Favorable financing terms are not a separate asset, the IRS said
Many utilities are divesting generating assets. Companies bidding on these assets sometimes try to allocate part of the purchase price to favorable financing that the buyer will inherit from the seller. An example is where assets come encumbered by a loan or lease at rates that are below market. The idea is to try to write off that part of the purchase price over the remaining term of the financing, which may be shorter than the depreciable life of the other assets.
The IRS said no to this approach in two “field service advice” memos released recently to the public. A field service advice is a memo from the national office to an IRS lawyer preparing to litigate against a taxpayer. The IRS said it is “illogical to suggest that an obligation to pay money is an asset.” It recommended that “[a]lthough this matter is not entirely free from doubt and has litigating hazards, we believe that there are several arguments that we can assert to demonstrate that the petitioner is not entitled to an amortization deduction for favorable financing.”