Academic journal article Journal of Accountancy

Court Denies Deductions for "Routine" Costs

Academic journal article Journal of Accountancy

Court Denies Deductions for "Routine" Costs

Article excerpt

In the ongoing dispute over the distinction between costs that are currently deductible and those that must be capitalized, the Tax Court dealt two blows to taxpayers who seek to deduct what they consider to be their routine costs of doing business. The court required a bank to capitalize loan origination costs (PNC Bancorp, Inc. v. Commissioner, 110 TC no. 27 [June 8, 1998]), and it required the parent company of the Fidelity family of mutual funds to capitalize expenses incurred in launching new funds (FMR Corp. and Subsidiaries v. Commissioner, 110 TC no. 30 [June 18, 1998]).

In the PNC case, the taxpayer and the IRS agreed that the approved loans were "separate and distinct assets" The Supreme Court's holding in Indopco v. United States (503 U.S. 79 [1992]) suggests expenses incurred in creating these assets should be capitalized. The taxpayer had argued that loan origination costs should be deductible because they are recurring ordinary and necessary business expenses which are integral to a bank's day-to-day business. The court rejected this argument, finding no exemption for recurring ordinary expenditures from the general rule that the expenses of acquiring or creating a capital asset must be capitalized. In other words, capitalization trumps expensing.

The court also adopted the IRS's view that loan origination costs should be amortized over the expected lives of the loans, and this view was consistent with financial accounting treatment used by the taxpayer, in accordance with FASB Statement no. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. …

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