t c no united_states tax_court david j lychuk and mary k lychuk et al petitioners v commissioner of internal revenue respondent docket nos filed date a acquires and services multiyear installment contracts as its sole business operations a acquires each contract pincite percent of its face value and is entitled to all principal and interest payments a’s employees perform various credit review services in order to decide whether to acquire each contract offered to a and as to the contracts which a chooses to acquire perform additional services in paying the sellers r determined that all of a’s salaries benefits and overhead printing telephone computer rent and utilities relating to its acquisition and not to its service operation were capital expenditures r also determined that a had to capitalize professional fees and commissions ' cases of the following petitioners are consolidated herewith edward c and virginia m blasius docket no james e and mary jo blasius docket no -- - collectively offering expenditures relating to its offering of notes in and a second offering that was planned in and abandoned in held the salaries and benefits are capital expenditures a’s payment of these items was directly related to its anticipated acquisitions of assets with expected useful lives exceeding year held further the overhead expenses may be deducted currently under sec_162 i r c a’s payment of these items was not directly related to the anticipated acquisitions and any future benefit that a received from these expenses was incidental to its payment of them held further sec_165 i r c allows a to deduct the portion of the capitalized salaries and benefits that was attributable to installment contracts which it never acquired a may deduct those amounts for the respective years in which it ascertained that it would not acquire the related contracts held further a must capitalize all of the offering expenditures a’s payment of these expenditures was anticipated to provide a with significant future_benefits held further sec_165 i r c allows a to deduct in the portion of the capitalized offering expenditures that was attributable to the abandoned offering oksana xenos for petitioners ’ bric r skinner for respondent laro judge petitioners petitioned the court to redetermine deficiencies attributable primarily to adjustments which respondent made to their income from a subchapter_s briefs of amici curiae were filed by robert a rudnick b john williams jr james f warren and richard j gagnon jr as counsel for federal_home_loan_mortgage_corporation fhlmc and by felix b laughlin and anna-liza harris as counsel for federal_national_mortgage_association fnma - - corporation automotive credit corporation acc respondent determined a dollar_figure deficiency in the federal_income_tax of david j and mary k lychuk respondent determined dollar_figure and dollar_figure deficiencies in the and federal income taxes respectively of edward c and virginia m blasius respondent determined dollar_figure and dollar_figure deficiencies in the and federal income taxes respectively of james e and mary jo blasius both blasius couples alleged in their respective petitions that they had an overpayment for on account of costs which acc failed to deduct for that year following concessions we must decide whether acc must capitalize certain expenditures made during and the expenditures were generally acc’s payment of salaries benefits and overhead printing telephone computer rent and utilities relating to its acquisition of retail installment contracts installment contracts in the ordinary course of its business installment contracts expenditures and professional fees and commissions relating to a private_placement offering of notes that acc accomplished in and a second offering that acc planned in and abandoned in collectively ppm expenditures we hold that acc must capitalize both groups of expenditures to the extent described herein we must also decide whether acc may deduct the portion james blasius is edward blasius’ son - of the capitalized installment contracts expenditures relating to installment contracts which it never acquired we hold it may deduct that portion under sec_165 we must also decide whether acc may deduct the portion of the ppm expenditures relating to the abandoned offering we hold it may deduct that portion for under sec_165 findings_of_fact the parties have stipulated many of the facts we incorporate herein the parties’ stipulation of facts and the exhibits submitted therewith we find the stipulated facts accordingly each petitioning couple is a husband and wife who resided in michigan when their petition was filed each petitioning couple filed a joint federal_income_tax return for the relevant years acc is a cash_method taxpayer that was incorporated in and elected shortly thereafter to be taxed as an s_corporation for federal_income_tax purposes it was formed to provide alternate financing for purchasers of used automobiles or light trucks collectively automobiles who have marginal credit its sole business operation is the acquisition of installment contracts from automobile dealers dealers who have sold automobiles to high credit risk individuals and the servicing 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 - - of those contracts its primary business activities are credit investigation credit evaluation documentation and the monitoring of collections on installment contracts its business is conducted out of space that it rents in bingham farms michigan pursuant to a 5-year lease that began on date under the lease acc pays monthly rent of dollar_figure during the first months and dollar_figure afterwards acc’s shareholders and their respective ownership interests are as follows james and mary jo blasius edward and virginia blasius donald tern sec_5 david lychuk none of the shareholders except james blasius works in acc’s daily business the other male shareholders serve as the directors of acc’s board acc’s key management personnel includes its president james blasius its vice president and chief financial officer steven balan its credit manager cass budzynowski and its credit investigator hope mcgee during the relevant years each of these individuals performed services in connection with acc’s acquisition of installment contracts james blasius managed acc’s overall operation and handled personally all contracts with dealers steven balan supervised and oversaw acc’s day-to-day management and its financial and general office management cass -- - budzynowski analyzed credit applications and supervised credit investigations hope mcgee analyzed credit reports and verified all information provided by credit applicants eg by directly contacting employers banks and creditors acc pays each of its key management personnel a base salary rach of these individuals is also entitled to receive an annual bonus at the sole discretion of acc’s board_of directors the bonuses are paid from a bonus pool established by acc and in which acc places funds in an amount up to dollar_figure percent of its pretax net profits except in the case of james blasius no restrictions exist as to the amount of compensation that acc may pay to its officers or key employees james blasius’ bonus is limited to percent of the pool under the terms of each installment contract an individual buys an automobile from a dealer at a set price to be paid with interest in monthly installments the average rate of interest charged to the buyers is approximately percent the length of repayment ranges from to months acc and the dealers have an independent agreement under which the dealers sell some of the installment contracts and the right to the corresponding payments of principal and interest to acc at a price equal to percent of each contract’s principal_amount e at a 35-percent discount as of date acc acguired the installment contracts from dealers of - which sold to acc percent of the installment contracts which acc acguired acc is not obligated to acquire all of the installment contracts offered to it by the dealers but generally must decide on whether it will acquire a particular installment contract before the related automobile sale is finalized acc rests its decision as to the acquisition of an installment contract on its analysis of the buyer’s credit worthiness that analysis generally includes acc’s review of the buyer’s credit application acc’s obtaining of one or more credit reports on the buyer acc’s verifying of the buyer’s job status salary and residence and acc’s evaluation of various aspects of the buyer’s credit history such as payment history and financial stability tf acc acquires an installment contract the dealer generally assigns its rights under that contract to acc as part of the automobile sale and acc pays the dealer the 65-percent amount upon acc’s receipt of all of the documents relating to the installment contract the automobile buyer pays acc all amounts due under the installment contract and the automobile buyer collateralizes his or her obligation to make those payments with the purchased automobile acc may repossess and sell the automobile if the buyer defaults on the installment contract acc’s acquisition of installment contracts generally followed an established procedure first acc would contact acc services all of the installment contracts it acquires --- - dealers and advise them that it was in the business of acquiring installment contracts on an ongoing basis second acc would enter into the independent agreement with each dealer that decided to sell its installment contracts to acc and the dealer would provide acc with its sellers license third the dealer when faced with a prospective automobile buyer who did not qualify for traditional financing would alert the buyer to acc’s financing business fourth a buyer who wanted to finance the purchase with acc would complete a detailed credit application that the dealer would transmit to acc by facsimile fifth acc would record the application in its daily log and perform its credit review process sixth to the extent that acc decided favorably on a credit application and the buyer accepted acc’s financing_arrangement ’ acc would issue the dealer a check for the 65-percent amount on the next friday or if acc had not yet received the requisite documentation from the dealer on the first friday after it received that documentation one piece of documentation reguired by acc was the fully executed installment contract that was printed on a form that bore acc’s name logo address and telephone number upon receipt of this contract acc assigned the applicant an account number and entered all applicable information into its computerized collection system acc’s approval of an application did not always result in its acquisition of the related installment contract an applicant sometimes decided for one reason or another not to accept acc’s financing_arrangement --- - acc’s credit review process generally included six steps all of which acc could perform within to hours first acc would access electronically credit bureau reports on the applicant and assign points to certain items shown on the reports second acc would measure the total points either against preestablished levels for approval or denial or against an arbitrary level of approval or denial that was ascertained intuitively third acc would analyze through debt-to-income and loan-to-value ratios an applicant’s ability to pay the debt taking into account his or her disposable income and income per dependent acc would sometimes perform in connection with this step a budgetary analysis to suggest changes to the loan terms eg by decreasing the monthly payment over a longer time frame so as to meet preestablished target ratios fourth acc would conditionally approve or deny an applicant on the basis of all of the information that it had as of yet accumulated fifth as to applications that received a conditional approval acc would perform an additional review as to the applicant by verifying mainly by telephone his or her employment residency and personal references and by interviewing the applicant by telephone sixth as to the applicants who passed this additional level of review acc would communicate to the dealer acc’s approval of the applicant in some instances acc would inform the dealer that it was unwilling to finance the purchase under the terms offered to it but would finance a lesser amount -- - of principal and or would finance the purchase over a shorter repayment term in and acc paid installment contracts expenditures totaling dollar_figure and dollar_figure respectively these expenditures which were attributable to acc’s obtaining of credit reports and screening of credit histories related primarily to the portion of acc’s payroll and overhead expenses that was attributable to its credit analysis activities none of these expenditures included any postacquisition or servicing expenses acc ascertained the amount of these expenditures at the request of its independent auditors the parties agree that these expenditures are related to acc’s credit analysis activities and that the breakdown of specific expenditures is as set forth below the parties dispute whether any or all of the expenditures is directly related to acc’s credit analysis activities as contended by respondent or is indirectly related to those activities as contended by petitioners we use the term credit analysis activities to refer to acc’s credit review services and its funding services ée acc’s issuance of the checks to dealers in consideration for the installment contracts breakdown of specific expenditures’ salary percentage of total expenses amount and benefits related to acc’s credit in employee wages fica mesc futa bc bs total expense analysis activities issue steve balan dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure james blasius big_number big_number big_number big_number big_number cass budzynowski big_number big_number big_number big_number big_number hope mcgee big_number big_number big_number big_number big_number kelly big_number big_number big_number big_number big_number stacey big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number overhead items printing big_number big_number telephone big_number big_number computer big_number big_number rent big_number big_number utilities big_number big_number big_number big_number big_number salary wages and percentage of total expenses amount estimated benefits related to acc’s credit in employee bonus fica mesc futa bc bs total expense analysis activities issue steve balan dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure james blasius big_number big_number big_number big_number big_number cass budzynowski big_number big_number big_number big_number big_number hope mcgee big_number big_number big_number big_number kelly big_number big_number big_number big_number big_number sue big_number big_number big_number big_number big_number kathy big_number big_number big_number big_number big_number stacey big_number 4il big_number big_number kirsten big_number big_number big_number big_number big_number big_number big_number big_number overhead items printing big_number big_number telephone big_number big_number computer big_number big_number rent big_number big_number utilities big_number big_number big_number big_number big_number big_number ' the record does not indicate the surname of each of the listed employees nor does the record indicate the job titles of the employees listed without a surname or describe their daily duties the parties agree than this column equals dollar_figure actually it equals dollar_figure because the dollar_figure unexplained difference is immaterial to our analysis we use the parties’ figure of dollar_figure acc deducted the installment contracts expenditures of dollar_figure on its federal_income_tax return and it deducted -- dollar_figure of the dollar_figure in installment contracts expenditures on its federal_income_tax return acc now claims that it was entitled to deduct for the remaining dollar_figure of installment contracts expenditures dollar_figure - dollar_figure as to the respective years acc deducted officers’ compensation of dollar_figure and dollar_figure and salaries wages of dollar_figure and dollar_figure the portion of the officers’ compensation salaries wages and overhead which was deducted but not in issue is attributable to acc’s servicing of the installment contracts for financial_accounting purposes acc separately listed the installment contracts as assets on its and balance sheets in addition acc initially deducted the installment contracts expenditures of dollar_figure for but amended that year’s financial statements to amortize the expenditures over the expected life of the related installment contracts acc’s independent auditors required the amendment and related amortization in order to comply with statement of financial_accounting standards no sfa sec_91 accounting for nonrefundable fees and costs