¶1Petitioners petitioned the Court to redetermine deficiencies attributable primarily to adjustments which respondent made to their income from a subchapter S corporation, Automotive Credit Corp. (ACC). Respondent determined a $1,202 deficiency in the 1993 Federal income tax of David J. and Mary K. Lychuk. Respondent determined $2,149 and $11,461 deficiencies in the 1993 and 1994 Federal income taxes, respectively, of Edward C. and Virginia M. Blasius. Respondent determined $23,683 and $89,609 deficiencies in the 1993 and 1994 Federal income taxes, respectively, of James E. and Mary Jo Blasius.
¶2Following concessions, we must decide whether ACC must capitalize certain expenditures made during 1993 and 1994. The expenditures were generally ACC’s payment of (1) salaries, benefits, and overhead (printing, telephone, computer, rent, and utilities) relating to its acquisition of retail installment contracts (installment contracts) in the ordinary course of its business (installment contracts expenditures) and (2) professional fees and commissions relating to a private placement offering of notes that ACC accomplished in 1993 and a second offering that ACC planned in 1993 and abandoned in 1994 (collectively, ppm expenditures). We hold that ACC must capitalize both groups of expenditures to the extent described herein. We must also decide whether ACC may deduct the portion of the capitalized installment contracts expenditures relating to installment contracts which it never acquired. We hold it may deduct that portion under section 165(a).
¶3FINDINGS OF FACT
¶4The parties have stipulated many of the facts. We incorporate herein the parties’ stipulation of facts and the exhibits submitted therewith. We find the stipulated facts accordingly. Each petitioning couple is a husband and wife who resided in Michigan when their petition was filed. Each petitioning couple filed a joint Federal income tax return for the relevant years.
¶5ACC is a cash method taxpayer that was incorporated in 1992 and elected shortly thereafter to be taxed as an S corporation for Federal income tax purposes. It was formed to provide alternate financing for purchasers of used automobiles or light trucks (collectively, automobiles) who have marginal credit. Its sole business operation is (1) the acquisition of installment contracts from automobile dealers (dealers) who have sold automobiles to high credit risk individuals and (2) the servicing of those contracts. Its primary business activities are credit investigation, credit evaluation, documentation, and the monitoring of collections on installment contracts. Its business is conducted out of space that it rents in Bingham Farms, Michigan, pursuant to a 5-year lease that began on October 22, 1992. Under the lease, ACC pays monthly rent of $3,137.50 during the first 24 months and $3,250 afterwards.
¶6ACC’s shareholders and their respective ownership interests are as follows:
1993 1994
James and Mary Jo Blasius 77% 86%
Edward and Virginia Blasius 13 14
Donald Terns 5 -0-
David Lychuk 5 -0-
¶7None of the shareholders, except James Blasius, works in ACC’s daily business. The other male shareholders serve as the directors of ACC’s board.
¶8ACC’s key management personnel includes its president, James Blasius, its vice president and chief financial officer, Steven Balan, its credit manager, Cass Budzynowski, and its credit investigator, Hope McGee. During the relevant years, each of these individuals performed services in connection with ACC’s acquisition of installment contracts. James Blasius managed ACC’s overall operation and handled personally all contracts with dealers. Steven Balan supervised and oversaw ACC’s day-to-day management and its financial and general office management. Cass Budzynowski analyzed credit applications and supervised credit investigations. Hope McGee analyzed credit reports and verified all information provided by credit applicants, e.g., by directly contacting employers, banks, and creditors.
¶9ACC pays each of its key management personnel a base salary. Each of these individuals is also entitled to receive an annual bonus at the sole discretion of ACC’s board of directors. The bonuses are paid from a “bonus pool” established by ACC and in which ACC places funds in an amount up to 16.25 percent of its pretax net profits. Except in the case of James Blasius, no restrictions exist as to the amount of compensation that ACC may pay to its officers or key employees. James Blasius’ bonus is limited to 55 percent of the pool.
¶10Under the terms of each installment contract, an individual buys an automobile from a dealer at a set price to be paid (with interest) in monthly installments. The average rate of interest charged to the buyers is approximately 22 percent. The length of repayment ranges from 12 to 36 months.
