*1 v. REVENUE INTERNAL OF COMMISSIONER ASSN. LOAN & SAVINGS LINCOLN February Argued No. 544. 14, 1971 June Decided Court, in which of the opinion J., the delivered Blackmun, White, Stewart, Brennan, J., Harlan, Black, and C. Burger, dissenting opinion, J., filed joined. JJ., Douglas, Marshall, and post, p. 359. petitioner. for cause the argued- Zinn J. Matthew Griswold, General Solicitor were brief on the him
With Staple- L. Walters, Thomas Attorney General Assistant ... Carmack. English ton, David and respondent. for cause argued Bennion Y. Adam Victor Mackay and Colder A. were brief on the him With Walch. L. opinion delivered
Mr. Blackmun Justice Court. “additional whether question presents
This case savings by a state-chartered in 1963 paid premium” Insur Loan Savings Federal to the association loan of 404§ compulsion under Corporation ance C. U. S. amended, Act, as Housing. -National § 1727 (d),1 is deductible the association, for income tax purposes, ordinary and necessary business ex- pense under § 162 (a) of the Internal Revenue Code of 1954, 26 U. S. C. §162 (a).'
The Commissioner of Internal Revenue determined a
deficiency of $461,454.38 in the 1963 cash basis federal
income tax of- Lincoln Savings and Loan Association.
Nearly all the deficiency was attributable
to the disallow-
ance. of a deduction claimed for Lincoln’s payment of
$882,636.86
pursuant
made
to § 404 (d). Lincoln sought
redetermination
Court,
in the Tax
Judge Raum,
in a
decision reviewed by the court without dissent, upheld
the deficiency.
In Lincoln Angeles). Los (then Francisco Home Loan Bank of San Lincoln has remained application granted That was Fran since that time. San a member of t'he Bank ones of 12 regional cisco Bank is one established Loan Bank Board under supervised by the Federal Home 725, Act of Home Loan Bank Stat. Federal *3 pro 12 1421-1449. These banks amended, §§ S. C. U. by mortgage lending making vide and funds for liquidity needed to meet un advances to member institutions as heavy and credit demands. Each usual or withdrawal purchase capital member must stock -its bank equal unpaid amount to of its outstanding “aggregate 1% principal” loan 12 and maintain that percentage. (c). U. S. C. 1426 §
In became, is, June 1938 Lincoln and still an institution by the Federal Savings Loan Insurance Cor poration (FSLIC), corporation by created 402 of § Act, National 12 Housing 1256, 48 Stat. U. S. C. 1725, § and under the direction of the Federal Home Loan Bank By Board. duty statute FSLIC has the to insure the of savings associations; accounts all federal and loan it may also insure the accounts-of qualified state-chartéred ' such as associations Lincoln. Section 403 12 (a), U. S. C. (a).
Each institution so insured was originally required,, by (a) of the Act, 48 Stat. to 1258, pay FSLIC an annual premium insurance measured the total amount' of its plus accounts obligations.3 The creditor statute provided that continue, these were to an nually until FSLIC’s reserve for losses amounted to 5% of the insured accounts plus creditor obligations of all its insured institutions, and at such intervals thereafter as were necessary to maintain the reserve at that level. pattern
This was changed, however, effective January 1, the Act of September 8, 1961, 75 Stat. 482. That Act, by .its § 3, § 404 amended (a), 12 U. C. S. § 1727 (a), to present form.4
Section 404 (a) now requires FSLIC to establish two reserves, namely, a Primary Reserve “which shall be the general reserve,” and a Secondary Reserve. The require ment for the annual premium of 1% is continued, %2 but the level of the general reserve was lowered from 2% of the totál of 5% plus accounts creditor obliga tions. Sections 404 (b)(1) and 404 (b)(2), 12 U. S. C. §§ 1727 (b)(1) .and 1727 (b)(2). The 1961 Act, more over, added subsection § 404. 12 U. C. to. S. (d). This required that the insured institution pay FSLIC, with respect to any calendar year, an “addi premium tional in the nature of a prepayment with re spect to future premiums of such institution under sub section . (b) . . .” This premium” “additional was, and 3For more than a decade before 1963 the premium annual was at the rate of total, 259; prior V12 Stat. 1% thereto the ' been, had successively, 48 Stat. 1258; % % 1%. 49 Stat. 298. 4Section 404.
