concurring: I write separately to clarify why I believe the fees paid by Metrobank to the FDIC are currently deductible.
In INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 86-87 (1992), the Supreme Court described two closely related types of costs that are to be capitalized under section 263: (1) Costs incurred in connection with the acquisition, creation, or enhancement of a specific capital asset; and (2) costs that provide significant benefits that accrue to a taxpayer in future years.
Recently, in analyzing costs allegedly incurred in connection with the acquisition or creation of a capital asset, three Courts of Appeals have reversed all or part of recent Tax Court opinions. See Wells Fargo & Co. & Subs. v. Commissioner, 224 F.3d 874 (8th Cir. 2000), affg. in part and revg. in part Norwest Corp. & Subs. v. Commissioner, 112 T.C. 89 (1999); PNC Bancorp, Inc. v. Commissioner, 212 F.3d 822 (3d Cir. 2000), revg. 110 T.C. 349 (1998); A.E. Staley Manufacturing Co. & Subs. v. Commissioner, 119 F.3d 482 (7th Cir. 1997), revg. and remanding 105 T.C. 166 (1995). In these opinions, because of the close relationship of the above types of costs, the Courts of Appeals use language and analyses that are relevant in the instant case to the issue as to the capitalization of fees paid because they allegedly provided to Metrobank significant future benefits.
In Wells Fargo & Co. & Subs. v. Commissioner, 224 F.3d at 885-887, the Court of Appeals for the Eighth Circuit explained as follows:
it is not proper to decide that a cost must be capitalized solely because the fact finder determines that the cost is “incidentally connected” with a long term benefit. This is supported by both Lincoln Savings and INDOPCO.
The INDOPCO case addressed costs which were directly related to the acquisition, while * * * [Wells Fargo] involves costs which were only indirectly related to the acquisition. * * * In this case, there is only an indirect relation between the salaries (which originate from the employment relationship) and the acquisition (which provides the long term benefit * * *).
Based on the above analysis of the Court of Appeals for the Eighth Circuit, salary and investigatory costs indirectly relating to the acquisition of a capital asset and indirectly providing the taxpayer with future benefits were not required to be capitalized under INDOPCO because they did not directly provide significant future benefits to the taxpayer. See id. at 889.
In PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 829, involving expenses paid for credit reports, appraisals, and salaries relating to consumer loans, the Court of Appeals for the Third Circuit refused to conclude that
in performing credit checks, appraisals, and other tasks intended to assess the profitability of a loan, the banks “stepped out of [their] normal method of doing business” so as to render the expenditures at issue capital in nature. Encyclopaedia Britannica, Inc. v. Commissioner, 685 F.2d 212, 217 (7th Cir. 1982).
The Court of Appeals for the Third Circuit, in PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 830, continued as follows (quoting from a portion of the taxpayer’s brief):
the Tax Court proceeded from the clearly accurate premise that the expenses in question were associated with the loans, incurred in connection with the acquisition of the loans, or “directly related to the creation of the loans,” * * * to the faulty conclusion that these expenses themselves created the loans. We conclude that the term “create” does not stretch this far. In Lincoln Savings, it was the payments themselves that formed the corpus of the Secondary Reserve; therefore, it naturally follows that these payments “created” the reserve fund. In * * * [the taxpayer’s] case, however, the expenses are merely costs associated with the origination of the loans; the expenses themselves do not become part of the balance of the loan. * * * [Citation omitted.]
While purporting to apply the Lincoln Savings language, both the Tax Court and the government effectively have transformed that language, by subtle but significant degrees, from a test based on whether a cost “creates” a separate and distinct asset, into a much more sweeping test ?}i ij: ‡
In PNC Bancorp, Inc. v. Commissioner, 110 T.C. at 370, we concluded that the costs in issue were “assimilated” into the asset that was acquired. In contrast, the Court of Appeals for the Third Circuit held that the costs reflected “recurring, routine day-to-day business” costs that may be currently deducted as the costs were not incurred for significant future benefits. PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 834. While the benefits from the consumer loans would continue for years, the Court of Appeals for the Third Circuit resolved not to expand the type of costs that must be capitalized “so as to drastically limit what might be considered as ‘ordinary and necessary’ expenses.” Id. at 830.
A.E. Staley Manufacturing Co. & Subs. v. Commissioner, 119 F.3d 482 (7th Cir. 1997), involved fees paid to investment bankers to explore alternative transactions in connection with an unsuccessful defense of a hostile tender offer. In reversing the Tax Court’s holding that the fees had to be capitalized, the Court of Appeals for the Seventh Circuit relied on the “well-worn notion” that costs incurred in defending a business are currently deductible. Id. at 487.
As noted in A.E. Staley Manufacturing by the Court of Appeals for the Seventh Circuit, the test to apply under INDOPCO is difficult to articulate and to apply. See id. The test is very factual and practical. In an effort to partially reconcile the various statements of the INDOPCO test and, in particular, in light of the recent Courts of Appeals opinions reversing the Tax Court’s application of the INDOPCO test, I offer the following:
Under INDOPCO, direct and indirect (e.g., overhead) costs that are similar to routine expenses incurred by a taxpayer in the ordinary and normal course of its business (e.g., salaries and insurance fees) need not be capitalized unless they directly relate to the acquisition, creation, or enhancement of a specific capital asset or unless they directly produce significant benefits to the taxpayer that accrue to the taxpayer in future years.
Applying this statement of the INDOPCO capitalization test to the fees involved in this case, it becomes clear that the fees should be currently deductible. Relevant aspects of the fees are described on pages 221-225 of the majority’s opinion. I would emphasize that the fees—
(1) Were paid to the FDIC, the Federal governmental agency which routinely supervises Metrobank in the normal course of its business, not to Community, the transferor of the deposit liabilities and not to third parties such as lawyers and financial advisers for a specific service necessary to consummate the conversion transaction;
(2) were similar to other insurance fees that were routinely paid by Metrobank to the Federal Government in the normal course of Metrobank’s banking business;
(3) both in amount paid per year ($71,518) and in the total cumulative amount paid over 5 years ($352,904), were generally less than Metrobank’s total regular insurance premiums paid into the FDIC funds in a single year (in 1993 and 1994, $465,046 and $463,583 respectively, and in 1995, $322,245);
(4) did not provide Metrobank with any additional insurance coverage with regard to its deposit liabilities (including those transferred from Community) and were not paid in lieu of the regular future annual insurance premiums due;
(5) once paid by Metrobank into the insurance funds, were not refundable to Metrobank and were available for use by the FDic to assist any participant in the funds;
(6) were triggered by and were coincidental with the conversion transaction, but had the origin and purpose, and were assessed and paid not because thereof but because of the broader purpose to shore up the financial strength of the FDIC’s insurance funds, the financial strength of which was of ongoing and necessary concern not just to the FDIC but to the entire financial community (and which concern reflected the same purpose for which Metrobank and others paid the annual premiums into the FDIC insurance funds). In other words, the FDIC, Metrobank, Community, and all other contributors into the insurance funds had the same purpose for paying the annual premiums and for paying the exit and entrance fees (i.e., the maintenance of the financial integrity of the Federal Government’s depository liability insurance programs, essential not just to the government, but also to every participant in the financial community — the Government, the banks and savings and loans, and even you and I, the depositors who hope and trust that we will always be able to get our money back).
For the reasons stated, I respectfully concur.