RUWE, WHALEN, and GALE, JJ., agree with this dissenting opinion.
M, a State bank, acquired a portion of the assets and
assumed a portion of the deposit liabilities of C, a failed
Federal savings association. Before the transaction, the deposit
liabilities of M and C were insured by different funds (B and S,
respectively) administered by the Federal Deposit Insurance
Corporation. The transaction was a "conversion transaction"
under
participated in a different fund, and M assumed C's deposit
liabilities. R determined that the exit and entrance fees
related to the transaction which M paid to S and B,
respectively, under
non-deductible capital expenditures. The fees were
capitalizable, R asserts, because they produced significant
future benefits to M in that M, following the assumption,
insured all of its deposit liabilities through B. M's use of B
to insure all of its deposit liabilities meant that M's future
costs*19 for compliance and insurance premiums would be lower than
if M had continued to use S to insure the assumed deposit
liabilities.
HELD: M's payment of the fees produced no significant
future benefit to M that would require capitalization of either
fee.
James R. Walker and Charles L. Mastin II for petitioner.
*212 LARO, JUDGE: The parties submitted this case to the Court without trial. See Rule 122. Respondent determined deficiencies of $ 15,288, $ 14,372, and $ 14,375 in petitioner's respective taxable years ended October 31, 1993, 1994, and 1995. Following concessions, we must decide whether petitioner may deduct the exit and entrance fees which its subsidiary, Metrobank, paid to the Federal Deposit Insurance Corporation (FDIC) with respect to a "conversion transaction" under
BACKGROUND
The parties have filed with the Court a stipulation of facts and certain related exhibits. We incorporate herein by reference that stipulation of facts and those exhibits. We find the stipulated facts accordingly, and we set forth the relevant facts in this background section. We also set forth in this section, as they relate to the operation of the FDIC and of the insurance funds at issue, the pertinent provisions of title 12 of the United States Code (1994) (title 12).
Petitioner is a Delaware corporation whose principle office was in East Moline, Illinois, when its petition was filed. It is a bank holding company that files consolidated Federal income tax returns. 2 It reports its income and expenses using an accrual*21 method and on the basis of a fiscal year ending *213 on October 31. It includes in its consolidated returns a wholly owned subsidiary, Metrobank, that is a bank chartered in Illinois.
The FDIC is a congressionally established corporation that serves primarily to protect financial institution depositors by insuring any deposit up to $ 100,000 that is held by a bank or savings association participating in the FDIC insurance program. The Banking Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) are separate funds which the FDIC maintains and administers under this program. *22 The BIF insures the deposit liabilities of participating banks, e.g., Metrobank. The SAIF insures the deposit liabilities of participating savings associations; e.g., Community Federal Savings Bank (Community). Each financial institution that participates in the FDIC's insurance program is generally assessed a semiannual charge (premium) equal to its liability for deposits multiplied by the applicable rate set forth in
Community is a failed savings association. On October 16, 1990, Metrobank submitted to the FDIC a bid to consummate a transaction (transaction) under which Metrobank would acquire a portion of Community's assets and assume a portion of Community's deposit liabilities. Because Community and Metrobank each insured its deposit liabilities through a different FDIC fund, and Metrobank had agreed to assume*23 Community's deposit liabilities, which would be insured after the transaction by the BIF instead of the SAIF, the transaction was a conversion transaction under
(i) the change of status of an insured depository
institution from a Bank Insurance Fund member to a Savings
Association Insurance Fund member or from a Savings Association
Insurance Fund member to a Bank Insurance Fund member;
(ii) the merger or consolidation of a Bank Insurance Fund
member with a Savings Association Insurance Fund member;
(iii) the assumption of any liability by --
*214 (I) any Bank Insurance Fund member to pay any deposits
of a Savings Association Insurance Fund member; or
(II) any Savings Association Insurance Fund member to
pay any deposits of a Bank Insurance Fund member;
(iv) the transfer of assets of --
(I) any Bank Insurance Fund member to any Savings
*24 Association Insurance Fund member in consideration of the
assumption of liabilities for any portion of the deposits
of such Bank Insurance Fund member; or
(II) any Savings Association Insurance Fund member to
any Bank Insurance Fund member in consideration of the
assumption of liabilities for any portion of the deposits
of such Savings Association Insurance Fund member;
Financial institutions are required by
Each insured depository institution participating in a
conversion transaction shall pay --
(i) in the case of a conversion transaction in which
the resulting or acquiring depository institution is not a
Savings Association Insurance Fund member, an exit fee
* * * which --
(I) shall be deposited in the Savings Association
*25 Insurance Fund; or
(II) shall be paid to the Financing Corporation,
if the Secretary of the Treasury determines that the
Financing Corporation has exhausted all other sources
of funding for interest payments on the obligations of
the Financing Corporation and orders that such fees be
paid to the Financing Corporation;
(ii) in the case of a conversion transaction in which
the resulting or acquiring depository institution is not a
Bank Insurance Fund member, an exit fee in an amount to be
determined by the [Federal Deposit Insurance] Corporation
* * * which shall be deposited in the Bank Insurance Fund;
and
(iii) an entrance fee in an amount to be determined by
the [Federal Deposit Insurance] Corporation * * *, except
that --
(I) in the case of a conversion transaction in
which the resulting*26 or acquiring depository
institution is a Bank Insurance Fund member, the fee
shall be the approximate amount which the [Federal
Deposit Insurance] Corporation calculates as necessary
to prevent dilution of the Bank Insurance Fund, and
shall be paid to the Bank Insurance Fund; and
(II) in the case of a conversion transaction in
which the resulting or acquiring depository
institution is a Savings Association Insurance Fund
member, the fee shall be the approximate amount which
the [Federal Deposit Insurance] Corporation calculates
as necessary to prevent dilution of the Savings
Association Insurance Fund, and shall be paid to the
Savings Association Insurance Fund.
*215 Metrobank consummated the transaction on November 2, 1990, and the FDIC approved the transaction on November 6, 1990, effective as of November 2, 1990. After the transaction, all of Metrobank's deposit liabilities*27 (including those assumed from Community) were insured by the BIF. Metrobank could not have insured through the BIF the deposit liabilities it had assumed from Community without paying the exit and entrance fees.
In total, Metrobank paid to the FDIC an exit fee of $ 309,565 and an entrance fee of $ 43,339 on its assumption of Community's deposit liabilities. Metrobank paid those fees in five annual installments, paying $ 71,518 in each subject year ($ 62,735 for the exit fee and $ 8,783 for the entrance fee). 3 For each of the subject years, petitioner claimed a deduction for the payment of the fees during that year. Petitioner also claimed for those respective years deductions of $ 465,046, $ 463,583, and $ 311,245 that Metrobank paid to the FDIC as semiannual insurance premiums under
*28 Pursuant to
If Metrobank did not pay its annual FDIC insurance premiums after the transaction, the FDIC could commence administrative proceedings to terminate involuntarily Metrobank's FDIC insurance. Metrobank could also in certain circumstances voluntarily terminate its FDIC insurance. Metrobank would not have been entitled to a refund for the exit or entrance fee which it paid to the FDIC incident to the transaction if it terminated its FDIC insurance after the transaction either voluntarily or involuntarily.
