Document: 29 L.Ed.2d 519 91 S.Ct. 1893 403 U.S. 345 COMMISSIONER OF INTERNAL REVENUE, Petitioner,v.LINCOLN SAVINGS AND LOAN ASSOCIATION. No. 544. Argued Feb. 23, 1971. Decided June 14, Syllabus Payment by a state-chartered savings and loan association of the 'additional premium' required § 404(d) National Housing Act to be paid Federal Savings Loan Insurance Corp. is not deductible for income tax purposes as an ordinary necessary business expense under 162(a) Internal Revenue Code. 9 Cir., 422 F.2d 90, reversed. Matthew J. Zinn, Washington, D.C., petitioner. Adam Y. Bennion, Los Angeles, Cal., respondent. Mr. Justice BLACKMUN delivered opinion Court. 1 This case presents question whether in 1963 Corporation compulsion Act, amended, 12 U.S.C. s 1727(d),1 association, purposes, Code 1954, 26 162(a). 2 The Commissioner determined deficiency $461,454.38 cash basis federal Lincoln Association. Nearly all was attributable disallowance deduction claimed Lincoln's payment $882,636.86 made pursuant 404(d). sought redetermination Tax Judge Raum, decision reviewed court without dissent, upheld deficiency. 51 T.C. 82 (1968). On appeal Ninth Circuit reversed, one judge dissenting. 90 (1970).2 Because importance issue industry Government, we granted certiorari. 400 901, 139, 27 L.Ed. 137 (1970). 3 * pertinent facts are dispute. California organized 1925 licensed state law. It subject Division Financial Code, 5000 et seq., also regulations State's Commissioner. Administrative Tit. 10, c. 2. 4 In 1936 applied membership Home Bank San Francisco (then Angeles). That application has remained member since that time. regional ones established supervised Board 1932, 47 Stat. 725, §§ 1421—1449. These banks provide liquidity funds mortgage lending making advances institutions needed meet unusual or heavy withdrawal credit demands. Each must purchase capital stock its bank amount equal 1% outstanding 'aggregate unpaid principal' maintain percentage. 1426(c). 5 1938 became, still is, institution insured (FSLIC), corporation created 402 48 1256, 1725, direction Board. By statute FSLIC duty insure accounts associations; it may qualified associations such Lincoln. Section 403(a), 1726(a). 6 so originally required, 404(a) 1258, pay annual insurance premium measured total plus creditor obligations.3 provided these premiums were continue annually until FSLIC's reserve losses amounted 5% obligations institutions, at intervals thereafter level. 7 pattern changed, however, effective January 1, 1962, September 8, 1961, 75 482. 3, amended 404(a), 1727(a), present form.4 8 now requires establish two reserves, namely, Primary Reserve 'which shall general reserve,' Secondary Reserve. requirement 1/12 continued, but level lowered from 2% obligations. Sections 404(b)(1) 404(b)(2), 1727(b) (1) 1727(b)(2). 1961 moreover, added subsection (d) 404. 1727(d). FSLIC, with respect any calendar year, nature prepayment future (b) *.' was, net increase institution's accounts, less 1426(c), end expend purchasing Bank.5 additional credited 1727(a). As noted, statutorily prescribed reserve. Corporation's income; this thus represents retained earnings. payments, each institution, constitute major item gross income. To extent payments exceed corporation's expenses they flow part have no property interest constituting 10 subsists separately possesses different characteristics. It, course, receives premium,' payable, institution. 'return' on Reserve's 'outstanding balances rate average return during year investments held of, guaranteed principal by, United States.' 404(e), 1727(a) 1727(e). contrast Reserve, 'available only Corporation' then 'only other which available therefor insufficient losses.' 11 pro rata share 404(e) states assignable transferable except regulation otherwise, provides 'in cases merger consolidation, transfer bulk assets similar transactions. *' An obtain refund if status terminated, 407, 1730, receiver legal custodian appointed liquidation, determines gone into liquidation. 404(f), 1727(f). Following December 31 aggregate equals exceeds (and alone does 2%), suspended. 