There is no question that petitioner's LBO constituted a redemption1994 U.S. Tax Ct. LEXIS 63">*78 within the meaning of section 162(k)(1). ¹² The parties center their dispute on whether the deductions at issue were "in connection with" the redemption.

The words in a revenue act should be interpreted in their ordinary, everyday sense. Commissioner v. Soliman, 506 U.S.   , 113 S. Ct. 701, 705-706 (1993) (quoting Malat v. 103 T.C. 345">*352 Riddell, 383 U.S. 569">383 U.S. 569, 383 U.S. 569">571 (1966) (quoting Crane v. Commissioner, 331 U.S. 1">331 U.S. 1, 331 U.S. 1">6 (1947))). The phrase "in connection with" has been interpreted broadly. See Snow v. Commissioner, 416 U.S. 500">416 U.S. 500, 416 U.S. 500">502-503 (1974)1994 U.S. Tax Ct. LEXIS 63">*79 (interpreting section 174(a)(1)). "In connection with" means associated with, or related. Huntsman v. Commissioner, 905 F.2d 1182">905 F.2d 1182, 905 F.2d 1182">1184 (8th Cir. 1990), revg. and remanding 91 T.C. 917">91 T.C. 917 (1988) (interpreting section 461(g)(2)).¹³1994 U.S. Tax Ct. LEXIS 63">*80 Events or elements are "connected" when they are "logically related". Webster's Third New International Dictionary 480 (1986). Petitioner used the debt capital obtained via the expenditures in question to finance the redemption. There is a clear logical relation between petitioner's redemption, the corresponding need for financing, and the costs incurred to obtain that financing. Indeed, several of the major documents produced by Morgan Stanley with regard to the LBO financing explicitly refer to the issuance of debt securities and incurrence of loans as "necessary" to the transaction. ¹⁴

1994 U.S. Tax Ct. LEXIS 63">*81 Moreover, petitioner's payment of financing costs, its receipt of the debt capital, and the effectuation of the redemption were continuous events. The entire LBO transaction, from conception to completion and refinancing, took 103 T.C. 345">*353 only 8 months. The costs at issue were all incurred and paid during that time. These costs (and the debt capital obtained through them) were an integral part of a detailed plan which Morgan Stanley described as a "proprietary" strategy for funding the transaction. Thus, the financing costs were both a cause and an effect of the LBO. From an "ordinary, everyday" perspective, therefore, petitioner's financing costs were "in connection with" the redemption. Assigning a broad construction to the phrase, we reach this conclusion all the more easily.

In In re Kroy (Europe) Ltd., 27 F.3d 367">27 F.3d 367 (9th Cir. 1994), the Court of Appeals for the Ninth Circuit addressed the question at issue in this case, reaching a result contrary to the one we reach today. The Court of Appeals agreed that the "in connection with" inquiry is the critical one in interpreting section 162(k), stating: "it is * * * necessary to decide in the first1994 U.S. Tax Ct. LEXIS 63">*82 instance whether or not the expenditure was incurred 'in connection with' a stock redemption before IRC section 162(k) applies." 27 F.3d 367">Id. at 369 n.3. Nevertheless, the Court of Appeals did not analyze the phrase "in connection with", nor did it look to the previous use of the phrase by Congress or the meaning attributed to it by the Federal courts. Instead, the Court of Appeals relied on other doctrines not referred to in the statute. ¹⁵ We believe our analysis of the phrase "in connection with" comports with congressional intent and judicial precedent; therefore, we respectfully decline to follow the holding of the Court of Appeals.

Congress expressly imparted a broad application to the phrase as used in section 162(k). The conference report states that "the phrase 'in connection with [a] redemption' is intended to be construed broadly," and that deductions for expenses will be disallowed if they are "related to" the redemption. 1994 U.S. Tax Ct. LEXIS 63">*83 H. Conf. Rept. 99-841, at 168-169 (1986), 1986-3 C.B. (Vol. 4) 1, 168-169. ¹⁶ The Senate report, which the 103 T.C. 345">*354 conference report generally follows, is even more explicit. It states:

The committee intends that amounts subject to this provision will include amounts paid to repurchase stock; premiums paid for the stock; legal, accounting, brokerage, transfer agent, appraisal, and similar fees incurred in connection with the repurchase; and any other expenditure that is necessary or incident to the repurchase * * * [S. Rept. 99-313, at 223 (1986), 1986-3 C.B. (Vol. 3) 1, 223; emphasis added.]

1994 U.S. Tax Ct. LEXIS 63">*84

The exception in section 162(k)(2)(A)(i) for interest deductions also supports our interpretation. Interest is a cost of financing. There would simply have been no need to provide an exception if related financing costs in general were not considered to be in connection with a redemption. The evolution of the exception is illustrative. The Senate added the interest exception as an amendment to the House bill, which provided for no exceptions to the general disallowance rule. That the Senate believed the exception necessary indicates that interest, had it not been excepted, would indeed have been disallowed. This is supported by the explanation of the change that is contained in the conference report:

The Senate amendment is generally the same as the House bill, except the provision does not apply to (1) interest deductible under section 163 * * * [H. Conf. Rept. 99-841, at 168 (1986), 1986-3 C.B. (Vol. 4) 1, 168.]

The clear implication is that the "in connection with" phrase would include interest were it not for the interest exception added by the Senate. There is no exception, however, for other costs of financing.

27 F.3d 367">Petitioner and the Court of 1994 U.S. Tax Ct. LEXIS 63">*85 Appeals in In re Kroy (Europe) Ltd., supra, contend that the interest exception was provided for situations in which stock is redeemed by issuing a debt instrument to the stockholder. See 27 F.3d 367">In re Kroy (Europe) Ltd., supra at 369 n.3. In such cases, petitioner suggests, interest payments to the former stockholder potentially could have been characterized as actual consideration for the stock. The exception, according to petitioner, prevents such treatment. There is simply no support for this theory in the legislative history. ¹⁷ As more fully explained infra, according to 103 T.C. 345">*355 petitioner's interpretation of the phrase "in connection with", financing costs, including interest, would never be considered to be incurred in "connection with a redemption". Were we to accept petitioner's interpretation of the "in connection with" language, the exception for interest would become redundant. Apparently recognizing this, petitioner suggests that Congress was simply acting "out of an abundance of caution" in providing for an interest exception. We cannot accept the idea that Congress would provide a specific exception1994 U.S. Tax Ct. LEXIS 63">*86 for all "[deductions] allowable under section 163 (relating to interest)" merely out of an abundance of caution, while at the same time showing no apparent concern about leaving a broadly worded disallowance provision in place that literally applies to all other financing costs. If the exception for interest has any meaning, it must be that the costs of financing are covered by the "in connection with" language of section 162(k) when the financing is inextricably related to a redemption.

