Opinion
No. 6362–92.
1996-10-22
FORT HOWARD CORPORATION and Subsidiaries, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.*
James L. Malone III, Kristen E. Hazel, and Lonn W. Myers, Chicago, IL, for petitioner. Lawrence C. Letkewicz, William E. Bogner, and Dana E.P. Hundrieser, Chicago, IL, for respondent.
James L. Malone III, Kristen E. Hazel, and Lonn W. Myers, Chicago, IL, for petitioner. Lawrence C. Letkewicz, William E. Bogner, and Dana E.P. Hundrieser, Chicago, IL, for respondent.
In Fort Howard Corp. v. Commissioner, 103 T.C. 345 (1994), we held that sec. 162(k), I.R.C., precluded petitioner from deducting or amortizing the costs and fees, other than interest, that petitioner paid in 1988 to borrow funds used in the leveraged buyout of its stock. Sec. 1704(p) of the Small Business Job Protection Act of 1996, Pub.L. 104–188, 110 Stat. 1755, 1868, which was signed by the President on Aug. 20, 1996, and applies retroactively to 1988, provides that the expense disallowance rule of sec. 162(k) does not apply to any “deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness”. Held: In light of this statutory modification, we now hold that the expense disallowance rule of sec. 162(k), as amended on Aug. 20, 1996, does not preclude petitioner from taking deductions for the amount of costs and fees it paid or incurred that are properly allocable to indebtedness and amortized over the term of such indebtedness.
SUPPLEMENTAL OPINION
RUWE, Judge:
On August 24, 1994, we issued an opinion that resolved some, but not all, of the issues in this case. Fort Howard Corp. v. Commissioner, 103 T.C. 345 (1994). The parties have now settled the remaining issues.
One of the issues resolved in our prior opinion was whether section 162(k)
precluded petitioner from deducting or amortizing the costs and fees, other than interest, that petitioner paid in 1988 to borrow funds used in the leveraged buyout (LBO) of its stock. We held that such costs and fees were paid or incurred “in connection with” a redemption and that section 162(k) precluded petitioner from deducting or amortizing them for purposes of computing its taxable income.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
On August 20, 1996, the President signed the Small Business Job Protection Act of 1996, Pub.L. 104–188, 110 Stat. 1755 (the Act). Section 1704(p) of the Act provides that the expense disallowance rule of section 162(k) does not apply to any “deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness”. 110 Stat. 1887. This provision takes effect as if included in the amendment made by section 613 of the Tax Reform Act of 1986, Pub.L. 99–514, 100 Stat. 2251, which applies to amounts paid or incurred after February 28, 1986.
The Act's amendment of section 162(k) applies to the period in which the costs and fees at issue in this case were paid or incurred and changes the tax treatment of the costs and fees, other than interest, that petitioner paid or incurred to borrow funds.
Including the amendment made by sec. 1704(p) of the Small Business Job Protection Act of 1996, Pub.L. 104–188, 110 Stat. 1755, sec. 162(k) as it applies to this case provides:
(k) Stock redemption expenses.—
(1) In general.—Except as provided in paragraph (2), no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred by a corporation in connection with the redemption of its stock.
(2) Exceptions.—Paragraph (1) shall not apply to—
(A) Certain specific deductions—Any—
(i) deduction allowable under section 163 (relating to interest),
(ii) deduction for amounts which are properly allocable to indebtedness and amortized over the term of such indebtedness, or
(iii) deduction for dividends paid (within the meaning of section 561).
(B) Stock of certain regulated investment companies.—Any amount paid or incurred in connection with the redemption of any stock in a regulated investment company which issues only stock which is redeemable upon the demand of the shareholder.
The Act's amendment to sec. 162(k) does not affect the Court's previous determination with respect to whether $26.2 million of the $40 million fee paid to Morgan Stanley should be characterized as interest. See Fort Howard Corp. v. Commissioner, supra at 369–376.
The Court's opinion filed in August 1994 obviously did not reflect the Act's amendment of section 162(k) in August 1996. The parties, therefore, have jointly moved that we reconsider our opinion concerning section 162(k) and issue a supplemental opinion applying the 1996 amendment.
We shall grant the joint motion to reconsider. The parties have agreed to the amount of costs and fees allocable to indebtedness. We now hold that the expense disallowance rule of section 162(k), as amended on August 20, 1996, does not preclude petitioner from taking deductions for the amount of costs and fees it paid or incurred that are properly allocable to indebtedness and amortized over the term of such indebtedness.
An appropriate order will be issued granting the parties' Joint Motion for Reconsideration of Opinion.
Decision will be entered under Rule 155.
U.S.Tax Ct.,1996.Fort Howard Corp. v. C.I.R.107 T.C. No. 12, 107 T.C. 187, Tax Ct. Rep. (CCH) 51,610, Tax Ct. Rep. Dec. (RIA) 107.12
This opinion supplements our previously filed opinion in Fort Howard Corp. v. Commissioner, 103 T.C. 345 (1994).