“(a) The Corporation shall establish a Primary Reserve which *4 shall be general the reserve of Corporation the and a Secondary Reserve to.which shall be credited the amounts of the prepayments by made insured institutions pursuant to subsection and the credits pursuant made to the first sentence (e).” subsection
349 of the the total net increase institu is, still of the in 2% the institution any insured less amount tion’s accounts^ as,of C, end of the (c), 1426 required, § 12 U. S. the Federal stock.in year, expend purchasing to tois The additional Home Loan- Bank.5 be. n 12 (a), 404 Secondary Reserve. Section credited to the (a). U. C. 1727 § S. Primary Re- statutorily prescribed
As noted, FSLIC’s annually with serve is its It is general reserve. credited represents the thus Corporation’s income; net this net . payments, retained earnings. (b)(1) premium The 404§ institution, is, the of each insured required %2 1% major constitute item in income. To gross FSLIC’s corpora- premium payments .extent these exceed che expenses they year, tion’s losses for the insurance part Primary flow as FSLIC’s net to the Reserve. property institutions have no interest in the funds
constituting Primary Reserve.
(cid:127) Secondary separately pos- Reserve subsists sesses different It, of course, characteristics.. receives 2% “additional premium,” payable, to the extent such is required by 404 (d) § from each insured institution. FSLIC must Secondary also credit the annually Reserve with a “return” on the Secondary Reserve’s “outstanding balances ... at a rate equal to the average annual rate of return to Corporation during ... on the investments Corporation held in obligations of, Act, by 2, repealed (1) The 1961 of the Federal Home § § Act, 12 (1), Bank U. S. C. Loan which had the effect of re ducing from to the stock required an insured institution is 2% 1% hold relation to its outstanding unpaid (The loan principal. requirement provided by had been 27, 1950, Act of June 2% 2, 257.) 64 Stat. contemplated was that for most institutions this reduction approximately would offset the' additional to the required (d). under Rep. H. R. 823, No. Sess, 87th 1st Cong., (1961).; Rep. S. 87th No. Cong, Sess, (1961). 1st 1-2
350 by,
or interést the guaranteed principal as to and (e), 404 12 U. S. C. (a) United States.” Sections 404 Primary (a) §§ 1727 and 1727 In with the (e). contrast only . . . Reserve, Secondary the is “available Reserve Corporation” “only for losses the to such and then extent as which are Corporation other accounts of the available therefor losses.” are insufficient for such Sec- tion 404 (e), (e). U. S. C. §
Each insured in the pro institution has a rata share Secondary Reserve. is (e) Section 404 states that this not assignable or except FSLIC, by regu- transferable lation or otherwise, provides “in or con- merger cases of solidation, transfer of bulk assets . . . and similar trans- actions . . . .” An may cash institution obtain a refund pro of its rata if share its as an insured status is terminated, 407, 12 1730, § S. C. or if receiver § U. or other legal appointed is purposes for custodian liquidation, or if Corporation the determines that the institution has gone into liquidation. (f), Section 12 U. S. C. § 1727 (f). any
