Court Opinion

ID: 9469511
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:42:24.399669+00
Date Added: 2024-06-11T17:41:25.492358
License: Public Domain

MURNAGHAN, Circuit Judge,
dissenting:
Neither reargument by counsel, nor eloquence of Judge Widener writing for the en banc majority convinces me that the panel opinion1 coming to the opposite conclusion was erroneous.
First, I find altogether unpersuasive the determination that an established line of four circuit decisions2 must be rejected on the basis of a non-specific obiter statement in Commissioner v. Lincoln Savings & Loan Association, 403 U.S. 345, 91 S.Ct. 1893, 29 L.Ed.2d 519 (1971).3 The holding in Lincoln Savings was that the expenditure was capital in nature and so “not an expense, let alone an ordinary expense, deductible under § 162(a).”4 The aside that “the presence of an ensuing benefit that may have some future aspect is not controlling; many expenses concededly deductible have prospective benefit beyond the taxable year”5 says nothing about what expenditures having some enduring aspects are, and what ones are not, deductible. Obviously, the amounts fought over in Richmond Television, Darlington-Hartsville and Georator were not “concededly deductible.”
In my majority panel opinion I pointed out simply that it was not a case for decision on an “all or nothing” basis, but that rather individual attention had to be paid to the several distinct items, to determine whether they were ordinary and necessary, and so deductible, expenses, or whether they should be capitalized. Life in excess *295of one year remains a prominent, indeed a predominant, characteristic of a capital item, even though something other than duration of existence may prove controlling in some circumstances — not specified in Lincoln Savings, and manifestly the exceptions rather than the rule.
Second, I view somewhat wryly the controlling weight accorded by the en banc majority to justification language set forth in the legislative history of the new Internal Revenue Code Section 195. See S.Rep. No.1036, 96th Cong., 2d Sess. 11, reprinted in [1980] U.S.Code Cong. & Ad.News 7293, 7301. The section was designed to benefit taxpayers by permitting them to elect to amortize, over a period no shorter than five years, expenditures which otherwise, insofar as the characteristics with which we are here concerned matter, would be recognized as deductible. The nature of the expenditures — planning costs — were like those with which we are here confronted, except that they involved start-up expenditures for new, rather than for existing businesses.
The nondeductibility perceived as requiring amelioration when IRC § 195 was passed arose not from the length of life of an expenditure, but from the non-business nature of expenditures paid or incurred before a new business began operation. Those expenditures were nondeductible whether their life spans were ten days or ten years. S.Rep.No. 1036, supra, at 7300.
Insofar as IRC § 195 is concerned, it is relevant to observe, at the outset, that amortization is a way, for tax purposes, to deal with capital items, not customarily a way to deal with items of ordinary and necessary expense. The statute thus focuses on broadening of the category of capital expenditure, not on an expansion of the deductible category. My panel opinion called for determinations to be made as to whether expenditures not qualifying for immediate 100% deduction should be amortizable, and, if so, over what duration of time. Such items not qualifying for 100% deducti-bility status under law extant when IRC § 195 was adopted were explicitly not the subject of, or affected by, IRC § 195. Expenditures amortizable at the taxpayer’s election had to be such as “if paid or incurred in connection with the expansion of an existing trade or business ... would be allowable as a deduction for the taxable year in which paid or incurred.” 26 U.S.C. § 195(b)(2) (emphasis supplied).
It requires a giant, and unjustified leap, to derive from the justification set out in the legislative history any support for the proposition that all investigatory costs are automatically deductible, irrespective of length of life. Eligible expenses under IRC § 195 include “investigatory costs incurred in reviewing a prospective business prior to reaching a final decision to acquire or to enter that business.” S.Rep.No.1036, supra, at 7301. But that is only one of the qualifications. In addition, to qualify as an eligible expense, an expenditure “must be one which would be allowable as a deduction for the taxable year in which it is paid or incurred if it were paid or incurred in connection with the expansion of an existing trade or business.” Id.
Thus, the legislative history does not purport to say that all investigatory costs are deductible. To the contrary, it explicitly limits its application solely to those investigatory costs which are deductible in nature. The implication is inescapable that there are other investigatory costs which are not deductible, i.e. are to be capitalized. Consequently, we are brought straight back to the question we started with: In the case of each expenditure, was it deductible, or capi-talizable? Hence, I submit that the authority relied on is illusory and not supportive of the conclusion reached by the en banc majority.
To sum it all up, we have here a case where an opportunity to resort to the golden mean is ignored. Start-up expenditures and other expenditures like start-up expenditures except that they concern existing businesses often have multi-year lives or applications. In such cases they should not be immediately fully deductible in the year paid or incurred as ordinary and necessary expenses. Rather they should be capitalized and prorated. That is to say that *296they should, over time, be deductible for income tax purposes, but not all at once, in one fell swoop.
Apparently Congress, in recently enacting IRC § 195 first decided that complete denial of any deductibility was unfair and unwise and that existing law to that effect should be changed. Second, Congress evidently appreciated that, as a matter of economic fact, a new enterprise often must operate, at the outset, at a loss, perhaps over a period of several years. Congress presumably appreciated that a new business could well see the losses altogether evaporate as deductions, because there had been no profit against which to apply them. Such a state of affairs would be inconsistent with a congressional desire to encourage formation of new businesses and the probable resulting increase in employment. So an election to amortize was extended to taxpayers to permit them to take some portions of early year expenditures as deductions in later, more probably profitable, years.
Congress by enacting IRC § 195 thus only emphasized the nature as capital, rather than as ordinary and necessary expanses, of the exploratory expenditures category. The congressional legislation, therefore, is fully consistent with, and strongly supports the result reached in my panel majority opinion. There is simply no justification for reading the legislative history as making more deductible than theretofore exploratory expenditures for existing businesses. To the extent such expenditures had been recognized as having the character of ordinary and necessary expenses (primarily short life span) they should remain deductible, and their counterparts among expenditures for new businesses, by IRC § 195, are made, at the taxpayer’s election, amortizable. To the extent expenditures for existing businesses have characteristics of longer life, they will remain capitalizable. That is all that IRC § 195 and its justification language say. That is all that they should be deemed to mean.
Otherwise, a result constituting a substantial tax windfall — the immediate de-ductibility of all expenditures of a specific class,, however capital in nature they may be, will result. Taxes are eminently practical, of course. On the basis of that slogan, we uphold enactments whose fairness seems suspect to us, if we are sure Congress meant the apparent unfairness. See Struthers v. United States, 442 F.Supp. 562, 564 (D.Minn.1977); Commissioner of Internal Revenue v. Caulkins, 144 F.2d 482, 484 (6th Cir. 1944). Here, however, the legislative enactment of IRC § 195 does not directly relate to the tax status of expenditures for existing businesses at all. The legislative history, properly read, in no way compels the erection of a large, unreasonable and inherently unfair tax preference. Other taxpayers must capitalize and not deduct all at once expenditures having extended lives or applications. The taxpayer here, and others, preeminently banks, who will benefit from the decision of the en banc majority, can by no means merit description as “economically deprived.” The benefit heaped upon them further contributes to the deserved description of our income tax system as a disgrace.
I dissent.

