Court Opinion

ID: 9493377
Source: CourtListenerOpinion
Date Created: 2023-08-05 15:06:27.619195+00
Date Added: 2024-06-11T17:55:48.540201
License: Public Domain

BRIGHT, Circuit Judge,
concurring.
I concur in Judge Hand’s fine opinion. I write separately to emphasize that the record in this case is inadequate to show that the portion of the salaries in question, $150,000, was directly or substantially related to the acquisition. Moreover, the tax *890court’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 1991, DBTC had 9 executives and 73 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 1991, $150,000 was attributable to services performed in the transaction. DBTC deducted the salaries, including the $150,000, on its 1991 Federal income tax return. Respondent disallowed the $150,000 deduction; i.e., the portion attributable to the transaction.
Add. at lla-12a.
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.
APPENDIX
To qualify for a deduction, “an item must (1) be ‘paid or incurred during the taxable year,’ (2) be for ‘carrying on any trade or business,’ (3) be an ‘expense,’ (4) be a ‘necessary’ expense, and (5) be an ‘ordinary’ expense.” Commissioner v. Lincoln Savings and Loan Assoc., 403 U.S. 345, 91 S.Ct. 1893, 29 L.Ed.2d 519 (1971). Assuming the first four requirements are met, the following flow chart will be helpful when determining the proper tax consequence of a business expenditure. By answering the “either or” questions in the flow chart, one can follow the chart to determine whether an expense should be capitalized or deducted. A legend is provided to assist the reader.

LEGEND

A = physical capital ASSET created or enhanced;
~A = NO physical capital ASSET created or enhanced;
B = BENEFIT beyond the taxable year;
~B = NO Benefit beyond the taxable year;
R = the expense is directly RELATED to B;
~R = the expense is indirectly related to B;
C = CAPITALIZE;
D = DEDUCT.
*891[[Image here]]