Lincoln Savings and Loan Association v. CIR

• Decision Date: 18 March 1970
• Docket Number: No. 23923.,23923.
• Citation: 422 F.2d 90
• Parties: LINCOLN SAVINGS AND LOAN ASSOCIATION, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

422 F.2d 90 (1970)

LINCOLN SAVINGS AND LOAN ASSOCIATION, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 23923.

United States Court of Appeals, Ninth Circuit.

February 3, 1970.

Rehearing Denied March 18, 1970.

Adam Y. Bennion (argued), of MacKay McGregor & Bennion, Los Angeles, Cal., for appellant.

David E. Carmack (argued), Atty., Dept. of Justice, Johnnie M. Walters, Asst. Atty. Gen., Tax Div., Dept. of Justice, K. Martin Worthy, Chief Counsel, IRS, Washington, D. C., for appellee.

Before ELY and HUFSTEDLER, Circuit Judges, and THOMPSON,^* District Judge.

THOMPSON, District Judge:

We are asked to review a determination by the Tax Court. A deduction of $882,636.86 from Appellant's gross income for 1963 was contested. The Tax Court held that Appellant's payment, made for inclusion in the Secondary Reserve Account of the Federal Savings and Loan Insurance Corporation (FSLIC) resulted in the acquisition of a capital asset rather than constituting an ordinary and necessary business expense deductible in the year paid as contemplated by 26 U.S.C. § 162(a).

Jurisdiction and scope of review are governed by 26 U.S.C. § 7482.

The Tax Court, in its published opinion, Lincoln Savings and Loan Association, Petitioner, v. Commissioner of Internal Revenue, Respondent, Docket No. 325-67, 51 T.C. 82, made a comprehensive and accurate statement of the facts. Also in that opinion, as well as in First Federal Savings and Loan Association of St. Joseph v. United States, 288 F. Supp. 477 (W.D.Mo.1968), and in Washington Federal Savings and Loan Association of Miami Beach v. United States, 304 F.Supp. 1072 (S.D.Fla.1969), we find extensive expositions of the applicable statutes and legislative history. Whatever may be said in favor of the proliferation of the printed legal word which has attended the effort of judicial draftsmen to make each opinion an integrated, comprehensive whole, in this situation, where we are concerned with unique and specialized statutory provisions having a tax impact only on one particular segment of the economy, the savings and loan institutions, we discern no advantage in repeating all the arguments, contentions and responses made by the parties here which have been thoroughly considered in the referenced opinions. Neither is it useful to restate the facts in detail, a statement which required twenty-three typewritten pages of the Tax Court opinion. We are writing with the assumption that the reader is familiar with the opinions to which reference has been made.

The taxpayer here is a state-chartered savings and loan association. The St. Joseph and Miami Beach opinions, supra, concerned federal savings and loan associations. The federal institutions are required by law to insure deposits with FSLIC and so to make the premium payments to the Secondary Reserve. A state-chartered institution is not required by law to insure deposits with FSLIC. In this respect, the cases differ. The Tax Court, however, found as a fact that "in the opinion of its (taxpayer's) management loss of its insured status with the FSLIC would cause a mass withdrawal of savings by its depositors", and quite properly refused to distinguish the St. Joseph case on account of the difference we have noted. We deem both the St. Joseph and Miami Beach opinions to be persuasive authority in support of the contentions of this taxpayer and we adopt the cogent arguments in those opinions by reference, without repetition.

The Tax Court opinion approves Revenue Ruling 66-49 (Internal Revenue Bulletin, C.B. 1966-1, January-June 1966, p. 36). The headnote summarizes the ruling.¹ Such rulings, unlike Treasury Regulations, do not have the force of law and are at most merely persuasive.² We think the revenue ruling is wrong.