Petitioner notes that, historically, financing costs have been amortizable over the life of a loan. ¹⁸ Petitioner contends that neither section 162(k) nor its legislative1994 U.S. Tax Ct. LEXIS 63">*87 history mentions this historic treatment or gives any indication of an intent to change it. Indeed, petitioner argues that section 162(k) was enacted solely to "clarify" prior law. From this, petitioner concludes that the law concerning financing costs remains unchanged.

1994 U.S. Tax Ct. LEXIS 63">*88 Specifically, petitioner contends that section 162(k) clarified that the decision in Five Star Manufacturing Co. v. Commissioner, 355 F.2d 724">355 F.2d 724 (5th Cir. 1966) (allowing deduction for "greenmail payments" necessary for corporate survival), 103 T.C. 345">*356 revg. 40 T.C. 379">40 T.C. 379 (1963), was "bad law", and that the decisions in Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572 (1970) (disallowing deductions for legal, brokerage, and accounting fees incident to a redemption), and United States v. Hilton Hotels Corp., 397 U.S. 580">397 U.S. 580 (1970) (same), constituted "good law". However, the statute applies to all redemptions and "any amount" incurred in connection therewith. Sec. 162(k)(1) (emphasis added). Petitioner acknowledges that this transcends simple clarification of the law concerning greenmail.

Section 162(k) did make the clarifications noted by petitioner. See S. Rept. 99-313, 490 F.2d 218">supra at 223 & n.3, 1986-3 C.B. (Vol. 3) at 223 (citing 397 U.S. 572">Woodward v. Commissioner, supra; and 397 U.S. 580">United States v. Hilton Hotels Corp., supra; 355 F.2d 724">Five Star Manufacturing Co.1994 U.S. Tax Ct. LEXIS 63">*89 v. Commissioner, supra). However, the text of the statute and legislative history indicates that Congress intended more. Section 162(k) applies to deductions that are "otherwise allowable". This evidences an intent to override preexisting law. ¹⁹

The phrase "in connection with" also suggests that Congress was at least as concerned with the breadth of the statute's application as it was with clarification. The conference report states:

The conferees wish to clarify that, while the phrase "in connection with [a] 1994 U.S. Tax Ct. LEXIS 63">*90 redemption" is intended to be construed broadly, the provision is not intended to deny a deduction for otherwise deductible amounts paid in a transaction that has no nexus with the redemption other than being proximate in time or arising out of the same general circumstances. * * * [H. Conf. Rept. 99-841, 486 U.S. 107">supra at 168, 1986-3 C.B. (Vol. 4) at 168.]

The report goes on to provide several illustrative examples of the statute's scope. There is no mention in any of these examples of how prior law might have treated the expenses involved. Indeed, Congress explicitly considered the possibility that section 162(k) might be a change in the law:

In denying a deduction for payments in connection with redemptions of stock, the committee intends no inference regarding the deductibility of 103 T.C. 345">*357 such payments under present law. * * * [S. Rept. 99-313, 133 F.2d 200">supra at 224, 1986-3 C.B. (Vol. 3) at 224.]

Thus, we cannot say that Congress intended no change in the law where costs associated with redemptions are concerned. ²⁰

1994 U.S. Tax Ct. LEXIS 63">*91 Nor can we agree that the general rule -- allowing amortization of financing costs over the life of the loan -- implies that such costs are not "in connection with" a redemption. This rule, and most of the cases and rulings cited by petitioner in support of it, ²¹1994 U.S. Tax Ct. LEXIS 63">*92 deal with whether financing costs should be capitalized as part of the cost of purchasing or constructing an asset, or as the cost of "creating" a loan. Under section 263, an expense is capitalized into the cost of a particular asset if it is incurred "for" that asset. Sec. 263(a)(1). It is this inquiry to which the cases and rulings cited by petitioner generally adhere. ²² See, e.g., 103 T.C. 345">*358 Anover Realty Corp. v. Commissioner, 33 T.C. 671">33 T.C. 671, 33 T.C. 671">675 (1960) ("The expenditure is not for the purpose of securing an asset" (emphasis added)).

1994 U.S. Tax Ct. LEXIS 63">*93

The scope and language of section 162(k) contrasts sharply with that of section 263. Section 162(k) applies to a limited class of transactions (redemptions). Within that limited class of transactions, however, it is drafted to apply to a broad range of expenses, as illustrated in the Senate report (followed by the conference committee):

The committee understands that some corporate taxpayers are taking the position that expenditures incurred to repurchase stock from stockholders to prevent a hostile takeover of the corporation by such shareholders -- so-called "greenmail" payments -- are deductible business expenses. The committee wishes to provide expressly that all expenditures by a corporation incurred in purchasing its own stock, whether representing direct consideration for the stock, a premium payment above the apparent stock value, or costs incident to the purchase, are nonamortizable capital expenditures. [S. Rept. 99-313, 133 F.2d 200">supra at 223, 1986-3 C.B. (Vol. 3) at 223; emphasis added.]

We construe the phrase "in connection with" in the manner prescribed by Congress and prior case law interpreting that phrase. ²³ The cases cited by petitioner1994 U.S. Tax Ct. LEXIS 63">*94 apply a different legal inquiry.

