Fort Howard Corporation and Subsudiaries v. Commissioner , 107 T.C. No. 12 ( 1996 )

107 T.C. No. 12UNITED 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).
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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.
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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...)
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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.
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An appropriate order
will be issued granting the
parties' Joint Motion for
Reconsideration of Opinion.
Decision will be entered
under Rule 155.