dissenting:
I. Introduction
We are faced here with a question of fact, whether petitioner’s payments of the exit and 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. Background
A. Facts
This 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 Corporation (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 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 (hereafter, without citation, FIRREA), 12 U.S.C. sec. 1813 (c)(2) (1988), and the purchase constituted a “conversion transaction” (conversion transaction) within the meaning of 12 U.S.C. sec. 1815(d)(2)(B) (Supp. I, 1989). As a consequence, Metrobank required the approval of the Federal Deposit Insurance Corporation (the FDIC), which it obtained, to participate in the purchase. 12 U.S.C. sec. 1815(d)(2)(A) (Supp. I, 1989). Because the purchase constituted a conversion transaction, Metrobank was obligated to pay the exit and entrance fees imposed by 12 U.S.C. section 1815(d)(2)(E) (Supp. I, 1989) (the exit fee and the entrance fee, respectively, or, collectively, the fees), which were assessed against it by the FDIC and became its liability. See 12 U.S.C. sec. 1815(d)(2)(F) (Supp. I, 1989); 12 C.F.R. sec. 312.10(a) (1991). Metrobank paid the fees over 5 years, as permitted by 12 C.F.R. section 312.10(e) (1991), and deducted each payment (the payments) on its Federal income tax return for the year in which payment was made.
B. Issue Raised by the Pleadings
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 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 Section 162(a) and Treas. Reg. § 1.162-l(a).
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. Discussion
A. Introduction
The details of the purchase are not in controversy. The pleadings establish that the only issue for decision is whether the payments entitle Metrobank to a deduction pursuant to section 162(a) and section 1.162-l(a), Income Tax Regs. Section 162(a) allows “as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. As pertinent to this case, section 1.162-l(a), Income Tax Regs., states that, among items included in business expenses, are “insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business”. Petitioner’s burden is to prove that the payments are not capital expenditures as alleged by respondent in the notice.1 I believe that petitioner has failed to carry that burden. Specifically, petitioner has not shown that, as to it, the exit fee is anything other that a cost incident to the purchase, nor has it shown that the entrance fee purchased an insurance benefit or, even if it did, that such insurance benefit did not extend beyond the year in which the purchase occurred.
B. The Exit Fee
1. Introduction
The exit fee is imposed by 12 U.S.C. sec. 1815(d)(2)(E)(i) (Supp. I, 1989), in an amount to be determined jointly by the FDIC and the Secretary of the Treasury (Secretary). See 12 U.S.C. sec. 1815(d)(2)(F) (Supp. I, 1989). The origin of the exit fee requirement is section 206(a)(7) of FIRREA. With respect to transactions such as the purchase, regulations establish the amount of the exit fee as “the product derived by multiplying the dollar amount of the retained deposit base transferred from the Savings Association Insurance Fund member to the Bank Insurance Fund member by 0.90 percent (0.0090)”. 12 C.F.R. sec. 312.5(c)(2) (1991). In pertinent part, the term “retained deposit base” means:
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.
[12 C.F.R. sec. 312.1(j) (1991).]
2. Failure of Petitioner To Establish the 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 as to the imposition of the exit fee.” Majority op. p. 220. Nevertheless, the majority speculates variously that the purpose of the exit fee is “to discourage SAlF-insured institutions from insuring their deposits with the BIF”, majority op. p. 219, “to protect the integrity of the SAIF, id. p. 222, and “to compensate the former insurer (in this case, the SAIF) for its future loss of income as to the assumed deposit liabilities”, id. p. 223. The majority also speculates that the purpose of the exit fee is to compensate the Savings Association Insurance Fund from the cherry-picking of its desirable members: “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.” Id.
The majority has failed to reconcile its various speculations with the condition imposed by 12 U.S.C. sec. 1815(d)(2)(C) (Supp. I, 1989), pertinent to the approval by the FDIC of a conversion transaction during the 5-year moratorium imposed by 12 U.S.C. sec. 1815(d)(2)(A)(ii) (Supp. I, 1989), that the FDIC may approve such a conversion transaction any time if:
(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 6-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 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
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 12 U.S.C. section 1815(d)(2)(F)(i) (1988) (by promulgating 12 C.F.R. sec. 312.5) (1991).3 Petitioner, however, did not do so. The record, therefore, contains no evidence from which we could conclude that the exit fee was collected and expended on petitioner’s behalf for any benefit (for instance, insurance for the remainder of the year in which the purchase occurred) that would entitle petitioner to a deduction under section 162(a).
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, 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 cost of such property”. Section 1.1012-l(a), Income Tax Regs., provides: “The cost is the amount paid for such property in cash or other property.” As used in section 1012, the term “cost” (cost) has been interpreted to include any indebtedness to the seller for the purchase price of the property and any indebtedness to a third party secured by the property. See, e.g., Parker v. Delaney, 186 F.2d 455 (1st Cir. 1950) (purchase money indebtedness included in cost basis); Blackstone Theatre Co. v. Commissioner, 12 T.C. 801, 804 (1949) (cost basis of property acquired subject to liens for taxes and penalties includes amount of such liens); sec. 1.1012-l(g)(l), Income Tax Regs, (cost of property includes amount attributable to debt instrument issued in exchange for property). Cost also includes expenses of, or incident to, the acquisition of property. See, e.g, Warner Mountains Lumber Co. v. Commissioner, 9 T.C. 1171, 1174 (1947) (fee paid to attorney for examining title of property to be purchased is part of cost of property); sec. 1.263(a)-2(d), Income Tax Regs, (fees for architect’s services); sec. 1.263(a)-2(e), Income Tax Regs. (“Commissions paid in purchasing securities”), approved in principle by Helvering v. Winmill, 305 U.S. 79 (1938).