We respond similarly to petitioner's reliance on Woodward v. Commissioner, 397 U.S. 572">397 U.S. 572 (1970), and United States v. Hilton Hotels Corp., 397 U.S. 580">397 U.S. 580 (1970). Petitioner contends that our interpretation of section 162(k) is essentially a reversion to the "primary purpose" test for expense characterization -- a test that was rejected in Woodward and Hilton. Instead, petitioner1994 U.S. Tax Ct. LEXIS 63">*95 urges us to utilize the "origin of the claim" test, which derives from the decision in United States v. Gilmore, 372 U.S. 39">372 U.S. 39 (1963), and was adopted in Woodward v. Commissioner, 397 U.S. 572">397 U.S. at 578. Petitioner argues that the "origin" of the financing costs is in the loan and debt transactions, which, under the latter test, would be 103 T.C. 345">*359 regarded as separate from the redemption. ²⁴ In In re Kroy (Europe) Ltd., 27 F.3d 367">27 F.3d at 369, the Court of Appeals for the Ninth Circuit relied heavily on identical reasoning to reach its conclusion.

The approach utilized by petitioner and the Court of Appeals for the Ninth Circuit assumes that the inquiry in this case is the same as that contemplated by the origin of the claim 1994 U.S. Tax Ct. LEXIS 63">*96 test. ²⁵ We disagree. The origin test first arose out of a need to determine whether the expenses of defending a lawsuit were of a business or personal nature. See United States v. Gilmore, 372 U.S. 39">372 U.S. 39, 372 U.S. 39">43-44 (1963); Commissioner v. Tellier, 383 U.S. 687">383 U.S. 687, 383 U.S. 687">689 (1966); see also Accardo v. Commissioner, 942 F.2d 444">942 F.2d 444 (7th Cir. 1991), affg. 94 T.C. 96">94 T.C. 96 (1990); Fischer v. United States, 490 F.2d 218">490 F.2d 218, 490 F.2d 218">222 (7th Cir. 1973). It was expanded in 397 U.S. 572">Woodward v. Commissioner, supra, and 397 U.S. 580">United States v. Hilton Hotels Corp., supra, to deal with the question of whether such expenses were current or capital in nature.²⁶ See 397 U.S. 572">Woodward v. Commissioner, supra at 574; 397 U.S. 580">United States v. Hilton Hotels Corp., supra at 582; see also Anchor Coupling Co. v. United States, 427 F.2d 429">427 F.2d 429, 427 F.2d 429">433 (7th Cir. 1970). By contrast, there is no question that the financing costs at issue in this case are capital and business-related1994 U.S. Tax Ct. LEXIS 63">*97 expenditures. Goodwin v. Commissioner, 75 T.C. 424">75 T.C. 424, 75 T.C. 424">440-441 (1980). This initial characterization and treatment of the expense will be the same regardless of our decision. The issue here is simply whether these financing costs were incurred "in connection with" the redemption within the meaning of section 162(k). The origin of the claim test provides no answer to this question.

1994 U.S. Tax Ct. LEXIS 63">*98 In utilizing the origin test in 372 U.S. 39">United States v. Gilmore, supra; 383 U.S. 687">Commissioner v. Tellier, supra; 397 U.S. 572">Woodward v. Commissioner, supra; and 397 U.S. 580">United States v. Hilton Hotels Corp., supra the Supreme Court looked to the nature of the lawsuit at 103 T.C. 345">*360 issue; i.e., the actions of the defendant involved in the suit, and the kind of transaction from which the claim arose. See Entwicklungs und Finanzierungs A.G. v. Commissioner, 68 T.C. 749">68 T.C. 749, 68 T.C. 749">759 (1977); Boagni v. Commissioner, 59 T.C. 708">59 T.C. 708, 59 T.C. 708">713 (1973). In essence, this Court looked to the raison d'etre for the suit, as distinguished from the consequences of defending (or failing to defend) the suit. See 427 F.2d 429">Anchor Coupling Co. v. United States, supra at 433.

The financing costs here correspond to the legal fees in the cited cases. The debt in this case is the analog to the lawsuits. Nevertheless, petitioner would have us end the analysis at this point. Petitioner argues that the origin of the financing costs is in its loan transaction 1994 U.S. Tax Ct. LEXIS 63">*99 and that we need look no further. This cannot be the end of the analysis. If it were, the Supreme Court in the cited cases would have ended its analysis by concluding that the legal fees originated in lawsuits. This would have told the Court nothing. Instead, the Court was forced to look further, to the origin and nature of the lawsuits. 59 T.C. 708">Boagni v. Commissioner, supra at 713.

If we were to apply the origin test here, we would also be forced to look further to the origin of the financing transaction. When we do so, we find that the loan transaction had its origin in the redemption plan. The financing originated in the planning stages of the redemption and nowhere else. At this point, however, the origin of the claim test breaks down. For the redemption was also a consequence of the financing. Thus, the origin test does not help to resolve this case. Nor should we expect it to. It was designed to make substantive distinctions between business and personal expenditures, or between current and capital expenditures. There are no such distinctions to be made here.

The appropriate test is found in the statute itself. It is an inquiry into whether1994 U.S. Tax Ct. LEXIS 63">*100 the expenditures are "in connection with" the redemption. ²⁷1994 U.S. Tax Ct. LEXIS 63">*101 It applies simply and clearly to the 103 T.C. 345">*361 issue at hand. We see no reason to engage in difficult alternative lines of inquiry when the test provided in the statute is so readily applicable. Contrary to petitioner's arguments, and those of the Court of Appeals in In re Kroy (Europe) Ltd., see 27 F.3d 367">27 F.3d at 370, our interpretation is not a reversion to the "primary purpose" test or a rejection of the origin test, but rather a common sense application of the specific test provided in the statute.²⁸

1994 U.S. Tax Ct. LEXIS 63">*102 Petitioner next attempts to classify its procurement of financing as a transaction having "no nexus with the redemption other than" its temporal and circumstantial proximity. Petitioner cites the conference report, which states:

The conferees wish to clarify that, while the phrase "in connection with [a] redemption" is intended to be construed broadly, the provision is not intended to deny a deduction for otherwise deductible amounts paid in a transaction that has no nexus with the redemption other than being proximate in time or arising out of the same general circumstances. * * * [H. Conf. Rept. 99-841, 486 U.S. 107">supra at 168, 1986-3 C.B. (Vol. 4) at 168.]

