A new court decision may drive up the industry's taxes by requiring loan expenses to be written off over the life of the credit.

In a case pitting PNC Bank Corp. against the Internal Revenue Service, Tax Court Judge Robert P. Ruwe ruled Monday that the company may not deduct all loan expenses in the year they were incurred.

"It is apparent the current deduction of costs improperly accelerated the tax benefits ... and did not properly match the costs with the interest income produced by the loans," Judge Ruwe wrote, backing a 1992 IRS decision.

PNC has not decided whether to appeal. "We are disappointed in the court's decision and we are reviewing it with an eye toward our options," a company spokesman said Wednesday.

Though industry officials do not know how much money is at stake, they said it will be costly. The Mortgage Bankers Association of America estimated it costs $1,500 to make an average mortgage.

At issue is how banks treat the costs of extending credit, such as obtaining credit reports, conducting searches of land records, and appraising properties.

The industry has always deducted these costs from its yearly income just like other business expenses. But in 1992 the IRS said banks must spread them out over the life of the loan. That would have driven up banks' taxable incomes because they would be deducting only a small portion of the expenses each year.

"This would be very difficult for banks to implement," said Charles W. Wheeler, national director of banking and financial tax services for KPMG Peat Marwick. "There is not uniform agreement on what costs should be included."

Opposition from the industry persuaded the IRS to back off until it issued detailed instructions. But the agency had already ordered PNC to change its accounting practices, so the company sued.

IRS officials refused to comment Wednesday.

With backing from the court, however, the IRS may now soon force banks to amortize many indirect costs of their loan business, said James E. O'Connor, tax counsel for America's Community Bankers. "That would be an auditing nightmare," he said.

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