Rev. Rul. 86-67

1986-1 C.B. 238, 1986-19 I.R.B. 6.

DEDUCTIONS; BALANCE OF A DECEDENT'S UNAMORTIZED LOAN COSTS

Published: May 12, 1986

Section 461.-General Rule for Taxable Year of Deduction 26 CFR 1 .461-1: General Rule for taxable year of deduction.

  Deductions; balance of a decedent's unamortized loan costs. The balance of unamortized loan costs incurred by a taxpayer may be deducted on the final income tax return for the year of the taxpayer's death.

ISSUE

  Whether the balance of unamortized mortgage loan costs incurred by a taxpayer may be deducted on the income tax return for the year of the taxpayer's death.

FACTS

  A died in 1983. During A's lifetime A purchased a number of single-family homes, townhouses, and condominiums that A leased to others. A financed each purchase by obtaining a mortgage loan from a financial institution. In order to obtain the mortgages, A incurred various loan costs for services provided by the lender, such as appraisal fees, settlement fees, and notary fees. A also incurred other expenses in connection with obtaining the mortgages including commissions, abstract fees, and recording fees. None of these expenses were in the nature of 'points,' that is, charges made for the use or forbearance of money that are considered to be interest, These various expenses were capitalized and amortized over the terms of the mortgage loans to which such expenses related. When A died in 1983, there was a total balance of x dollars of unamortized loan costs with respect to the mortgages. A's estate continued to make payments on the loans. The balance of the unamortized mortgage loan costs was deducted on A's final income tax return for 1983.

LAW AND ANALYSIS

  Expenses incurred to obtain a loan are capital expenditures that must be amortized over the period of the loan. See Enoch v. Commissioner, 57 T.C. 781,

794-95 (1972), acq. on this issue, 1974-1 C.B. 1, in which the United States Tax Court held that loan expenses must be capitalized and cannot be deducted in the year paid. See also Rev. Rul. 70-360, 1970-2 C.B. 103.

  In S. & L. Building Corp. v. Commissioner, 19 B.T.A. 788 (1930), acq. X-1 C.B. 60 (1931), a corporation was allowed to deduct the balance of unamortized loan costs in the year mortgaged property was sold and the mortgage assumed by the purchaser. The court said the mortgage fees were a cost of the use of the borrowed money, rather than a cost of the property securing the mortgage. When a taxpayer no longer bears the burden of a mortgage, a deduction should be allowed for the remaining portion of the associated unamortized mortgage loan fees. In Longview Hilton Hotel Company v. Commissioner, 9 T.C. 180 (1947), acq.

1947-2 C.B. 3, the taxpayer corporation was allowed a deduction for similar costs upon its dissolution when it transferred the mortgaged property to its eight shareholders who assumed the mortgage indebtedness. In Anover Realty Corporation v. Commissioner, 33 T.C. 671 (1960), a transferee corporation that assumed a mortgage on transferred property argued that loan expenses that were incurred by the transferor for the sole purpose of acquiring a business asset

(the mortgaged property) should follow the asset when it was transferred. The court states that the loan expenses were made to obtain the use of the money; the purpose of the loan itself did not matter. 'If the debt is assumed by the transferee it merely marks an earlier end to the period for which the borrower had the use of the money, which means the borrower . . . can take the unamortized balance as a deduction in the year of transfer.' 33 T.C. at 675.

  Expenses incurred to obtain a loan are distinguishable from expenses incurred in connection with the acquisition of an income- producing asset, such as a lease. For example, in Plaza Investment Co. v. Commissioner, 5 T.C. 1295

(1945), the taxpayer corporation had paid a commission to a broker who had secured a tenant for a long term lease. Upon dissolution, the corporation transferred the lease to its shareholders and deducted the balance of the commission on its final return. The court indicated that the commission was a capital expenditure to acquire an income-producing asset. The dissolution of the corporation did not terminate the lease, so the benefit of the expense continued until the lease expired resulting in the expense being amortized over the remainder of the lease term. The court distinguished S. & L. Building Corp. by pointing out that payments to obtain a loan do not add value to the mortgaged property and do not result in acquiring an income-producing asset; they are expenses in connection with the creation of a liability. Accord, Wolan v. Commissioner, 184 F.2d. 101 (10th Cir. 195), aff'g No. 17,250 (T.C.M. 1949). See also Rev. Rul. 81-161, 1981-1 C.B. 313.

  Although none of the above cited authorities concerns the deduction of unamortized loan costs of a decedent, the principles set forth in these authorities are applicable to the facts here. a taxpayer's death, a corporation's dissolution, or an arm's length sale of mortgaged property-all terminate the use of loan proceeds and mark the appropriate time to deduct the balance of unamortized loan costs. The authorities cited above are not concerned with the nature of the termination of the taxpayer's liability. Here, A's death ends the period during which A benefited from the expenses incurred to obtain the loans.

HOLDING The x dollars of unamortized mortgage loans costs A incurred is deductible on A's final income tax return for 1983.

Rev. Rul. 86-67, 1986-1 C.B. 238, 1986-19 I.R.B. 6.