associated with originating or acquiring loans and initial direct costs of leases ’ acc ’ the record does not indicate why acc’s auditors believed that the amendment was reguired under sfa sec_91 whereas sfa sec_91 provides explicitly for the deferral of direct loan origination costs it does not provide similarly as to the direct costs of acquiring loans sfa sec_91 provides as to the acguisition of loans that the initial investment in a purchased loan or group of loans shall include the amount_paid to the seller plus any fees continued - - amortized the installment contracts expenditures of dollar_figure over the expected lives of the related installment contracts for acc performed its credit review services as to approximately big_number credit applications in and approximately big_number credit applications in as to those applications acc acquired installment contracts in and installment contracts in in other words acc acquired in each year approximately percent of the installment contracts which were offered to it the original terms of the installment contracts averaged dollar_figure months and their actual duration averaged months the original terms of the installment contracts averaged months and their actual duration averaged months of the installment contracts acquired in had an actual duration of months or less of the installment contracts acquired in had an actual duration of months or less acc issued a private_placement memorandum ppm on date offering up to dollar_figure million of its subordinated asset continued paid or less any fees received all other costs incurred in connection with acquiring purchased loans or committing to purchase loans shall be charged to expense as incurred we note in passing however that rules such as sfa sec_91 which are compulsory for financial_accounting purposes do not control the proper characterization of an item for federal_income_tax purposes see 439_us_522 see also 284_us_552 -- backed notes notes acc intended through the offering to raise funds for its current operation including the acquisition of installment contracts which would be and were pledged to secure acc’s obligations under the notes the notes matured in months but could be redeemed by the noteholders pincite or months the notes bore interest pincite percent during the first year percent during the second year and percent during the final year the notes were purchased by approximately investors and approximately five of these investors redeemed their notes before maturity bast-west capital corporation east-west sold the notes on acc’s behalf and was paid a commission equal to percent of the principal_amount of the notes sold plu sec_1 percent of the principal outstanding pincite months plu sec_1 percent of the principal outstanding pincite months included in east-west’s commission was a percent due diligence fee acc deducted dollar_figure dollar_figure and dollar_figure of offering expenses commissions and professional fees respectively for acc deducted dollar_figure dollar_figure and dollar_figure of offering expenses commissions and professional fees respectively for the deductions for and included costs attributable to a second private_placement offering that was planned in and abandoned in - respondent audited acc’s and taxable years as to respondent disallowed dollar_figure of installment contracts expenditures deducted by acc determining that these expenses were capital expenditures relating to assets having a life exceeding one year respondent also disallowed dollar_figure and dollar_figure of ppm expenditures deducted by acc for and respectively determining that these expenditures were capital expenditures which had to be amortized over the terms of the notes the dollar_figure included legal fees of dollar_figure and a registration fee of dollar_figure paid in for the private_placement offering that acc abandoned in the dollar_figure included legal fees of dollar_figure paid in for the private_placement offering that acc abandoned in the remaining adjustments as to the ppm expenditures consisted of legal fees and commissions paid in connection with the ppm opinion we must decide whether acc may expense any of the disputed costs or must capitalize them as expenditures to be deducted in later years income_tax deductions are a matter of legislative grace and petitioners bear the burden of proving acc’s entitlement to the claimed deductions see rule a 503_us_79 interstate transit respondent made no adjustment to acc’s deduction of installment contracts expenditures_for -- - lines v commissioner 319_us_590 for federal_income_tax purposes the principal difference between classifying a payment as a deductible expense or a capital_expenditure concerns the timing of the taxpayer’s recovery_of the cost as the supreme court has observed the primary effect of characterizing a payment as either a business_expense or a capital_expenditure concerns the timing of the taxpayer’s cost_recovery while business_expenses are currently deductible a capital_expenditure usually is amortized and depreciated over the life of the relevant asset or where no specific asset or useful_life can be ascertained is deducted upon dissolution of the enterprise through provisions such as these the code endeavors to match expenses with the revenues of the taxable_period to which they are properly attributable thereby resulting in a more accurate calculation of net_income for tax purposes indopco inc v commissioner supra pincite our inquiry begins with the installment contracts expenditures respondent determined and maintains that acc must capitalize these expenditures to the extent stated herein respondent argues primarily that these expenditures are capital expenditures because they were related to acc’s acquisition of separate and distinct assets ie the installment contracts respondent argues secondly that acc’s payment of the installment contracts expenditures provided it with significant future_benefits in that it was able to acquire the installment contracts which produced income for it in later years petitioners maintain that the installment contracts expenditures are currently deductible petitioners agree that the expenditures are related to the acquisition of the installment contracts but argue primarily that the expenditures are deductible as routine recurring business_expenses arising primarily from an employment relationship rather than from a capital_transaction petitioners argue secondly that the installment contracts expenditures are deductible because they are not described in either sec_263 or the related regulations we agree with respondent in part and with petitioners in part we agree with respondent that acc must capitalize the installment contracts expenditures to the extent of the salaries and benefits ’ we conclude that acc’s payment of the salaries and benefits was directly related to its acquisition of the installment contracts we agree with petitioners that acc may we allow acc to deduct under sec_165 the portion of those expenditures that was attributable to the installment contracts which it never acquired acc may deduct those amounts for the respective years in which it ascertained that it would not acquire the related contracts see 688_f2d_1376 11th cir affg in part and remanding in part tcmemo_1981_123 see generally 110_tc_349 commissioner allowed banks to deduct loan origination costs expended in connection with loans which were not successfully approved revd on other grounds 212_f3d_822 3d cir respondent argues that petitioners have failed to prove the portion of the expenditures attributable to the installment contracts which it never acquired we disagree we have found as a fact that acc did not acquire approximately percent of the installment contracts which were offered to it in each of the subject years we hold that acc may deduct for and percent of the installment contracts expenditures attributable to installment contracts which in those years it decided not to acquire see 39_f2d_540 2d cir -- - currently deduct the installment contracts expenditures to the extent of the overhead expenses we conclude that acc’s payment of the overhead expenses was not directly related to the anticipated acquisition of any of the installment contracts we also conclude that any future benefit that acc received from the overhead expenses was incidental to its payment of them as discussed in detail below we believe that the supreme court’s mandate as to capitalization requires that an expenditure be capitalized when it creates or enhances a separate and distinct asset see 403_us_345 produces a significant future benefit see indopco inc v commissioner supra pincite- or is incurred in connection with the acquisition of a capital_asset ’ 418_us_1 see 397_us_572 given the supreme court’s pronouncement in woodward v commissioner supra pincite that an acgquisition-related we like the court_of_appeals for the eleventh circuit in bllis banking corp v commissioner supra pincite understand the term capital_asset to be used for this purpose in its accounting sense to encompass any asset with a useful_life exceeding year see also 248_f2d_742 10th cir it may be said in general terms that an expenditure should be treated as one in the nature of a capital outlay if it brings about the acquisition of an asset having a period of useful_life in excess of one year such an understanding is directly consistent with the secretary’s interpretation set forth in sec_1_263_a_-2 income_tax regs of examples of property for which the costs of acquisition are capital expenditures expenditure is a capital_expenditure when its origin is in the process of acquisition itself we understand the phrase in connection with in the third situation to mean that the expenditure must be directly related to the acquisition our analysis begins with the relevant statutory text we apply that text in accordance with the related treasury income_tax regulations the validity of which has not been challenged by either party and the interpretation of that text and those regulations primarily by the united_states supreme court sec_162 provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the treasury regulations specify that ordinary and necessary business_expenses include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs such as a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_1_162-7 income_tax regs the supreme court has explained that a cash_method taxpayer such as acc may deduct an expenditure under sec_162 if the expenditure is an expense an ordinary_expense a necessary expense paid during the taxable_year and made to carry on a trade_or_business see commissioner v lincoln sav loan association supra at - - the supreme court has stated that a necessary expense is an expense that is appropriate or helpful to the development of the taxpayer’s business see 383_us_687 290_us_111 and that an ordinary_expense is an expense that is normal usual or customary in the type of business involved 308_us_488 see also welch v helvering supra pincite the supreme court has observed that the need for an expenditure to be ordinary serves in part to clarify the distinction often difficult between those expenses that are currently deductible and those that are in the nature of capital expenditures which if deductible at all must be amortized over the useful_life of the asset commissioner v tellier supra pincite the fact that a payment falls within a literal reading of sec_162 does not necessarily mean that the payment is deductible sec_161 and sec_261 for example except certain payments from the current deductibility provision of sec_162 a see indopco inc v commissioner u s pincite sec_161 provides that there shall be allowed as deductions the items specified in sec_162 subject_to the exceptions provided in sec_261 and following relating to items not deductible sec_261 provides that no deduction --- - shall in any case be allowed in respect of the items specified in this part ie part ix items not deductible sec_263 is included in part ix sec_263 provides in language that dates back to the revenue act of sec_117 13_stat_282 see 506_us_546 n sec_263 has one of the longest lineages of any provision in the internal_revenue_code that no deduction shall be allowed for-- any amount_paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate the treasury regulations interpret this text by listing the following item as an example of a capital_expenditure the cost of acquisition construction or erection of buildings machinery and equipment furniture and fixtures and similar_property having a useful_life substantially beyond the taxable_year sec_1_263_a_-2 income_tax regs the determination of whether an expenditure is deductible under sec_162 or must be capitalized under sec_263 a is not always a straightforward or mechanical process e jach case ‘turns on its special facts’ and the cases sometimes appear difficult to harmonize indopco inc v commissioner supra pincite quoting deputy v du pont supra pincite in accordance with the current law on capitalization an expenditure may be deductible in one setting but capitalizable in -- - a different setting for example in commissioner v idaho power co u s pincite the supreme court observed the following as to wages paid_by a taxpayer in its trade_or_business of course reasonable wages paid in the carrying on of a trade_or_business qualify as a deduction from gross_income but when wages 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 similarly in 688_f2d_1376 11th cir affg in part and remanding in part tcmemo_1981_123 the court_of_appeals for the eleventh circuit observed as to business_expenses in general an expenditure that would ordinarily be a deductible expense must nonetheless be capitalized if it is incurred in connection with the acquisition of a capital_asset ‘we do not use the term capital_asset in the restricted sense of sec_1221 instead we use the term in the accounting sense to refer to any asset with a useful_life extending beyond one year accord 114_tc_458 taxpayer required to capitalize legal fees incurred to defend against state antitrust suit arising out of and connected to prior stock acquisition cf 46_tc_492 otherwise deductible business_expenses are capital expenditures when paid to acquire a capital_asset affd 388_f2d_298 6th cir 7_tc_48 salary rent advertising and traveling - - expenses which would ordinarily be deductible may be a capital_expenditure if made to cultivate or develop business the benefits of which will be realized in future years the just-quoted observations of the supreme court and the court_of_appeals for the eleventh circuit in the idaho power co and ellis banking corp cases respectively reflect a longstanding firmly established body of law under which expenditures incurred in connection with the acquisition of a capital_asset are considered capital expenditures includable in the acquired asset’s tax basis ’ commissioner v idaho power co supra pincite see woodward v commissioner u s pincite it has long been recognized as a general matter that costs incurred in the acquisition or disposition of a capital_asset are to be treated as capital expenditures see also 794_f2d_1157 6th cir costs incurred in connection with the acquisition or construction of a capital_asset are capital expenditures revg on other grounds 83_tc_103 ellis banking corp v commissioner supra at the commissioner has had a similar longstanding view see eg revrul_73_580 1973_2_cb_86 portion of compensation paid_by corporation to its employees that is attributable to services performed in connection with corporate acquisitions is a capital_expenditure revrul_69_331 1969_1_cb_87 bonuses and commissions paid_by gas distributor to secure long-term leases for hot water heaters are capital expenditures revrul_57_400 1957_2_cb_520 commissions paid_by bank to brokers and other third parties for introduction of acceptable applicants for mortgage loans are capital expenditures - an expenditure that would ordinarily be a deductible expense must nonetheless be capitalized if it 1s incurred in connection with the acquisition of a capital_asset cf a b staley manuf119_f3d_482 7th cir costs are capital expenditures if they are associated with facilitating a capital_transaction revg on other grounds and rem105_tc_166 731_f2d_1181 5th cir expenditures incurred in the acquisition of a capital_asset must generally be capitalized 161_f2d_997 6th cir well settled rule that expenditures incurred as an incident to the acquisition or sale of property are not ordinary and necessary business_expenses but are capital expenditures which must be added to the cost of the property affg 6_tc_1148 capitalizable expenditures are not limited to the actual price that the buyer pays to the seller for the asset but include for example the payment of legal brokerage accounting appraisal and other ancillary expenses related to the asset’s acquisition woodward v commissioner supra pincite see 397_us_580 see also ellis banking