¶11ACC and the dealers have an independent agreement under which the dealers sell some of the installment contracts (and the right to the corresponding payments of principal and interest) to ACC at a price equal to 65 percent of each contract’s principal amount (i.e., at a 35-percent discount). As of April 30, 1993, ACC acquired the installment contracts from 13 dealers, 3 of which sold to ACC 69.4 percent of the installment contracts which ACC acquired. ACC is not obligated to acquire all of the installment contracts offered to it by the dealers but generally must decide whether it will acquire a particular installment contract before the related automobile sale is finalized. ACC rests its decision as to the acquisition of an installment contract on its analysis of the buyer’s creditworthiness. That analysis generally includes ACC’s review of the buyer’s credit application, ACC’s obtaining one or more credit reports on the buyer, ACC’s verifying the buyer’s job status, salary, and residence, and ACC’s evaluation of various aspects of the buyer’s credit history such as payment history and financial stability. If ACC acquires an installment contract, the dealer generally assigns its rights under that contract to ACC as part of the automobile sale, and ACC pays the dealer the 65-percent amount upon ACC’s receipt of all of the documents relating to the installment contract. The automobile buyer pays ACC all amounts due under the installment contract, and the automobile buyer collateralizes his or her obligation to make those payments with the purchased automobile.
¶12ACC’s acquisition of installment contracts generally followed an established procedure. First, ACC would contact dealers and advise them that it was in the business of acquiring installment contracts on an ongoing basis. Second, ACC would enter into the independent agreement with each dealer that decided to sell its installment contracts to ACC, and the dealer would provide ACC with its seller’s license. Third, the dealer, when faced with a prospective automobile buyer who did not qualify for traditional financing, would alert the buyer to ACC’s financing business. Fourth, a buyer who wanted to finance the purchase with ACC would complete a detailed credit application that the dealer would transmit to ACC by facsimile. Fifth, ACC would record the application in its daily log and perform its credit review process. Sixth, to the extent that ACC decided favorably on a credit application, and the buyer accepted ACC’s financing arrangement,
¶13ACC’s credit review process generally included six steps, all of which ACC could perform within 3 to 4 hours. First, ACC would access electronically credit bureau reports on the applicant and assign points to certain items shown on the reports. Second, ACC would measure the total points either against preestablished levels for approval or denial or against an arbitrary level of approval or denial that was ascertained intuitively. Third, ACC would analyze through debt-to-income and loan-to-value ratios an applicant’s ability to pay the debt, taking into account his or her disposable income and income per dependent. ACC would sometimes perform in connection with this step a budgetary analysis to suggest changes to the loan terms (e.g., by decreasing the monthly payment over a longer timeframe) so as to meet preestablished target ratios. Fourth, ACC would conditionally approve or deny an applicant on the basis of all of the information that it had already accumulated. Fifth, as to applications that received a conditional approval, ACC would perform an additional review as to the applicant by verifying (mainly by telephone) his or her employment, residency, and personal references, and by interviewing the applicant by telephone. Sixth, as to the applicants who passed this additional level of review, ACC would communicate to the dealer ACC’s approval of the applicant. In some instances, ACC would inform the dealer that it was unwilling to finance the purchase under the terms offered to it but would finance a lesser amount of principal and/or would finance the purchase over a shorter repayment term.
¶14In 1993 and 1994, ACC paid installment contracts expenditures totaling $267,832 and $339,211, respectively. These expenditures, 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.
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¶17ACC deducted the installment contracts expenditures of $267,832 on its 1993 Federal income tax return, and it deducted $288,911 of the $339,211 in installment contracts expenditures on its 1994 Federal income tax return. ACC now claims that it was entitled to deduct for 1994 the remaining $50,300 of installment contracts expenditures ($339,211 - $288,911). As to the respective years, ACC deducted officers’ compensation of $158,099 and $217,036 and salaries/wages of $126,464 and $194,306. The portion of the officers’ compensation, salaries/wages, and overhead which was deducted but not in issue is attributable to ACC’s servicing of the installment contracts.
¶18For financial accounting purposes, ACC separately listed the installment contracts as assets on its 1993 and 1994 balance sheets. In addition, ACC initially deducted the installment contracts expenditures of $267,832 for 1993 but amended that year’s financial statements to amortize the expenditures over the expected life of the related installment contracts. ACC’s independent auditors required the amendment and related amortization in order to comply with Statement of Financial Accounting Standards No. 91 (SFAS 91), Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.
¶19ACC performed its credit review services as to approximately 1,824 credit applications in 1993 and approximately 2,158 credit applications in 1994. As to those applications, ACC acquired 693 installment contracts in 1993 and 820 installment contracts in 1994; in other words, ACC acquired in each year approximately 38 percent of the installment contracts which were offered to it. The original terms of the 1993 installment contracts averaged 23.89 months, and their actual duration averaged 17.5 months. The original terms of the 1994 installment contracts averaged 29 months, and their actual duration averaged 19.5 months. Of the 693 installment contracts acquired in 1993, 182 had an actual duration of 12 months or less. Of the 820 installment contracts acquired in 1994, 217 had an actual duration of 12 months or less.
