concurring: Although I would go further than the majority and allow all of the salaries and overhead included in the so-called installment contract expenditures to be currently deductible, I do not dissent because I largely agree with the result reached by the majority and with the movement reflected therein away from the approach that would capitalize otherwise routine business expenses.
In PNC Bancorp, Inc. v. Commissioner, 110 T.C. 349, 370 (1998), revd. 212 F.3d 822 (3d Cir. 2000), a case involving the treatment of salary expenses very similar to those involved herein (namely, salary expenses of credit institutions whose officers and employees, among other things, investigate the creditworthiness of potential borrowers), we concluded that a portion of the salary expenses should be “assimilated” into the capital costs of the loans that were approved.
The Court of Appeals for the Third Circuit disagreed and held that the salaries and other expenses reflected “recurring, routine day-to-day business” activities that did not produce significant future benefits and therefore that the expenses were currently deductible. PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 834. The Court of Appeals resolved not to expand the type of expenses that must be capitalized “so as to drastically limit what might be considered as ‘ordinary and necessary’ expenses.” Id. at 830.
I believe the facts noted below reflect the noncapital, ordinary and necessary nature of all of the salary and overhead expenses that are in issue herein and should control resolution of this fact issue.
(1) The salaries ACC paid were routine, reasonable, and recurring, and the amounts thereof, including increases and bonuses thereto, were tied to overall net company profits, not to the acquisition of specific installment loans. As the Supreme Court explained:
Of course, reasonable wages [salaries] paid in the carrying on of a trade or business qualify as a deduction from gross income. * * * [Commissioner v. Idaho Power Co., 418 U.S. 1, 13 (1974); emphasis added.]
(2) Generally, and for the most part, the specific benefits initially received by ACC from the services of its employees investigating proposed installment loans (namely, the receipt of information needed to review the creditworthiness of potential debtors on the installment loans) were exhausted or lost by ACC almost simultaneously with the receipt of the benefits (i.e., for various reasons the large majority of the proposed installment loans that were investigated and considered by ACC were abandoned within a day. (See majority op. p. 378)). In my opinion, this fact reflects strongly on the ordinary, noncapital nature of all of ACC’s related salary and overhead expenses and rebuts the appropriateness of some complicated and rather arbitrary adjustment under which a portion of the expenses would be capitalized.
As stated by the Court of Appeals for the Sixth Circuit in Godfrey v. Commissioner, 335 F.2d 82, 85 (6th Cir. 1964), the appellate venue for these cases:
The test of an ordinary business expense is whether it is of a recurring nature and its benefit is generally exhausted within a year. * * * [Emphasis added.]
Generally, the benefits ACC received were exhausted within a few hours after a majority of the prospective installment loans were investigated and considered.
Under section 1.263(a)-2(a), Income Tax Regs., expenses are to be capitalized where they produce benefits to a taxpayer with a life substantially beyond a year. Computing the average life of all of the installment loans investigated and considered by ACC’s employees (including the loan applications rejected or withdrawn as well as those approved) produces an average life for all of the installment loans investigated and considered of 6.6 months for 1993 and 7.4 months for 1994.1 Because a majority of the installment loans investigated and considered by ACC were never purchased and because the average life of all of the installment loans (factoring in all installment loans investigated and considered) was not beyond 1 year, I believe it would be erroneous to conclude generally that the allegedly related salaries and overhead provided benefits to ACC with a life “substantially beyond” 1 year.
(3)The salaries and overhead were not paid by ACC in connection with any specific installment loans. Note the Supreme Court’s words, also from Commissioner v. Idaho Power Co., 418 U.S. at 13, linking expenditures to be capitalized to specific capital assets:
But when wages [salaries] 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. * * * [Emphasis added.]
The point is not whether there is only one capital asset or many capital assets to which expenses may be attached and capitalized. Rather, the point is that to require capitalization of what are otherwise routine and recurring ordinary and necessary expenses, the expenses must be directly linked and associated with very specific and identifiable capital assets.
(4) Services relating to ACC’s credit investigations that were performed by ACC employees simply constituted investigatory activities, and as such the related salaries and overhead expenses should be currently deductible. See Wells Fargo & Co. & Subs. v. Commissioner, 224 F.3d 874, 887-888 (8th Cir. 2000), affg. in part and revg. in part Norwest Corp. & Subs. v. Commissioner, 112 T.C. 89 (1999).
(5) Quite contrary to a possible reading of the majority opinion (see Ruwe, J., concurring op. p. 422), ACC’s primary and underlying business activity is not the “purchase” of installment loans. Rather, it is the “holding” of those loans and the associated provision of funds to debtors and the credit intermediation relating thereto (and all that is encompassed within credit intermediation) that ACC provides that constitute ACC’s primary, dominant, and underlying business activity.
Presumably, the amount of ACC’s income and profit in any one year relates primarily to its annual cost of funds and to the losses associated with delinquent loan repayments, on the one hand, as compared to the interest income ACC receives each year on the installment loans, on the other hand. For Federal income tax matching purposes, those expenses and income would appear to be matched fully and completely on ACC’s annual Federal income tax returns, as filed. To now require capitalization, as respondent would, of a portion of ACC’s regular and routine salary and overhead expenses, on the ground that they somehow relate directly to the acquisition of specific installment loans would, in my opinion, reflect a misunderstanding of the true nature (1) of ACC’s underlying business activity, (2) of ACC’s costs and expenses, and (3) of ACC’s income and profit.
As the majority opinion states (majority op. p. 376), ACC was formed “to provide alternate financing”. ACC’s credit investigations and its credit risk decisions relating thereto represent just one of the steps (and certainly not the dominant step) in ACC’s business of credit intermediation (i.e., of providing “financing”).2
Although the majority would allow most of ACC’s salary expenses in issue to be currently deductible, I would go further and hold all of such salaries to be currently deductible.
I also am puzzled by the majority’s different treatment of salaries and overhead expenses. I believe that on the particular facts of this case both salaries and overhead expenses should receive consistent treatment and, as indicated, be fully deductible.
The concluding comments made by the Court of Appeals for the Third Circuit in PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 835, reflect much of my thinking on the issue before us. I quote a portion thereof:
we find the case before us today to be much farther from the heartland of the traditional capital expenditure (a “permanent improvement or betterment”) than are the scenarios at issue in INDOPCO and Lincoln Savings. We will not mechanistically apply phrases from those precedents in ignorance of the realities of the facts before us. We see no principled distinction between the costs at issue here and other costs incurred as “ordinary expenses” by banks. [Id.]
My computation of the average life of ACC’s installment loans investigated and considered (including in the “Total” loans those installment loans rejected or withdrawn) is shown below:
Year Accepted Total Average duration of accepted loans Average duration of all loans1 Number of installment loans Rejected'or withdrawn
1993 1,131 693 1,824 17.5 months 6.6 months
1994 1,338 820 2,158 19.5 months 7.4 months
For 1993 [(1,131 x 0) + (693 x 17.5)] 1,824 = 6.6.
For 1994 [(1,338 x 0) + (820 x 19.5)] 2,158 = 7.4.
I acknowledge that the majority opinion (majority op. p. 376) is less than clear in its statement of the business purpose of ACC. Nevertheless, the majority does acknowledge the important role of ACC in providing “financing”, which in my opinion and experience involves much more than just investigating loan applicants and approving or rejecting the applications.