In order to make this argument, however, petitioner relies on the case law regarding capitalization of financing costs. We have already determined that case law to be inapposite under section 162(k). Moreover, on a factual basis, we think it somewhat disingenuous to say that the financing in this case had no nexus with the redemption. Rather, it was absolutely necessary to the redemption. ²⁹ Instead of arising 103 T.C. 345">*362 out of the same general circumstances, the financing in this case arose solely 1994 U.S. Tax Ct. LEXIS 63">*103 because of the redemption. As examples of transactions arising out of the same general circumstances (but not in connection with), the conference report describes a payment to a departing employee (whose stock is also redeemed) in discharge of the corporation's obligations under an employment contract. Other examples include:

Payments in discharge of other types of contractual obligations, in settlement of litigation, or pursuant to other actual or potential legal obligations or rights, may also be outside the intended scope of the provision to the extent it is clearly established that the payment does not represent consideration for the stock or expenses related to its acquisition * * *. [H. Conf. Rept. 99-841, 486 U.S. 107">supra at 169, 1986-3 C.B. (Vol. 4) at 169; emphasis added.]

By contrast, petitioner's financing costs were expenses directly related to the acquisition of its stock, as we have found above. Thus, we reject petitioner's argument that such costs have no nexus with the redemption.

1994 U.S. Tax Ct. LEXIS 63">*104 Petitioner next argues that, structurally, the statute is organized to suggest that financing costs were not considered to be in connection with a redemption. For this argument, petitioner relies on the placement of the interest exception within subparagraph (A) of paragraph (2). The two exceptions listed in that subparagraph, according to petitioner, are of a kind; namely, deductions for amounts potentially characterizable as actual consideration for stock. According to petitioner, the exception in subparagraph (B), on the other hand, relates to incidental expenses (defined not to include financing costs) but only when paid or incurred in connection with the redemption of any stock in certain regulated investment companies. Under this theory, the statute contemplates interest -- a financing cost -- only as a potential payment in consideration for stock, not as an expense "in connection with" a redemption. From this, petitioner concludes that other financing costs, such as those at issue, are also not in connection with a redemption.

Petitioner's theory is mere speculation. In the absence of legislative guidance, we cannot say for certain why section 162(k)(2) groups the exceptions1994 U.S. Tax Ct. LEXIS 63">*105 as it does. At bottom, however, this argument simply returns us to the phrase "in 103 T.C. 345">*363 connection with". We have already decided that it should be interpreted broadly. A speculative theory regarding the statute's structure is not enough to convince us otherwise.

Petitioner argues that our interpretation is insupportable because it "[indicates] a purported breadth of I.R.C. § 162(k) that would include not only the costs related to obtaining funds through borrowing, but also costs of obtaining funds used in a redemption through sales of assets, operating cash flows, etc." Petitioner's argument attributes a purely legalistic modus operandi to the "in connection with" inquiry. That inquiry, by contrast, has always been a factual one. Centel Communications Co. v. Commissioner, 920 F.2d 1335">920 F.2d 1335, 920 F.2d 1335">1341 n.6, 1342 (7th Cir. 1990), affg. 92 T.C. 612">92 T.C. 612 (1989). Thus, the statute's "purported breadth" will be limited to those circumstances indicating an actual factual relationship between the expenditure and the redemption.³⁰

1994 U.S. Tax Ct. LEXIS 63">*106 We need not address petitioner's fear that section 162(k) might be extended to the costs of asset sales, the proceeds of which are used to fund a redemption. We note however, that, in such cases, the factual relationship between the redemption and the cost at issue would be significantly more attenuated than the connection we address today. For our purposes, it is enough to decide that, on the facts of this case, petitioner's financing costs were incurred in connection with its redemption. As with most debt, petitioner was expressly required by each lender and debt purchaser to use the proceeds for a clearly specified purpose -- the redemption, the refinancing of the bridge loan, and other refinancings brought about solely due to the redemption. The purchasers and lenders specifically conditioned their loans and debt purchases. Had the redemption not taken place, no loans would have been forthcoming. In the case of most asset sales, on the other hand, the purchaser would have no reason to condition the seller's use of the proceeds upon anything. A seller of assets would have full discretion to use the proceeds for a redemption or for any other purpose. Petitioner was given1994 U.S. Tax Ct. LEXIS 63">*107 no such latitude.

103 T.C. 345">*364 Petitioner also argues that the revenue estimates for section 162(k) provide evidence of its intended scope. The minimal level of those estimates, according to petitioner, indicates the appropriateness of a less expansive interpretation for the section. We place little faith in the interpretative value of these estimates. Petitioner cites, and we have found, no case which uses such estimates as a factor in its interpretation of a statute. ³¹ The legislative history provides no explanation for the numbers reached, nor does it state the assumptions on which they are based.

Petitioner next contends that, even if the financing costs of its bridge loans are 1994 U.S. Tax Ct. LEXIS 63">*108 subject to section 162(k), the financing costs associated with its issuance of permanent debt on November 1, 1988, are not "in connection with" its LBO. The facts, however, contradict this contention. Donald P. Brennan, head of Morgan Stanley's merchant banking division, stated that the permanent debt was "part of the plan" of the redemption. On April 6, 1988, at the very first stage of planning, Morgan Stanley proposed a tentative timetable for the LBO including -- as the final step -- a refinancing with permanent debt. On June 28, 1988, Bankers Trust distributed a confidential document to various banks encouraging them to join in the banking syndicate. That document assumed that the bridge loans would be refinanced "at the date of the merger." ³² In July of 1988, Mr. Brennan contacted Dillon, Read & Co., regarding the possibility that Dillon, Read & Co. would act as qualified independent underwriter of permanent financing. The drafting of the preliminary prospectus for the public offering of permanent financing began at that time as well. Morgan Stanley issued a letter dated August 8, 1988, stating that it was "highly confident" of its ability to underwrite the permanent1994 U.S. Tax Ct. LEXIS 63">*109 financing at market rates in an amount at least sufficient to repay the $ 400 million of bank bridge loans under the credit agreement. Indeed, on June 25, 1988, over 1 month prior to the initiation of the tender offer, the institutional investors had committed to purchase permanent 103 T.C. 345">*365 financing securities of $ 95 million. On August 1, 1988 -- still 7 days before the close of the tender offer -- FH Holdings, FH Acquisition, and the investors executed a securities purchase agreement, in which the investors made commitments to purchase bridge and permanent financing.

