Metrocorp, Inc. v. Comm'r of Internal Revenue
| Decision Date | 13 April 2001 |
| Docket Number | No. 19780–98.,19780–98. |
| Citation | 116 T.C. 211,116 T.C. No. 18 |
| Parties | METROCORP, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayer, a state bank, petitioned for redetermination of deficiencies arising from disallowed expense treatment for deposit insurance paid on conversion transaction in acquiring assets and liabilities of failed federal savings association. The Tax Court, Laro, J., held that expenses were currently deductible.
Decision for taxpayer.
Ruwe, J., dissented in written opinion, in which Whalen, Halpern, Beghe, Gale, and Marvel, JJ., joined.
Halpern, J., dissented in written opinion, in which Ruwe, Whalen, Beghe, Gale, and Marvel, JJ., joined.
James R. Walker and Charles L. Mastin II, for petitioner.
Jennifer L. Nuding, for respondent.
OPINION
M, a State bank, acquired a portion of the assets and assumed a portion of the deposit liabilities of C. a failed Federal savings association. Before the transaction, the deposit liabilities of M and C were insured by different funds (B and S, respectively) administered by the Federal Deposit Insurance Corporation. The transaction was a “conversion transaction” under 12 U.S.C. sec. 1815(d)(2)(B) (1994), because M and C each participated in a different fund, and M assumed C's deposit liabilities. R determined that the exit and entrance fees related to the transaction which M paid to S and B, respectively, under 12 U.S.C. sec. 1815(d)(2)(E) (1994), were non-deductible capital expenditures. The fees were capitalizable, R asserts, because they produced significant future benefits to M in that M, following the assumption, insured all of its deposit liabilities through B. M's use of B to insure all of its deposit liabilities meant that M's future costs for compliance and insurance premiums would be lower than if M had continued to use S to insure the assumed deposit liabilities.
Held: M's payment of the fees produced no significant future benefit to M that would require capitalization of either fee.
The parties submitted this case to the Court without trial. See Rule 122. Respondent determined deficiencies of $15,288, $14,372, and $14,375 in petitioner's respective taxable years ended October 31, 1993, 1994, and 1995. Following concessions, we must decide whether petitioner may deduct the exit and entrance fees which its subsidiary, Metrobank, paid to the Federal Deposit Insurance Corporation (FDIC) with respect to a “conversion transaction” under 12 U.S.C. sec. 1815(d)(2)(E)(iv) (1994). We hold it may.1 Unless otherwise indicated, section references are to the Internal Revenue Code applicable to the relevant years. Rule references are to the Tax Court Rules of Practice and Procedure.
The parties have filed with the Court a stipulation of facts and certain related exhibits. We incorporate herein by reference that stipulation of facts and those exhibits. We find the stipulated facts accordingly, and we set forth the relevant facts in this background section. We also set forth in this section, as they relate to the operation of the FDIC and of the insurance funds at issue, the pertinent provisions of title 12 of the United States Code (1994) (title 12).
Petitioner is a Delaware corporation whose principal office was in East Moline, Illinois, when its petition was filed. It is a bank holding company that files consolidated Federal income tax returns.2 It reports its income and expenses using an accrual method and on the basis of a fiscal year ending on October 31. It includes in its consolidated returns a wholly owned subsidiary, Metrobank, that is a bank chartered in Illinois.
The FDIC is a congressionally established corporation that serves primarily to protect financial institution depositors by insuring any deposit up to $100,000 that is held by a bank or savings association participating in the FDIC insurance program. The Banking Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) are separate funds which the FDIC maintains and administers under this program. The BIF insures the deposit liabilities of participating banks, e.g., Metrobank. The SAIF insures the deposit liabilities of participating savings associations; e.g., Community Federal Savings Bank (Community). Each financial institution that participates in the FDIC's insurance program is generally assessed a semiannual charge (premium) equal to its liability for deposits multiplied by the applicable rate set forth in 12 U.S.C. sec. 1817(b)(1)(C) or (D) (1994). Any amount assessed against a participant in the BIF is deposited into the BIF and is available to the FDIC for use with respect to any BIF participant. Any amount assessed against a participant in the SAIF is deposited into the SAIF and is available to the FDIC for use with respect to any SAIF participant.