At the end of 1990, the approximate rates for depository insurance under the BIF and the SAIF were .12 percent (.0012) and .208 percent (.00208), respectively. As of the same time, SAIF rates were set to exceed BIF rates until 1998.
Respondent determined that petitioner could not deduct either fee that Metrobank paid*30 to the FDIC incident to the conversion transaction and disallowed petitioner's deductions for those payments. According to the notice of deficiency:
It has been determined that your deductions for the entrance and
exit fee paid to the Federal Deposit Insurance Corporation for
the transfer of your insured deposits from one depository
insurance to another depository insurance fund is a non-
deductible capital expenditure that is not subject to
depreciation or amortization.[4]
DISCUSSION
We are faced once again with the question of whether an expenditure may be deducted currently as an expense or must be capitalized and deducted in a later year. Following
*32 We decide this case as framed by respondent and hold that petitioner may deduct the fees. In reaching this holding, we specifically note that respondent did not determine, and has declined to argue, that the fees should be capitalized on the grounds that they were necessarily incurred in connection with the acquisition of another financial institution or, more specifically, the acquisition of the assets and liabilities of another financial institution. See, e.g.,
Our analysis begins with a general background of the FDIC and the pertinent insurance funds. Congress established the FDIC in 1933 to insure bank deposits, see
High interest rates, inflation, Government deregulation, fraud, and insider abuse caused a crisis in the savings association industry during the late 1970's*34 and the 1980's. The FSLIC's insurance fund was threatened by this crisis when a large number of failing savings associations approached the FSLIC with deposit insurance liabilities and hundreds of savings associations actually failed. The FSLIC's insurance fund became insolvent by billions of dollars after the FSLIC paid out billions of dollars to cover the failed savings associations' insured deposits and incurred additional liabilities on its closing of hundreds of problem savings associations. See
The Federal Home Loan Bank Board (Bank Board) was an independent agency in the Executive Branch of the United States with broad discretionary powers over the Federal home loan bank system. In 1985, the Bank Board attempted to replenish the FSLIC insurance fund by raising the insurance premiums charged to the FSLIC-insured institutions through a "special assessment" at the maximum amount allowed by Congress. As a result, many healthy FSLIC-insured savings associations, which paid insurance premiums of approximately $ 2.08 per $ 1,000 of insured deposits,*35 took the steps necessary to meet the requirements to withdraw from the FSLIC insurance system and obtain insurance from the FDIC, which charged insurance premiums of only $ .83 per $ 1,000 of insured deposits. See
Congress responded to the savings associations' attempt to change their insurer from the FSLIC to the FDIC by passing the Competitive Equality Banking Act of 1987 (CEBA), Pub. L. 100-86, 101 Stat. 552. In relevant part, CEBA: (1) Imposed a moratorium that prohibited savings associations from leaving the FSLIC insurance fund and (2) imposed a final insurance *219 premium on savings associations which left the FSLIC insurance fund after the moratorium expired. See CEBA sec. 306(h), 101 Stat. 602, amended by Pub. L. 100-378, sec. 10, 102 Stat. 887, 889 (1988), current version at
CEBA proved to be ineffective in replenishing the FSLIC's insurance funds, and, on August 9, 1989, Congress enacted the*36 Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, 103 Stat. 183, as an emergency measure to prevent the collapse of the savings association industry. See H. Rept. 101-54(I) at 307 (1989); see also H. Conf. Rept. 101-222 at 393 (1989);
Congress anticipated that SAIF participants would try to convert to BIF participants in order to escape the higher SAIF premiums and regulatory costs. Thus, Congress included in FIRREA certain control*37 measures to prevent an exodus from the SAIF. See
*38 FIRREA imposed two relevant exceptions to the moratorium. First, the FDIC could allow certain conversion transactions involving the acquisition of a depository institution that was in default or in danger of default. 7 A financial institution that utilized this exception was required to pay an exit fee to the fund that insured the assumed deposit liabilities before the transaction and an entrance fee to the fund that insured the assumed deposit liabilities after the transaction. See
Under the second exception to the moratorium,*39 certain conversion transactions could be consummated through a merger or consolidation (collectively, merger). See
With this backdrop in mind, we turn to the relevant text of the Internal Revenue Code.
*41
When an expense creates a separate and distinct asset, it usually must be capitalized. See, e.g.,
Respondent makes no assertion*42 that either fee created or enhanced a separate and distinct capital asset. Respondent's sole argument in support of the determination is that the fees generated for Metrobank the proffered benefits listed
We are unable to find as a fact that Metrobank's payment of either fee produced for Metrobank a significant future benefit requiring capitalization. Whether a benefit is significant to the taxpayer who incurs the underlying expense rests on the duration and extent of the benefit, and a future benefit that flows incidentally from an expense may not be significant. *43 See
Metrobank did not pay either fee as a condition to obtaining FDIC insurance in the first place. Metrobank always had and, absent a decision by it to the contrary, would always have had FDIC insurance for its deposit liabilities, including those deposit liabilities assumed from Community. Metrobank paid the fees to insure its assumed deposit liabilities with the BIF, the insurance fund in which it was already a participant, rather than with the SAIF, a fund with which it was unaffiliated. Any benefit that Metrobank derived from insuring the assumed deposit liabilities with the BIF, rather than the SAIF, is insignificant when weighed against the primary purpose for the payment of the fees. That purpose, as explained herein, was, in the case of the exit fee, to protect the integrity of the SAIF for the direct benefit of the FDIC and the potential benefit of the SAIF's participants, one of which *223 was not Metrobank, by imposing upon Metrobank a final premium for the insurance coverage that the assumed deposit liabilities had received while insured by the*44 SAIF before their assumption. The primary purpose of the entrance fee, as also explained herein, was to protect the integrity of the BIF by charging an additional first-year premium for insurance coverage on the assumed deposit liabilities.
It is critical that Metrobank would not have recovered any portion of either fee were it to have severed its relationship with the BIF. Metrobank paid the exit fee to the SAIF as a nonrefundable, final premium for insurance that it had already received. The SAIF had insured the assumed deposit liabilities before the conversion transaction, and Metrobank was not affiliated with the SAIF either before or after the transaction. Metrobank had neither a right nor a chance to recover any of the exit fee following its payment of the fee to the SAIF; SAIF funds were available for use by the FDIC only with respect to SAIF participants. As we view the exit fee in the context of the statutory scheme, we see that the fee serves mainly to compensate the former insurer (in this case, the SAIF) for its future loss of income as to the assumed deposit liabilities, which compensation flowed to the direct benefit of the FDIC and the potential benefit of the former*45 insurance fund's participants. But for the conversion transaction, the former insurer would have received income in the form of the semiannual insurance premiums payable on the deposit liabilities which were the subject of the assumption, and a failing SAIF participant could have had an opportunity to reach that income were the FDIC to have allowed it. Here, the exit fee gave to the SAIF (and to its participants) 0.9 percent of the deposit liabilities assumed by Metrobank which translates into four to five times the annual assessment which the SAIF would otherwise have received as to those liabilities had they not been assumed by Metrobank.
