WASHINGTON - A federal appellate court handed PNC Bancorp and other banking companies a major victory Friday by allowing banks to deduct the full amount of many loan expenses during the year the loan is made.
The decision by the U.S. Court of Appeals for the Third Circuit in Philadelphia reversed a 1998 Tax Court decision that could have given the Internal Revenue Service authority to limit a valuable tax deduction for the banking industry.
"These expenses are so integral to a bank's ordinary business. If these weren't deductible, then almost anything wouldn't be deductible," said Robert Willens, managing director at Lehman Brothers Inc. in New York.
Still, the case is not likely to have an effect on shares of PNC or other banks, he said. "I don't think it's that meaningful an item for the financials," Mr. Willens said.
The banking industry's largest trade group, the American Bankers Association, said the ruling was "a landmark decision upholding historic tax treatment of loan origination costs."
"This decision confirms the industry's long-standing position that normal and routine costs incurred in the particular business of banking are tax deductible in the year incurred," said Donald Ogilvie, the ABA's executive vice president.
"We hope that this decision puts an end to uncertainty in an area of tax law that has become unnecessarily controversial," Mr. Ogilvie said.
Spokesmen for PNC and the IRS were not immediately available.
The controversial Tax Court decision held that costs related to marketing, researching, and originating loans were capital expenses that could not be deductible in the first year. Instead, PNC was required to spread out a deduction for lending expenses over the life of the loan. Losing much of the deduction's value in the first year of a loan would make lending more expensive.