Opinion ID: 769343
Heading Depth: 2
Heading Rank: 3

Heading: The Deductibility of Expenses Incurred in Custom Chrome's Redemption of its Stock

Text: 41 The Tax Court lucidly analyzed whether the $650,000 in expenses incurred by Custom Chrome in the purchase of its stock from Cruze was deductible. In essence, the purchase of Cruze's shares was a redemption (i.e., repurchase) by CustomChrome of its stock. Under I.R.C. S 162(k), 16 expenses incurred in a redemption, other than those involving financing, are treated as nondeductible capital expenses and were thus properly excluded by the Tax Court. See United States v. Hilton Hotels Corp., 397 U.S. 580 (1970); Small Business Job Protection Act of 1996, Pub. L. No. 104-188, S 1704(p), 110 Stat. 1755, 1886 (1996) (amending S 162(k) retroactively so that expenses for indebtedness related to the redemption are deductible over the term of indebtedness); see generally Boris I. Bittker & James S. Eustice, Federal Income Taxation of Corporations and Shareholders Pe5.04[6] (6th ed. 1997). 17 42 Specifically, although a holding company and an acquisition company were formed to accomplish the purchase of Cruze's stock, under the step transaction doctrine, the separate steps of this transaction must be treated as a single transaction. Penrod v. Commissioner, 88 T.C. 1415, 1428-30, 1999 WL 49335 (1987) (holding that, where the separate steps of a transaction constitute pre-arranged parts of a single transaction designed to reach a particular result, the series of steps is one transaction for tax purposes). 43 Here, although the acquisition company technically purchased Cruze's stock, it was incorporated only ten days prior to the leveraged buyout, and was immediately merged into Custom Chrome, which assumed all the acquisition company's liabilities. Thus, under the step transaction doctrine, Custom Chrome should be considered to have repurchased -that is, redeemed -its own stock from Cruze. Therefore, under I.R.C. S 162(k), Custom Chrome is not entitled to any deductions for expenses incurred from the redemption. 18 44