We view the entrance fee as also paid as a nonrefundable premium for insurance coverage; in contrast with the exit fee, however, we understand the entrance fee to be paid for the current year's insurance. The use and purpose of the entrance fee is diametrically different from that of the exit fee. In addition to the fact that the entrance fee is significantly less than the exit fee, the entrance fee is paid to the fund that insures the deposits of the institution that assumes *224 the deposit liabilities in a conversion transaction. Moreover, the entrance*46 fee is imposed in accordance with an express congressional intent to prevent dilution of the reserves of the current insurer through the addition of unworthy participants which could prove to be financially troubled and cause an undesired depletion of that insurer's resources. See H. Rept. 101-54(I), at 325 (1989). But for the imposition of the entrance fee, the participants in an FDIC fund could deplete the reserves of that fund if the fund became liable for an extraordinary amount of deposit liabilities which had been assumed by the participants in conversion transactions. After a BIF participant assumes the deposit liabilities of a SAIF participant and pays an entrance fee, however, the value of the BIF generally bears the same ratio to the total deposits insured by the BIF (inclusive of the deposits underlying the assumed deposit liabilities) as before the conversion transaction.
We find additional support for our conclusion that Metrobank derived insignificant benefits from its payment of the fees by noting that Metrobank paid both fees incident to its management's decision to assume the deposit liabilities of a failed savings association. Metrobank's management obviously made*47 a business decision to pay the two fees to insure the assumed deposit liabilities with its regular insurer, the BIF; management decided not to forgo the fees, merge under the second exception to the moratorium, and insure the deposit liabilities with the SAIF. The BIF's annual insurance premiums were less expensive than those of the SAIF, and Metrobank, being a participant in the BIF, was obviously more familiar with its requirements. Although respondent observes correctly that Metrobank could have avoided the fees by assuming the deposit liabilities through a merger, Metrobank chose for business reasons not to do so. We decline to second-guess that business judgment. Under the facts herein, the exercise of such a sound and reasonable business practice under which a taxpayer such as Metrobank acts to minimize its recurring operating costs is not a significant future benefit that requires capitalization of the related nonasset- producing expenditures. Cost saving expenditures such as this, which are incurred in the process of fulfilling an everyday sound and reasonable business practice, as opposed to effecting a change in corporate structure, qualify *225 for current deductibility under*48
Respondent analogizes petitioner's payment of the fees with the purchase of a nontransferable membership interest, which, respondent asserts, is a capitalizable expense. According to respondent, Metrobank's membership interest in the BIF entitled it to: (1) A substantial reduction in future depository insurance premiums, (2) the right to insure all of its deposits in a more stable insurance fund, and (3) the need to adhere to only one regulatory scheme. We disagree with respondent's analogy. 9 First, as mentioned above, respondent makes no assertion that Metrobank's payment of either fee was related to the purchase of a capital asset.*49 10 Second, Metrobank was already participating in the BIF program before the transaction, and Metrobank could have continued its participation in the BIF program had it not consummated the transaction. Third, new banks are not charged either fee to insure their deposit liabilities with the BIF, nor is either fee imposed when a bank assumes the deposit liabilities of another bank. Fourth, the fees were nonrefundable, and any perceived benefit derived from Metrobank from its payment of the fees would have been extinguished completely had Metrobank terminated its FDIC insurance.
*50 We conclude and hold that the fees are currently deductible. In so concluding, we note that respondent does not argue that the facts at hand are similar to the facts of
We have considered all arguments of the parties and, to the extent not discussed herein, find those arguments to be irrelevant or without merit. To reflect concessions,
Decision will be entered under Rule 155.
Reviewed by the Court.
WELLS, CHABOT, COHEN, SWIFT, GERBER, COLVIN, FOLEY, VASQUEZ, and THORNTON, JJ. *51 , agree with this majority opinion.
* * * * *
CONCURRENCE OF JUDGE SWIFT
SWIFT, J., CONCURRING: I write separately to clarify why I believe the fees paid by Metrobank to the FDIC are currently deductible.
In
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
In
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*53 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
In
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.
217 (7th Cir. 1982).
The Court of Appeals for the Third Circuit, in
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 *228 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
*55 separate and distinct asset, into a much more sweeping test
* * * . * * *
In
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
*229 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*57 clear that the fees should be currently deductible. Relevant aspects of the fees are described on pages 18-24 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 five 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*58 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 *230 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*59 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.
* * * * *
CONCURRENCE OF JUDGE CHIECHI
CHIECHI, J., CONCURRING: Respondent chose to ask the Court to decide the issue of whether the exit fee and the entrance fee should be capitalized solely on the basis of respondent's theory that those fees generated certain significant future benefits for Metrobank. The majority states that it will "decide this case as framed by respondent". Majority op. p. 11. However, the majority rejects respondent's reliance on
*61 I have considered and resolved the issue of whether the exit fee and the entrance fee should be capitalized solely on the basis of respondent's theory that those fees produced certain significant long-term benefits for Metrobank. On the record presented, I, like the majority, reject respondent's theory that the benefits which respondent asserts the fees in question produced are significant long-term benefits requiring capitalization of those fees. 3 However, I disagree with the majority that the exit fee is a "final premium for insurance that it had already received", majority op. p. 20, and that the entrance fee is a "premium * * * paid for the current year's insurance", majority op. pp. 21-22. In my view, the record and
*62 THORNTON, J., agrees with this concurring opinion.
* * * * *
DISSENT OF JUDGE RUWE
RUWE, J., DISSENTING: The majority refuses to consider whether the exit and entrance fees should be capitalized as costs incurred in connection with the acquisition of a capital asset because the majority believes that respondent failed to include this theory in his determination. The majority reads the notice of deficiency too narrowly. Respondent's determination, as contained in the notice of deficiency, states:
It has been determined that your deductions for the entrance and exit fee paid to the Federal Deposit Insurance Corporation for the transfer of your insured deposits from one depository insurance to another depository insurance fund is a non-deductible capital expenditure that is not subject to depreciation or amortization.
*232 The language contained in the notice of deficiency is broad and disallows deduction of the fees simply because respondent determined that the fees were capital expenditures.
