REVENUE RULE 93-68

1993-2 C.B. 72, 1993-33 I.R.B. 4.

Internal Revenue Service
Revenue Ruling

INTEREST PROPERLY ALLOCABLE TO THE PURCHASE OF STOCK

Published: October 25, 1993

§ 163. Interest, 26 CFR 1.163-1: Interest deduction in general.

(See Also § 469; 1.469-2T.)

Interest properly allocable to the purchase of stock. Interest incurred by an individual in connection with the purchase of stock in a C corporation is investment interest for purposes of the § 163(d) of the Code investment interest deduction limitation, unless the individual is a dealer or a trader in stock or securities.

ISSUE

If an individual who is neither a dealer nor a trader in stock or securities borrows money to purchase the stock of a C corporation to protect the individual's employment with the corporation, is the interest on the loan "investment interest" for purposes of the § 163(d) investment interest deduction limitation?

FACTS

A, an individual, is an employee of X, a C corporation. A borrows money to purchase 100 percent of the stock of X. A is neither a dealer nor a trader in stock or securities. A's sole motive for purchasing and holding the X stock is to protect A's employment with X. X has never paid a dividend.

LAW AND ANALYSIS

§ 163(d)(1) of the Code limits the amount of investment interest that a taxpayer other than a corporation may deduct for any taxable year to the amount of the taxpayer's net investment income for the taxable year. § 163(d)(2) provides that amounts not deducted by reason of § 163(d)(1) are carried forward indefinitely to succeeding taxable years.

§ 163(d)(3)(A) of the Code defines "investment interest" as any interest allowable as a deduction (determined without regard to § 163(d)(1)) that is paid or accrued on indebtedness properly allocable to property held for investment. Under § 163(d)(5)(A), the term "property held for investment" includes any property that produces income of a type described in § 469(e)(1). The type of income described in § 469(e)(1)(A) includes any gross income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business.

Because stock generally produces dividend income, it is property held for investment within the meaning of sections 163(d)(5)(A) and 469(e)(1)(A) of the Code, unless the dividends are derived in the ordinary course of a trade or business. In this case, any dividends paid by X would not be derived by A in the course of a trade or business because A is neither a dealer nor a trader in stock or securities. Thus, the X stock purchased by A is property held for investment pursuant to § 163(d)(5)(A), regardless of A's motives for purchasing or holding that stock. Accordingly, the interest paid by A that is attributable to A's purchase of the X stock is investment interest within the meaning of § 163(d)(3)(A) and A's deduction of that interest is limited by § 163(d)(1).

Cases holding that stock is not property held for investment in the absence of a substantial investment motive (see, e.g., Miller v. Commissioner, 70 T.C. 448 (1978)) involve taxable years beginning prior to January 1, 1987, the effective date of current § 163(d)(5)(A) of the Code (as amended by the Tax Reform Act of 1986 to define "property held for investment"). Thus, those cases are not relevant in determining whether stock is property held for investment within the meaning of § 163(d)(5)(A).

If the interest attributable to A's purchase of the X stock were not characterized as investment interest, that interest would be nondeductible personal interest under § 163(h)(1) of the Code. Under § 163(h)(2)(A), the term "personal interest" includes interest paid or accrued on indebtedness properly allocable to the trade or business of performing services as an employee, unless one of the other exceptions in § 163(h)(2) applies. In this case, the investment interest exception in § 163(h)(2)(B) precludes treating the interest attributable to A's purchase of the X stock as personal interest.

HOLDING

If an individual who is neither a dealer nor a trader in stock or securities borrows money to purchase stock in a C corporation to protect the individual's employment with the corporation, the interest on the loan is investment interest for purposes of the § 163(d) investment interest deduction limitation.

DRAFTING INFORMATION

The principal author of this revenue ruling is Stephen J. Toomey of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Toomey on (202) 622- 4960 (not a toll-free call).

Rev. Rul. 93-68, 1993-2 C.B. 72, 1993-33 I.R.B. 4.