Court Opinion

ID: 9465535
Source: CourtListenerOpinion
Date Created: 2023-08-05 00:48:47.705097+00
Date Added: 2024-06-11T17:39:13.451317
License: Public Domain

DUNIWAY, Circuit Judge
(concurring and dissenting):
I concur in Judge Kilkenny’s opinion insofar as it holds that the cost to each bank, $5,000, of the operating manuals, advertising and publicity aids, programs, “marketing knowhow” and motivational programs was deductible as ordinary and necessary business expense.
I dissent as to the computer program, which cost each bank $7,500. I would hold that that cost is a capital expense, and reverse the judgment of the tax court in each case to that extent. I would hold that, under the “separate and identifiable asset test” of Colorado Springs National Bank v. United States, 10 Cir., 1974, 505 F.2d 1185, the computer program is such an asset, a capital asset which must be amortized over its useful life. In this respect, I conclude that the tax court’s findings are clearly erroneous.
A computer program, the “deck of cards” (Tr. p. 172) that the banks bought, is a translation into computer language of a set of instructions to the computer. Each grid point can be given either a positive or a negative electrical charge. Particular sequences of charges process the factual data in the computer. When the cards are fed into the computer, the computer language on those cards causes the computer to arrange the factual data that it receives and stores, and to retrieve it, in particular ways. A particular use or particular uses of the data fed into the computer, and retrieved from it, is accomplished by a program properly designed to store and retrieve data in the desired manner. Thus, for example, the computer may be programmed to print out monthly bills, weekly sales volumes, etc.
Roughly analogous are a player piano and the punched paper music rolls that are used to activate it. Air entering the player mechanism through a particular hole in the roll causes the striking of a string and produces a note. An arrangement of holes, both horizontally and vertically, on the roll, can produce a Schubert sonata. If a restaurant owner bought a player piano for the entertainment of his guests, he would be required to amortize it over its useful life. If he paid a musician to play the piano live, the owner would be entitled to a deduction of his wages as an ordinary expense. If the owner then dispensed with the musician and instead purchased a repertoire of music rolls that he could insert into the piano to get music automatically, he would be required to amortize the cost of the music rolls over their useful life. On the other hand, he could deduct as expense the cost of having someone insert and remove the music rolls.
In the case at bar, the computer program, the $15,000 “deck of cards,” is like the music rolls for the piano. The banks did not buy a computer program every day, or every year. Because a new program cost $175,000 to $200,000, the banks continued using the one they had bought for over five years. Thus, buying the computer program was not a “recurring expense” as that phrase is used in Colorado Springs National Bank, supra. For their $15,000, the banks got an intangible asset that they could and did use for over five years.1 The $15,000 should be capitalized and amortized accordingly.
*1054None of the cases cited in Judge Kilkenny’s opinion requires a contrary result. In Colorado Springs National Bank, supra, what was purchased was computer services, not a computer program. The only item of cost of the six listed at 505 F.2d 1187 that might possibly be considered comparable is number 1, “Computer costs, $1,329.50, incurred to keypunch and insert its customer account data into the MSBA computer.” That is, as the court said, a recurring cost. It does not appear that the bank bought any interest in the computer program. First National Bank of South Carolina v. U. S., 4 Cir., 1977, 558 F.2d 721, did not involve the purchase of a computer program. Other cases cited present different problems, and are not persuasive.
I would reverse and remand as to the cost of the computer program for a determination of the appropriate rate of amortization under Revenue Procedure 69-21.

. The Banks’ witness Muir testified in substance that the program was used until 1971 or 1972, when the Banks and two other banks got together to purchase a new and better program for $200,000. In their brief, the Banks “vigorously assert that [if the program is a capital asset, its] useful life . . . was exhausted after five taxable years.” (p. 34)