The broad language contained in the notice of deficiency should not have misled petitioner into believing*63 that it did not have to establish that the fees were not costs incurred in connection with the acquisition of a capital asset. Petitioner's primary argument on brief was that the fees were for deposit insurance coverage for the years in issue. Petitioner's alternative argument was that if the fees must be capitalized then they are to be associated with the acquired deposits and amortized over the useful life of the core deposits. Thus, petitioner recognized that the fees might be viewed as being incurred in connection with the acquisition of capital assets. There is nothing to indicate that there were any additional facts bearing on this case that could have been introduced. This case was submitted on the stipulated facts, and there is nothing to indicate that petitioner was not aware of its burden of proving entitlement to the claimed deductions, including the need to establish that the fees were not incurred in connection with the acquisition of assets.
This is not a case where respondent issued a narrowly drawn notice of deficiency and subsequently advanced new grounds not directly or implicitly within the ambit of the determination. See
Petitioner bears "the burden of clearly showing the right to the claimed deduction".
Capitalization is generally required for expenditures that are incurred by a taxpayer "in connection with" the acquisition of an asset. Such expenditures include more than just the stated purchase price of the asset. For example, wages paid in connection with the acquisition of a capital asset or legal fees paid to consummate an acquisition must be capitalized.*66 See
In
Of course, reasonable wages paid in the carrying on of a trade or business qualify as a deduction from gross income. * * * But when wages are paid in connection with the construction or acquisition of a capital asset, they must be capitalized and are then entitled to be amortized over the life of the capital asset so acquired. * * * *234
In
A particular cost, no matter what its type, may be deductible in one context but may be required to be capitalized in another context. Simply because other cases have allowed a current deduction for similar expenses in different contexts does not require the same result here. * * *
* * * * * * *
As previously indicated, expenditures which otherwise might qualify*67 as currently deductible must be capitalized if they are incurred "in connection with" the acquisition of a capital asset.
As further explained in
The requirement that costs be capitalized extends beyond the price payable to the seller to include any costs incurred by the buyer in connection with the purchase, such as appraisals of the property or the costs of meeting any conditions of the sale. See, e.g.,
Metrobank chose to acquire Community's assets. One way to accomplish this was through a conversion transaction where assets of an SAIF insured institution are transferred to a BIF insured institution and, after the transfer, all deposits are insured by the BIF. Pursuant to*69 this method, Metrobank was required to pay the exit and entrance fees. The other way Metrobank could have acquired Community's assets was to effectuate a merger with Community. If Metrobank had chosen *235 to acquire Community through a merger it would have avoided the requirement to pay exit and entrance fees, but the deposits acquired from Community would have continued to be insured by the SAIF. Metrobank undoubtedly had its reasons for not entering into a merger transaction. On brief, petitioner states that among its reasons for choosing to acquire Community's assets in a conversion transaction in which it had to pay the exit and entrance fees were to reduce future deposit insurance premiums and reduce the future regulatory and reporting requirements that would otherwise have applied. 5
*70 The fact that the expenditures by Metrobank were incurred in connection with the acquisition of Community's assets is especially clear in the case of the exit fee. On page 20, the majority asserts that the "purpose" of the exit fee was to protect the integrity of the SAIF for the potential benefit of SAIF participants. While this may have been the FDIC's purpose, it surely was not one of Metrobank's business purposes. Metrobank was never insured by the SAIF and derived no insurance coverage from the SAIF in return for payment of the exit fee. To the extent that "purpose" is relevant to the issue of capitalization versus deduction, it is the payor's (taxpayer's) purpose for making an expenditure that controls whether the expenditure must be capitalized. See
The majority allows the exit fee as an insurance expense deduction. It justifies its conclusion that the exit fee did not produce significant future benefits for Metrobank by finding that all the insurance benefits*71 from the SAIF had been received prior to Metrobank's acquisition of Community's *236 assets. 6 The majority thus rejects petitioner's primary argument that the exit fee was paid for deposit insurance coverage that Metrobank received during the years in issue. 7 As described on page 20 of the majority opinion, the exit fee paid by Metrobank was for insurance coverage that Community's deposit liabilities had received BEFORE Metrobank acquired Community's assets and assumed its liabilities. 8 Nevertheless, the majority concludes that "Metrobank paid the exit fee to the SAIF as a nonrefundable, final premium for insurance that IT had already received." Majority op. p.20. (Emphasis added.) Of course, if the exit fee was paid for insurance that Metrobank had already received, it would follow that there was no significant future benefit. However, the majority's conclusion that the exit fee was a "premium" for insurance coverage that Metrobank had already received from the SAIF is clearly wrong.
*72 Metrobank never received any "insurance" benefit from the SAIF. Any SAIF insurance benefit was derived prior to Metrobank's acquisition of Community's assets. Indeed, the majority acknowledges that "Metrobank was not affiliated with the SAIF either before or after the transaction" whereby it acquired Community's assets and liabilities. Majority op. p. 21. Metrobank would have no reason to pay for "insurance" coverage on deposits for a period prior to its acquisition of those deposits. It is obvious that Metrobank paid the exit fee because it was required in order for Metrobank to acquire Community's assets. The exit fee was paid for, and in connection with, the acquisition of Community's assets.
Petitioner has failed to prove its entitlement to the deductions in issue. The uncontroverted facts show that the fees were costs incurred in connection with the acquisition of a capital asset. Accordingly, the fees should be capitalized.
WHALEN, HALPERN, BEGHE, GALE, and MARVEL, JJ., agree with this dissenting opinion.
*237 * * * * *
DISSENT OF JUDGE HALPERN
HALPERN, J., DISSENTING:
I. INTRODUCTIONWe are faced here with a question of fact, whether petitioner's payments of the exit and*73 entrance fees constitute capital expenditures. Petitioner bears the burden of proving that they do not. See Rule 142(a). I do not believe that petitioner has carried that burden. Therefore, I would sustain respondent's deficiency determinations to the extent allocable to respondent's disallowance of deductions for those payments.
II. BACKGROUNDA. FACTSThis case was submitted for decision without trial, the parties having stipulated or otherwise agreed to facts that each believed sufficient to make his (its) case. See Rule 122(a). The fact that this case was submitted upon a stipulated record does not alter petitioner's burden of proof. See Rule 122(b). Following is a summary of the significant facts relied on by petitioner.
Metrobank purchased certain assets of a failed savings association from the Resolution Trust Company (the purchase, the assets, Community, and the RTC, respectively). It did so pursuant to a purchase and assumption agreement (the agreement), which states that, as consideration for the assets (and certain rights and options it acquired), Metrobank would pay to the RTC a premium of $ 400,000 and assume certain deposit and other liabilities of Community's and*74 undertake certain other obligations and duties. At the time of the purchase, Metrobank was an "insured depository institution", within the meaning of section 204(c) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. 101-73, 103 Stat. 191 (1989) (hereafter, without citation, FIRREA),
On account of Metrobank's deductions of the payments (for 1993 through 1995), respondent determined deficiencies in tax. In his notice of deficiency (the notice), respondent explained the adjustments giving rise to the deficiencies related to the payments as follows:
It has been determined that your deductions for the entrance and exit fee paid to the Federal Deposit Insurance Corporation for the transfer of your insured deposits from one depository insurance [fund] to another depository insurance fund is a non-deductible capital expenditure that is not subject to depreciation or amortization. Accordingly, your taxable income is being increased as follows: [$ 71,518 for each year].
