Rev. Rul. 69-189

Advice has been requested concerning the extent to which annual charges allowed to a licensed small loan lender by Chapter 1321 of the Ohio Revised Code and paid by the borrower are deductible as interest under section 163(a) of the Internal Revenue Code of 1954.

Rather than providing for separate maximum limitations on allowable interest, commission, and service charges, Chapter 1321 limits a lender to a total maximum loan charge based on the principal amount borrowed. By definition this total maximum loan charge includes interest and all manner of compensation for any examination, service, brokerage, commission, or bonus, and reimbursement of any expenses incurred that may be paid by a borrower, except insurance commissions and filing and recording fees. The borrower in the instant case paid such a maximum loan charge.

Section 163(a) of the Code provides for the deduction of all interest paid or accrued within the taxable year on indebtedness. Interest has been defined as the compensation allowed by law or fixed by the parties for the use, forbearance, or detention of money. See Old Colony Railroad Co. v. Commissioner, 284 U.S. 552 (1932), Ct. D. 456, C.B. XI-1, 274 (1932); Fall River Electric Light Co., 23 B.T.A. 168 (1931).

If a loan charge is not paid for the use or forbearance of money per se, but is rather to compensate a lender for the cost of specific services performed in connection with a borrower's account, then such a charge will not qualify as an interest payment under section 163(a) of the Code. For example, since charges made for closing costs of a loan and papers drawn in connection therewith, are not for the use or forbearance of money per se, they do not give rise to an interest deduction. See Workingmen's Loan Association v. United States, 142 F. 2d 359 (1944) and Rev. Rul. 57-541, C.B. 1957-2, 319.

Under Chapter 1321 of the Ohio Revised Code a loan contract does not have to break down the total loan charge into interest and other charges. Therefore, it is difficult for a borrower to establish the extent to which a portion of the total loan charge is an interest charge. To be deductible under section 163(a) of the Code, it is not necessary that interest be stated as a specific percentage of the sum loaned or computed at a rigid stated rate, but it is a prerequisite that the sum claimed as interest be definitely ascertainable. See Kena, Inc. v. Commissioner, 44 B.T.A. 217 (1941). Thus, only that portion of the total charges substantiated to be interest is allowable as a deduction under section 163(a) of the Code.

Accordingly, the portion of a maximum loan charge allowed under Chapter 1321 of the Ohio Revised Code paid by the borrower for the use, forbearance, or detention of money per se is deductible as interest under section 163(a) of the Code.

In the instant case, if the borrower and the lender agreed at arm's length in the loan contract as to what was the proper portion of the maximum loan charge that was interest, such an agreement would ordinarily be accepted for Federal income tax purposes. In this connection, a statement by the lender that the entire charge was interest would not be sufficient if the facts indicated that a portion of the charge was attributable to specific services performed in connection with the borrower's account.