Rev. Rul. 67-297

Advice has been requested whether the loan origination fee (commonly referred to as `points') paid in connection with acquisition of a home mortgage loan guaranteed by the Veterans Administration is deductible as interest under section 163 of the Internal Revenue Code of 1954.

The taxpayer obtained a home mortgage loan from a lending institution during the taxable year. The loan was insured by the Veterans Administration under its loan guaranty program.

In connection with the loan, the taxpayer paid the lender an amount referred to as a `loan origination fee.' The amount of the fee was computed as one percent of the amount of the loan. It was charged by the lender in addition to the maximum rate of interest permitted to be imposed upon Veterans Administration insured loans.

Section 163(a) of the Code provides that there shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness. Interest has been defined as the amount which one has contracted to pay for the use of borrowed money. See Old Colony Railroad Co. v. Commissioner , 284 U.S. 552 (1932), Ct. D. 456, C.B. XI-1, 274 (1932).

Paragraph B, Part I of section 36.4312 of Veterans Administration Pamphlet 26-7 (formerly VA Pamphlet 4-3), entitled, `Lenders Handbook,' provides, as follows:

B. A lender may charge and the veteran may pay a flat charge not exceeding 1 percent of the amount of the loan, provided that such flat charge shall be in lieu of all other charges relating to costs of origination not expressly specified and allowed in this schedule.

Among the charges relating to costs of origination which are not expressly specified and allowed under pertinent provisions of the `Lenders Handbook' are such items as the lenders appraisal fee, the cost of preparing the mortgage note or deed of trust, the settlement fee, notary fees and the cost of providing certain information concerning the property involved to the Veterans Administration.

Revenue Ruling 57-541, C.B. 1957-2, 319, concerns the case of a finance company primarily engaged in a loan servicing business. Its income is derived principally from `application fees' and `financing fees' earned by obtaining Federal Housing Administration and Veterans Administration mortgages.

In holding that the fees there involved are not interest income and, therefore, are not personal holding company income, Revenue Ruling 57-541 states, in part, as follows:

* * * The fees in question are specifically authorized as separate and distinct charges for the services rendered and may be earned by an approved Federal Housing Administration mortgagee whether or not it lends money in connection with the insured mortgage and realizes pure interest income therefrom.

In view of the above, the application fees and financing fees under consideration do not represent interest within the meaning of Section 543(a)(1) of the Code but represent legitimate charges for services rendered either for the investor or the ultimate owner of the mortgages or partially for both. * * *

Based upon the foregoing, the loan origination fee (commonly referred to as `points') paid by the taxpayer in connection with the qcquisition of a home loan guaranteed by the Veterans Administration is not interest within the meaning of section 163 of the Code.

Accordingly, the amount of the loan origination fee in the instant case is not allowable as a deduction under section 163 of the Code. Moreover, such fee is not an additional cost of the property acquired, within the meaning of section 1012 of the Code, and is not to be taken into account by the taxpayer in determining gain or loss upon a subsequent sale or exchange of the property. Compare Andover Realty Corp. v. Commissioner , 33 T.C. 671, and cases cited therein.