Rev. Rul. 75-172

Advice has been requested whether a fee incurred in obtaining a construction and permanent mortgage loan is deductible over the period of construction or over the entire period of the loan under the circumstances described below.

A corporation was formed to acquire, own, construct, and operate a housing project. In order to obtain financial assistance for the project, the corporation applied for and was accepted for a construction and mortgage loan from a State operated housing development authority, the lender. In connection with obtaining the loan, the corporation entered into a contract with the lender whereby for a fee of 31/2 percent of the estimated principal, the lender was obligated to lend money to the corporation. Under the contract the corporation was required to pay the lender, on or before the initial disbursement of funds, a nonrefundable fee as compensation for the cost of specific services, such as construction and architectural inspection, site planning, and engineering services performed in connection with the making of the loan, and also for legal fees and other amounts incurred by the lender in obtaining the loan proceeds through the issuance of its short-term notes and long-term bonds.

The terms of the lending agreement were as follows:

(1) During the period of construction the lender was required to charge a fixed interest rate.

(2) After the period of construction the lender was required to charge an interest rate on the outstanding principal of the loan based on the lender's cost of borrowing money plus one-half of one percent.

(3) Since the actual cost of construction could only be estimated at the time the loan was entered into, the principal of the loan could only be estimated, but in any case would not exceed the lesser of a fixed sum or 90 percent of the actual cost of construction as determined at the completion of construction.

(4) Payment of interest would begin immediately; repayment of principal would begin 15 months after granting the loan. The principal was to be repaid in 480 monthly installments.

(5) Neither the lender nor the corporation could be released from its obligations under the contract.

In Herbert Enoch, 57 T.C. 781, 795 (1972), the United States Tax Court held that loan and escrow fees are amortizable over the life of the loan. See also Julia Stow Lovejoy, 18 B.T.A. 1179, 1182 (1930), in which the United States Board of Tax Appeals stated: "In its essence such a disbursement is not unlike bond discount, prepaid rent, cost of acquiring or disposing of a leasehold or term contract and many other transactions. They should be spread over the definite period of the loan, lease or contract." Accordingly, since the fee in the instant case is a cost of acquiring the entire 495-month loan, it is deductible ratably over the entire 495-month duration of the loan.