found a tract of land he wanted to purchase, and negotiated an acceptable price. He formed Kingstowne, L.P. (KLP) to buy the property. The land was owned by, and the sole asset of, Greendale Development Company, Inc. (Greendale), which was owned by four shareholders. On Mar. 8,1985, KLP agreed to purchase Greendale stock for $29 million. The purchase agreement required a $3 million deposit, with the balance due on the settlement date, Apr. 26, 1985. The agreement allowed KLP to defer settlement until Oct. 1, 1985, by paying the stockholders an additional $225,000 a month. If KLP defaulted on the settlement...