Commissioner of Internal Revenue v. Lincoln Savings & Loan Assn

PETITIONER: Commissioner of Internal Revenue
RESPONDENT: Lincoln Savings & Loan Assn
LOCATION: Charlotte-Mecklenburg School District

DOCKET NO.: 544
DECIDED BY: Burger Court (1970-1971)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 403 US 345 (1971)
ARGUED: Feb 23, 1971
DECIDED: Jun 14, 1971

Facts of the case

Question

Media for Commissioner of Internal Revenue v. Lincoln Savings & Loan Assn

Audio Transcription for Oral Argument - February 23, 1971 in Commissioner of Internal Revenue v. Lincoln Savings & Loan Assn

Warren E. Burger:

We’ll hear arguments next in number 544 Commissioner of Internal Revenue against Lincoln Savings and Loan Association.

Mr. Zinn, you may proceed whenever you're ready.

Matthew J. Zinn:

Mr. Chief Justice and may it please the Court.

This federal income tax case is here on a writ of certiorari to the Court of Appeals for the Ninth Circuit.

It raises a question that affects the tax liability of every savings and loan association that insures its depositors’ accounts with the Federal Savings and Loan Insurance Corporation, respondent is such an association.

During 1963, the only taxable year in issue, it paid a regular annual insurance premium for depositors insurance to the Insurance Corporation, amounting to approximately $135,000.00.

This payment was required by Section 404 (b) of the National Housing Act and the Commissioner allowed it as an ordinary and necessary business expense deduction under Section 162 (a) of the Internal Revenue Code.

The treatment of this payment is not in dispute.

Also during 1963, respondent contributed an additional $882,000.00 to the Insurance Corporation.

This contribution was required by Section 404 (d) of the National Housing Act and it is described in the statute as being in the nature of a prepayment with respect to future premiums.

The question presented here is whether the $882,000.00 is an ordinary and necessary business expense of a 1963, on the ground that it is simply an additional cost of current insurance as respondent claims or whether as the Commissioner urges, the $882,000.00 is a capital expenditure, which is deductible in future years, if actually used to pay respondents’ regular annual insurance premiums or to meet insurance losses of the Insurance Corporation.

In other words, the basic question here is not whether a deduction should be allowed, but when a deduction should be allowed.

Potter Stewart:

Does is it have to be one or the other?

Matthew J. Zinn:

No, Mr. Justice.

Potter Stewart:

Either an ordinary and necessary business expense or a capital expenditure?

Because frankly, I have trouble seeing how it fit into the statutory definition of either.

Matthew J. Zinn:

Mr. Justice, let me deal first with the capital expenditure --

Potter Stewart:

Then, we don’t have to decide this case, but I wondered if those are the only two possible facts.

Matthew J. Zinn:

The term cap -- let me start with capital expenditure.

The term capital expenditure appears and is defined in Section 263 of the Code.

Potter Stewart:

And it doesn’t fit that definition.

Matthew J. Zinn:

Right, but that issue has been dealt with explicitly by Mr. Justice Blackmun, when he sat on the Eighth Circuit in a case called General Bancshares Corporation, which is not cited in either of the briefs, but was cited below and which is reported at 326 F.2d.

There, Mr. Justice Blackmun speaking for unanimous Eighth Circuit, in the case in which this Court subsequently denied certiorari, said this about Section 263, and I quote, “Section 263, with its denial of deductibility for specified capital expenditures, and Section 162 (a), with its grant of deductibility for ordinary and necessary business expenses, are not of course, mutually exclusive.

Neither are they together all inclusive.”

Section 263 obviously is not in itself an exclusive list of nondeductible capital expenditures.

Apart from Mr. Justice Blackmun’s comments in that case, this Court only last term in two unanimous decisions in the Woodward and Hilton cases held that appraisal expenses incurred in connection with the evaluation of dissenting shareholders’ stock were nondeductible capital expenditures, but they too are not new buildings or permanent improvement or betterments.

And the Court did this of course, without mention of the fact that Section 263 has only a limited definition.

So, I think it's fair to say, Mr. Justice that this Court has innumerable occasions done that in --

At least, did once?

Matthew J. Zinn:

No, on innumerable occasions, as early as 1938 in Helvering and Winmill, it held that brokerage expenses in the acquisition of capital stock are capital expenditures to be added to the cost of the stock.