corp v commissioner supra pincite capitalizable expenditures also include compensation paid for services performed in connection with an asset’s acquisition - - including a reasonable proportion of the wages and salaries of employees who spend some of their working hours laboring on the acquisition briarcliff candy corp v commissioner 475_f2d_775 2d cir revg on other grounds and remanding tcmemo_1972_43 see commissioner v idaho power co supra pincite see also 539_f2d_409 5th cir affg 63_tc_86 berlmutter v commissioner 44_tc_382 affd 373_f2d_45 10th cir cf strouth v commissioner tcmemo_1987_552 costs of securing potential leases including checking the lessee’s credit reviewing the lease application and drafting the lease documents are capital expenditures when the supreme court was faced with the question as to the capitalization of litigation costs incurred appraising the stock of minority shareholders in connection with the majority shareholder’s acquisition of that stock the court held that the central inquiry was whether the expenditure originated in the process of acquisition woodward v commissioner supra pincite in other words the court set its focus on the directness of the costs’ relationship to the acquisition and adopted a test under which costs originating in the process of acquiring a capital_asset are considered capital expenditures - - we believe that the application of the process of acquisition test is appropriate here ’ both this court and the court_of_appeals for the ninth circuit applied the process of acquisition test in 76_tc_351 affd 722_f2d_1462 9th cir to decide whether the taxpayer investors could deduct two types of fees which they paid to an investment advisory and financial management company the first fee was a nonrefundable monthly retainer that the taxpayers paid for investment counsel and advice the amount of this fee depended on the investor’s income level and the investor’s financial planning tax_advice and investment needs the second fee was a one-shot charge for services rendered in connection with each investment acquired the amount of this fee equaled a specific percentage of the investment’s cost we allowed the taxpayers to deduct the monthly fees but reguired them to capitalize the one-shot fees we focused on whether the services performed by the investment adviser were performed in the process of acquisition or for investment advice we concluded that the services relating to the monthly fee did not arise out of that process but that the services relating to the one-shot fee did see id pincite the court_of_appeals for the ninth circuit agreed see 722_f2d_1462 9th cir this approach is consistent with a test suggested by the amicus for fhlmc -- p7 - thus while the monthly fees were connected to an acquisition in the sense that they were required to be paid in order to consummate any acquisition both this court and the court_of_appeals for the ninth circuit acknowledged that the fees were insufficiently connected with an acquisition to require their capitalization the process of acquisition test therefore does not simply rest on whether an expenditure is somehow connected to an asset acquisition but focuses more appropriately on whether the expenditure was directly related to that acquisition we apply the process of acquisition test to the facts at hand the salaries and benefits are a capital_expenditure if the underlying services were performed in the acquisition process or in other words were directly related to acc’s anticipated acquisition of installment contracts see 397_us_572 honodel v commissioner supra we conclude that the underlying services were performed in that process ie the services were directly related to acc’s anticipated acquisition of installment contracts each of the employees spent a significant portion of his or her time working on credit analysis activities which was the first and in acc’s business an indispensable step in acc’s acquisition process and but for acc’s anticipated acquisition of installment contracts acc would not have incurred the salaries - - and benefits attributable to those activities ’ the credit review activities were so inexorably tied to and such an integral part of the acquisition process that the portion of the salaries and benefits attributable thereto must be considered as part of the cost of the installment contracts to be sure the supreme court in commissioner v idaho power co u s pincite even considered the tools and materials used by the construction workers in addition to the wages of the workers themselves as part of the capital asset’s cost as did the court in 688_f2d_1376 11th cir with respect to office supplies filing fees travel_expenses and accounting fees we hold that the salaries and benefits are capital expenditures to the extent that the parties have agreed that those costs are attributable to the credit analysis activities as a matter of fact acc admitted as much in its ppm when it stated in the event only a minimal amount of notes are sold pursuant to this offering the company acc would have to downsize its operations and could in fact operate with its current portfolio of retail installment contracts with as few as three individuals including the president of the company james blasius ‘4 to the extent that the specific work performed by each individual as to the acquisition process is not contained in the record petitioners bear the consequences of any deficiency in the record as they bear the burden of disproving respondent’s determination that the costs of the services and benefits at issue are capital expenditures - - as to the overhead expenses we conclude and hold differently those expenses are capital expenditures to the extent that they originated in acc’s acquisition process or in other words were directly related to acc’s anticipated acquisition of installment contracts we are unable to find that such was the case none of these routine and recurring expenses originated in the process of acc’s acquisition of installment contracts nor in fact in any anticipated acquisition at all acc would have continued to incur most of these expenses in the ordinary course of its business had its business only been to service the installment contracts the items of rent and utilities for example were generally fixed charges which had no meaningful relation to the number of credit applications analyzed or the number of installment contracts acquired by acc nor did the printing expense have any such meaningful relation in fact acc’s printing costs were less in than in even though acc analyzed percent more credit applications and acquired percent more installment contracts in than in although acc’s telephone and computer costs did increase in from the prior year we are unable to discern from the record any direct relationship between that increase and the increase from the prior year in credit applications analyzed and or installment contracts acquired so as to require capitalization of those costs -- - we recognize that the court in perlmutter v commissioner t c pincite required the taxpayer there to capitalize a portion of his utilities as sufficiently connected to a capital_transaction in that regard the perlmutter case is distinguishable from the case at hand in that the perlmutter case preceded woodward v commissioner supra and the related process of acquisition test we also distinguish the printing costs at hand from the printing costs in a e staley manufacturing co subs v commissioner f 3d pincite the latter of which we and the court_of_appeals for the seventh circuit considered as associated with a capital_transaction the printing costs there unlike those here were required to be incurred by the taxpayer so as to facilitate communication with shareholders and others in connection with the transaction see a e staley manufacturing co subs v commissioner t c pincite respondent argues that acc’s payment of the overhead expenses produced for it a significant future benefit requiring capitalization under 503_us_79 we disagree on the basis of our discussion above we conclude that any future benefit that acc realized from these expenses was incidental to its payment of them so as not to require capitalization on that theory see id pincite petitioners argue that the salaries and benefits are ipso facto deductible because they are the routine recurring expenses --- - of acc’s business petitioners make three assertions in support of this argument petitioners first assert that the salaries and benefits are fixed costs which flow from an employment agreement and are not dependent upon the occurrence of a capital_transaction in this regard petitioners contend the amounts of the salaries and benefits paid_by acc are unaffected by the quantity principal_amount or duration of the installment contracts and those items would have been incurred even without the acquisition of an installment contract petitioners assert secondly that the salaries and benefits are deductible under a literal reading of sec_1_162-1 income_tax regs the relevant text of that section allows a taxpayer to deduct reasonable_compensation that is directly connected with or pertaining to the taxpayer’s trade_or_business petitioners assert thirdly that the salaries and benefits are deductible under the established jurisprudence of 592_f2d_1050 9th cir affg 63_tc_644 558_f2d_721 4th cir 505_f2d_1185 10th cir and 68_tc_872 affd ' the amicus for fnma also advances this argument - - f 2d 8th cir collectively credit card cases petitioners assert that the credit card cases hold that recurring expenses are deductible under sec_162 whenever the expenses are incurred in the ordinary course of business petitioners also point to indopco inc v commissioner supra and contend that the supreme court acknowledged there that an expense’s recurring nature is critical to qualifying it as deductible under sec_162 we disagree with petitioners’ argument that sec_162 a allows acc to deduct the expenses that recur in the ordinary course of its business merely by virtue of the fact that the expenses are everyday and or routine in nature in order for a payment to be deductible under sec_162 the underlying expense must not only be normal usual or customary in the type of business involved deputy v du pont u s pincite it must be realized and exhausted in the year of payment see stevens v commissioner f 2d pincite although an employer’s payment of salaries and benefits similar to the ones at issue will usually generate for the employer benefits that will be realized and exhausted in the year of payment the same is not true when those items are directly related to the employer’s acquisition of a capital_asset such as an installment contract ‘ petitioners also rely on 26_bta_886 - - the benefits which acc will reap from the installment contracts namely interest and excess principal income ’ will not be realized and exhausted within the year of payment acc will realize those benefits in each of the later years in which the interest and excess principal are received given the supreme court’s observation in indopco inc v commissioner supra pincite that our tax law endeavors to measure taxable_income by allowing expenses to be deducted in the taxable_year in which the related_income is recognized see also 507_us_546 364_us_122 it is only appropriate to defer acc’s deduction of its payment of any expenses directly related to that interest or excess principal income to the years in which acc recognizes the income ’ only then will acc’s taxable_income be calculated more accurately for tax purposes than if acc had deducted those expenses currently we find instructive to our decision the case of 305_us_79 revg 93_f2d_494 2d cir ‘7 we use the term excess principal to refer to the principal on the installment contracts that exceeded percent of their face value the salaries and benefits were instrumental to the production of that income in that acc would not have acquired any of the installment contracts without performing its credit analysis activities in this regard we disagree with the amicus representing fnma that all of acc’s salaries and benefits are indirect expenses to which sec_263 does not apply in the first place - -- revg and remanding 35_bta_804 there the taxpayer claimed that he could deduct as compensation brokerage commissions paid to acquire securities in the ordinary course of his business the commissioner had disallowed the deduction determining that the payments were capital expenditures the taxpayer argued that it could deduct the payments because he asserted they were an ordinary and necessary business_expense the taxpayer asserted that he was in the business of buying and selling securities a divided board_of_tax_appeals sustained the commissioner’s disallowance see 35_bta_804 the court_of_appeals for the second circuit disagreed with the board holding that the payments were deductible if the taxpayer was in fact engaged in the business of buying and selling securities see 93_f2d_494 2d cir the supreme court held that the payments were capital expenditures the supreme court noted that the treasury regulations regs art set forth a longstanding position that commissions paid in acquiring securities are considered part of the securities’ cost and stated the fact--if it be a fact--that the taxpayer was engaged in the business of buying and selling securities does the substance of these regulations regarding commissions paid to acquire securities has been carried forward into sec_1 a -2 e income_tax regs -- - not entitle him to take a deduction contrary to this provision helvering v winmill u s pincite petitioners argue that helvering v winmill supra is irrelevant petitioners recognize that the taxpayer in the winmill case similar to petitioners here relied on a provision in the regulations that provided specifically that compensation paid in the ordinary course of business qualified as a deductible expense petitioners distinguish the winmill case by noting that another provision in those regulations provided specifically that commissions paid in purchasing securities are a part of the cost price of such securities regs art petitioners conclude that the supreme court’s holding in the winmill case rested solely on the presence of the second provision and assert that no similar provision exists here to preclude explicitly its deduction of the salaries and benefits petitioners also note that the instant facts are different than winmill in that acc is not a securities_dealer the installment contracts are not securities and none of the installment contracts expenditures are commissions we disagree with petitioners’ assertion that helvering v winmill supra is irrelevant we like the supreme court in the winmill case focus on a specific longstanding position set forth in the treasury regulations to conclude that the salaries and benefits must be capitalized even though in a different - - setting those costs may have qualified for deduction under a more general regulatory provision specifically whereas sec_1_162-1 treasury income_tax regs provides generally that the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade_or_business are deductible expenses sec_1_263_a_-2 income_tax regs provides specifically that capitalized expenditures include the cost of acquisition construction or erection of buildings machinery and equipment furniture and fixtures and similar_property having a useful_life substantially beyond the taxable_year we disagree with petitioners when they assert that this latter provision does not preclude explicitly acc’s deduction of the salaries and benefits the installment contracts similar to the buildings machinery and equipment and furniture and fixtures listed specifically in sec_1_263_a_-2 income_tax regs have anticipated useful lives extending substantially beyond the taxable_year of the related expenditures we also disagree petitioners argue that the installment contracts are not similar to the examples in the regulations and hence expenditures connected thereto need not be capitalized we disagree we understand the word similar to encompass any property that like the examples has a useful_life extending substantially beyond the taxable_year of the related expenditure petitioners’ narrow interpretation of the regulations fails to recognize that the supreme court has consistently taken a wider view as to capital expenditures see eg 403_us_345 contributions to depository reserve fund were capital expenditures 305_us_79 taxpayer continued -- - with petitioners when they draw factual distinctions between the two cases sufficient to warrant contrary results the facts that acc is not a securities_dealer that the installment contracts are not securities and that none of the installment contracts expenditures are commissions are in our minds merely distinctions without a difference compare woodward v commissioner u s pincite wherein the court stated the court recognized in helvering v winmill supra that brokers’ commissions are ‘part of the acquisition_cost of the securities ’ helvering v winmill supra u s pincite s ct pincite and relied on the treasury regulation which had been approved by statutory re-enactment to deny deductions for such commissions even to a taxpayer for whom they were a regular and recurring expense in his business of buying and selling securities in this case there can be no doubt that legal accounting and appraisal costs incurred by taxpayers in negotiating a purchase of the minority stock would have been capital expenditures see 36_tc_173 under whatever test might be applied such expenses would have clearly been ‘part of the acquisition cost’ of the stock helvering v winmill supra accord commissioner v wiesler f 2d pincite the winmill case follow s the well settled rule that expenditures incurred as an incident to the acquisition of property are not ordinary and necessary business_expenses but are capital continued required to capitalize the regular and recurring costs incurred in acquiring securities -- - expenditures ellis banking corp v commissioner tcmemo_1981_123 nor would the fact that petitioner was engaged in the business of acquiring bank stock entitle it to deduct such expenditures if the bank stock was a capital_asset and the expenditures were incurred in the acquisition thereof helvering v winmill supra we also apply the case of 418_us_1 revg 477_f2d_688 9th cir revg tcmemo_1970_83 there the taxpayer was a public_utility engaged in the production transmission and sale of electricity throughout its long existence the taxpayer regularly and routinely constructed additional transmission and distribution facilities using its own eguipment and hundreds of its own employees respondent determined that the taxpayer had to capitalize the depreciation on its equipment to the extent used in the construction_project the supreme court agreed the court noted that a goal of federal_income_tax accounting is to match income with the related expenses and observed that ‘ it has long been recognized as a general matter that costs incurred in the acquisition of a capital_asset are to be treated as capital expenditures ’ id pincite quoting woodward v commissioner supra pincite ellipsis in original further the court noted there can be little question that other construction-related expense items such as tools materials and -- -- wages paid construction workers are to be treated as part of the cost of acquisition of a capital_asset id pincite the court concluded that requiring the taxpayer to capitalize its depreciation would maintain tax parity between it and another taxpayer who retained an independent_contractor to construct the improvements and additions for it in the latter case the court stated the depreciation on the equipment used by the independent_contractor would be part of the cost that the contractor charged on the project the court believed it unfair to allow a taxpayer to deduct the cost of constructing its facility if it has sufficient resources to do its own construction work while requiring another taxpayer without such resources to capitalize its cost including the depreciation charged by the contractor see id pincite the court expressed no opinion as to the fact that the taxpayer in the idaho power co case had been regularly and routinely improving its facilities throughout most of its long existence nor that these improvements had for the most part been made by its employees see id see also the opinions of the lower courts at 477_f2d_688 9th cir idaho power co v commissioner tcmemo_1970_83 the amicus for fhlmc would limit the supreme court’s tax parity rationale to cases of self-created assets we read nothing that would so limit that rationale -- - the court_of_appeals for the eleventh circuit also applied the case of commissioner v idaho power co supra in 688_f2d_1376 11th cir to require capitalization of certain acquisition-related expenditures there the taxpayer was a bank_holding_company that under state law had to acquire the stock of other banks or organize new banks in order to expand its business into new geographic markets the taxpayer agreed with another bank parkway and certain of parkway’s shareholders to acquire all of parkway’s stock in exchange for taxpayer stock the agreement was contingent on the satisfaction of certain events prior to consummation of the acquisition but in connection therewith the taxpayer incurred various expenses conducting a due diligence examination of parkway’s books these expenses were for office supplies filing fees travel_expenses and accounting fees the taxpayer deducted these expenses and respondent disallowed the deduction respondent determined that the expenses had to be capitalized we sustained respondent’s disallowance we held that the expenses were capital expenditures because they were incurred in connection with the acguisition of a capital_asset the court_of_appeals for the eleventh circuit agreed the taxpayer had argued that the expenses were ordinary and necessary because they were incurred in connection with its decision to acquire the stock and - al --- in evaluating the market in which parkway was located see id pincite the taxpayer noted that the expenses were incurred before it was bound to buy parkway’s stock the court_of_appeals in rejecting the taxpayer’s claim to current deductibility stated ellis also devotes a portion of its brief to arguing that it is in the business of promoting banks so that the expenditures made in that business are deductible it is not enough to establish that expenditures are incurred in carrying_on_a_trade_or_business to qualify for a deduction under section 162--all of the requirements set out above namely the five requirements for deductibility set forth in commissioner v lincoln sav loan association u s pincite must be fulfilled indeed if being in the business sufficed ellis would be able to deduct the purchase_price of the parkway stock id pincite n the court_of_appeals went on to say that the expenses of investigating a capital_investment are properly allocable to that investment and must therefore be capitalized that the decision to make the investment is not final at the time of the expenditure does not change the character of the investment when a taxpayer abandons a project or fails to make an attempted investment the preliminary expenditures that have been capitalized are then deductible as a loss under sec_165 as the first circuit stated ‘ expenditures made with the contemplation that they will result in the creation of a capital_asset cannot be deducted as ordinary and necessary business_expenses even though that expectation is subsequently frustrated or defeated ’ union mutual f 2d pincite emphasis in original nor can the expenditures be deducted because the expectations might have been but were not frustrated id pincite our opinion as to the salaries and benefits is further supported by the cases of 335_f2d_82 - -- 6th cir affg tcmemo_1963_1 and 388_f2d_298 6th cir godfrey v commissioner supra concerned deductions that the taxpayer claimed as to a joint_venture in two parcels of real_estate known as the goose pond and adams packing properties before taking title to the goose pond property the taxpayer and his associates caused a use survey to be conducted on the property in order to ascertain its best commercial use they concluded from the survey that the upper part of the tract was best suited for an automobile dealership and that the lower portion could best be used for a shopping center they acquired the property and then discovered that it lacked the zoning classification necessary to use it in the manner indicated by the survey they retained attorneys to try to change the property’s classification their attempt was unsuccessful the taxpayer deducted his proportionate share of the cost of the survey and the attorney’s fee the taxpayer also deducted travel and living_expenses that he had paid in connection with acquiring both the goose pond and adams packing properties we denied the deductions holding that all of the expenditures were capital expenditures we observed that the use survey represented their first step in the contemplated development of the property and its benefits were obviously expected to extend beyond the year in which the survey was made -- - godfrey v commissioner tcmemo_1963_1 we observed that the attorney’s fee was part of the cost of the development of a capital_asset in that it represented an unsuccessful attempt to have the goose pond property rezoned for certain commercial use we observed that the travel and living_expenses generally related to the acquisition and development of the property the court_of_appeals for the sixth circuit agreed with us that all of the expenditures were capital expenditures the court stated the tax_court found that the cost of the use survey was a capital_expenditure the court said it represented their first step in the contemplated development of the property and its benefits were obviously expected to extend beyond the year in which the survey was made the test of an ordinary business_expense is whether it is of a recurring nature and its benefit is generally exhausted within a year an expenditure is of a capital nature where it results in the taxpayer’s acquisition or retention of a capital_asset or in the improvement or development of a capital_asset in such a way that the benefit of the expenditure is enjoyed over a comparatively lengthy period of business operation 7_tc_507 aff’d 161_f2d_842 c a the purpose of the use survey was to benefit the land in a permanent way so that the owners could derive income from it on the basis of its best use we agree with the tax_court that this was properly a capital_expenditure we are of the opinion that the same reasoning is applicable to the expenditure for attorney’s fee counsel for the taxpayer concedes that if the effort had been successful the expenditure would not have been a deductible item we think there can be no distinction the purpose of the expenditure was to create a permanent_benefit the fact that it created neither a permanent nor exhaustible benefit does not change its character godfrey v commissioner f 2d pincite in 46_tc_492 the taxpayer and another individual woody entered into various joint ventures each of which involved acquiring a race horse and sharing that horse’s winnings or any proceeds from its sale woody paid the purchase_price of each horse and the taxpayer paid each horse’s maintenance and training expenses we held that one-half of the otherwise deductible maintenance_expenses were capital expenditures because they represented the taxpayer’s cost of acquiring a one-half interest in the horses we stated we agree with respondent to the extent that at least some portion of these expenses which would otherwise be deductible as ordinary and necessary business_expenses must be capitalized as petitioner’s acquisition costs in the particular factual circumstances here present it is obvious that petitioner had some acquisition_cost for his interests these interests were not acquired for nothing although woody paid the entire purchase_price for each horse he did not give petitioner a one-half interest in each without consideration in effect woody assumed petitioner’s half of the purchase_price and as consideration for this petitioner assumed woody’s half of the expense burden x id pincite the court held that our findings as to the remaining expenses were not clearly erroneous see 335_f2d_82 6th cir affg tcmemo_1963_1 - - in affirming our decision the court_of_appeals for the sixth circuit held that the mere fact that the expenses were recurring and otherwise deductible business_expenses was not enough to make the expenses deductible under sec_162 the court noted that sec_162 was primarily intended to cover recurring expenditures where the benefit derived from the payment is realized and exhausted within the taxable_year and that the benefit from the expenses would not be exhausted within the year stevens v commissioner f 2d pincite accord perlmutter v commissioner t c pincite taxpayer required to capitalize portion of salaries utilities insurance depreciation legal and audit expenses office expenses and vehicle and truck expenses allocable to the construction of shopping center buildings we also are mindful of 224_f3d_874 8th cir affg in part and revg in part 112_tc_89 there a bank davenport entered into a transaction with another bank norwest that resulted in norwest’s owning all the stock of an entity of which davenport was a part following the taxpayer’s concession that sec_263 required that davenport capitalize the costs which were directly related to the transaction we were left to decide whether sec_162 a allowed davenport to deduct investigatory costs of dollar_figure due -- - diligence costs of dollar_figure and officers’ salaries of dollar_figure which respondent had determined were attributable to the transaction most dollar_figure of the investigatory costs related to services rendered by a law firm before davenport agreed to participate in the transaction the remaining dollar_figure investigatory costs related to services performed by the law firm in investigating whether after the transaction norwest’s director and officer liability coverage would protect davenport’s directors and officers for acts and omissions occurring before the transaction the due diligence costs related to services performed by the law firm in connection with norwest’s due diligence review the disallowed officers’ salaries were attributable to services performed in the transaction we held that sec_162 did not let davenport deduct any of the disputed costs our holding followed our conclusion that all of the costs bore a sufficient nexus to a transaction producing a significant long-term benefit to fall within the rules of capitalization as set forth primarily in 503_us_79 upon appeal the commissioner conceded that sec_162 allowed davenport to deduct the investigatory costs of dollar_figure because they were attributable to the investigatory stage of the transaction that concession followed the commissioner’s release of revrul_99_ 1999_1_cb_998 which holds that -- - expenditures incurred in the course of a general search for or investigation of an active trade_or_business in order to determine whether to enter a new business and which new business to enter other than costs incurred to acquire capital assets that are used in the search or investigation qualify as investigatory costs that are eligible for amortization as start-up_expenditures under sec_195 however expenditures incurred in the attempt to acquire a specific business do not qualify as start-up_expenditures because they are acquisition costs under sec_263 the nature of the cost must be analyzed based on all the facts and circumstances of the transaction to determine whether it is an investigatory cost incurred to facilitate the whether and which decisions or an acquisition_cost incurred to facilitate consummation of an acquisition as to the remaining fees of dollar_figure dollar_figure dollar_figure all of which were incurred after davenport had made its final_decision as to the acquisition the court_of_appeals for the brighth circuit agreed with us that those amounts were capital expenditures the court_of_appeals disagreed with us however as to the officers’ salaries and held that those costs were currently deductible the court reasoned the commissioner’s position as to the deductibility of investigatory expenditures incurred to acquire specific assets is set forth in revrul_74_104 1974_1_cb_70 there the costs were evaluation expenditures which the taxpayer incurred in its business of acquiring residential property to renovate and sell to the public before acquiring the property the taxpayer evaluated certain localities to ascertain the feasibility of selling the property in that locality the taxpayer incurred a cost to secure an initial report from an independent agent and other costs to evaluate the report and the locality involved the ruling holds that the costs are capital expenditures because they were incurred in connection with acquiring the residential property and provide benefits beyond the current taxable_year through the sale of the renovated property -- - the distinction between the case at hand and the indopco case lies in the relationship between the expense at issue and the long term benefit in indopco the expenses in question were directly related to the transaction which produced the long term benefit accordingly the expenses had to be capitalized see 503_us_79 112_sct_1039 117_led_226 we conclude that if the expense is directly related to the capital_transaction and therefor the long term benefit then it should be capitalized see eg 503_us_79 112_sct_1039 117_led_226 in this case there is only an indirect relation between the salaries which originate from the employment relationship and the acquisition which provides the long term benefit x similarly the instant case