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 nonrefundable, final premium for insurance that it had already received.” Majority op. p. 223 (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 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 section 162(a).
C. The Entrance Fee
1. Introduction
The entrance fee is imposed by 12 U.S.C. sec. 1815(d)(2)(E)(iii) (Supp. I, 1988) in an amount to be determined by the FDIC. The FDIC is guided in making that determination as follows:
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; [12 U.S.C. sec. 1815(d)(2)(E)(iii)(I) (Supp. I, 1989)].
With respect to transactions such as the purchase, regulations establish the amount of the entrance fee as “the product derived by multiplying the dollar amount of the entrance fee deposit base transferred from the Savings Association Insurance Fund member to the Bank Insurance Fund member by the Bank Insurance Fund ratio.” 12 C.F.R. sec. 312.4(c)(2) (1991). The term “entrance fee deposit base” is defined in 12 C.F.R. sec. 312.1(g) (1991) as follows:
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 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 12 C.F.R. section 312.1(c) (1991) as follows:
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) 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), supra 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. p. 223.
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 section 162(a).
3. Discussion
Certain business-related insurance expenses unquestionably are deductible under section 162(a). See, e.g., sec. 1.162-1(a), Income Tax Regs., discussed supra in sec. III.A. Not all business-related, annual insurance premiums, however, are deductible under section 162(a). See, e.g., Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345 (1971) (disallowing deduction for “additional premiums” (prepayments of future premiums) paid by taxpayer to Federal Savings and Loan Association); Commissioner v. Boylston Mkt. Association, 131 F.2d 966 (1st Cir. 1942) (disallowing deduction for prepaid insurance premiums), affg. a Memorandum Opinion of this Court dated November 6, 1941. In Black Hills Corp. v. Commissioner, 101 T.C. 173 (1993), Supplemental Opinion at 102 T.C. 505 (1994), affd. 73 F.3d 799 (8th Cir. 1996), we disallowed deductions for those portions of annual premiums paid for black lung insurance that the taxpayer had not shown to be commensurate with the actual risks of loss for the years of payment. We relied on INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), to conclude that the premium payments, the deduction of which we disallowed, created significant future benefits for the taxpayer. See Black Hills Corp. v. Commissioner, 102 T.C. at 514.
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 ensure 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, 12 U.S.C. sec. 1821(a)(5) (Supp. I, 1989)). The Fund was established by Congress for use by the FDIC to carry out its insurance purposes. See 12 U.S.C. sec. 1821(a)(4)(C) (Supp. I, 1989). Initial funding of the Fund came from the Permanent Insurance Fund. See 12 U.S.C. sec. 1821(a)(5)(B) (Supp. I, 1989). Additional funding was to come from annual assessments (the annual assessments) against insured depository institutions. See 12 U.S.C. sec. 1817(b)(1)(A) (Supp. I, 1989). Congress established a designated reserve ratio for the Fund of 1.25 percent of estimated insured deposits, or, if justified by circumstances that raise a significant risk of substantial future losses, a higher percentage, up to 1.50 percent. 12 U.S.C. sec. 1817(b)(l)(B)(i) (Supp. I, 1989). Assessment rates were fixed for an initial period that might extend to 1995 (0.12 percent of insured deposits for the year in question). 12 U.S.C. sec. 1817(b)(1)(C) (Supp. I, 1989). However, with restrictions, the FDic could increase rates if necessary to restore the Fund’s ratio of reserves to insured deposits to its target level. 12 U.S.C. sec. 1817(b)(l)(C)(iv) (Supp. I, 1989). Any assets of the Fund in excess of 1.25 percent of insured deposits are treated as a supplemental reserve, which assets, if the supplemental reserve is no longer needed, are to be distributed to Fund members (but earnings on those assets are to be distributed annually). See 12 U.S.C. sec. 1817(b)(l)(B)(iii) (Supp. I, 1989). Finally, assessment income in excess of amounts necessary to maintain the designated reserve ratio is to be credited against the Fund member’s assessment for the following year. See 12 U.S.C. sec. 1817(d) (Supp. I, 1989). Clearly, the annual assessment system for the Fund designed by Congress contemplates continued participation by insured depository institutions. There are multiperiod aspects to the system that raise questions as to the extent of the deductibility of even the annual assessments.
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 12 C.F.R. section 312.4 (1991) is limited to that stated purpose is not clear. Possibly, the fee imposed by 12 C.F.R. section 312.4 (1991) was designed to make up for what, in hindsight, was an inadequate annual assessment because, when that assessment was fixed, the conversion transaction was not taken into account. On the other hand, perhaps it was a reserve contribution that would serve only to reduce next year’s annual assessment. Given the complex nature of the annual assessment system, without testimony from officials of the FDIC or other information, we do not know what the assessment of the entrance fee was designed to accomplish.
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 INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992). Petitioner has failed to do so. Petitioner has failed to prove its entitlement to a deduction on account of payment of the entrance fee pursuant to section 162(a).
IV. Conclusion
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, Beghe, Gale, and Marvel, JJ., agree with this dissenting opinion.
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).
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. pp. 218-219. 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”).
See, e.g., 55 Fed. Reg. 10406, 10408 (Mar. 21, 1990), prescribing an 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.”
To the contrary, see supra note 3.