Community is a failed savings association. On October 16, 1990, Metrobank submitted to the FDIC a bid to consummate a transaction (transaction) under which Metrobank would acquire a portion of Community's assets and assume a portion of Community's deposit liabilities. Because Community and Metrobank each insured its deposit liabilities through a different FDIC fund, and Metrobank had agreed to assume Community's deposit liabilities, which would be insured after the transaction by the BIF instead of the SAIF, the transaction was a conversion transaction under 12 U.S.C. sec. 1815(d)(2)(B)(iv) (1994). Section 1815(d)(2)(B) of title 12 defines a “conversion transaction” as:
(i) the change of status of an insured depository institution from a Bank Insurance Fund member to a Savings Association Insurance Fund member or from a Savings Association Insurance Fund member to a Bank Insurance Fund member;
(ii) the merger or consolidation of a Bank Insurance Fund member with a Savings Association Insurance Fund member;
(iii) the assumption of any liability by—
(I) any Bank Insurance Fund member to pay any deposits of a Savings Association Insurance Fund member; or
(II) any Savings Association Insurance Fund member to pay any deposits of a Bank Insurance Fund member;
(iv) the transfer of assets of—
(I) any Bank Insurance Fund member to any Savings Association Insurance Fund member in consideration of the assumption of liabilities for any portion of the deposits of such Bank Insurance Fund member; or
(II) any Savings Association Insurance Fund member to any Bank Insurance Fund member in consideration of the assumption of liabilities for any portion of the deposits of such Savings Association Insurance Fund member;
Financial institutions are required by 12 U.S.C. sec. 1815(d)(2)(E) (1994) to pay to the FDIC exit and entrance fees on conversion transactions, and Metrobank agreed in its bid to pay these fees to the FDIC. That section provides:
Each insured depository institution participating in a conversion transaction shall pay—
(i) in the case of a conversion transaction in which the resulting or acquiring depository institution is not a Savings Association Insurance Fund member, an exit fee * * * which—
(I) shall be deposited in the Savings Association Insurance Fund; or
(II) shall be paid to the Financing Corporation, if the Secretary of the Treasury determines that the Financing Corporation has exhausted all other sources of funding for interest payments on the obligations of the Financing Corporation and orders that such fees be paid to the Financing Corporation;
(ii) in the case of a conversion transaction in which the resulting or acquiring depository institution is not a Bank Insurance Fund member, an exit fee in an amount to be determined by the [Federal Deposit Insurance] Corporation * * * which shall be deposited in the Bank Insurance Fund; and
(iii) an entrance fee in an amount to be determined by the [Federal Deposit Insurance] Corporation * * *, except that—
(I) 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 [Federal Deposit Insurance] Corporation calculates as necessary to prevent dilution of the Bank Insurance Fund, and shall be paid to the Bank Insurance Fund; and
(II) in the case of a conversion transaction in which the resulting or acquiring depository institution is a Savings Association Insurance Fund member, the fee shall be the approximate amount which the [Federal Deposit Insurance] Corporation calculates as necessary to prevent dilution of the Savings Association Insurance Fund, and shall be paid to the Savings Association Insurance Fund.
Metrobank consummated the transaction on November 2, 1990, and the FDIC approved the transaction on November 6, 1990, effective as of November 2, 1990. After the transaction, all of Metrobank's deposit liabilities (including those assumed from Community) were insured by the BIF. Metrobank could not have insured through the BIF the deposit liabilities it had assumed from Community without paying the exit and entrance fees.
In total, Metrobank paid to the FDIC an exit fee of $309,565 and an entrance fee of $43,339 on its assumption of Community's deposit liabilities. Metrobank paid those fees in five annual installments, paying $71,518 in each subject year ($62,735 for the exit fee and $8,783 for the entrance fee).3 For each of the subject years, petitioner claimed a deduction for the payment of the fees during that year. Petitioner also claimed for those respective years deductions of $465,046, $463,583, and $311,245 that Metrobank paid to the FDIC as semiannual insurance premiums under 12 U.S.C. sec. 1817 (1994).
Pursuant to 12 U.S.C. sec. 1815(d)(2)(E)(i) and (iii) (1994), the FDIC deposited the exit fee into the SAIF, and it deposited the entrance fee into the BIF....
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