In the petition, petitioner assigned the following errors to respondent's adjustments:
The Commissioner erred in disallowing petitioner's payment of $ 71,518*76 to the Federal Deposit Insurance Corporation as an ordinary and necessary business expense. The expenditure is allowable as an ordinary and necessary business expense pursuant to
By the answer, respondent denied petitioner's assignments of error. Respondent did not, however, disagree with petitioner's averments, which, in substance, reflect the facts stipulated. Petitioner filed no reply.
III. DISCUSSIONA. INTRODUCTIONThe details of the purchase are not in controversy. The pleadings establish that the only issue for decision is *239 whether the payments entitle Metrobank to a deduction pursuant to
1. INTRODUCTION
The exit fee is imposed by
the total deposits transferred from a Savings Association Insurance Fund Member to a Bank Insurance Fund Member * * * less the following deposits:
(1) Any deposit acquired, directly or indirectly, by or through any deposit broker; and
(2) Any portion of any deposit account exceeding $ 80,000.
*240
2. FAILURE OF PETITIONER TO ESTABLISH PURPOSE OF THE EXIT FEE
There is no clear explanation in FIRREA of the purpose of the exit fee. Moreover, the majority recognizes: "The pertinent legislative history does not contain an explicit explanation of Congress' intent*79 as to the imposition of the exit fee." Majority op. p. 16. Nevertheless, the majority speculates variously that the purpose of the exit fee is "to discourage SAIF-insured institutions from insuring their deposits with the BIF", Majority op. p. 15, "to protect the integrity of the SAIF, id. at 20, and "to compensate the former insurer (in this case, the SAIF) for its future loss of income as to the assumed deposit liabilities",
The majority has failed to reconcile its various speculations with the condition imposed by
(ii) the conversion occurs in connection with the acquisition of a Savings Association Insurance Fund member in default or in danger of default, and the Corporation determines that the estimated financial benefits to the Savings Association Insurance Fund or the Resolution Trust Corporation equal or exceed the Corporation's estimate of loss of assessment income to such insurance fund over the remaining balance of the 5-year period referred to in subparagraph (A) * * *
Apparently, Congress intended the FDIC to approve conversion transactions involving a failed or failing Savings Association Insurance Fund (SAIF) member during the moratorium *241 only if the loss of that member would IMPROVE the SAIF (e.g., if the present value of any expected bailout of such member exceeded the present value of any expected premiums). 2
*81 Because petitioner failed to establish Congress' purpose in enacting the exit fee requirement, the majority's conclusions as to that purpose are not supported by the record. Perhaps petitioner could have obtained indirect evidence of Congress' purpose for the exit fee by establishing the rationale behind the FDIC's and the Secretary's decisions in implementing
*82 3. PETITIONER HAS FAILED TO CARRY ITS BURDEN OF PROOF
Without any clear understanding of the purpose of the exit fee, I fail to see how petitioner has carried its burden of showing that the payments (as allocable to the exit fee) are not a capital expenditure. Petitioner argues: "The exit fee assessment is merely a one-time payment required by the FDIC to protect the SAIF when deposits are transferred out of the fund." Even if that claim were true, so what? How does it establish that the exit-fee-allocable payments were anything other than a cost incident to the purchase?
The purchase was an asset purchase, with Metrobank acquiring assets relating to the main office and one branch of Community. The assets were cash, cash items, securities, *242 loans, various business assets, certain records and documents, and any assets securing liabilities assumed by Metrobank. The liabilities assumed by Metrobank pursuant to the agreement (the liabilities) consisted of indebtedness for deposits, secured indebtedness, and any indebtedness for unpaid employment taxes and ad valorem taxes.
With exceptions not here relevant, section 1012 provides the following rule: "The basis of property shall be the*83 cost of such property".
It is clear that the cost of the assets includes not only the $ 400,000 premium paid by Metrobank to the RTC but also the liabilities. The conclusion suggested by the facts before us is that the exit fee, which was imposed by statute and not by contract, was also part of that cost. If the only measurable benefit to Metrobank resulting from payment of the exit fee is that such payment enabled Metrobank to proceed with the purchase, then I fail to see how the exit fee is anything other than a cost incident to the purchase of the assets. There is nothing in the record (or in FIRREA) to support the majority's finding that: "Metrobank paid the exit fee to the SAIF as a non-refundable, final premium for insurance that IT had *243 already received." Majority op. p. 20 (emphasis added). 4 Even if that were taken as a statement with respect to Community, it would not justify a current deduction for Metrobank any more than would Metrobank's payment of its indebtedness for Community's unpaid employment taxes*85 and ad valorem taxes, which it assumed pursuant to the agreement.
4. CONCLUSION
Petitioner bears the burden of proof, and the pleadings clearly establish what it is that petitioner must prove, viz, that the exit-fee-allocable payments were not a capital expenditure. Clearly, respondent has failed to convince the majority that petitioner enjoyed the long-term benefits claimed for it by respondent. That, however, in no way satisfies petitioner's burden. Petitioner has failed to prove that the exit fee constituted anything other than a cost incident to the purchase and, therefore, a capital expenditure. Petitioner has failed to prove its entitlement to a deduction on account of payment of the exit fee pursuant to
1. INTRODUCTION
The entrance fee is imposed by
*86 in the case of a conversion transaction in which the resulting or acquiring depository institution is a Bank Insurance Fund member, the fee shall be the approximate amount which the Corporation calculates as necessary to prevent dilution of the Bank Insurance Fund, and shall be paid to the Bank Insurance Fund;
The term "entrance fee deposit base" generally refers to those deposits which the Federal Deposit Insurance Corporation, in its discretion, estimates to have a high probability of remaining with the acquiring or resulting depository*87 institution for a reasonable period of time following the acquisition, in excess of those deposits that would have remained in the insurance fund of the depository institution in default or in danger of default had such institution been resolved by means of an insured deposit transfer. The estimated dollar amount of the entrance fee deposit base shall be determined on a case-by-case basis by the Federal Deposit Insurance Corporation at the time offers to acquire an insured depository institution (or any part thereof) are solicited by the Federal Deposit Insurance Corporation or the Resolution Trust Corporation.
