Loan fees: deductible even if proceeds of loan are used for a redemption.

• Author: Bailine, Rick

A recent bankruptcy court case, apparently of first impression, has concluded that loan fees incurred to finance a stock redemption are not denied a deduction by Sec. 162(k).

Sec. 162(k) provides that no deduction is allowed to a corporation for any amount paid or incurred in connection with a redemption of its stock. This provision (originally Sec. 162(l)) was enacted as part of the Tax Reform Act of 1986 in response to the perceived abuse in "greenmail" cases of taking a tax deduction for the amount paid to the greenmailer.

The provision, however, is not intended to be limited to greenmail transactions. Rather, it is to be construed broadly to reflect congressional intent that a corporate redemption is a capital transaction. The General Explanation of the Tax Reform Act of 1986 (the "Blue Book") illustrates the intended broad reach of Sec. 162(k) by listing numerous items that are to be nondeductible. The list includes amounts paid to repurchase stock, premiums paid for stock, legal, accounting, brokerage, transfer agent, appraisal and similar fees incurred in connection with the repurchase of stock, and any other amount necessary or incident to the stock repurchase. Moreover, the Blue Book indicated that whether an expense was incurred "in connection with" a repurchase was also to be construed broadly.

Although Sec. 162(k) has been in effect for almost six years, no regulations have yet been published. Thus, language such as the Blue Book explanation must provide guidelines in determining deductibility under Sec. 162(k).

Conspicuously absent from the list of nondeductible items are loan fees. In fact, certain loan fees (i.e., points) are apparently expressly deductible under Sec. 162(k)(2)(a)(i). (See, generally, Rev. Rul...