Following December 31 on which the aggregate of Primary the Reserve and the Secondary equals Reserve or exceeds of the total of all plus insured accounts 2% creditor'obligations of all the insured (and institutions the Primary Reserve alone does not equal or exceed such. the 2%), additional required by 404 (d) are suspended. Section 404 (g), 12 U. S. C. (g).6 When this takes place, pro rata share of each insured institution in the Secondary Reserve used, to the extent available, to discharge the institution’s obligation to pay regular, its or basic, premium required for under (b)(1). § 404 Thereafter, if the aggregate of the two 6The Act 23, of Dec. 1969, 91-151, Pub. L. (a), 83 §6 Stat. 375, changed, effective after. 1969, the applicable reserve pre mium measures to the designated percentages only “accounts” than rather, plus-“creditor accounts obligations.” reserves decreases to less than l.%%, obligation to pay- additional under 404 (d) resumes and the pro rata share Reserve is longer no used (b)(1) premium. §404 regular When- ever, any following Primary December exceeds, alone equals or such 2%, Corporation shall pay in cash to each insured institution rata share of the Secondary Reserve and shall not accept thereafter further (d) prepayments.7
PSLIC maintains a separate account for each insured *6 institution’s share of the Secondary Reserve. It submits to the institution annually a disclosing statement that share and the interest credited to it.8 regulations Under . by the California Savings issued and Loan Commissioner by and the Federal Home Loan Bank Board, Lincoln re- ports its interest in FSLIC’s Secondary as Reserve an on asset its balance sheet and treats the interest earned on rata share of the Secondary Reserve as income.9 7In 1961 projected FSLIC that the aggregate Primary of the and Secondary equal Reserves would or exceed all accounts .of 2% and obligations creditor of all by 1970; institutions that no payments to the Secondary required Reserve would be 1971— for 1975 and 1980-1995; that Primary the Reserve alone would reach by 1995; Reserve, level and Secondary 2% would be by consumed in discharging 1995 the insured premium institutions’ obligations (b) (1). under § As consequence a of the 1969 amendments effected Pub. L. 91-151, eliminating obligations creditor in measuring the adequacy reserves, the aggregate of Primary FSLIC’s Secondary and Reserves reached the suspension level in 1969 rather than 1970. 2% Beginning in 1970 the Secondary is being used to fulfill the premium institutions’ obligations (b)(1). under 404§ 31, As December Lincoln’s share $1,034,- amounted to As 689.86. 31, 1967, December it '$4,922,115.46. was This had been accumulated since (e) the 404 and payments § and credits began required by as the 1961Act. 9 The Internal Revenue Service that, has for a ruled cash basis taxpayer, this interest is taxable in earned, not only but annually Lincoln an “Insurance Premium
FSLIC sends (b)(1). Notice” for the due. under § 404 basic annually It also Lincoln a “Notice of Insurance sends' if Prepayment” amount, any, Premium under for the due § 404 For 1963 the former was and the (d). $135,760.52 latter $882,636.86. paid by was was Each Lincoln.
On its. federal tax return. Lincoln deducted income (b)(1) § both its 404 (d) payment and its 404§ ordinary necessary and expenses business under (a) § the Code. The Commissioner allowed the former, disallowed the latter. but
The Tax Court held that 404 (d) payment was a nondeductible capital expenditure and. not ordi- was nary necessary business expense, pay- ment . was deductible when only used from Reserve to pay 404 (b) (1) premiums or to meet actual losses of FSLIC. As noted above, the Ninth Circuit reversed panel. divided
II
To qualify as an allowable deduction
(a)
under
162 of the 1954 Code, an
(l)
item must
“paid
be
or incurred
during the taxable year,” (2) be
any
for “carrying on
trade or business,” (3) be an “expense,” (4) be a “neces
*7
sary” expense,
(5)
and
be an “ordinary” expense. This
Court has considered these several requirements, or one
or more of them, in a number of cases. See, for example,
Welch Helvering,
v.
290 U.
111
S.
(1933); Helvering, v.
