Academic journal article Journal of Accountancy

New Ruling on Debt Capital Deductions

Academic journal article Journal of Accountancy

New Ruling on Debt Capital Deductions

Article excerpt

The Tax Court decided in Fort Howard Corp. v. Commissioner in August 1994 that fees incurred to obtain debt capital used to buy back stock could not be deducted. However, the court's decision directly contradicts a June 1994 Ninth Circuit Court ruling on the same issue (U.S. v. Kroy). If the Tax Court decision is upheld on appeal, the stage will be set for a Supreme Court resolution of the conflicting court decisions and a period of uncertainty pending adjudication.

Although both cases dealt with leveraged buyouts, the issue is broader because it extends to any debt-financed buyback of shares. The Fort Howard decision is in accordance with Internal Revenue Code section 162(k), which says expenses cannot be deducted if they are incurred "in connection with" a buyback. Fort Howard argued the fees were an interest expense and thus were deductible. The court acknowledged that interest expense on debt incurred in connection with a buyback is deductible because interest is a financing cost. …

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