The term "Bank Insurance Fund reserve ratio" is defined in
The term "Bank Insurance Fund reserve ratio" shall mean the ratio of the net worth of the Bank Insurance Fund to the value of the aggregate total domestic deposits held in all Bank Insurance Fund members. * * *
Like the exit fee, the origin of the entrance fee requirement is in section 206(a)(7) of FIRREA. H. Rept. 101-54(I) (1989), *88 is the report of the Committee on Banking, Finance and Urban Affairs that accompanied H.R. 1278, 101st Cong., 1st Sess. (1989), which, as enacted, became FIRREA. That report states that the entrance fee "must be enough to prevent the dilution of the reserves of the Fund to be joined by the institution." H. Rept. 101-54(I) at 325.
2. PETITIONER'S CLAIM, AND MAJORITY'S UNDERSTANDING, AS TO PURPOSE OF ENTRANCE FEE
On brief, petitioner argues: "Petitioner paid the entrance fee simply to insure the deposits transferred into the BIF until the next FDIC premium assessment." The majority concurs: "[W]e understand the entrance fee to be paid for the current year's insurance." Majority op. pp. 21-22.
Neither petitioner nor the majority has convinced me that the entrance fee was a deductible insurance premium. Therefore, I do not believe that petitioner has carried its burden of showing that payment of the entrance fee meets the prerequisites for a deduction under
*245 3. DISCUSSION
Certain business-related insurance expenses unquestionably are deductible under
It is a question of fact whether any premium payment creates future benefits that rule out a current deduction. The fact that Congress intended an entrance fee adequate to insure nondilution of the Bank Insurance Fund (sometimes, the Fund) is not, by itself, a sufficient fact to prove that its payment did not create a significant future benefit to Metrobank. The Fund was established by section 211 of FIRREA (adding, among other provisions,
The assessment system established by Congress is detailed and complex. The majority has made little reference to it. The entrance fee required of Metrobank was assessed at a rate different from the annual assessment rate and on a base that did not necessarily take into account all of the deposit liabilities assumed by Metrobank pursuant to the purchase. The purpose of the entrance fee was, as stated, to prevent dilution of the Fund. Whether the rationale for the actual entrance fee imposed by
4. CONCLUSION
Petitioner was required to prove a fact: that the payment of the entrance fee created no significant future benefits that rule out a current deduction. See
Petitioner's task was established by the notice and the pleadings, to prove that the payments were not capital expenditures. Respondent has not shifted the grounds on which he determined the related deficiencies. Respondent has failed to persuade the majority of his view of the facts. That, as stated, does not relieve petitioner of its burden to prove facts in support of its assigned error, that respondent erred in disallowing petitioner's deductions for the payments because they were capital in nature. Petitioner has failed to carry its burden of proof. Therefore, we should sustain the deficiencies related to the payments.
RUWE, WHALEN, *94 BEGHE, GALE, and MARVEL, JJ., agree with this dissenting opinion.
* * * * *
DISSENT OF JUDGE BEGHE
BEGHE, J., DISSENTING: The stipulated facts establish that Metrobank paid the exit and entrance fees to acquire selected assets and deposits of Community. At least some of the acquired assets were capital, because Metrobank could expect to receive significant long- term benefits from them. See
The majority advance three arguments for avoiding this seemingly inescapable conclusion. First, the majority claim that respondent "did not determine, and has declined to argue" that the fees should be capitalized on the ground that they were incurred in connection with the acquisition of capital assets. Majority op. p. 11. Second, the majority assert that the fees were paid to an insurer (the FDIC) in order to protect the "integrity" of the insurer's reserves. Majority op. pp. 19-22. Third, the majority claim that the fees were deductible "cost saving expenditures". Majority op. pp. 22- 23. None of these arguments holds water.
COSTS INCURRED IN CONNECTION WITH ASSET ACQUISITIONS ARE CAPITAL
*96 Even normally deductible costs must be capitalized if they are sufficiently related to the acquisition of a capital asset (or to some other capital transaction). As the Supreme Court stated in
Of course, reasonable wages paid in the carrying on of a trade or business qualify as a deduction from gross income. * * * But when wages are paid in connection with the construction or acquisition of a capital asset, they must be capitalized and are then entitled to be amortized over the life of the capital asset so acquired.
This Court has recently cited Idaho Power Co. to support the holding that legal fees, like other expenditures that ordinarily might qualify as currently deductible, must be capitalized if they are incurred "in connection with" the acquisition of a capital asset. See
RESPONDENT SUFFICIENTLY RAISED ASSET ACQUISITION ISSUE
According to the majority, respondent failed to argue that the exit and entrance fees were connected with Metrobank's asset acquisition; we should therefore defer consideration of this "theory" to another day. Majority op. p. 11. I disagree.
Although respondent didn't specifically argue that the fees were paid to acquire Community's assets and deposits, respondent did argue that the fees created significant long-term benefits for Metrobank. The presence of significant long-term benefits is relevant to the case at hand because it serves to distinguish payments that result in the acquisition of capital assets from those that don't. See
More importantly, the stipulated record establishes that the fees were paid in connection with Metrobank's asset acquisition. We should therefore consider the factual, causal, and legal consequences of that relationship, even if respondent didn't expressly raise it as an issue, and even though the case at hand was submitted fully stipulated under Rule 122. In
OUR CONSIDERATION OF ASSET ACQUISITION ISSUE WOULD NOT PREJUDICE PETITIONER
Although respondent's actions don't limit our ability to consider the relationship between fees paid and assets acquired, the majority suggest we should close our eyes to that relationship "in order to*100 avoid prejudicing petitioner". Majority op. p. 11. According to the majority, if respondent had stressed that relationship, "petitioner may well have wanted to offer evidence relating to it." Id.
I agree that the appropriate question is whether respondent's conduct has limited or precluded petitioner's opportunity to present pertinent evidence. See
*251 The majority assert that considering the relationship between fees paid and assets acquired requires us to "second guess" petitioner's business judgment. See majority op. pp. 22-23. To the contrary, I accept*102 that judgment; the payment of the fees was a necessary element of the transaction that petitioner, in its best business judgment, actually decided to achieve. 3
I also disagree with the majority's suggestion that our reliance on Metrobank's asset acquisition would unfairly surprise petitioner. Petitioner was aware*103 that respondent would rely on two cases referred to by the majority (see majority op. p. 24 note 10):
*104 There's other evidence of petitioner's awareness of the importance of that connection. In its brief, petitioner argued in the alternative that, if the fees were capitalized, they should be amortized over the life of the "core deposits" *252 acquired from Community. See Brief for Petitioner at 24-25. 5 Finally, respondent's long-term benefit argument sufficiently raised the issue whether the fees were part of the cost of acquiring capital assets, as I explained
*105 TREATING THE FEES AS INSURANCE PREMIUMS IS ALSO INSUFFICIENT
Even if I accepted the majority's invitation to defer consideration of the asset acquisition "theory" to another day, I would still conclude that the fees must be capitalized. The majority assert that deduction is proper because any long-term benefit to Metrobank "is insignificant when weighed against the primary purpose for the payment of the fees." Majority op. p. 20. According to the majority, that primary purpose was to "protect the integrity" of the SAIF and the BIF. Id. The majority additionally assert that "Metrobank paid the exit fee to the SAIF as a nonrefundable, final premium for insurance that it had already received", while the entrance fee was a nonrefundable premium "for the current year's insurance." Majority op. pp. 20-21. Once again, I disagree.