Winmill,
353 Commissioner, 572 397 U. S. v. Woodward (1966); 397 U. S. Corp., Hilton Hotels v. United States (1970); (1970). differ- emphasized Cardozo In Welch Mr. Justice “necessary” “ordinary” and the ence between deduc- order to achieve both satisfying need for in elusive, well-known, but his in case where tion. It is that appears: answer for the suggestion rule is not a by the statute up
“The standard set full- all its life. Life way of it in law; is.rather riddle.” to the the answer supply must ness 115. S.,U. at Douglas S., U. stressed, 308 d,u
In Pont Justice Mr. or “popular rule of the accepted 493, 495-496, at empha- and further words, import” of a statute’s received normal,' the connotation “[o]rdinary has sized that its on- case “turns and that each usual, customary,” or also In Tellier Mr. special facts.” Justice Stewart “ordinary” and requirement double emphasized the' “necessary”' and said:. decision's-ha,ve consistently the term construed
“Our require minimal only the ‘necessary’ imposing helpful’ expense be ‘appropriate ment [taxpayer’s] of the busi development ‘the for function of the term principal ness’ ..... clarify distinction, ‘ordinary’ (a) in to. expenses are cur between those difficult, often rently and those that are the nature deductible expenditures, which, all, if deductible at capital be amortized over the useful life of the asset.” must S., 383 U. 689-690. at
n clearly, Here much for as to generalities. So 1963, Lincoln .(d) premium” “additional satisfied, requirements. pay- three of the five listed
ment was during made year. taxable It was made in carrying on trade or business. And it was a “neces- sary” payment, for it was compelled by the provisions - the National Housing Act. The Government so con- cedes. The focus, therefore, and only our here, concern is whether the payment was an expense ordinary and an one within the meaning 162 (a) of the Code.
Lincoln's argument essentially is that 404 (d) payment really was no different from its (b)(1) § 404 payment for both were for insurance of its depositors’ accounts and creditor obligations; that all similarly situated insured savings and loan associations (there 4,419 were on December 31, 1963) paid the § 404 (d) premium; and that possibility of a future bene fit from the expenditure not does serve to make capital it in nature as distinguished from an expense.
We feel that the very recital of the facts and of the structure and operation of FSLIC’s reserves, I Part of this opinion, itself provides an answer adverse to Lincoln’s argument.' It is enough, .not in order that an expenditure qualify income tax deduction, it merely be one paid by all similarly insured associations, or that it serves to fortify FSLIC’s insurance purpose and operation. Further, the presence of an ensuing benefit that may have some aspect future is not controlling; many expenses concededly deductible prospective have effect beyond the year. taxable What is important and controlling, we feel, is that § 404 (d) payment serves to create or enhance for Lin- coln is what essentially a separate and distinct additional asset and that, as an inevitable consequence, the payment is capital- in nature and not an expense, let alone an ordinary expense, deductible under § 162 (a) in the ab- sence'of other factors not established here. 'We note the following: made,
Á. FSLIC, to when subject positive controls. rigid continuing *9 That payment Secondary must Reserve. flow into the reserve is circum- primarily only available for stated and scribed then purposes, namely, the of losses and only to the extent all other insuffi- assets FSLIC are cient to cover Secondary losses. The thus those has complete seniority respect upon with to demands FSLIC. upon. the asset last called
B. The insured recog- institution has a distinct and nized property Secondary interest in This the Reserve. is revealed by: (1) 404(e), The recognition, in § transferability of the pro institution’s rata share therein. transferability is restricted, sure, This limited to be but it exists approved situations of merger, consolida- for. tion, and the like. (2) The in prospective refund, and cash at that, of the pro upon institution’s rata share termination of its status, receivership or or upon liquidation, or when the Primary Reserve alone reaches the suspension level. (3) use of the institution’s rata share to its basic under (b)(1) when suspension by level is reached aggregate of the Primary and Secondary Reserves. (4) FSLIC’s separate maintenance account for each insured institution’s share in the Secondary Reserve. (5) statutorily required annual credit from FSLIC’s earnings to the institution’s share of Secondary Re- serve. The share thus is an income-producing entity and the income inures to the benefit the insured institution.
C. Although compulsory accounting rules do not con trol tax consequences, Old Colony R. Co. v. Commis sioner, 284 U. S. 562 (1932), there is significance have, the fact that all in concerned here recognized the presence and the significance of this property interest
in Reserve. FSLIC submits annual state- ments insured institutions showing payments fed-, credits to respective their shares. Lincoln, albeit eral and state requirements, shows that interest on asset its balance and the sheet credit as income. And parent Lincoln’s corporation, First Lincoln Financial Cor- poration, although not subject to such regulation, has done the same its financial statements.
