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See Bittker & Eustice, Federal Income Taxation of Corporations
and Shareholders, par. 5.04[6], at 5-29 (6th ed. 1997);
1 Ginsburg & Levin, Mergers, Acquisitions, and Buyouts, sec. 202,
at 2-15 (1998); 2 Ginsburg & Levin, Mergers, Acquisitions, and
Buyouts, sec. 1302.1.3, at 13-19 (1998).
For 1992, the $650,000 in legal and professional fees that
petitioner incurred in connection with the redemption of Cruze’s
stock constitute under section 162(k) nondeductible capital
expenditures.
OID Associated With $26 Million Loan
Original issue discount (OID) associated with a loan is
treated as interest and, ratably over the term of the loan, is
deductible by the debtor and taxable as ordinary income to the
creditor. Secs. 163(e), 1272(a)(1). Generally, OID is incurred
when the debtor, at the time the loan is obtained, receives from
the creditor less than the face amount of the loan.
Where, in addition to the obligation to pay the creditor the
principal amount of the loan obligation and interest, a debtor
corporation grants to a creditor options to acquire stock in the
debtor corporation, in determining whether OID is associated with
the loan, the principal amount of the loan obligation and the
value of the options are considered together and are treated as a
single investment unit. Sec. 1273(c)(2). Typically, in this
situation, the amount of OID, if any, associated with the loan
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