is distinguishable from acer realty co v commissioner’ wherein this court held that the salaries paid to two officers for unusual nonrecurrent services had to be capitalized 132_f2d_512 8th cir the taxpayer was a corporation whose only business was leasing real_estate to a related corporation its officers were paid no salaries prior to their undertaking a large building program at which point the two officers began acting as general contractors and performed all the services necessary to the management of the construction of the buildings acer realty f 2d pincite because the salaries were clearly and directly related to the capital project this court determined that most of the salaries paid were extraordinary or incremental expenses which had to be capitalized 132_f2d_512 8th cir 7acer realty is the only case in our circuit that we are aware of which denies the taxpayer a deduction for salary expenses the instant case is easily distinguishable from acer realty because davenport’s officers had always received salaries even before the acquisition was a possibility there was no increase in their salaries attributable to the acquisition and they would have been paid the salaries whether or not the acquisition took place therefore we determine that the salary expenses in this case originated from the employment relationship between the taxpayer and its officers --- - indirectly the payment of these salaries provided davenport with a long term benefit wells fargo co subs v commissioner f 3d pincite judge bright wrote a concurring opinion in wells fargo co subs to highlight the fact that the record did not allow for a determination as to the portion of the salaries which were directly related to the transaction judge bright wrote i write separately to emphasize that the record in this case is inadequate to show that the portion of the salaries in question dollar_figure was directly or substantially related to the acquisition moreover the tax court’s findings_of_fact on this issue does not address the direct or indirect relationship of the work of the officers to the acquisition that finding recited during dbtc davenport had executives and other officers collectively the officers john figge james figge thomas figge and richard horst worked on various aspects of the transaction as did other officers none of the offices were hired specifically to render services on the transaction all were hired to conduct dbtc’s day-to-day banking business dbtc’s participation in the transaction had no effect on the salaries paid to its officers of the salaries paid to the officers in dollar_figure was attributable to services performed in the transaction dbtc deducted the salaries including the dollar_figure on its federal_income_tax return respondent disallowed the dollar_figure deduction ie the portion attributable to the transaction this finding does not address whether some officers at any particular period of time devoted substantial work to the acquisition or whether the officers during the period of time in question only incidentally worked on the acquisition while doing regular banking duties -- - in order to determine whether an allocation of officers’ salaries to an acquisition-transaction such as made here qualifies as a deduction from income or should be capitalized the taxing authorities should require the taxpayer to show officers’ time devoted to the acquisition as compared to time spent on regular work during a particular and relevant time period the finding made by the tax_court here does not justify capitalization of the officers’ salaries id pincite- bright j concurring we do not believe that our view as to the salaries and wages at hand is inconsistent with the court_of_appeals for the eighth circuit’s view as to the salaries at issue in wells fargo co subs supra the cases are factually distinguishable there some of davenport’ sec_82 officers spent a portion of their time performing services on a capital_transaction apparently it was a relatively small portion since the total salary attributable to work performed on the transaction by all of the officers was dollar_figure the services which they performed as to the capital_transaction were extraordinary in the daily course of their employment and the capital_transaction was extraordinary to their employer’s business they would have been paid the same salaries regardless of whether the transaction was consummated here by contrast each of the disputed employees spent a significant portion of his or her time in fact in of the cases all of his or her time working on capital_asset acquisitions which occurred in the ordinary course of acc’s -- - business the employees were paid specifically to perform work as to the acquisitions and the amount of the compensation that acc paid to the employees hinged directly on the number of installment contracts that it acquired eg at least some of the employees were entitled to receive a bonus in profitable years thus whereas the officers in wells fargo co subs supra performed the typical services of bank employees services which could include work on a capital_transaction as part of the bank’s business in general acc’s employees were hired and paid to perform services that necessarily would include work on capital_asset acquisitions the record here indicates specifically the portion of acc’s total compensation that was directly related to acc’s acquisition of the installment contracts and in accordance with supreme court precedent as well as jurisprudence from the second circuit fifth circuit and this court we consider as capital expenditures that proportion of the wages and salaries of employees who spend some of their working hours laboring on the acquisition briarcliff candy corp v commissioner f 2d pincite see commissioner v idaho power co u s pincite see of the total compensation paid to the disputed employees in and percent dollar_figure dollar_figure and percent dollar_figure 5big_number respectively was attributable to the acquisition of installment contracts we also bear in mind the statement in acc’s ppm discussed supra note - - also cagle v commissioner f 2d pincite perlmutter v commissioner t c pincite petitioners are mistaken when they assert that established jurisprudence provides that sec_162 always allows a taxpayer to deduct the everyday recurring costs of its business the primary cases upon which petitioners rely ie the credit card cases did not merely rest on facts that the costs at issue there were everyday and recurring in nature all of those cases involved costs which were incurred in the businesses’ startup phase and which did not produce any separate or distinct asset in colorado springs natl bank v united_states f 2d pincite for example the court_of_appeals for the tenth circuit noted that the start-up_expenditures here challenged did not create a property interest they produced nothing corporeal or salable similarly in first natl bank of south carolina v united_states f 2d pincite the court_of_appeals for the fourth circuit noted that membership in asba is not a separate and distinct additional asset created or enhanced by the payments in question likewise in iowa-des moines natl bank v commissioner t c pincite we noted that the costs did not create or enhance a separate and distinct asset or property interest cf central tex sav loan association v united in 592_f2d_1050 9th cir affg 63_tc_644 the continued -- - states f 2d pincite5 court distinguished the credit card cases by virtue of the fact that the expense of the taxpayer before it created a separate and distinct asset contrary to petitioners’ assertion and as discussed infra the view of the court_of_appeals for the third circuit we do not read any of the credit card cases to hold that everyday recurring expenses are ipso facto deductible under sec_162 in fact as this court observed in iowa-des moines natl bank v commissioner t c pincite costs are entitled to deduction when they are related to the active_conduct of an existing business and do not create or enhance a separate and distinct asset or property interest nor do we understand the supreme court in 503_us_79 to have espoused the sweeping pronouncement proffered by petitioners as to this issue ’ petitioners also rely on 212_f3d_822 3d cir revg 110_tc_349 when this case was tried the court_of_appeals for the third circuit had not yet released its opinion in that case and petitioner sec_26’ continued court_of_appeals for the ninth circuit adopted as the law of that circuit the decision of the tenth circuit in 505_f2d_1185 10th cir nor do we read 26_bta_886 to hold that salaries and benefits are ipso facto deductible when they are recurring costs -- -- took the view that our opinion there was inapplicable to this case because they claimed the cases were factually distinguishable we held in pnc bancorp inc v commissioner supra that loan origination costs were capital expenditures the court_of_appeals for the third circuit disagreed holding that the costs were deductible expenses petitioners now assert that pnc bancorp inc is relevant to our inquiry we do not believe that pnc bancorp inc v commissioner supra is so factually distinguishable from the instant case to support contrary results although the cases are obviously distinguishable by virtue of the fact that pnc as defined below was a loan originator and acc is a loan acquirer we do not believe that this bare distinction is meaningful enough to support contrary results in the cases especially given the supreme court’s statements in commissioner v idaho power co supra pincite to the effect that the creation of an asset is subject_to the same set of capitalization_rules as the acquisition of an asset given the additional fact that the court_of_appeals for the third circuit disagreed with our view as to the rules of capitalization applicable to the loan origination costs in pnc bancorp inc we believe it appropriate to reconsider our opinion there in light of the contrary view set forth by the court_of_appeals for the third circuit in reversing our decision we have carefully done so giving due regard to - -- the contrary view for the reasons set forth below we continue to adhere to our view on the rules of capitalization as expressed in pnc bancorp inc respectfully disagreeing with the contrary view expressed by the court_of_appeals for the third circuit pnc was the successor_in_interest to two banks collectively pnc which had deducted expenditures paid to market research and originate loans to pnc’s customers these expenditures included amounts paid to record security interests amounts paid to third parties for property reports credit reports and appraisals and an allocable portion of salaries and benefits paid to employees for evaluating a borrower’s financial condition evaluating guaranties collateral and other security arrangements negotiating loan terms preparing and processing loan documents and closing loan transactions pnc capitalized and amortized these costs for financial_accounting purposes but deducted them for federal_income_tax purposes pnc argued that the costs were deductible for tax purposes because they were recurring expenses in the banking business were integral to pnc’s daily operation and provided pnc with only short-term benefits we found that pnc incurred the costs to create separate and distinct assets ie the loans and that the costs produced for pnc long-term benefits in the form of the interest to be received in later years the court_of_appeals for the third circuit -- - disagreed with both of these findings the court_of_appeals focused primarily on the everyday meaning of the word ordinary and without any reference to 305_us_79 and with only a passing reference to 418_us_1 which the court_of_appeals cited for the proposition that capitalization prevents the distortion_of_income in the case of depreciable_property concluded that the loan origination costs were ordinary business_expenses for purposes of sec_162 because the costs were normal and routine to the business of a bank see pnc bancorp inc v commissioner f 3d pincite the court saw no meaningful distinction between pnc’s loan origination costs and the costs incurred as ordinary expenses by banks in general the court stated that pnc’s deduction of the loan origination costs would not distort its income because it incurred those costs regularly see id pincite the court_of_appeals for the third circuit also stated that pnc’s costs did not create any separate and distinct asset within the meaning of 403_us_345 unlike the assets in lincoln sav loan association which were not used by the taxpayer in its everyday business pnc used its loans as part of its everyday business the court_of_appeals distinguished the respective assets in the cases by this fact the court_of_appeals also distinguished -- - pnc’s costs from the payments in lincoln sav loan association by noting that the payments in lincoln sav loan association had formed the corpus of the asset whereas pnc’s costs were not included in the principal of the loans the court_of_appeals analogized pnc’s costs to the expenditures at issue in the credit card cases concluding that the costs were deductible under that line of cases pnc bancorp inc v commissioner f 3d pincite we do not believe that the normal and routine nature of the expenses in question dictates their deductibility as discussed above payments made with a sufficiently direct connection to the acquisition creation or enhancement of a capital_asset must be capitalized even when those payments are made in the course of the payee’s regular business operations see eg woodward v commissioner u s pincite helvering v winmill supra nor do we believe that any of the long line of cases addressing this acquisition-related capitalization requirement supports a conclusion that a payment is a capital_expenditure only if it creates enhances or becomes part of an asset that is unrelated to the taxpayer’s daily business an expense that recurs in a taxpayer’s business is a capital_expenditure when it is incurred in direct connection with the acquisition creation or enhancement of a separate and distinct asset or provides the taxpayer with a significant -- - future benefit see eg 503_us_79 commissioner v idaho power co supra pincite woodward v commissioner supra helvering v winmill supra see also ellis banking corp v commissioner tcmemo_1981_123 citing woodward v commissioner supra fact that a taxpayer incurs expenditures on a recurring basis does not ensure their characterization as ‘ordinary’ if they are incurred in the acquisition of a capital_asset the mere fact that an expense may have been deductible in the credit card cases or any other case for that matter does not necessarily mean that the same type of expense is ipso facto deductible in another setting such as the one found in 212_f3d_822 3d cir see eg commissioner v idaho power co supra pincite we also do not believe that the fact that pnc’s loan origination costs were recurring in nature means that pnc’s current deduction of them would allow for an appropriate matching of income and expense see pnc bancorp inc v commissioner supra pincite the supreme court stated explicitly in indopco inc v commissioner supra pincite that our federal_income_tax system endeavors to match expenses with the related revenue in the taxable_period for which the income is recognized the court stated in commissioner v idaho power co supra pincite that the purpose of sec_263 is to reflect the basic --- - principle that a capital_expenditure may not be deducted from current income it serves to prevent a taxpayer from utilizing currently a deduction properly attributable through amortization to later tax years when the capital_asset becomes income producing the thrust of these statements in our minds is that an expenditure must be deducted in accordance with its own individual identity regardless of the possible recurrence in the taxpayer’s business of that type of expense a taxpayer’s income will be distorted if the taxpayer currently deducts a recurring expense that should be capitalized and the amount of that expense fluctuates meaningfully between taxable years for example when the amount of such an expenditure increases significantly from one year to the next the deduction of the expenditure may result in the taxpayer’s income being understated in the first year and overstated in the second and the profits of the business may appear to be sinking when in fact it is enjoying great success or rising when in fact it may be seriously diminished see 56_tc_1324 affd without published opinion 496_f2d_876 5th cir such an inaccurate reporting of this fluctuation thwarts rather than fosters a major objective of efficient tax policy 63_f3d_614 7th cir affg in part revg in part and remanding on another issue tcmemo_1994_316 -- - nor do we read anything in sec_263 or the related regulations that hinges sec_263’s applicability to an expenditure on a finding that an asset acquired or created by the