D. The nature of the adjustments effected the 1961 Act is of some import. Due primarily to rapid growth of insured institutions years preceding the passage of that Act, ratio of FSLIC’s reserves to potential liability had declined. S. Rep. No. -778, 87th Cong., 1st Sess., 2, 12; on Hearing II. R. 7108 and H. R. 7109 before Subcommittee 1No. of the House Com- mittee on Banking and Currency,'87th Cong., 1st Sess:, *10 10. By the Act Congress reduced the requirement for Federal Home Loan Bank stock and at the same time channeled' new funds to FSLIC’s Secondary Re- serve. The 404 (d) payment and the in reduction the FHLB purchase stock requirement were effectuated together. . Certainly the FHLB stock is an asset and its acquisition is capital in nature. The complemen- tary § 404 (d) payment is directed to a fund. Each is a device designed .to achieve a particular and common result, namely, providing protection to the insured institution and to its depositors-by in way, the one case, of liquidity and availability of loan funds and, in the other, by way .of segregated amounts available to offset possible losses. Each is permanent more than tempo- (cid:127) rary. Each partakes more of the character of an asset than of an expense. And the two are made complemen- tary by the very provisions of § (d).
We do not regard as contrarily persuasive, or as im- posing an expense characteristic on the § 404 (d) pay- merits, six emphasized features by Lincoln or Court of Appeals:
A. The possibility that Lincoln’s share of the Sec- ondary Reserve would be consumed FSLIC’s losses and thus would never be refunded to Lincoln. The Tax pointed Court out, 51 T. C., at that this hazard any with exists routine investment a bank or an insurance company yet and presence does not investment an expense make rather than a capital undertaking.
B. The general unlikelihood, practical as a matter, of Lincoln’s recovery of its rata share of the Secondary Reserve. It is suggested liquidation will not take place because in day this corporate activity is assumed to be a continuing process and not limited in duration. It is pointed further out that termination of in- FSLIC surance is a business impossibility for it would result in mass withdrawal of. depositors’ accounts and in institu- tional suicide. It may well be true that liquidation is unlikely and that termination of insurance would be an undesirable business. decision. may usually same be said, however, of a manufacturing corporation’s invest- ment in plant and equipment or patents or in many other assets basic to its business and function.
C. The claimed identity purpose of the § 404 (b) (1) (d) payments, namely, the providing of in- surance for depositors’ accounts. .The former,.however, is only in-, annual in phase operation. provides surance year. for the When passes, the insur- *11 ance ceases. The latter, however, provides a fund avail- able for losses not only in the current year, but in the future. It is a fund capable under certain circumstances of finding way back to coffers of the insured insti- tutions. The ultimate purpose of the two payments may have much in common, but the route and the life of each differ from those of the other.
D. The compulsory imposed character of the both and the governing statute economic facts of. life: concedes, Lincoln however, “Compulsion, whether legal or economic, bearing upon should have no question whether a payment.is expense capital, or a expenditure.”10
E. The accounting concept anhual of the income tax. when, This factor is relevant deduction is issue. It has consequence less the determination of whether an item is or ordinary. expense. is not an As this, the mere maturing liability is enough. not
F. The suggestion that
404 (d) payment
not
is
included
the list of
capital
nondedúctible
expenditures
in.
specified by §
the 1954 Code.
is clear from
very
language of
(a)
§§ 162
and 263 that
the two
sections together are not all inclusive, and that
does
provide
not
a complete list of
expend
nondeductible
itures.
Iowa Southern
Commissioner,
Utilities
v.
Co.
