Court Opinion

ID: 4330842
Source: CourtListenerOpinion
Date Created: 2018-11-13 23:50:59.098615+00
Date Added: 2024-06-11T14:47:01.632712
License: Public Domain

107 T.C. No. 12

                     UNITED STATES TAX COURT

     FORT HOWARD CORPORATION AND SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*

     Docket No. 6362-92.                     Filed October 22, 1996.

          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

     *
      This opinion supplements our previously filed opinion in
Fort Howard Corp. v. Commissioner, 103 T.C. 345 (1994).
                                 - 2 -

     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.

         James L. Malone III, Kristen E. Hazel, and Lonn W. Myers,

for petitioner.

     Lawrence C. Letkewicz, William E. Bogner, and Dana E.P.

Hundrieser, for respondent.

                         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)1 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.

     1
      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.
                                       - 3 -

     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, 1986.2             The Act's amendment of

     2
      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
                                                              (continued...)
                               - 4 -

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.3

     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.

     2
      (...continued)
               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.
     3
      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.
- 5 -

             An appropriate order

        will be issued granting the

        parties' Joint Motion for

        Reconsideration of Opinion.

             Decision will be entered

        under Rule 155.