The confidential offering memorandum for the bridge notes, dated July 1988, is even more explicit. It states:

Because the Acquisition is expected to close prior to the time that the Permanent Financing will be issued, the financing1994 U.S. Tax Ct. LEXIS 63">*110 necessary to complete the Acquisition will be provided in two stages. * * * In the second stage of the financing, the Bridge Notes will be refinanced out of the proceeds of the issuance of the Permanent Financing. [Emphasis added.]

Thus, according to this document, the permanent financing was not only in connection with the redemption, but "necessary" to it as well.

In actuality, just 8 days separated the completion of the "redemption" and the issuance of the permanent financing. The tender offer for Fort Howard stock by FH Acquisition closed on August 8, 1988. The term and bridge loans were utilized on that date as well. On October 24, 1988, FH Holdings was merged into FH Acquisition. FH Acquisition survived the merger and was immediately merged with and into petitioner. And, on November 1, 1988, the permanent financing was issued and used to pay in full the bank bridge loan and all the subordinated floating-rate bridge notes.

On these facts, we find that the issuance of permanent financing on November 1, 1988, was clearly "in connection with" the redemption here at issue. The permanent debt was a refinancing of the bridge debt and term loans used to redeem petitioner's1994 U.S. Tax Ct. LEXIS 63">*111 shares in the tender offer. The credit agreement labels it as such and requires petitioner to issue refinanced permanent debt within 13 months. ³³ In Huntsman v. Commissioner, 905 F.2d 1182">905 F.2d 1182, 905 F.2d 1182">1184-1185 (8th Cir. 1990), revg. and remanding 91 T.C. 917">91 T.C. 917 (1988), the Court of Appeals for the Eighth Circuit found that the refinancing of the taxpayer's residence was "in connection with" the original 103 T.C. 345">*366 purchase because it "was merely an integrated step in securing the permanent financing". In Huntsman, the taxpayer purchased a principal residence in January 1981. The residence was partly financed by a 3-year balloon loan, secured by a mortgage on the property. The note was payable in monthly installments with the balance due in January 1984. On September 16, 1983, a few months prior to the maturity date of the loan, the taxpayers refinanced with a 30-year loan, paying off the balloon note and a second note. As part of the refinancing, the taxpayers paid points and deducted those points pursuant to section 461(g)(2), which permits a deduction for points paid in respect of any indebtedness incurred "in connection1994 U.S. Tax Ct. LEXIS 63">*112 with" the purchase or improvement of a principal residence. The Court of Appeals for the Eighth Circuit held that the phrase "in connection with" should be "broadly construed" and that "Acquiring the permanent mortgage was done to extinguish the short-term loans and finalize the purchase of the home." Huntsman v. Commissioner, 905 F.2d 1182">905 F.2d at 1185.

Petitioner's primary argument in this regard is simply that the successful issuance of the permanent financing was1994 U.S. Tax Ct. LEXIS 63">*113 never certain because of the risk involved. However, this does not obscure the fact that the issuance of such financing was part of the merger plan from before the time such plan was adopted by petitioner's board. Moreover, regardless of any uncertainty, the permanent financing was indeed issued. As in 905 F.2d 1182">Huntsman v. Commissioner, supra, it was issued to extinguish the short-term loans and finalize the financing for the redemption.

In 905 F.2d 1182">Huntsman v. Commissioner, supra, a majority of this Court held that the refinancing of the taxpayers' home was not in connection with the purchase. However, the majority's decision states:

We do not herein decide that all types of refinancing of a principal residence fall outside the exception of sec. 461(g)(2). An example may be the building of a residence with a construction loan replaced upon completion with a permanent mortgage loan. Another example may be a "bridge" loan, depending upon the circumstances. * * * [Huntsman v. Commissioner, 91 T.C. 917">91 T.C. 920 n.5.]

Both of these scenarios are represented in this case. The buyout group planned from the start to replace the bridge 103 T.C. 345">*367 debt with the 1994 U.S. Tax Ct. LEXIS 63">*114 permanent debt upon completion of the redemption. Moreover, the period between purchase and refinancing in 905 F.2d 1182">Huntsman v. Commissioner, supra (over 2 1/2 years) was substantially longer than the period here. Therefore, this case does not present an occasion to reconsider our opinion in 905 F.2d 1182">Huntsman v. Commissioner, supra.

Finally, petitioner contends that Esmark, Inc. & Affiliated Cos. v. Commissioner, 90 T.C. 171">90 T.C. 171 (1988), affd. without published opinion 886 F.2d 1318">886 F.2d 1318 (7th Cir. 1989), and similar cases support its argument. In Esmark, this Court refused to apply the "step-transaction doctrine" to disregard the first part (the "tender offer") of a two-step acquisition despite the fact that the two steps were part of an overall plan. Again, petitioner's argument obscures the significance of the "in connection with" inquiry. The step transaction doctrine is aimed at determining whether one of several steps in a transaction is "individually meaningless". 90 T.C. 171">Esmark, Inc. & Affiliated Cos. v. Commissioner, supra at 195. The "in connection with" inquiry is broader, focusing on whether steps in1994 U.S. Tax Ct. LEXIS 63">*115 a transaction have a common "nexus" or are "related". See H. Conf. Rept. 99-841, 486 U.S. 107">supra at 168-169, 1986-3 C.B. (Vol. 4) at 168-169. While the presence of steps in a single plan may prove little about the independent significance of such steps, it is conspicuous evidence of a common nexus and relation between them. We have made our inquiry and find that a nexus and relation is clearly present between the "redemption" in this case and the permanent financing. ³⁴

This concludes the legal analysis in this case as presented by the parties and as addressed by the Court of Appeals in 27 F.3d 367">In re Kroy (Europe) Ltd., supra.1994 U.S. Tax Ct. LEXIS 63">*116 Additional analysis is warranted, however, in order to fully explain the application of section 162(k) to amortization deductions for the costs here at issue. The statute disallows deductions for "any amount paid or incurred". Sec. 162(k)(1). Does amortization constitute an amount paid or incurred? We answer this question in the affirmative.