expenditure was used outside of the taxpayer’s daily business in fact if such was the case the costs incurred to acquire manufacturing equipment would arguably be deductible because that equipment is indispensable to the daily operation of the manufacturer’s business moreover in the case of an appraisal the costs of which are clearly capital expenditures when incurred in connection with the purchase of property the appraisal neither adds value to the appraised property nor has a long-term life we also note our disagreement with the concept that a cost is a capital_expenditure only if it becomes part of an asset to be sure the depreciation of the equipment used to construct the facilities in 418_us_1 did not become an actual part of those facilities nor do we find persuasive pnc’s argument to the court_of_appeals for the third circuit that our application of the separate and distinct asset test of commissioner v lincoln sav loan association u s pincite was too expansive in that it would require capitalization of costs incurred in connection with or with respect to the acquisition of an asset pnc bancorp inc v commissioner f 3d pincite such an argument conflicts directly not only with the supreme court’s -- - reasoning in commissioner v idaho power co supra pincite and woodward v commissioner u s pincite but with the reasoning of various courts of appeals that have required capitalization of amounts incurred in connection with the acquisition of an asset see eg johnsen v commissioner f 2d pincite central tex sav loan association v united_states f 2d pincite ellis banking corp v commissioner f 2d pincite nor do we believe that the fact an expenditure is somehow connected to the needs of current income production is enough to qualify that expenditure as a current deduction pnc bancorp inc v commissioner f 3d pincite citing 918_f2d_426 3d cir affd sub nom 503_us_79 in our minds an expenditure that produces both a current and long-term benefit is neither percent deductible nor percent capitalizable instead regardless of whether the expenditure’s primary or predominant purpose is to benefit significantly the business’ current operation on the one hand or its long-term operation on the other hand the expenditure is a capital_expenditure to the extent that it produces a significant long-term benefit and deductible to the remaining extent see woodward v commissioner u s pincite commissioner v idaho power co supra 40_f2d_372 8th cir affg on other grounds 8_bta_225 412_f2d_1222 having rejected petitioners’ first argument as to the salaries and benefits we now turn to petitioners’ second argument that the salaries and benefits are outside the reach of sec_263 because they contend those items are not described in that section petitioners make three assertions in support of this argument first they assert that sec_263 applies only when an expenditure creates or adds value to a separate and distinct capital_asset and that acc’s payment of the salaries and benefits neither created nor added value to a capital_asset according to petitioners an expenditure is subject_to sec_263 only if it is incurred to increase the value of in 418_us_1 the supreme court held that the taxpayer must capitalize the portion of depreciation on transportation equipment allocable to part-time use in constructing improvements and other capital facilities for the taxpayer in 40_f2d_372 8th cir affg on other grounds 8_bta_225 the court_of_appeals for the ehighth circuit held that a railway had to capitalize the cost of operating its regular trains to the extent it was attributable to the transportation of the railway’s workmen and materials to construction sites in 412_f2d_1222 the court of claims held that depreciation on automotive equipment used primarily for operating and maintaining a pipeline system but occasionally used in construction operations had to be capitalized to the extent it was attributable to the construction the amici for fnma also advance this argument -- - property and concerns the permanent improvement or betterment of that property petitioners also contend that the installment contracts are ordinary and not capital assets in the hands of acc second they assert that the salaries and benefits are expansion costs as to an existing business which they contend are deductible under a line of cases including 212_f3d_822 3d cir briarcliff candy corp v commissioner f 2d pincite 26_bta_886 and the credit card cases petitioners also point to the following excerpt from the legislative_history under sec_195 in the case of an existing business eligible startup expenditures do not include deductible ordinary and necessary business_expenses paid_or_incurred in connection with an expansion of the business as under present law these expenses will continue to be currently deductible h rept pincite 1980_2_cb_709 third they assert that the salaries and benefits did not generate a future benefit to acc they contend that the salaries and benefits are not directly related to the acquisition of any specific installment contract they contend that the salaries and benefits were predecisional expenses which generated predominately short-term benefit they contend that the salaries and benefits did not themselves generate future income but only allowed acc to decide whether it would acquire an installment contract - -- we reject petitioners’ second argument as to their first assertion we disagree with them that acquisition costs are capitalizable under sec_263 only if they create or add value to a capital_asset in 467_f2d_47 9th cir affg t cc the taxpayer was a shareholder of an s_corporation capitol that agreed to acquire the stock of a company that owned and operated radio station kgms in capitol incurred dollar_figure of legal engineering and accounting fees in connection with the transfer to capitol of control of station kgms’ radio-broadcasting license the taxpayer deducted his proportionate share of these expenses and the commissioner disallowed the deduction asserting that the expenses were capital expenditures the taxpayer argued in this court that he could deduct dollar_figure of the expenses because they were attributable to a hearing held by the federal communications commission on this matter and which did not add any value to the acquired stock we disagreed with the taxpayer that any of these amounts were currently deductible on appeal so did the court_of_appeals for the ninth circuit according to as mentioned above we understand the term capital_asset to be used in its accounting sense and not in accordance with its meaning under sec_1221 we add to our prior discussion that the term as applied to capitalization issues does not arise from the code but is a byproduct of judicial interpretation on the basis of our understanding of the meaning of the term we reject petitioners’ contention that costs related to an ordinary asset under sec_1221 can never be a capital_expenditure -- - that court the expenditures connected with the acquisition of the broadcast license were no less capital in character because they did not themselves contribute additional and specific financial value to the license being sought the important fact is that the expenditures were made for the purpose of acquiring a capital_asset dustin v commissioner f 2d pincite accord 44_f2d_709 6th cir fees paid to guarantors of rent under lease were capital expenditures notwithstanding the fact that the fees added no value to the lease or to the property leased thereunder affg 15_bta_566 in making this assertion petitioners focus solely on the latter part of the text in sec_263 to wit the phrase made to increase the value of any property we do not do likewise a proper reading of that section in full reveals that the phrase relates to permanent improvements or betterments and not to new buildings cf dustin v commissioner t c pincite here we are dealing with salaries and benefits paid to acquire capital assets e the installment contracts and not with expenditures made to improve or better property already owned we also bear in mind that the test for capitalization under the treasury department’s longstanding interpretation of sec_263 as set forth in sec_1_263_a_-2 income_tax regs the cost of acquiring a long-term asset is an example of a capital_expenditure -- - does not hinge on the amount of value added to property but looks at the nature of the expense itself see 219_f3d_359 4th cir when the nature of an expenditure bears a direct relation to the acquisition of a capital_asset such as is the case here the expenditure must be capitalized the amicus for fnma expands on petitioners’ first assertion by reference to sec_1_263_a_-1 income_tax regs that section provides in general the amounts referred to in paragraph a of this section include amounts paid_or_incurred to add to the value or substantially prolong the useful_life of property owned by the taxpayer or to adapt property to a new or different use the amicus also references the following passage from this court’s memorandum opinion in mayer v commissioner t c memo it appears from the record that these transaction fees consisted in large part of general overhead rather than costs specifically allocable to individual purchases and sales these expenses are not capitalizable under sec_263 the amicus for fnma concludes that the salaries and benefits are indirect_costs outside the realm of sec_263 this passage is likewise referenced by the amicus for fhlmc -- - we disagree with the additional arguments set forth by the amicus for fnma as to petitioners’ first assertion the rule_of sec_1_263_a_-1 income_tax regs upon which the amicus relies is merely a general_rule that is not intended to contain the sole parameters of capitalization under sec_263 nor do the amici rely correctly on our memorandum opinion in mayer v commissioner supra there the taxpayer was an individual who argued that he could capitalize his investment-related expenses we held he could not because he failed to meet his burden_of_proof nor are we persuaded by petitioners’ second assertion that a body of law treats the salaries and benefits as deductible expansion costs as to the body of cases relied upon by petitioners we have discussed at length our disagreement with their reading of these cases and adhere to our belief that none of the cases supports the result that they desire nor does the record at hand persuade us that any of the salaries and benefits were incurred in expansion of acc’s business even if they could be construed to be expansion costs which as just mentioned we do not find that they are petitioners would still not prevail simply because a cost may gualify as an expansion cost in fact petitioners’ assertion that the costs were related to an expansion of acc’s business is inconsistent with their primary argument that the expenditures were incurred routinely in acc’s everyday business -- - does not make it a deductible expense see eg 110_tc_402 sec_195 does not require that every expenditure incurred in any business expansion is to be currently deductible such is especially true here where the salaries and benefits were incurred in connection with the acquisition of a capital_asset we also are unpersuaded by petitioners’ third assertion that the salaries and benefits did not generate a significant future benefit to acc these costs contributed directly to acc’s receipt in later years of interest and excess principal income this income significantly benefitted acc in that it was the bread and butter of its operation because acc’s payment to its employees of the disputed salaries and benefits provided acc with such a significant long-term benefit they are capital expenditures see 503_us_79 see also 418_us_1 397_us_572 397_us_580 cf 491_us_244 n the important point is whether the taxpayer is investing in an asset or economic_interest with an income-producing life that extends substantially beyond the taxable_year nor is a cost deductible merely because it preceded the final_decision as to the acquisition of a specific asset -- - the amicus for fnma concludes as to the salaries and benefits that capitalizing these costs will administratively burden acc we disagree it was acc that identified these costs for its auditors in order to capitalize the costs for financial_accounting purposes contrary to the amicus’ assertion under the facts of this case it is not impossible to identify the portion of the salaries and benefits which are attributable to each installment contract we now turn to the ppm-related expenditures respondent determined and argues that acc must capitalize these expenditures respondent points to the fact that the repayment of the notes extended beyond the year of their issuance petitioners maintain that the ppm expenditures are currently deductible petitioners repeat many of the same arguments which we have rejected as to the salaries and benefits stressing their assertion that acc issued the notes in order to obtain funds to acquire installment contracts in the ordinary course of its business petitioners also add with citations to 70_f2d_341 4th cir revg and remanding 27_bta_965 and 32_bta_266 that financing the amicus also raises an issue as to whether acc’s income was reflected clearly within the meaning of sec_446 by its deduction of the salaries and benefits this issue was not raised by the parties and is not before the court we decline the amicus’ invitation to address it -- jo - companies such as acc may currently expense commissions connected to the issuance of long-term debt we agree with respondent that the ppm expenditures are as to each of petitioners’ arguments capital expenditures which we rejected above we also reject them here as applied to the ppm expenditures_for the reasons stated above as to petitioners’ additional argument we reject that argument as well the fact that acc incurred the ppm expenditures in borrowing funds means that the expenditures are capital expenditures and must be amortized over the life of the debt see eg 71_tc_955 57_tc_781 9_tc_180 18_bta_1179 see also s l bldg corp v commis19_bta_788 revd on other ground60_f2d_719 2d cir revd sub nom 288_us_406 compare 33_tc_671 wherein we stated it is not the purpose for which the loan is made that 1s important it is the purpose of the expenditure for loan discounts and expenses that in contrast with respondent however we allow acc to deduct for under sec_165 the portion of those expenditures that was attributable to the offering that was abandoned in that year see ellis banking corp v commissioner f 2d pincite additional argument - 7jl1- purpose is to obtain financing or the use of money over a fixed period extending beyond the year of borrowing when we analyze the reason behind the rule_of amortizing such debt expenses the distinction between this case and s l building corporation and longview hilton hotel co vanishes here as in the cited cases the mortgage discounts and expenses represent the cost of money borrowed for a period extending beyond the year of borrowing it matters not that the proceeds of the loans be used to build an income-- producing warehouse as in julia stow lovejoy or to purchase additional properties as in s l building corporation or to buy the mortgaged premises as in the instant case in all such cases the expenditure represents an expenditure for the cost of the use of money and not a capital_expenditure for the cost of any asset obtained by the use of the proceeds of the money borrowed as to the two cases upon which petitioners rely to support their from the case at hand and require no further discussion and by the amici those cases are factually distinguishable we have considered each of the arguments made by the parties herein as meritless we have rejected all arguments not discussed decisions will be entered under rule reviewed by the court wells chabot cohen gerber colvin vasquez and thornton agree with this majority opinion chiechi j did not participate in the consideration of this opinion - j2 - swift j 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 110_tc_349 revd 212_f3d_822 3d cir 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 f 3d pincite 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 pincite -- - 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 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 gualify as a deduction from gross_income x kk 418_us_1 emphasis added 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 ie for various reasons the large majority of the proposed installment loans that were investigated and considered by acc were abandoned within a day majority op p 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 335_f2d_82 6th cir 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 x 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 sec_1_263_a_-2 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 months for and months for 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 one 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 one