The majority's conclusion that Metrobank paid the exit fee for insurance it had already received is clearly wrong. As the majority opinion clearly states, the exit fee was paid to the SAIF. See id. The deposits of Community acquired by Metrobank were insured by the SAIF only when they were Community's deposits; those deposits became insured by the BIF upon their*106 acquisition by Metrobank.
Therefore, if the exit fees accurately can be described as premiums for SAIF insurance, they were for insurance coverage the deposits received BEFORE Metrobank acquired them. The only business purpose Metrobank could have had for paying this "SAIF insurance expense" was its desire to acquire Community's assets and deposits.
*253 The majority's reliance on the role the fees played in protecting the "integrity" of the SAIF is misplaced. While it may have been the FDIC's purpose in imposing the exit fees, it certainly wasn't Metrobank's reason for paying them. Moreover, the FDIC's purpose is of limited relevance to the case at hand. See
What all this means is that, even if the majority's characterization of the fees as insurance premiums is correct, the fees nevertheless must be capitalized. As I've already explained, ordinarily deductible expenditures must be capitalized, when they are incurred*107 in connection with the acquisition of a capital asset. More generally, however, insurance premiums that give rise to benefits extending beyond the end of the taxable year must be capitalized, even if they are not connected with the acquisition of a capital asset. See
The entrance and exit fees were in addition to the semiannual premiums Metrobank paid to the BIF to insure the acquired deposits after the acquisition. The fees were also several times greater than the semiannual*108 premiums, as a percentage of the acquired deposits. See majority op. pp. 7-9, 21. 6 The exit and entrance fees therefore *254 resemble premium prepayments, which entitled Metrobank to insure the acquired deposits with the BIF in future years. This would support capitalizing the exit and entrance fees, even if they had no connection with the acquisition of a separate asset. See
*109 THE COST SAVINGS ARGUMENT IS NOT PERSUASIVE
The majority's final argument for deductibility is that cost savings expenditures, such as payments to escape from burdensome or onerous contracts, are generally deductible. See majority op. pp. 23-24. This principle may have been limited by the Supreme Court's opinion in
Finally, we have held that a payment to terminate a burdensome contract may be capitalized, if the payment is also integrally related to the acquisition of a new long-term contract with significant future benefits. See
For all the foregoing reasons, I respectfully dissent.
RUWE, WHALEN, and GALE, JJ., agree with this dissenting opinion.
Footnotes
1. Our holding renders moot the parties' other dispute; namely, whether the fees, if capitalizable, are amortizable.↩
2. For purposes of title 12, the term "bank" generally refers to a State-chartered bank, and the term "savings association" generally refers to a Federal- or State-chartered savings association (or savings and loan or thrift as it is sometimes called).
12 U.S.C. sec. 1813(a) and(b) (1994)↩ . We use herein the same terminology. We refer collectively to banks and savings associations as financial institutions.3. We recognize that the sum of the exit and entrance fee ($ 309,565 + $ 43,339 = $ 352,904) is $ 4,186 less than the total of the five payments ($ 71,518 x 5 = $ 357,590). The record does not adequately explain the difference.↩
4. The notice of deficiency indicates that the deposits were actually transferred from the SAIF to the BIF. This is not true. As explained herein, the BIF and the SAIF do not hold a financial institution's deposits but merely insure the deposits held by the financial institutions.↩
5. We use the term nonasset-producing expenditures to refer to expenditures which do not create or enhance a separate and distinct asset.↩
6. Congress later extended the 5-year FIRREA moratorium, which was in effect during the relevant years.↩
7. The subject transaction was consummated under this exception.↩
8. An expense is ordinary if it is of common or frequent occurrence in the type of business involved. See Deputy v. du
Pont, 308 U.S. 488">308 U.S. 488 , 495, 84 L. Ed. 416">84 L. Ed. 416, 60 S. Ct. 363">60 S. Ct. 363 (1940);Welch v. Helvering, 290 U.S. 111">290 U.S. 111 , 114, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933). An expense is necessary if it is appropriate or helpful to the development of the taxpayer's business. SeeCommissioner v. Tellier, 383 U.S. 687">383 U.S. 687 , 689, 16 L. Ed. 2d 185">16 L. Ed. 2d 185, 86 S. Ct. 1118">86 S. Ct. 1118 (1966);Welch v. Helvering, supra.↩ 9. We recognize that title 12 uses the terms BIF member and SAIF member to refer to the participants of those funds. See, e.g.,
12 U.S.C. sec. 1813(d) (1994)↩ . We do not understand Congress' use of the word "member" to refer to a membership interest in the funds in the property sense of the word. In fact, respondent has not even made such an argument.10. In this regard, respondent relies incorrectly on
Darlington-Hartsville Coca-Cola Bottling Co. v. United States, 273 F. Supp. 229">273 F. Supp. 229 (D.S.C. 1967), affd.393 F.2d 494">393 F.2d 494 (4th Cir. 1968), and rodewayInns of Am. v. Commissioner, 63 T.C. 414">63 T.C. 414↩ (1974), to support his position herein. The taxpayer in each of those cases purchased a capital asset incident to the payment of the expenses in dispute there.11. In fact, respondent does not even mention
Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345">403 U.S. 345 , 29 L. Ed. 2d 519">29 L. Ed. 2d 519, 91 S. Ct. 1893">91 S. Ct. 1893↩ (1971), in his brief.1. On brief, respondent described those two cases as cases in which "the courts held that the taxpayers could not deduct expenses that were part of a plan to produce a positive business benefit for future years."↩
2. Similarly, if the majority decided this case "as framed by respondent", majority op. p. 11, the majority should not have concluded that, although respondent does not argue that the facts presented in this case are similar to the facts in
Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345">403 U.S. 345 , 29 L. Ed. 2d 519">29 L. Ed. 2d 519, 91 S. Ct. 1893">91 S. Ct. 1893↩ (1971), see majority op. p. 25, the facts in the instant case are not similar to those facts, see id.3. Unlike the majority, I have not considered whether there are any benefits other than those alleged by respondent that are significant future benefits generated for Metrobank by the fees in question. See majority op. pp. 18-19.↩
1. Where the record contains sufficient facts to permit us to decide a case on an issue that would dispose of it, we shall do so, regardless of whether the parties have pleaded the issue. See
Rendina v. Commissioner, T.C. Memo. 1996-392 ;Barnette v. Commissioner, T.C. Memo. 1992-595 , affd. without published opinion sub nom.Allied Management Corp. v. Commissioner, 41 F.3d 667">41 F.3d 667 (11th Cir. 1994); see alsoPark Place, Inc. v. Commissioner, 57 T.C. 767">57 T.C. 767 , 768-769↩ (1972).2. See
Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345">403 U.S. 345 , 354, 29 L. Ed. 2d 519">29 L. Ed. 2d 519, 91 S. Ct. 1893">91 S. Ct. 1893↩ (1971).3. See
INDOPCO, Inc. v. Commissioner, 503 U.S. 79">503 U.S. 79 , 87-88, 117 L. Ed. 2d 226">117 L. Ed. 2d 226, 112 S. Ct. 1039">112 S. Ct. 1039↩ (1992).4. See
Commissioner v. Idaho Power Co., 418 U.S. 1">418 U.S. 1 , 13, 41 L. Ed. 2d 535">41 L. Ed. 2d 535, 94 S. Ct. 2757">94 S. Ct. 2757 (1974);American Stores Co. & Subs. v. Commissioner, 114 T.C. 458">114 T.C. 458 , 469↩ (2000).6. We do not use the term "capital asset" in the restricted sense of section 1221. Instead, we use the term in the accounting sense, to refer to any asset with a useful life extending beyond one year.↩
5. These objectives appear to be significant long-term benefits that support respondent's argument. Petitioner states on page 13 of its brief:
Metrobank's purposes for incurring the expenditures were twofold. First, by electing to convert the deposits assumed from the SAIF to the BIF, Petitioner hoped to reduce future deposit insurance assessments because the BIF assessment rate was much less than the SAIF assessment rate. Second, Petitioner was already a member of BIF and understood the FDIC rules and regulations for insurance coverage through this system. Maintaining insurance coverage under both funds would significantly increase the reporting and administrative requirements on an ongoing basis.↩
6. Petitioner acquired Community's assets on Nov. 2, 1990.↩
7. The years in issue are petitioner's fiscal years ending Oct. 31, 1993, 1994, and 1995.↩
8. It is ironic that the majority relies on this theory that petitioner never argued. Petitioner argued that the exit fee paid to the SAIF was for insurance coverage that it received during the years in issue. The majority correctly recognizes that Metrobank was not insured by the SAIF during those years.↩
1. On the basis of the notice and the pleadings, it is apparently respondent's position that, if the payments are not capital expenditures, they may be deducted as ordinary and necessary business expenses under
sec. 162(a)↩ .2. The majority may have in mind the exit fee previously imposed by the Competitive Equality Banking Act of 1987 (CEBA), Pub. L. 100-86, 101 Stat. 552. See discussion in Majority op. p. 13. That exit fee, imposed by
12 U.S.C. sec. 1441(f)(4) (1988)↩ , was designed to protect against the Federal Savings and Loan Insurance Corporation's losing insured institutions. See H. Rept. 100-62, at 42 (1987) ("Some profitable well-capitalized institutions are considering converting from an institution insured by FSLIC to an institution insured by FDIC. * * * In order to reduce the amount of assessments flowing out of FSLIC during the recapitalization period, the Committee believes it is necessary to require the payment of a exit fee.")3. See, e.g.,
55 Fed. Reg. 10406, 10408↩ (Mar. 21, 1990), prescribing interim rule for assessment of exit fee and setting exit fee at 0.90 percent of the deposit base as the "approximate present value of each SAIF member's pro rata share of interest expense on the obligations of the Financing Corporation ("FICO") projected over the next thirty years."4. To the contrary, see supra note 3.↩
1. See majority op. p. 18, which states that "Expenses must generally be capitalized when they either: (1) Create or enhance a separate and distinct asset or (2) OTHERWISE GENERATE SIGNIFICANT [LONG-TERM] BENEFITS". (emphasis added.)↩
2. By contrast, in the cases relied upon by the majority, it was clearly possible that the taxpayers could have offered relevant evidence to support their position, or the Court believed that the record did not permit it to decide the issue. See
Concord Consumers Housing Coop. v. Commissioner, 89 T.C. 105">89 T.C. 105 , 106-107 n.3 (1987) (Court did not consider whether taxpayer was sec. 216 cooperative housing corporation because neither party addressed the issue and Court could not tell from the record);Leahy v. Commissioner, 87 T.C. 56">87 T.C. 56 , 64-65↩ (1986) (Commissioner originally contended that partnership was not entitled to investment tax credit on ground that partnership was not owner of the property; later ground was alleged failure to attach statement to return, as required by regulations).3. It appears that the only way Metrobank could have acquired assets and deposits from Community, without paying exit and entrance fees, would have been to acquire control of Community and then merge or consolidate with it. See majority op. p. 16; Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. 101-73, sec. 206(a)(7), 103 Stat. 183, 195, currently codified at
12 U.S.C. sec. 1815(d)(3)(A) (Supp. V, 2000)↩ ). Of course, this is not what Metrobank did. Moreover, such a transaction might have required Metrobank to acquire all assets (and assume all liabilities, including unknown and contingent liabilities) of Community, rather than a portion of them.4. See Brief for Petitioner at 22 (briefs were simultaneous), which states: "The Respondent has cited
Darlington-Hartsville Coca- Cola Bottling Co. v. United States, 393 F.2d 494">393 F.2d 494 (4th Cir. 1968) andRoadway Inns of America v. Commissioner, 63 T.C. 414">63 T.C. 414↩ (1974) as support for Respondent's argument that the exit and entrance fees were paid as part of a plan to produce a positive business benefit for future years."5. There is no occasion in the case at hand to consider petitioner's alternative argument that, if the fees are capitalizable, petitioner is entitled to amortize them over a 10-year period; there is no evidence of useful life in the stipulated record. It does seem to me that amortization should probably be allowed over such useful life of the core deposits acquired as could be shown. See
Citizens & Southern Corp. v. Commissioner, 91 T.C. 463">91 T.C. 463 (1988), affd. without published opinion900 F.2d 266">900 F.2d 266 (11th Cir. 1990); see alsoFirst Chicago Corp. v. Commissioner, T.C. Memo 1994-300">T.C. Memo 1994-300 ;Trustmark Corp. v. Commissioner, T.C. Memo 1994-184">T.C. Memo 1994-184↩ , and compare Field Serv. Adv. Mem. 2000-08-005 (Feb. 25, 2000), where, in a transaction similar to the case at hand, the taxpayer amortized the entrance and exit fees over a 10-year period for financial statement purposes.6. The third of the emphasized points in Judge Swift's concurrence (Swift, J.↩, concurring op. p. 31) compares the entrance and exit fees paid by Metrocorp to acquire the deposits of Community with the regular semiannual premiums paid by Metrocorp on its total deposits, including both its own deposits and the deposits of Community that it acquired. Obviously, the ratio of the entrance and exit fees to the regular semiannual premiums would be much higher if the regular premiums paid by Metrocorp on its own deposits are removed from consideration. They should be so removed if the much more meaningful comparison of the entrance and exit fees with the regular premiums on the acquired deposits is to be made.