103 T.C. 345">*368 Section 162(k) was designed to provide that costs in connection with a redemption are "nonamortizable capital expenditures." S. Rept. 99-313, 490 F.2d 218">supra at 223, 1986-3 C.B. (Vol. 3) at 223 (emphasis added); H. Rept. 99-426, at 248 (1986), 1986-3 C.B. (Vol. 2) 1, 248 (emphasis added). In explicitly prohibiting amortization, the legislative history suggests that amortization was considered an "amount paid" by Congress.³⁵

1994 U.S. Tax Ct. LEXIS 63">*117 The case law supports this conclusion. In Commissioner v. Idaho Power Co., 418 U.S. 1">418 U.S. 1 (1974), the Supreme Court explored whether construction equipment depreciation constituted an "amount paid out" as a capital expenditure in constructing a capital asset for purposes of section 263(a)(1). The Court stated:

There is no question that the cost of the transportation equipment was "paid out" in the same manner as the cost of supplies, materials, and other equipment, and the wages of construction workers. * * * In acquiring the transportation equipment, taxpayer "paid out" the equipment's purchase price; depreciation is simply the means of allocating the payment over the various accounting periods affected. As the Tax Court stated in Brooks v. Commissioner, 50 T.C., at 935, "depreciation -- inasmuch as it represents a using up of capital -- is as much an 'expenditure' as the using up of labor or other items of direct cost." [418 U.S. 1">Id. at 16-17; fn. ref. omitted.]

For tax purposes, amortization serves a purpose similar, if not identical, to depreciation. See Arkansas-Oklahoma Gas Co. v. Commissioner, 201 F.2d 98">201 F.2d 98, 201 F.2d 98">102 (8th Cir. 1953),1994 U.S. Tax Ct. LEXIS 63">*118 revg. 17 T.C. 1208">17 T.C. 1208 (1952); Black's Law Dictionary 76, 397 (5th ed. 1979) (definitions of "amortization" and "depreciation"). Moreover, while the expenditures and transactions to which sections 162(k) and 263 apply may be different, the aims of the two sections are analogous. Both prohibit current deductions and characterize the expenses to which they apply as capital. In light of these similarities and the decision in Idaho Power, we see no way to avoid characterizing the amortization deductions here at issue as "amounts paid or incurred". ³⁶

1994 U.S. Tax Ct. LEXIS 63">*119

103 T.C. 345">*369 This treatment comports with the congressional intent to treat costs in connection with a corporation's purchase of its own stock as capital expenditures. S. Rept. 99-313, 490 F.2d 218">supra at 223, 1986-3 C.B. (Vol. 3) at 223; H. Rept. 99-426, 490 F.2d 218">supra at 248, 1986-3 C.B. (Vol. 2) at 248. "[S]tock is most naturally viewed as a capital asset". Arkansas Best Corp. v. Commissioner, 485 U.S. 212">485 U.S. 212, 485 U.S. 212">222-223 (1988). Costs capitalized as part of the purchase price of stock are not amortizable as a matter of general tax law. Barbour Coal Co. v. Commissioner, 74 F.2d 163">74 F.2d 163 (10th Cir. 1934), affg. a Memorandum Opinion of this Court; Skaggs Cos. v. Commissioner, 59 T.C. 201">59 T.C. 201, 59 T.C. 201">207 (1972). Section 162(k) ostensibly implements an alternative capitalization scheme for expenses incurred "in connection with" particular stock purchases. Therefore, it is only logical that the prohibition on amortization should be extended to expenses covered by that scheme. If we were to characterize amortization deductions as something other than amounts paid or incurred, 1994 U.S. Tax Ct. LEXIS 63">*120 they would arguably be deductible under the plain language of section 162(k). This would thwart the purpose of the statute.

The final issue for decision is whether portions of the $ 40 million fee paid to Morgan Stanley should be characterized as interest deductible under section 163, which is excepted from the general rule under section 162(k). On its 1988 Form 1120, petitioner treated $ 36 million of the $ 40 million paid to Morgan Stanley as a cost of obtaining the financing for its LBO. Petitioner allocated this $ 36 million on a pro rata basis over all the various kinds of loans and debt issued in the transaction. ³⁷ Respondent does not challenge this allocation.

By amendment to petition, petitioner contended (and continues to contend) that the $ 40 million payment should be allocated as follows: (1) $ 26.2 million as additional interest on the bridge financing, which would be fully deductible in 103 T.C. 345">*370 1988 due to retirement of such financing in that year; (2) $ 12.42 million as1994 U.S. Tax Ct. LEXIS 63">*121 pro rata costs of issuing or obtaining all the various loans and debt issuances (including the permanent financing) used to finance the LBO; and (3) $ 1.38 million as nondeductible costs of obtaining equity financing.

As to those portions agreed by petitioner to be costs of obtaining debt financing, we have already decided that such costs were incurred in connection with the redemption and are neither deductible nor amortizable due to section 162(k). As noted, petitioner does not contest the nondeductibility of those portions of the fee agreed to be costs of obtaining equity financing. Thus, we need only decide whether the $ 26.2 million portion of the fee constituted additional interest on the bridge financing. In making this inquiry, we look to all the facts and circumstances and not mere terminology. See Duffy v. United States, 231 Ct. Cl. 679">231 Ct. Cl. 679, 690 F.2d 889">690 F.2d 889, 690 F.2d 889">897 (1982); Wilkerson v. Commissioner, 70 T.C. 240">70 T.C. 240, 70 T.C. 240">253 (1978), revd. on other grounds 655 F.2d 980">655 F.2d 980 (9th Cir. 1981). Petitioner bears the burden of proof. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933).1994 U.S. Tax Ct. LEXIS 63">*122

"Interest" is "the amount which one has contracted to pay for the use of borrowed money." Old Colony R.R. Co. v. Commissioner, 284 U.S. 552">284 U.S. 552, 284 U.S. 552">560 (1932). Interest is also commonly defined as "compensation for the use or forbearance of money." Deputy v. du Pont, 308 U.S. 488">308 U.S. 488, 308 U.S. 488">498 (1940). Interest is the equivalent of "rent" for the use of funds. Dickman v. Commissioner, 465 U.S. 330">465 U.S. 330, 465 U.S. 330">339 (1984).

