Academic journal article Journal of Accountancy

LBOs: Loan Fees Deductible

Academic journal article Journal of Accountancy

LBOs: Loan Fees Deductible

Article excerpt

In a case with potentially wide ramifications, the bankruptcy court ruled expenses incurred in obtaining loans for a leveraged buyout (LBO) were ordinary and necessary business expenses (U.S.v. Kroy Ltd., U.S. Bankruptcy Court, District of Arizona, 2/14/92). Because the LBO created an economic benefit to the business beyond the year in which the loan fees were incurred, the court ruled the expenses were eligible to be amortized over the term of the loan.

The Internal Revenue Service argued the loan acquisition costs were capital expenditures because the purchase of stock merely affected the company's capital structure and was not meaningful to its ability to carry on its business. The court, however, disagreed. It found the expenses were to obtain loans that assisted the LBO, which (in this case) created substantial employee company ownership. Employee ownership, in turn, has the potential to enhance a corporation's ability to operate its business more profitably.

The court also did not accept the argument that the loan fees were nondeductible under tax code section 162(k), which disallows expenses incurred in connection with stock redemption. …

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