404(g); 1727(g).6 When takes place, used, available, discharge obligation regular, basic, 404(b)(1). Thereafter, reserves decreases than 3/4%, resumes longer used regular premium. Whenever, following 31, 2%, accept further prepayments.7 13 maintains separate account submits statement disclosing it.8 Under issued Board, reports asset balance sheet treats earned income.9 14 LIC sends 'Insurance Premium Notice' basic due 'Notice Prepayments' amount, any, For former $135,760.52 latter $882,636.86. 15 deducted both allowed former, disallowed latter. 16 Court nondeductible expenditure expense, when actual FSLIC. noted above, reversed divided panel. II. 17 qualify allowable 1954 'paid incurred taxable year,' (2) 'carrying trade business,' (3) 'expense,' (4) 'necessary' (5) 'ordinary' expense. considered several requirements, more them, number cases. See, example, Welch v. Helvering, 290 111, 54 78 212 (1933); Helvering Winmill, 305 79, 59 45, 83 52 (1938); Deputy du Pont, 308 488, 60 363, 84 416 (1940); Interstate Transit Lines Revenue, 319 590, 63 1279, 87 1607 (1943); Heininger, 320 467, 64 249, 88 171 Tellier, 383 687, 86 1118, 185 (1966); Woodward 397 572, 1302, 25 577 (1970); States Hilton Hotels Corp., 580, 1307, 585 18 Cardozo emphasized difference between need satisfying order achieve deduction. where his well-known, elusive, suggestion answer appears: 19 'The standard set up rule law; rather way life. Life fullness supply riddle.' U.S., 115, S.Ct., 9. 20 Pont Douglas stressed, 493 495 496, 367, accepted 'popular received import' statute's words, 'ordinary connotation normal, usual, customary,' 'turns special facts.' Tellier Stewart double said: 21 'Our decisions consistently construed term imposing minimal 'appropriate helpful' 'the development (taxpayer's) business'. function clarify distinction, often difficult, those currently expenditures, which, all, amortized over useful life asset.' 689—690, 1120. 22 So much generalities. Here clearly, 1963, satisfied three five listed requirements. year. carrying business. And payment, compelled provisions Act. Government concedes. focus, therefore, our concern here, within meaning 23 argument essentially really depositors' obligations; similarly situated (there 4,419 1963) premium; possibility benefit serve make distinguished 24 We feel very recital structure operation Part I opinion, itself adverse argument. enough, deduction, merely associations, serves fortify purpose operation. Further, presence ensuing some aspect controlling; many concededly prospective effect beyond What important controlling, feel, $404(d) create enhance what distinct that, inevitable consequence, let absence factors here. note following: A. made, positive rigid continuing controls. primarily stated circumscribed cover losses. complete seniority demands upon last called upon. B. recognized revealed by: recognition, transferability therein. limited restricted, sure, exists approved situations merger, like. refund, termination status, receivership reaches suspension use reached Reserves. maintenance earnings income-producing entity inures C. Although compulsory accounting rules do control consequences, Old Colony R. Co. 284 552, 562, 211, 214, 76 484 (1932), there significance fact concerned here statements showing credits their respective shares. Lincoln, albeit shows parent corporation, First Corporation, although regulation, done same financial statements. 28 D. adjustments effected import. Due rapid growth years preceding passage ratio potential liability had declined. S.Rep.No.778, 87th Cong., 1st Sess., 2, 12; Hearing H.R. 7108 7109 before Subcommittee House Committee Banking Currency, 10. Congress reduced time channeled new reduction FHLB effectuated together. Certainly acquisition nature. complementary directed fund. device designed particular common result, providing protection depositors way, case, availability and, other, segregated amounts offset possible permanent temporary. partakes character regard contrarily persuasive, characteristic six features Appeals: 30 would consumed never refunded pointed out, T.C., 97, hazard routine investment company yet undertaking. unlikelihood, practical matter, recovery suggested liquidation will take place because day corporate activity assumed process duration. out impossibility result mass institutional suicide. well true unlikely undesirable decision. usually said, manufacturing plant equipment patents function. 