In contrast to these definitions, at the time of the LBO, all the parties involved intended, agreed, and believed that the fee was compensation for services. First, we note that petitioner paid amounts -- other than the $ 40 million at issue -- that were specifically designated as "additional interest". At trial, Mr. Donald P. Brennan, head of merchant banking at Morgan Stanley and later a director of petitioner, was asked whether the points and interest (exclusive of the $ 40 million) paid to Morgan Stanley were sufficient to compensate the firm for its risk in committing to purchase the amount of bridge notes ($ 793 million). Mr. Brennan replied that "at the time it appeared to be" but that "in1994 U.S. Tax Ct. LEXIS 63">*123 hindsight" it did not. The proxy statement issued to the stockholders for the purpose of approving the merger of FH Acquisition into Fort Howard indicates that Morgan Stanley acted as financial adviser to 103 T.C. 345">*371 FH Acquisition and as dealer/manager for the tender offer, and that, as "compensation for such services", Morgan Stanley was paid a "transaction fee" of $ 40 million. Mr. Brennan agreed that this description was correct at the time the proxy statement was written. On October 25, 1988, petitioner filed the prospectus for the subordinated notes and debentures with the SEC. The prospectus states that Morgan Stanley received a financial advisory fee of approximately $ 40 million in connection with the acquisition. Mr. Brennan, who was a director of petitioner at the time the prospectus was filed, agreed that the description of the $ 40 million transaction fee was correct at the time. Petitioner's Form 10-K for the year 1988, filed with the SEC, contains an identical description of the $ 40 million transaction fee. Ms. Kathleen J. Hempel, a director and principal financial officer of petitioner, agreed that this description was correct at the time it was filed. She testified1994 U.S. Tax Ct. LEXIS 63">*124 that she would have been "very concerned" if the description had been inaccurate. Ms. Hempel also approved the allocation of the $ 40 million fee on petitioner's tax return for 1988. At the time of her approval, she did not believe that any of the $ 40 million was interest.

All the documentary evidence unambiguously treats the payment in question as a fee for services, and petitioner treated the payment as a cost of obtaining the financing rather than as interest on its 1988 return. Petitioner first agreed to pay the $ 40 million in a letter executed to "confirm the arrangements under which * * * [Morgan Stanley] is engaged on an exclusive basis by FH Acquisition Corp., * * * in connection with a possible acquisition * * * of Fort Howard Corporation". In the letter, dated June 25, 1988, the payment was characterized as a "transaction fee", "In the event that [FH Acquisition] consummates an Acquisition Transaction". The letter was written by Morgan Stanley and signed by a representative of FH Acquisition. It stated:

This letter is to confirm our understanding with you with respect to our engagement. In connection with this assignment, you and we have agreed that Morgan Stanley1994 U.S. Tax Ct. LEXIS 63">*125 will assist * * * [FH Acquisition] in its preparation and structuring of the Acquisition Transaction and provide whatever financial advice and assistance may be required in connection therewith. [Emphasis added.]

103 T.C. 345">*372 In the letter, FH Acquisition agreed

to retain Morgan Stanley as sole dealer manager for the Offer and to enter into a dealer manager agreement with Morgan Stanley in Morgan Stanley's standard form, but not providing for the payment of any fees other than those provided for in this letter agreement. * * *

Thus, according to the letter, the parties contemplated that this would be the only "fee" that Morgan Stanley would receive for its services in organizing the LBO. ³⁸

On July 1, 1988, FH Acquisition sent a formal letter to Morgan Stanley by which it engaged Morgan Stanley as "Dealer Manager" for the tender offer. 1994 U.S. Tax Ct. LEXIS 63">*126 That letter stated in pertinent part:

2. [FH] Acquisition hereby engages you as financial advisor and appoints you as Dealer Manager and authorize[s] you to act as such in connection with the Offer. As Dealer Manager, you agree, in accordance with your customary practice, to perform those services in connection with the Offer as are customarily performed by investment banking concerns in connection with tender offers of like nature, including but not limited to soliciting Shares sought to be purchased by [FH] Acquisition pursuant to the Offer.

* * *

5. [FH] Acquisition and you agree that your services as financial advisor and the Dealer Manager hereunder are to be compensated as a component of the fee for your financial advisory services to [FH] Acquisition contemplated by the letter agreement between you and [FH] Acquisition, dated as of June 24, 1988. [Emphasis added.] ³⁹

1994 U.S. Tax Ct. LEXIS 63">*127 Morgan Stanley billed FH Acquisition for the $ 40 million fee on August 8, 1988, by an invoice that described the payment as follows: "For Financial Advisory Services rendered in organizing the financing required for the purchase of all the outstanding common shares of Fort Howard Corporation by FH Acquisition Corp." Morgan Stanley's internal documents all describe the $ 40 million fee as an "organizer fee". FH Acquisition paid the $ 40 million along with other "fees" listed in the same invoice, on August 9, 1988. Morgan Stanley's internal documents used to determine the feasibility of the tender offer and debt issuances all list the payment as an "organizer fee".

103 T.C. 345">*373 The magnitude of the fee is not out of line with the size of the transaction and the extent of Morgan Stanley's services. At the time, petitioner's LBO was one of the largest on record and was the largest in which Morgan Stanley had been involved. Morgan Stanley played a substantial role in getting the commitment from the five lead banks and in selling the LBO as a credit risk to the remaining banks in the bank syndicate. It also acted as financial adviser and dealer manager for all stages of the LBO. 1994 U.S. Tax Ct. LEXIS 63">*128 Petitioner points to testimony that Morgan Stanley's fee schedule in effect at the time for mergers and acquisitions would have called for a fee of $ 13.8 million on a transaction the size of petitioner's without any commitment of funds by Morgan Stanley. From this, petitioner concludes that $ 26.2 million ($ 40 million less $ 13.8 million) must have been "compensation for the use of money."

