- 37 -
of the indebtedness must have been fixed as of the date the
purported interest began to accrue. Midkiff v. Commissioner,
supra at 739-740; see also Halle v. Commissioner, 83 F.3d 649
(4th Cir. 1996), revg. on other grounds Kingstowne v.
Commissioner, T.C. Memo. 1994-630.
Indeck contends that this amount is deductible interest
because the parties to the Settlement Agreement intended it as
such; namely, as compensation to Mr. Polsky for the delay in
receiving payment for his shares between January 31, 1991 and May
9, 1994. Indeck further argues that the statutory requirement of
indebtedness is satisfied because Indeck had an “unconditional
obligation” under the Shareholders’ Agreement to purchase Mr.
Polsky’s shares at a price determined by third-party offers, and
this obligation was confirmed by the arbitrator’s decision
requiring Indeck to purchase Mr. Polsky’s shares at the PowerLink
offer price (i.e., $15,030,000) as of January 31, 1991 (the date
PowerLink’s offer was received), with 10-percent interest until
payment in full.
We conclude that the disputed $4,856,922 portion of the
settlement payment is not interest for purposes of section 163(a)
because it was not paid on indebtedness-–that is, it was not paid
with respect to an existing, legally enforceable obligation for
the payment of a principal sum, nor was the amount of the
Page: Previous 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 NextLast modified: May 25, 2011