First Sec. Bank of Idaho, N. A. v. C. I. R.

• Decision Date: 01 March 1979
• Docket Number: 76-3643,Nos. 76-3642,s. 76-3642
• Citation: 592 F.2d 1050
• Parties: 79-2 USTC P 9581 FIRST SECURITY BANK OF IDAHO, N. A., Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. FIRST SECURITY BANK OF UTAH, N. A., Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1050

592 F.2d 1050

79-2 USTC P 9581

FIRST SECURITY BANK OF IDAHO, N. A., Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.

FIRST SECURITY BANK OF UTAH, N. A., Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.

Nos. 76-3642, 76-3643.

United States Court of Appeals Ninth Circuit.

March 1, 1979.

Rehearing Denied March 15, 1979.

Gary R. Allen (argued), Washington, D. C., for appellant.

Alonzo W. Watson, Jr. (argued), of Ray, Quinney & Nebeker, Salt Lake City, Utah, for appellees.

Appeal from the Decision of the United States Tax Court.

Before DUNIWAY and KILKENNY, Circuit Judges, and BELLONI, District judge. ^*

KILKENNY, Circuit Judge:

In 1966 the appellees deducted as an ordinary and necessary business expense under the provisions of the Internal Revenue Code, 26 U.S.C. § 162(a), (I.R.C.1954), ¹ an assessment fee paid to BankAmericard Service Corporation (BSC). The Commissioner disallowed $12,500.00 of each bank's deductions, holding that the payment was for a franchise right of indefinite duration which must be capitalized. On review of the Commissioner's decision, the tax court found the assessment currently deductible and entered judgment for the appellees. 63 T.C. 644 (1975). The Commissioner appeals.

FACTS

On its income tax for the year 1966, appellee, First Security Bank of Idaho (Bank of Idaho) deducted under the caption "Other Deductions", an amount of $29,794.44 as "BankAmericard Expense." On its income tax return filed for the year 1966, First Security Bank of Utah (Bank of Utah) deducted under the caption "Other Deductions", an amount of $25,000.00 as "BankAmericard fee credit." Said deductions include for each bank an amount of $12,500.00 attributable to the items provided under the licensing agreements entered into in 1966 between BSC and said banks.

From the licensing agreements we learn that BSC was the owner, author and developer of "extensive technical information and 'know-how' " used in the establishment, administration and promotion of the BankAmericard Consumer Credit Plan. Each bank bargained for and received "technical information and 'know how' and like information as might thereafter be developed." BSC, in the agreement, promised to "cooperate with, and to instruct and assist (the bank's) representatives in the utilization of such information and 'know-how' in the establishment and administration of its credit plan." Accordingly, each bank was obligated to make only two payments to BSC: (1) a quarterly royalty payment based solely on the gross volume of sales charged under each bank's credit card plan utilizing BSC's emblems, and (2) an initial payment of $12,500.00 for all other consideration received under the agreement by the banks from BSC. The $12,500.00 initial fee paid by each bank to BSC under the license agreement was for computer programming and servicing, operating manuals, marketing "know-how", advertising and publicity aids, forms and agreements, training sessions, and other instructions in setting up and running a credit card operation. Of this $12,500.00 fee, $7,500.00 was allotted to the costs of the computer program and all that it comprised. The other $5,000.00 was allotted to operating manuals, advertising materials, programs, marketing "know-how", and motivational programs. No part of the $12,500.00 was allotted to the use of the BankAmericard emblem.

BSC was interested in promoting the nationwide use of its credit card program and the record would indicate it was willing to foster such an extensive use by supplying the computer program at less than actual cost. There is evidence that the value of the computer program which BSC supplied to the banks under the agreement was worth well in excess of $12,500.00 and could well have cost each bank from $75,000.00 to $100,000.00 to write or rewrite the program. The operating manuals supplied by BSC to the banks were used extensively for the first few months, but soon became obsolete and had to be replaced by more sophisticated manuals. In accordance with the mutual agreement of the parties, the licensing agreements were terminated as of June 30, 1970, after being in effect not quite four years.

ISSUE

Whether appellees' initial cost of $12,500.00 each for participation in the BankAmericard system constitutes ordinary and necessary expenses incurred in carrying on a trade or business, deductible under § 162(a)?

FINDINGS

Utilizing Colorado Springs National Bank v. United States, 505 F.2d 1185 (CA10 1974), and Golsen v. Commissioner, 54 T.C. 742 (1970), Aff'd.445 F.2d 985 (CA10 1971), Cert. denied 404 U.S. 940, 92 S.Ct. 284, 30 L.Ed.2d 254, as the applicable law, the tax court found that $7,500.00 of the $12,500.00 of initial expenditures paid by each bank represented the cost of computer programming and servicing and was, therefore, within the scope of the deductible expenditures approved by Colorado Springs National Bank, supra, and Golsen, supra. The record supports this finding. The tax court went on to find that the advertising and publicity aids, forms and agreements, training sessions and operating manuals the banks received represented deductible expenditures under § 162. It made this finding despite the argument of the Commissioner that: (1) the acquisition of indicia of the BankAmericard system, including the service marks of the BankAmericard, as well as certain computer programming, advertising aids, and training sessions provided "future economic benefits" of an unknown duration and, therefore, must be capitalized; and (2) that the expenditures incurred by the appellee banks in becoming part of the BankAmericard system were non-deductible preoperating costs involved in the banks' entering into a new trade or business. In rejecting both contentions, the tax court held that essentially the same questions were presented to the Tenth Circuit in Colorado Springs National Bank, supra, where the court held that the bank's expenditures for computer operations and various promotional material and activities in starting their consumer credit programs were currently deductible under § 162. As added support for its decision, the tax court cited Commissioner v. Lincoln Savings & Loan Assn., 403 U.S. 345, 91 S.Ct. 1893, 29 L.Ed.2d 519 (1971); Cubbedge Snow v. Commissioner, 31 T.C. 585 (1958), and Golsen, supra.

Additionally, the tax court found that the license to engage in and operate a consumer credit card plan under the name BankAmericard was not within the initial cost paid by the appellee banks. It held that the additional $5,000.00 represented each bank's payments for support and instructional services alone, noting that the initial fees were non-refundable even if, after payment, a bank never implemented the BankAmericard system. In so finding, the court suggested that had a bank already possessed the operational "know-how" of a nationwide consumer credit card system, as well as computer programming adequate to maintain the system, and had it desired to join the BankAmericard system in 1966, it would not have been required to pay any initial fees. The only payment required would have been the royalty fee based on gross sales volume.

DECISION

We adopt the decision of the Tenth Circuit in Colorado Springs National Bank, supra, as the law of this circuit, and hold that the tax court correctly applied the law to the facts before it. Contrary to what is argued by the appellant, the appellees did not acquire "several new, separate assets" which are distinguishable from those acquired by the taxpayer in Colorado Springs National Bank, supra. Indeed, we are unable to distinguish between the "computer costs" involved in the Colorado Springs case and the amounts paid for a "computer program" in the case before us.

Recent cases, which we approve, fully supporting the decision of the Tenth Circuit in Colorado Springs National Bank, supra, are First National Bank of South Carolina v. United States, 558 F.2d 721 (CA4 1977), and Iowa-Des Moines National Bank v. United States, 68 T.C. 872 (1977). Nothing in Lincoln Savings & Loan, supra, is contrary to these decisions.

CONCLUSION

Factual determinations of the tax court will not be set aside by the reviewing court unless it is demonstrated that such...