The LBO was performed by Morgan Stanley's merchant banking department, which used a different fee schedule from the mergers and acquisitions department. Moreover, Mr. Brennan testified that it was not possible to compare a scenario in which Morgan Stanley committed capital to one in which it did not. According to testimony from Mr. Brennan and Mr. Robert H. Niehaus, another principal of Morgan Stanley, the fee schedule used by the merchant banking department in 1988 indicated a fee of approximately 1 percent for a transaction of $ 4 billion, which was the size of petitioner's LBO. This correlates perfectly to the fee of $ 40 million actually charged by Morgan Stanley.

Petitioner's primary arguments in this regard focus on Morgan Stanley. Petitioner contends that Morgan Stanley has an average1994 U.S. Tax Ct. LEXIS 63">*129 (or target) return on its equity capital, which Morgan Stanley utilizes (along with the risk involved) in determining whether to commit funds to a particular investment. Petitioner argues that, in this case, if the $ 40 million was not interest, Morgan Stanley would have been committing capital to an investment (the bridge notes) with a very high risk at a rate whose yield was potentially below the firm's target return at the time. Essentially, petitioner asks us to determine the characterization of the amount at issue based on what would have been a "good" investment for Morgan Stanley.

103 T.C. 345">*374 Implicit in petitioner's argument (and those of its experts) is the assumption that all amounts paid as compensation for risk constitute interest. We disagree. As respondent correctly points out, a commitment fee compensates a lender for its risk in committing to make a loan, but nevertheless, does not constitute interest. Cf. Kovtun v. Commissioner, 54 T.C. 331">54 T.C. 331, 54 T.C. 331">338 (1970), affd. 448 F.2d 1268">448 F.2d 1268 (9th Cir. 1971).

Moreover, the established definitions of interest are not concerned with whether a lender receives a return commensurate1994 U.S. Tax Ct. LEXIS 63">*130 with its usual return. ⁴⁰ Indeed, this Court has stated that, in analyzing whether a payment constitutes interest or a service fee, "arguments focusing on the lender's costs appear to deal with the wrong party so far as the borrowers are concerned". Wilkerson v. Commissioner, 70 T.C. 240">70 T.C. 256. Here, the borrower's tax treatment is at issue. Thus, we find petitioner's arguments regarding Morgan Stanley's risk and required return somewhat beside the point.

Crucial in establishing whether a particular payment constitutes interest is whether the payment bears some relationship to the amount borrowed, or to the specific time period for which payment is designated. ⁴¹1994 U.S. Tax Ct. LEXIS 63">*132 Sharp v. Commissioner, 75 T.C. 21">75 T.C. 21, 75 T.C. 21">32 (1980), affd. 689 F.2d 87">689 F.2d 87 (6th Cir. 1982);1994 U.S. Tax Ct. LEXIS 63">*131 Lay v. Commissioner, 69 T.C. 421">69 T.C. 421, 69 T.C. 421">438 (1977). No such relationship is evidenced in the record before us. Petitioner's payment of the $ 40 million fee was contingent only upon successful completion of the tender offer. Morgan Stanley was to receive its $ 40 million fee regardless of the dollar amount of bridge notes purchased by it, as long as it had arranged for sufficient financing to purchase all the tendered shares. Mr. Brennan stated at trial that the amount of the fee was not in any way dependent upon the relative percentages of debt and equity that were going to be used to purchase petitioner's stock. He also confirmed that the amount of the fee was simply calculated as 1 percent of the total transaction, which was worth $ 4 billion in the aggregate. Thus, the $ 40 million was simply reflective of the total size of the LBO, rather than any particular debt amount purchased 103 T.C. 345">*375 by Morgan Stanley ⁴² and cannot be defined as "compensation [paid] for the use or forbearance of money." Deputy v. du Pont, 308 U.S. 488">308 U.S. at 498.

Moreover, the payment was not dependent in any way upon the term of the financing. The bridge notes had stated terms of approximately 13 months and provisions allowing conversion to long-term "rollover debentures" due September 15, 2004. The bridge notes were actually outstanding for less than 3 months. Yet, the $ 40 million was payable up front, without any reference to the term -- stated or actual -- of the notes. This is strong evidence that the payment did not constitute compensation for the use or forbearance of money. ⁴³Deputy v. du 308 U.S. 488">Pont, supra.Moreover, Mr. Niehaus testified that Morgan Stanley's management committee would probably not have approved the bridge loan investment "in the absence of some indication from the fixed income department that they were reasonably confident of syndicating the bridge loan". Indeed, on August 9, 1988, the same date the bridge notes were issued by petitioner, 1994 U.S. Tax Ct. LEXIS 63">*133 Morgan Stanley had executed contracts to make secondary sales of all but $ 75 million of the bridge notes it purchased. Morgan Stanley closed on these secondary sales and participations between August 11 and August 15, 1988, a maximum of 6 days after it purchased the bridge notes.

1994 U.S. Tax Ct. LEXIS 63">*134 103 T.C. 345">*376 Petitioner's attempts to use experts to support its characterization of the fee are simply restatements of its argument that the return received by Morgan Stanley would have been inadequate had the fee not constituted interest. These arguments ignore the fact that Morgan Stanley still received the same amount of money, whether it is characterized as interest or as a transaction fee. Mr. Charles B. Hintz, Morgan Stanley's treasurer, testified that -- as to Morgan Stanley's analysis of whether it received an adequate return on its capital -- the characterization of the $ 40 million as interest or service fee was irrelevant. Thus, we can infer nothing from petitioner's arguments regarding the return required by Morgan Stanley for its investment.

Petitioner agrees that some of the fee paid to Morgan Stanley constituted a payment for services. The question at issue, therefore, is how much. We must look to the actual evidence and testimony, rather than a theoretical model of risk and return, to make that determination. See Wilkerson v. Commissioner, 70 T.C. 240">70 T.C. 255-256. After doing so, we find petitioner's arguments unconvincing on both a factual1994 U.S. Tax Ct. LEXIS 63">*135 and logical basis. We conclude that the $ 26.2 million was a payment for services and not deductible under section 163 for purposes of section 162(k).

An appropriate order will be issued.

Hamblen, Chabot, Parker, Swift, Jacobs, Gerber, Wright, Wells, Whalen, Colvin, Chiechi, and Laro, JJ., agree with this majority opinion.