- 13 -
claims that “Once the debtor enters into a debt obligation for a
fixed rate, a subsequent increase in market rates of interest
over the obligation’s fixed contract rate does not create an
asset, amortizable or otherwise.” Respondent claims that
petitioner’s favorable financing involves only the differential
between market rates of interest and the contract rates of
interest stated in petitioner’s debt obligations. Respondent
argues that this differential is not an asset, it is
“fortuitous”, and it is “not a function of an expenditure”.
Respondent’s contentions are similar to the arguments the
Commissioner made in Ithaca Indus., Inc. v. Commissioner, 97 T.C.
253 (1991), affd. 17 F.3d 684 (4th Cir. 1994). In that case, the
taxpayer sought to amortize the value of certain favorable raw
material contracts that it had purchased as part of a stock
acquisition. We held that the favorable raw material contracts
constituted an intangible asset subject to amortization. Id. at
275. We stated in that case:
Respondent argues that the life of the contracts
is indefinite because any value inhering in the
contracts exists only so long as the favorable price
spread is predicted to exist. Respondent argues that
because yarn prices fluctuate, it is impossible to
predict with any accuracy the length of time the spread
would exist. We find this argument unpersuasive. The
favorable spread of the contracts is not the asset
being amortized. The asset is the contracts
themselves. The favorable spread is used only to
determine the value of the contracts. [Id. at 274.]
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011