year 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 u s pincite 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 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 number of installment loans rejected or average duration average duration year withdrawn accepted total of accepted loans of all loans big_number big_number months months big_number big_number months months for big_number ff big_number for big_number big_number -- - 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 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 224_f3d_874 8th cir affg in part and revg in part 112_tc_89 quite contrary to a possible reading of the majority opinion see ruwe j concurring op p 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 of acc’s underlying business activity of acc’s costs and expenses and of acc’s income and profit as the majority opinion states majority op p 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 1ie of providing financing ’ i acknowledge that the majority opinion majority op p 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 --- - 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 f 3d pincite 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 - jq - ruwe j concurring in part and dissenting in part i agree with the majority’s legal analysis and its application of that analysis to acc’s expenditures_for salaries and benefits hereinafter salaries that were incurred in connection with the acquisition of installment contracts the majority correctly holds that the percentage of salaries related to credit analysis activities must be capitalized however the majority then holds that overhead expenditures need not be capitalized i disagree with the majority’s conclusion that the overhead expenses were not directly related to the acquisition of installment contracts because in my opinion that conclusion is inconsistent with the majority’s specific findings_of_fact the following breakdown of specific expenditures appears on page of the majority’s findings_of_fact breakdown of specific expenditures salary percentage of total expenses amount and benefits related to acc’s credit in employee wages fica mesc futa bc bs total expense analysis activities issue steve balan dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure james blasius big_number big_number big_number big_number big_number cass budzynowski big_number big_number big_number big_number big_number hope mcgee big_number big_number big_number big_number big_number kelly big_number big_number big_number big_number big_number stacey big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number overhead items printing big_number big_number telephone big_number big_number computer big_number big_number rent big_number big_number utilities big_number big_number big_number big_number big_number salary wages and percentage of total expenses amount estimated benefits related to acc’s credit in employee bonus fica mesc futa bc bs total expense analysis activities issue steve balan dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure james blasius big_number big_number big_number big_number big_number cass budzynowski big_number big_number big_number big_number big_number hope mcgee big_number big_number big_number big_number kelly big_number big_number big_number big_number big_number sue big_number big_number big_number big_number big_number kathy big_number big_number big_number big_number big_number stacey big_number big_number big_number kirsten big_number big_number big_number big_number big_number big_number big_number big_number big_number overhead items printing big_number big_number telephone big_number big_number computer big_number big_number rent big_number big_number utilities big_number big_number big_number big_number big_number big_number these expenditures were all incurred in acc’s business the majority finds that acc’s only business operation was the acquisition of installment contracts and the servicing of those contracts ’ with respect to the salaries and overhead expenses found to be related to acc’s credit analysis activities dollar_figure for and dollar_figure for the majority makes the following finding of fact in and acc paid installment contracts expenditures totaling dollar_figure and dollar_figure respectively which were attributable to acc’s obtaining of credit reports and screening of credit histories related primarily to the portion of acc’s payroll and overhead expenses that was attributable to its credit analysis activities none of these ‘the majority finds its sole business operation is the acquisition of installment contracts from automobile dealers and the servicing of those contracts majority op pp the parties agree with the allocations in the above table -- - expenditures included any postacquisition or servicing expenses ‘we use the term credit analysis activities to refer to acc’s credit review services and its funding services 1ie acc’s issuance of the checks to dealers in consideration for the installment contracts majority op p emphasis added from the majority’s findings_of_fact i conclude acc’s business operation consisted of the acquisition of installment contracts and the postacquisition servicing of those contracts and of the total expenses for salaries and overhead for and dollar_figure for and dollar_figure for were related to credit analysis activities and were not related to any other business operations of acc to me the logical conclusion is that both salaries and overhead expenses totaling dollar_figure for and dollar_figure for were exclusively for acc’s acquisition of installment contracts and thus were directly related to the acquisition of installment contracts the percentage of acc’s salaries and overhead expenses that related exclusively to acc’s credit analysis activities indicates that most of acc’s business activity concerned the acquisition of installment contracts for example percent of salaries and percent of overhead expenses for were related to acc’s credit analysis activities for the the majority finds that none of these expenditures included any postacquisition or servicing expenses majority op p acc’s only business operation was the acquiring of installment contracts and the postacgquisition servicing of those installment contracts - - percentages were percent and percent respectively the majority finds that bach of the employees spent a significant portion of his or her time working on credit analysis activities and but for acc’s anticipated acquisition of installment contracts acc would not have incurred the salaries and benefits attributable to those activities majority op pp absent evidence to the contrary it would seem to follow logically that if acc’s business operation had not included credit analysis activities acc would never have incurred the overhead expenses attributable to those activities the majority correctly states that the overhead expenses would be capital in nature if they originated in acc’s process of acquiring installment contracts majority op p however the majority reasons that the overhead expenses were not directly related to the acquisition of installment contracts because none of these routine and recurring expenses originated in the process of acc’s acquisition of installment contracts nor in fact in any anticipated acquisition at all acc would have continued to incur most of these expenses in the ordinary course of its business had its business only been to service the installment contracts id there is nothing in the majority’s specific findings_of_fact to support the conclusion that overhead expenses related to credit analysis activities did not originate in the process of acc’s - - acquisition of installment contracts indeed it would be logical to conclude that the type and amount of these overhead expenses did originate in acc’s acquisition of installment contracts after all this activity was acc’s dominant activity if acc had never engaged in acquiring installment contracts most of its expenditures_for both salaries and overhead expenses would have been unnecessary in the first place the majority reasons that rent and utilities were generally fixed charges which had no meaningful relation to the number of credit applications analyzed or the number of installment contracts acquired by acc majority op p again with the possible exception of rent there are no specific findings_of_fact to support this rationale logic would indicate that if acc no longer engaged in credit analysis activities then its need for office space would decrease and it would take steps to reduce its rental and utility costs the same logic would apply even more so to printing telephone and computer costs there is nothing in the majority’s findings to indicate that these were it should be noted in this regard that petitioners bear the burden of clearly showing the right to the claimed deduction 503_us_79 the majority finds that acc had a 5-year lease that began in date there is no discussion of the specific terms of the lease other than the amount of monthly rent - -- fixed costs approximately percent’ of the printing and telephone costs were attributable exclusively to acc’s credit analysis activities ninety-five percent of the expenses for computers were related exclusively to acc’s credit analysis activities during the years in issue one can only wonder how the majority would have treated computer expenses if percent of such expenses were allocable to acc’s credit analysis activities the majority provides no legal basis for distinguishing between expenditures_for salaries and expenditures_for overhead expenses indeed the majority correctly states that overhead expenses are capital in nature to the extent that they originated in acc’s acquisition process or in other words were directly related to acc’s anticipated acquisition of installment contracts majority op p therefore my disagreement with the majority is based on what i view as the logical disconnect between the majority’s specific findings_of_fact and the majority’s rationale for concluding that the overhead expenses ‘the majority notes a variation in printing telephone and computer costs from one year to another but does not identify the cause see majority op pp ‘for percent of printing and telephone costs were attributable to acc’s credit analysis activities for percent of printing costs and percent of telephone costs were attributable to acc’s credit analysis activities - - were not directly related to acc’s credit analysis activities it is for that reason alone that i dissent whalen halpern beghe foley gale and marvel jj agree with this concurring in part and dissenting in part opinion -- - halpern j concurring in part and dissenting in part i concur in most of the majority’s report but like judge ruwe whom i join i dissent from the majority’s treatment of the overhead items--printing telephone computer rent and utilities overhead i introduction petitioners’ s_corporation automotive credit corporation acc cannot deduct its expenditures_for the installment contracts here in question because such expenditures are capital in nature they are capital in nature because each such expenditure purchases for acc the right to receive monthly payments for a term ranging from to months with respect to the overhead the question is whether acc may deduct its overhead costs related but in the majority’s view only indirectly related to such capital expenditures principally for the reasons set forth by judge ruwe i do not believe that they may i write separately however to make the following points the majority distinguishes between directly related and indirectly related costs without telling us how to draw that distinction in short the majority uses the guality of relatedness not in support of any analysis but only to express a conclusion ie the overhead was not directly related to acc’s capital expenditures the majority’s analysis also risks confusion with existing law and accounting principles that distinguish direct costs from indirect_costs moreover -- - under that law and those principles indirect_costs including overhead are often required to be capitalized to the extent the majority distinguishes directly related from indirectly related costs it seems to be saying that fixed costs are period_costs because they are only indirectly related to any capital_expenditure that is also not an accurate statement of current law and accounting principles that often require absorption or full costing methods_of_accounting for fixed costs the majority has ignored the proper mode of analysis which is to determine whether acc’s accounting for overhead clearly reflects its income il agreement of the parties the parties agree that the amounts identified by the majority as acc’s installment contract expenditures were related to acc’s credit analysis activities apparently they agree that overhead was related to acc’s credit analysis activities because items such as the telephone and computers facilitated acc’s obtaining of credit reports and screening of credit histories in turn the credit reports and case histories assisted acc’s employees in determining that any particular installment contract presented a sufficiently low expectation of nonperformance to justify its purchase acc treated the installment contract expenditures including overhead disparately for financial_accounting and federal_income_tax -- - purpose matching such expenditures to the expected life of the related installment contracts for financial_accounting purposes but deducting them for federal_income_tax purposes at least for iii majority’s approach according to the majority overhead expenses must be capitalized only if they are directly related to the acquisition of a capital_asset and such expenses are directly related to the acquisition of a capital_asset only to the extent that they increase on account of such acquisition for the reasons discussed below i do not believe that the majority’s limitation of overhead costs subject_to capitalization to what i will refer to as incremental overhead costs is an accurate application of the law nor do i believe that it provides an improvement to the law relating to the treatment of overhead costs iv overhead overhead is by definition an indirect_cost see g kohler’s dictionary for accountants cooper ijiri eds 6th ed overhead any cost of doing business other than a direct_cost of an output of product or service a generic name for manufacturing costs of materials and services not readily identifiable with the products or services that constitute the main outputs of an operation a cost is an indirect_cost and thus overhead if at the time the cost is incurred it is not identifiable with an individual -- -- department product activity or other object to be costed without distinction costing unit because overhead costs are not identifiable with a costing unit some process is necessary to allocate overhead among costing units distinctions between overhead costs and direct costs rest upon the methods of measuring unit costs direct costs can be identified with units to be costed e with departments activities orders products at the time the cost is incurred this is accomplished by measuring guantities of materials and hours of labor used for each costing unit overhead costs cannot as a practical matter be traced directly to individual costing units either because the process of making direct measurements is judged wasteful or because there is no acceptable method of direct measurement available as an example of a too costly measurement electric power used by each department ina factory can be measured but this is not always done because management does not wish to incur the expense of meters and records examples of the lack of a method of distribution may be observed in any endeavor to determine how much of the cost incurred for plant protection accounting or the president’s office applies to each unit_of_production id pincite as other authorities on accounting state indirect expenses by their very nature can be assigned to departments only by a process of allocation meigs et al accounting the basis for business decisions 4th ed although such process of allocation undoubtedly involves many judgments and uncertainties there are certain standards accounting literature is generally consistent in stating that indirect_costs should be charged against operations as incurred if they have no arguable cause- and-effect relationship with future revenues such as the salary of a mailroom clerk however many allocations of indirect_costs affect future periods an - -- example is the allocation of factory overhead to units of inventory produced during a period and remaining on hand at period-end minter et al handbook of accounting and auditing c2 ed one area of uncertainty concerns the treatment of fixed overhead costs in belkaoui the handbook of cost accounting theory and techniques the author states the issue of whether inventories should be costed at variable or full