. NCNB Corporation v. United States, 651 F.2d 943 (4th Cir. 1981).

. Richmond Television Corp. v. United States, 345 F.2d 901 (4th Cir. 1965), vacated on other grounds, 382 U.S. 68, 86 S.Ct. 233, 15 L.Ed.2d 143 (1965), original holding on this issue reaffirmed, 354 F.2d 410 (4th Cir. 1965); Darlington-Hartsville Coca-Cola Bottling Co. v. United States, 393 F.2d 494 (4th Cir. 1968), cert. denied, 393 U.S. 962, 89 S.Ct. 402, 21 L.Ed.2d 376 (1968); Georator Corp. v. United States, 485 F.2d 283 (4th Cir. 1973), cert. denied, 417 U.S. 945, 94 S.Ct. 3069, 41 L.Ed.2d 665 (1974).

. The decision in one of the three cases, Georator Corp., was handed down well after the opinion in Lincoln Savings was promulgated. The distinguished panel in Georator Corp., consisting of Judge (now Chief Judge) Winter and Judges Butzner and Field, were fully aware of Lincoln Savings, yet perceived no consequence such as Judge Widener now purports to derive from that case. At pages 284-85 of 485 F.2d the following appears:
Our analysis of this question begins with the principle of taxation reflected in Section 162(a) of the Internal Revenue Code that an expenditure securing benefits which are realized and exhausted in the same tax period is fully deductible in that tax period. Conversely, an expenditure securing benefits beyond the taxable year must be capitalized. Dar-lington-Hartsville Coca-Cola Bot. Co. v. United States, 393 F.2d 494 (4 Cir. 1968); Richmond Television Corporation v. United States, 345 F.2d 901 (4 Cir. 1965).
... It is also clear that Section 263 of the Code, 26 U.S.C. § 263, which disallows deductions for expenditures which increase the value of any property, does not provide a complete or exhaustive list of nondeductible expenditures. Commissioner v. Lincoln Savings & Loan Assn., 403 U.S. 345, 358, 91 S.Ct. 1893, 29 L.Ed.2d 519 (1971).

. 403 U.S. at 354, 91 S.Ct. at 1899.

. Id.