32 identity accounts. phase passes, ceases. latter, fund current future. capable certain circumstances finding back coffers institutions. ultimate common, route differ other. 33 imposed governing economic concedes, 'Compulsion, economic, should bearing expenditure.'10 34 E. concept tax. factor relevant issue. consequence determination this, mere maturing enough. 35 F. included list expenditures specified 263 clear language sections together inclusive, expenditures. Iowa Southern Utilities 333 382, 385 (CA8 1964), cert. denied, 379 946, 85 438, 543; General Bancshares 326 712, 716 832, 62, 40. See III 36 aspects. If if, reached, devoted premium, appear order. Indeed, Service ruled. Rev.Rul. 66—49, 1966—1 Cum.Bull. 36, 37. Cf. Treas.Reg. Income 1.162—13. 37 emphasize just controlling wise, supra, statutory labels 'prepayment' contained controlling. Burnett 356 755, 758 (CA5 1966), 77, 68. compulsorily taxpayer 38 therefore conclude Wichita State & Trust 69 595, 596 1934), 293 55 73, 79 662. 39 judgment Appeals 40 ordered. 41 Judgment 42 DOUGLAS, 43 Respondent whose deposits (FSLIC). coverage, respondent premiums. 404(b) pays percent Pursuant 404(d), premimum accounts.1 approximately 95% transferred unless drops below percent. prove insufficient, extremely remote. A kept paid. 404(g), Reserves obligations, falls 3/4%. cash. projections, 1971 1975 after 1979. No 1995, reach 2%. argues shares time, calculations show Fund exhausted prior 1995.2 44 expenses. premiums, characterizing affirmed ruling. Court, reasonable agree dissent 45 There claim necessary. position 'ordinary,' 1120, (1966). relies principle cost results creation having extends substantially close outlay. From he respondent's depends years. 46 form lower full argues, asset. losses, event national catastrophe. recurring, likely 1962 1995. Accounting principles, claims, demand either 'Only manner costs matched against revenues generated maintained.' professed sound. error applying case. benefit. insurance. later But labeling proves too much, invalidates well. obtained expenses, coverage. readily admits foreseeable exceeded high establishing conceivably serious deemed sufficient, all. (are to) maintained,' portion capitalized, depreciated appropriate term. Nor insofar concerned. stated: 49 'We think emphasis treatment receipt payee, mistaken determining doing business, focus taxpayer's payee money say rights ignored.' 92. 50 deductible, while are, rest distinction two, evidenced keeping 'accounts,' But, going concern, proper consideration. surely lead could either. might returned sufficient best, contingent render otherwise nondeductible. Alleghany Commissioner, 298, 305; Electric Tachometer 158, 161. returns earnings, reserves. benefit, according Service. At point, declare deduct Therefore, absent remote receive share, immaterial Also, revenue ruling even constructive possession taxing fund, inconsistent facts, correct obtaining success Sept. 6, 483, read: '(d) section, prescribe, per centum members next requirement, member, calculated accordance (c) section holdings stock, prepayments foregoing 1963. Subsection 21, 1968, 6(a), 858, Dec. 24, 1969, 416(c)(1), 401, ways Accord, associations: Washington Fed. S. L. Assn. States, 304 F.Supp. 1072 (SD Fla.1969), pending Fifth Circuit; St. Joseph 288 477 (WD Mo.1968). decade total, 259; thereto been, successively, 1/4 1/8 1%. 1258; 298. '(a) first sentence (e).' repealed 6(l) 1426(l), reducing hold relation principal. (The been 27, 1950, 257.) contemplated most H.R.Rep.No.823, (1961); 1—2 U.S.Code Adm.News, p. 2610. Pub.L. 91—151, 375, applicable measures designated percentages 'accounts' 'creditor obligations.' projected 1970; 1980—1995; 1995; 1995 discharging institutions' 1969 amendments 151, eliminating measuring adequacy 1970. Beginning 1970 being fulfill $1,034,689.86. 1967, $4,922,155.46. accumulated (e) began ruled taxpayer, earned, utilized Rev.Prel. 38. Brief Opposition 17. member. Solicitor refunds fits pattern. however raises return,

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