cost remains a subject of debate in both academic and business worlds the controversy centers mainly on two inventory_valuation methods the direct or variable costing method and the absorption or full costing method that debate is relevant to our analysis since as professor belkaoui states the main difference between product costing methods lies in the accounting treatment of fixed manufacturing overhead under the direct_costing method the fixed manufacturing overhead is regarded as a period cost that is an expired cost to be immediately charged against period sales id pincite under the absorption costing method on the other hand all the manufacturing costs whether variable or fixed are treated as product costs and hence inventoried with the products id ’ fixed overhead thus is only released to offset receipts as it flows into cost of goods ' professor belkaoui adds consequently under absorption costing the period_costs are limited to both selling and administrative overhead belkaoui handbook of cost accounting theory and techniques --- - sold which may or may not be in the period such overhead is incurred see id pincite professor belkaoui states that the central issue affecting income determination is whether fixed manufacturing costs are product or period_costs id pincite he concludes from the theoretical point of view both methods direct_costing and absorption appear to be internally consistent from the practical point of view as well both methods have merit thus there is no absolute answer to whether a cost is a product ora period cost id pincite for financial_accounting purposes the treatment of overhead starts with the recognition that overhead costs are indirect and thus in need of allocation and it proceeds from there to allocate such expenses pursuant to various standards practices and judgments in order to serve management’s and other’s needs for information including income determination see kohler’s dictionary for accountants cooper ijiri eds 6th ed overhead presents no different challenge for federal_income_tax purposes it is thus paradoxical that the majority’s approach should be that all inguiry ends once it is determined that an overhead cost is only indirectly related to the purchase of a capital_asset v clear_reflection_of_income a introduction by characterizing the printing telephone computer rent and utilities costs here in question as overhead petitioner and the majority do no more than identify that allocation is required in concluding that such costs need not be capitalized the majority accepts without question acc’s allocation which allocates the costs to acc’s postacquisition and servicing activities for which an immediate deduction is available the majority fails to apply any criteria to its acceptance of acc’s allocation notwithstanding that such allocation may be acceptable even required for financial_accounting purposes see majority op p note it still involves a method_of_accounting for federal_income_tax purposes the term method_of_accounting includes not only the over-all method_of_accounting of the taxpayer but also the accounting treatment of any item sec_1_446-1 income_tax regs see also sec_1 e a income_tax regs a change in method_of_accounting includes any change in the treatment of any material item’ a material_item is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction emphasis added a taxpayer’s method_of_accounting must clearly reflect income or the secretary may require the computation of taxable_income under a method of - - accounting that does clearly reflect income see sec_446 notwithstanding the majority’s disclaimer that it is not passing on whether acc’s method_of_accounting clearly reflected its income see majority op p note that is precisely what it is doing b clear reflection and sec_263 we have previously addressed the interplay between the clear-reflection standard and the requirements of sec_263 in 49_tc_275 the core issue was how to treat overhead in determining the cost of self-constructed assets we rejected the commissioner’s principal argument that sec_263 draws a clear line between deductible expenses and capital expenditures we stated that consideration necessarily had to be given to whether the taxpayer’s treatment of the overhead in question clearly reflected income we reject as without merit respondent’s contention that sec_263 of the code is in and of itself dispositive of the issue before us by requiring the capitalization of amounts ‘paid out for new buildings or for permanent improvements or betterments made to increase the value of any property ’ such section begs the very question we are asked to answer we are satisfied that under the circumstances involved herein sec_263 and sec_446 are inextricably intertwined a contrary view would encase the general provisions of sec_263 with an inflexibility and sterility neither mandated to carry out the intent of congress nor required for the effective discharge of respondent’s revenue-collecting responsibilities accordingly we turn to a determination as to whether petitioner’s method_of_accounting ‘clearly reflects -- - income’ pursuant to the provisions of sec_446 xk kek id pincite in fort howard paper co we found the taxpayer’s method_of_accounting clearly to reflect income notwithstanding that the taxpayer allocated no overhead to self-constructed property under the incremental_cost method_of_accounting adopted by him the commissioner argued for the full absorption cost method which would have required an allocation of overhead to self-constructed assets we stated under all the circumstances herein we hold that petitioner has satisfied its heavy burden and has convinced us that it employed a generally accepted method_of_accounting which ‘clearly reflects its income ’ in so doing we neither hold nor imply that under all circumstances a taxpayer has a right to choose between alternative generally accepted methods_of_accounting or that respondent may not under some circumstances require a taxpayer to accept his determination as to a preferred selection among such alternatives we hold merely that where a taxpayer in a complicated area such as is involved herein has over a long period of time consistently applied a generally accepted accounting_method which is considered ‘clearly to reflect’ income by competent professional authority and is not specifically in derogation of any provision of the internal_revenue_code and where this method has been frequently applied by respondent in making adjustments to the taxable_income of the same taxpayer as distinguished from respondent’s mere failure to object to its use by such taxpayer the taxpayer’s choice of method will not be disturbed xk kek id pincite citations omitted in 60_tc_368 affd 519_f2d_1280 10th cir we distinguished fort howard paper co and found the taxpayer’s -- - method_of_accounting for the costs of self-constructed assets did not clearly reflect income in part because it expensed incremental overhead costs in 174_f3d_1344 fed cir the taxpayer corporation paid a law firm an annual retainer fee which was paid to prevent the law firm from representing parties adverse to the taxpayer in a takeover attempt and for standing by to represent the taxpayer both if subject_to a hostile takeover and in other matters id pincite the law firm received the retainer whether it rendered legal services during the retainer year or not id pincite for some years it rendered no legal services and during others it rendered services in connection with deductible non-capital matters id during the year in question the law firm rendered services in connection with the taxpayer’s acquisition of a capital_asset and credited the year’s retainer amount against the amount billed for those services id for that year the taxpayer deducted the retainer amount and capitalized the remaining fee id the court_of_appeals disallowed the taxpayer’s deduction of the retainer amount stating even though the retainer fees were allowed as deductible expenses for most of the years the taxpayer paid them the use of the fee in a particular year determines the deductibility of the expense in that year and not the pattern of other years of -- - paying it id pincite1 although that issue was not decided on the basis of clear_reflection_of_income the taxpayer was required to allocate a fixed cost incurred for multiple purposes to a single capital_expenditure purpose c criticism of majority my criticism of the majority is not per se with its finding that there were no incremental overhead costs attributable to capital expenditures although i doubt that that is true my criticism is with the majority’s uncritical acceptance of the taxpayer’s method_of_accounting for overhead judge tannenwald’s nuanced analysis in fort howard paper co v commissioner supra exemplifies the considerations traditionally given to clear_reflection_of_income cases consider also judge dawson’s’ analysis in coors v commissioner supra the supreme court cases that figure so prominently in the majority’s analysis see majority op p are inapposite simply they do not address the accounting question here before us namely does it clearly reflect acc’s income for federal_income_tax purposes for acc to use a method_of_accounting that allocates zero overhead to a costing unit acc’s credit analysis activities to which such overhead concededly relates if acc’s accounting_method is rejected and some or all of the overhead is allocated to acc’s credit analysis activities then i suppose such overhead would in the majority’s terminology be directly - - related to those activities and the supreme court cases would be no bar to capitalization the question here is not whether the overhead directly or indirectly relates to acc’s credit analysis activities the question is whether acc has proven that its method_of_accounting clearly reflects its income it has not d majority’s reasoning once the majority’s approach is stripped of the erroneous notion that overhead can without allocation be identified to an individual costing unit e g a capital_expenditure what remains is an approach that says that for federal_income_tax purposes overhead need not be allocated to a costing unit when if that costing unit were eliminated the overhead would still be incurred immediately that approach raises analytic difficulties what if the overhead is incurred on account of two costing units one a capital_expenditure and one not and the overhead would be incurred in the same amount if either but not both were eliminated why is the default rule that the overhead is allocated in total to the noncapital expenditure looked at from a different perspective what if there is not a linear relationship between the taxpayer’s business activities and overhead the relationship may be step-wise so that the taxpayer’s business activities would have to increase by some guantum before rent for instance would increase assume for example that office space may only be rented in blocks of -- -- several thousand square feet there is thus no incremental_cost in adding a capital activity to space not fully occupied by a noncapital activity likewise there is no decrement in cost once having added the capital activity of completely subtracting the noncapital activity must we conclude that the rent still is not allocable to the capital activity the fact that a taxpayer would incur the same overhead costs should it discontinue a capital activity may only be evidence that it is amenable to an economically inefficient use of space or equipment short of adopting the accounting concept of direct or variable costing as normative for federal_income_tax purposes that does not seem to me a sufficient reason to foreclose any capitalization of fixed overhead if the direct or variable costing method is to be made normative for federal_income_tax purposes that is a job for the secretary or the congress not for us besides which as judge ruwe points out the majority has made no specific findings_of_fact to support its conclusion that acc’s acquisition activities did not give rise to any incremental overhead indeed petitioner has proposed the following finding of fact acc’s payroll and overhead costs attributable to credit review and other tasks relating to contract acquisition were not materially affected by whether any given installment contract was ultimately acquired by acc from a dealership - - that of course is not to say that overhead would not be materially affected if none of the contract acquisition activity were continued vi conclusion t am not here arguing for a rigid rule requiring allocation of overhead in all cases where overhead is related to a capital activity see e g 74_tc_1377 no capitalization required for overhead where capital activity acquisition of banks was incidental to taxpayer’s principal business of holding and managing banks revd and remanded on another issue 670_f2d_785 8th cir i am the majority states w e conclude that any future benefit that acc realized from these expenses was incidental to its payment of them so as not to require capitalization majority op p the majority has failed however to explain or quantify that finding without the overhead the acquisition activity would at the least have been substantially reduced judge swift in his concurring opinion suggests that any benefit derived by acc from both salaries and overhead associated with the credit analysis activities was incidental to acc’s primary business activity the holding of installment loans he would therefore permit a current deduction for both judge swift’s position is based upon his finding that any benefits associated with the credit analysis activities were exhausted or lost by acc almost simultaneously with the receipt of the benefits ie most of the installment loans were immediately rejected swift j concurring op p he also views such activities as investigatory activities the costs of which are currently deductible i believe that all of the credit analysis activities related to the purchased loans therefore the costs of that activity should be capitalized the acquisition of installment loans was an essential part of acc’s business and an unavoidable cost of continued however arguing against what appears to be the rigid approach of the majority that if the taxpayer’s method_of_accounting for overhead is to deduct all overhead that does not increase on account of capital activities such method_of_accounting clearly reflects income and thus must be accepted by respondent i can do no better than to close with the majority’s own words in our minds an expenditure that produces both a current and long-term benefit is neither percent deductible nor percent capitalizable instead regardless of whether the expenditure’s primary or predominant purpose is to benefit significantly the business’ current operation on the one hand or its long-term operation on the other hand the expenditure is capital in nature to the extent that it produces a significant long-term benefit and deductible to the remaining extent majority op p whalen and beghe jj agree with this concurring in part and dissenting in part opinion continued such acquisitions was that associated with the need to distinguish between acceptable and unacceptable risks ie the credit analysis activities put simply the hunt was essential to the capture beghe j concurring in part and dissenting in part having joined the side opinions of judges ruwe and halpern i write on to empathize with the concerns that may underlie the majority’s view on the treatment of the overhead costs as amplified by judge swift’s concurrence it bears observing that the oft-quoted passage in the opinion of the court_of_appeals for the seventh circuit in 685_f2d_212 7th cir revg tcmemo_1981_255 which includes the statement that the administrative costs of conceptual rigor are too great was uttered in the course of sustaining the commissioner’s determination that the costs in issue in that case had to be capitalized however the court_of_appeals then suggested that the distinction between recurring and nonrecurring costs might provide the line of demarcation in some cases but went on to observe that the distinction wouldn’t make sense when the taxpayer’s sole business was the creation or acquisition of capital assets although acc’s business includes the servicing as well as the acquisition of capital assets the relatively short average time the acquired loans remain outstanding raises questions about administrability the costs of conceptual rigor and whether the exercise has been worth the candle these musings lead me to suggest the time has come to request respectfully that the congress step in and enact some bright-line rules that will provide guidance to the business community and the internal_revenue_service and reduce the burdens of compliance and controversy on the public the service and the courts sec_195 and sec_197 come to mind as possible starting points or models gale j agrees with this concurring in part and dissenting in part opinion