Ill Lincoln’s rata share of the Secondary Reserve, of course, is not without its tax aspects. If its share is used .to losses or if, when suspension level reached, (cid:127)it. is devoted to the payment of Lincoln’s § 404 (b)(1). premium, a deduction at that time for the amount so used would appear to be in order. Indeed, the Internal Revenue Service has so ruled. Rev. Rul. 66-49, 1966-1 Cum. Bull, 36, 37. Cf. Treas. on Reg, Income Tax § 1.162-13. Opposition
10 Brief in
17.
*12
We emphasize
just
as compulsory accounting is
not .controlling taxwise, Old Colony R. Co. v. Com
missioner, supra, so the statutory labels of “prepay
ment” and “additional premium” contained in
(d)
§ 404
are not controlling. Burnett v. Commissioner, 356 F. 2d
755, 758 (CA5 1966), cert. denied,
We therefore conclude that Lincoln’s
§ 404
pay
ment made in 1963 is not
under
deductible
(a).
§ 162
See Wichita State Bank & Trust Co. v. Commissioner,
The judgment of the Court of Appeals is reversed. so is ordered. Mr. Justice Douglas, dissenting.
Respondent is a state-chartered savings and loan insti tution, whose deposits are the Federal Savings and Loan Insurance Corporation (FSLIC)-. To obtain this coverage, respondent must premiums. two Un der § 404 (b) of the National Housing Act, it pays an annual of one percent of the total amount %2 of its savings accounts and creditor obligations. Pur suant to § 404 (d), it must also pay an pre additional mium equal to percent two of any net increase in the total insured, amount of its accounts.1 The 404 (b) -premium is gross considered income of FSLIC, approximately 95% of which is transferred to its Primary Reserve to cover losses. These must paid be by insured insti tutions until the Primary equals percent two 1This may amount be reduced.by an equal amount any require ment for purchase of stock in the Federal Home Loan Bank of which the insured is a member.
the total insured sayings accounts obligations and creditor of all insured institutions. Thereafter; insured institu tions need pay -premiums no unless and until the Pri mary Reserve drops percent. below two 404 (d) ,is premium not considered income gross of FSLIC but is transferred tó a Reserve, to be used to cover losses only if other accounts prove insufficient, possibility considered extremely separate remote. A accounting *13 kept for each insured institution, showing the 404 (d) premiums paid. Under § 404 (g), at any time that thé. aggregate of the Primary and Secondary Reserves reaches- of all accounts creditor obligations, 2% § 404 no (d) payments be made, and .need funds from Secondary may be used to make § 404 (b) premium payments, until the aggregate falls below When the Primary Reserve reaches 2%, 1%%. FSLIC is to pay each insured institution pro rata share of the Secondary Reserve in By cash. .FSLIC’s projections, no § 404 premium payments (d) will be re quired in the years 1971 to 1975 and after 1979. No 404§ premiums (b) will be required after 1995, as the n Primary Reserve will reach The respondent 2%. argues that there will be no payments rata shares at that time, as the ;of calculations FSLIC show that the Secondary Fund will be exhausted prior to 1995.2
On its federal tax return for 1963 respondent deducted both its § 404 (b) ánd (d) § 404 premium payments as ordinary and necessary business expenses. The Commis- sioner of Internal Revenue allowed the deduction of 404§ - (b) premiums, but disallowed the latter, characterizing payments these capital nondeductible in investments 2The argues General Solicitor possible it is that some insured might institutions receive refunds' from the' Reserve, if growth their fits a pattern.. certain This only however raises the possibility of -such return, a without showing that such a possibility is more than remote. (b) only when used FSLIC, to be deducted losses FSLIC. used to meet actual or when premiums Ap- The Court ruling. Tax affirmed this' The Court Tax find- Court, Ninth reversed peals for the Circuit and neces- to be reasonable (d) premiums the 404 ing I year paid. in' the expense, deductible business sary from the- Appeals' with the Court of agree dissent decision here. are not (d) premiums
There is no claim that the 404§ is that necessary. position’ of the United States but the nature premiums “ordinary,” these are not “in if must capital expenditures, which, all, deductible at Commis- be amortized over the useful life of the asset.” Tellier, sioner v. (1966). 383 U. 689-690 S. principle
Commissioner relies on the that a cost which asset, results the creation of an a useful life having substantially beyond which extends the close of the outlay. capital taxable is a From this he argues respondent’s that the'determination of whether capital expenditures are deductible business or will, expenses depends on payments provide whether the years. a benefit future *14 respondent
Because the will obtain a benefit in the future from premiums, these in the form of lower 404§ (b) premiums or a full refund of its rata share on termination or he liquidation, argues, capital Reserve is a asset. It is riot used for losses, and will never except be used in the event of a national catas- . trophe. premiums These are not recurring, and will likely paid only be in 13 of the 34 from years 1962 to principles, 1995. Accounting the Commissioner claims, payments demand that these be they deducted when are used, either pay (b) premiums to or to losses. “Only in this manner will the costs of FSLIC .insurance be matched against revenues generated because such insurance is maintained.” professed rule by the United States is, of course,
sound. The is in error applying it to this case. Re- spondent has not established an asset for future benefit. merely has paid the premiums necessary to obtain in- surance. It is premiums true that paid in may result in a reduction in premiums in years. later But labeling this the creation of an proves asset too for much, it invalidates the deduction of § (b) premiums as well.
