Rev. Rul. 57-540

Advice has been requested whether certain service fees imposed by a mortgage finance company on borrowers are classifiable as interest within the meaning of section 543(a)(1) of the Internal Revenue Code of 1954 in determining personal holding company income.

A corporation is engaged in the business of buying, selling, and placing mortgages. The corporation places both chattel and real estate mortgages, which are accompanied by notes. Some of the mortgages placed are sold, and some are held by the corporation until maturity. Where a mortgage is placed, a service charge (referred to as a bonus, premium, etc.) is added to the amount of the actual funds advanced and is included in the total amount of the mortgage. The service charge is a variable factor dependent on the type of collateral received and the amount of continuous processing that may be necessary in carrying the loan and placing it for a specific transaction. The service charges are not to cover specific separable services but cover regular overhead expenses. The services rendered are a part of the regular loan business of the taxpayer and not special processing services for which a separable charge may be made. Cf. Workingmen's Loan Ass'n. v. United States , 142 Fed.(2d) 359. Ordinary interest rates are charged on all of the mortgages placed by the corporation. The service charges alone aggregate more than 50 percent of the gross income of the corporation. More than 50 percent of the corporation's outstanding stock is owned by five individuals.

Section 543(a)(1) of the Code provides, in part, that interest is included in personal holding company income. Section 39.502-1(b) of Regulations 118, applicable to the 1954 Code by authority of Treasury Decision 6091, C.B. 1954-2, 47, defines the term `interest' as being any amounts, includible in gross income, received for the use of money loaned. Cf. Revenue Ruling 57-541, listed below.

The term `interest' is used in section 543(a)(1) of the Code in a broad sense; hence, it includes, in the case of a finance company, the charges imposed on borrowers for making a loan regardless of whether such charges are designated as interest, finance, or service charges where services rendered are not truly separable. See Norman L. Noteman et al., Trustees v. Welch , 108 Fed.(2d) 206.

Accordingly, it is held that finance or service charges imposed on borrowers by a finance company, which do not warrant a charge separate from that for the use of borrowed money, constitute `interest' within the meaning of section 543(a)(1) of the Code, and are, therefore, includible in personal holding company income.