Court Opinion

ID: 4474128
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:46.513771+00
Date Added: 2024-06-11T14:53:51.257337
License: Public Domain

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 pages 380-381 of the majority’s findings of fact: [[Image here]] [[Image here]] 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.1 With respect to the salaries and “overhead” expenses found to be related to ACC’s credit analysis activities ($267,832 for 1993 and $339,211 for 1994),2 the majority makes the following finding of fact: In 1993 and 1994, ACC paid installment contracts expenditures totaling $267,832 and $339,211, 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.6 None of these expenditures included any postacquisition or servicing expenses. * * * From the majority’s findings of fact I conclude: (1) ACC’s business operation consisted of the acquisition of installment contracts and the postacquisition servicing of those contracts; and (2) of the total expenses for salaries and overhead for 1993 and 1994, $267,832 for 1993 and $339,211 for 1994 were related to credit analysis activities and were not related to any other business operations of ACC.3 To me, the logical conclusion is that both salaries and overhead expenses, totaling $267,832 for 1993 and $339,211 for 1994, 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, 76 percent of salaries and 68 percent of “overhead” expenses for 1993 were related to ACC’s credit analysis activities. For 1994, the percentages were 65 percent and 71 percent, respectively. The majority finds that “Each 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. p. 391. 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. 392. 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.4 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. 392. Again, with the possible exception of rent,5 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 to printing, telephone, and computer costs. There is nothing in the majority’s findings to indicate that these were fixed costs.6 Approximately 75 percent7 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 100 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 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.” Majority op. p. 392. 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 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.   We use the term “credit analysis activities” to refer to ACC’s credit review services and its funding services (i.e., ACC’s issuance of the checks to dealers in consideration for the installment contracts). [Majority op. p. 379; emphasis added.]    The majority finds: “Its sole business operation is (1) the acquisition of installment contracts from automobile dealers * * * and (2) the servicing of those contracts.” Majority op. p. 376.    The parties agree with the allocations in the above table.    The majority finds that “None of these expenditures included any postacquisition or servicing expenses.” Majority op. p. 379. ACC’s only business operation was the acquiring of installment contracts and the postacquisition servicing of those installment contracts.    It should be noted in this regard that petitioners bear “the burden of clearly showing the right to the claimed deduction”. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).    The majority finds that ACC had a 5-year lease that began in October 1992. There is no discussion of the specific terms of the lease other than the amount of monthly rent.    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. p. 392.    For 1993, 75 percent of printing and telephone costs were attributable to ACC’s credit analysis activities. For 1994, 75 percent of printing costs and 60 percent of telephone costs were attributable to ACC’s credit analysis activities.