The benefit to be obtained from the payment of 404§ (d) premiums, they whether be capital expenditures or deductible expenses, is not the reduction of pre- future miums but insurance coverage. The readily Government admits present that the level of 404 (b) is not needed to cover current foreseeable losses. Indeed, losses have never exceeded investment income. high pre- mium rate is for purpose of establishing Primary Reserve, to cover conceivably serious losses the future. When the Primary Reserve reaches a level deemed suffi- cient, no payments will be required at all. If “the costs of FSLIC insurance be [are to] matched against the revenues generated because such insurance is maintained,” a major portion of the § (b) premiums should also some, be capitalized, depreciated be over appropriate term.
Nor is it controlling that the Secondary Reserve is a capital account insofar as FSLIC is concerned. As the Court of Appeals stated:
“We think the emphasis upon the
treatment
receipt by the payee, FSLIC,
is mistaken and that
whether,
in determining
an expense is an ordinary and
necessary expense of doing business, the focus should
be on the taxpayer and the taxpayer’s business, not
on
payee
what the
does with the money paid. This
say
not to
that rights
retained
the taxpayer
are to be ignored.”
A decision that are deductible, hot while 404 (b) premiums are, only must rest on the dis tinction two, rights by respond between the retained ent in the Secondary Reserve. These are évidenced of separate payment keeping “accounts,” earn ings to these accounts, possibility recovery and the of a pro of a rata share of But, as the Court Reserve. Appeals noted, respondent is a going concern, possibility of a return liquidation share on is not proper consideration. As termination of insurance surely would lead to liquidation, could not con this be n sidered either. possibility The part some of the that Secondary Reserve might be respondent returned to when the' Primary Reserve reaches a is, sufficient level best, at remote. This contingent possibility recovery not does render an otherwise payment deductible nondeductible. Alleghany Corp. v. Commissioner, T. C. 305; Electric Tachometer Corp. Commissioner, v. C. T. 158, 161. paid réturns pro on a rata share of paid are out of earnings, is, out of funds .
which would otherwise be transferred to the Primary Reserve. The does not increase the aggre- gate amount of the reserves. paid returns are not available to the insured institution, and not tax- able to it until paid for its benefit, according Internal Revenue- Service. At that point, the insured institution would declare the income and deduct .the amount as expense. Therefore, absent the remote possibility the insured institution might receive a pro rata it share, is immaterial whether returns paid are to the Secondary only Reserve or to the Primary Reserve. Also, the revenue ruling that the insured institution does not have even possession constructive of a rata share of the Secondary Reserve, for purposes of taxing returns *16 position with the that, fund, is inconsistent
on the institution. capital asset pro rata share same is. correct Appeals was facts, the Court these On for the paid premiums, determining necessary for the success insurance obtaining purpose deductible, ordinary were business,, respondent’s expense. business