The question presented is whether the premium payments under 12 U.S. C. § 1727(d), which the taxpayer made into the Secondary Reserve of FSLIC, were deductible as "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." 26 U.S.C. § 162(a). The Tax Court said no, and characterized the expense as a non-deductible capital expenditure. 26 U.S.C. § 262. In doing so, the Court emphasized the way the Secondary Reserve was accounted for and managed by FSLIC. It pointed out that Section 1727(d) payments "are not considered as income by the FSLIC"; are used "only for losses of the corporation * * * to such extent as other accounts * * * are insufficient"; that the Secondary Reserve account is "rather like a capital account"; that the Secondary Reserve is "part of a pool of capital available to the FSLIC * * * in the event of emergency. We think the emphasis upon the treatment of the receipt by the payee, FSLIC, is mistaken and that in determining whether 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 what the payee does with the money paid. This is not to say that rights retained by the taxpayer are to be ignored.

Obviously, the payment made to the Secondary Reserve has hybrid characteristics. If this were not so, there would be no lawsuit. The tax impact of the payment must depend upon whether it is more like a capital investment or a business expense.

In opting for the business expense treatment of this expenditure, we first consider whether the revenue ruling to the contrary is inconsistent with the annual accounting concept of income determination and income tax assessment. We think that it is. The importance of this concept was emphasized in Security Flour Mills Co. v. Comm'r, 321 U.S. 281, 64 S.Ct. 596, 88 L.Ed. 725 (1944), where the Court said:

"The rationale of the system is this: `It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the goverment, at regular intervals. Only by such a system is it practicable to produce a regular flow of income and apply methods of accounting, assessment, and collection capable of practical operation.\'

"This legal principle has often been stated and applied. The uniform result has been denial both to goverment and to taxpayer of the privilege of allocating income or outgo to a year other than the year of actual receipt or payment, or, applying the accrual basis, the year in which the right to receive, or the obligation to pay, has become final and definite in amount."

To treat the payments of premiums to the Secondary Reserve as the acquisition of a capital asset is a departure from the basic concept of accounting for receipts and disbursements in the year when made (on cash basis accounting). So, it is not just a matter of choosing one treatment or the other. On the contrary, persuasive reasons should appear to justify the departure.

The Commissioner's ruling also ignores another of the most fundamental concepts of federal income taxation. Both federal income taxation and generally accepted principles of the accounting profession assume that a corporate taxpayer is a "going concern" and will continue indefinitely. Ascertainment of revenue at the end of the accounting period does not hinge upon determination of liquidation value of closing inventories, nor is appreciation or depreciation in value of balance sheet assets considered. This concept is so basic that Congress felt compelled to provide a specific exemption for corporations formed or acquired primarily for liquidation. 26 U.S.C. § 341 (1964). Accordingly, to give consideration to the possibilities of reimbursement because of liquidation or receivership is inconsistent with this principle. The possibility of reimbursement by the taxpayer's voluntary act of termination of coverage is in the same category. The Tax Court found that Appellant's management believed that termination of insurance would cause mass withdrawal by its depositors and, ultimately, liquidation. The Court also found that all but an insignificant portion of the savings and loan industry thought it necessary to have insurance coverage. Therefore, the practical realties require the conclusion that termination of coverage is not a proper consideration in determining the finality of the disbursement in issue. Termination here is deemed tantamount to liquidation or receivership.

We also believe that the revenue ruling is inconsistent within itself. It declares (1) that the payments to the Secondary Reserve were not deductible until any possibility of their return was precluded; also (2) that earnings on the Secondary Reserve are taxable to the taxpayer only when they become available to it without substantial restriction or are paid out for its benefit. When we consider that under the "claim of right" doctrine, there must be an impossibility of even constructive possession to defeat taxation of income and that a non-contractual obligation of repayment will not defeat it (James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961)) in the context of the "all events" test fixing the accounting period for the allowance of deductions as the one in which all events had occurred which fixed the amount and the fact of the liability (United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347 (1926); Dixie Pine Products Co. v. Comm., 320 U.S. 516, 64 S.Ct. 364, 88 L.Ed. 270 (1944); ...