¶20ACC issued a private placement memorandum (ppm) on April 30, 1993, offering up to $2.4 million of its subordinated asset backed notes (notes). ACC intended through the offering to raise funds for its current operation, including the acquisition of installment contracts which would be (and were) pledged to secure ACC’s obligations under the notes. The notes matured in 36 months but could be redeemed by the noteholders at 12 or 24 months. The notes bore interest at 12 percent during the first year, 13 percent during the second year, and 14 percent during the final year. The notes were purchased by approximately 50 investors, and approximately 5 of these investors redeemed their notes before maturity.
¶21East-West Capital Corp. (East-West) sold the notes on ACC’s behalf and was paid a commission equal to 4 percent of the principal amount of the notes sold, plus 1 percent of the principal outstanding at 12 months, plus 1 percent of the principal outstanding at 24 months. Included in East-West’s commission was a 1-percent due diligence fee.
¶22ACC deducted $29,647, $38,239, and $33,783 of offering expenses, commissions, and professional fees, respectively, for 1993. ACC deducted $36,251, $74,361, and $110,432 of offering expenses, commissions, and professional fees, respectively, for 1994. The deductions for 1993 and 1994 included costs attributable to a second private placement offering that was planned in 1993 and abandoned in 1994.
¶23Respondent audited ACC’s 1993 and 1994 taxable years. As to 1993, respondent disallowed $198,626 of installment contracts expenditures deducted by ACC, determining that these expenses were capital expenditures relating to assets having a life exceeding 1 year.
¶24OPINION
¶25We must decide whether ACC may expense any of the disputed costs or must capitalize them as expenditures to be deducted in later years. Income tax deductions are a matter of legislative grace, and petitioners bear the burden of proving ACC’s entitlement to the claimed deductions. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593 (1943). For Federal income tax purposes, the principal difference between classifying a payment as a deductible expense or a capital expenditure concerns the timing of the taxpayer’s recovery of the cost. As the Supreme Court has observed:
The primary effect of characterizing a payment as either a business expense or a capital expenditure concerns the timing of the taxpayer’s cost recovery: While business expenses are currently deductible, a capital expenditure usually is amortized and depreciated over the life of the relevant asset, or, where no specific asset or useful life can be ascertained, is deducted upon dissolution of the enterprise. … Through provisions such as these, the Code endeavors to match expenses with the revenues of the taxable period to which they are properly attributable, thereby resulting in a more accurate calculation of net income for tax purposes. … [INDOPCO, Inc. v. Commissioner, supra at 83-84.]
¶26Our inquiry begins with the installment contracts expenditures. Respondent determined and maintains that ACC must capitalize these expenditures to the extent stated herein. Respondent argues primarily that these expenditures are capital expenditures because they were related to ACC’s acquisition of separate and distinct assets; i.e., the installment contracts. Respondent argues secondly that ACC’s payment of the installment contracts expenditures provided it with significant future benefits in that it was able to acquire the installment contracts which produced income for it in later years. Petitioners maintain that the installment contracts expenditures are currently deductible. Petitioners agree that the expenditures are related to the acquisition of the installment contracts but argue primarily that the expenditures are deductible as routine, recurring business expenses arising primarily from an employment relationship rather than from a capital transaction. Petitioners argue secondly that the installment contracts expenditures are deductible because they are not described in either section 263(a) or the related regulations.
¶27We agree with respondent in part and with petitioners in part. We agree with respondent that ACC must capitalize the installment contracts expenditures to the extent of the salaries and benefits.
¶28Our analysis begins with the relevant statutory text. We apply that text in accordance with the related Treasury income tax regulations, the validity of which has not been challenged by either party, and the interpretation of that text and those regulations primarily by the U.S. Supreme Court. Section 162(a) provides that “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. The Treasury regulations specify that ordinary and necessary business expenses include “the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business”, sec. 1.162-l(a), Income Tax Regs., such as “a reasonable allowance for salaries or other compensation for personal services actually rendered”, sec. 1.162-7(a), Income Tax Regs. The Supreme Court has explained that a cash method taxpayer such as ACC may deduct an expenditure under section 162(a) if the expenditure is: (1) An expense, (2) an ordinary expense, (3) a necessary expense, (4) paid during the taxable year, and (5) made to carry on a trade or business. See Commissioner v. Lincoln Sav. & Loan Association, supra at 352-353. The Supreme Court has stated that a necessary expense is an expense that is appropriate or helpful to the development of the taxpayer’s business, see Commissioner v. Tellier, 383 U.S. 687, 689 (1966); Welch v. Helvering, 290 U.S. 111, 113-115 (1933), and that an ordinary expense is an expense that is “normal, usual, or customary” in the type of business involved, Deputy v. du Pont, 308 U.S. 488, 495-496 (1940); see also Welch v. Helvering, supra at 113-115. The Supreme Court has observed that the need for an expenditure to be ordinary serves, in part, to “clarify the distinction, often difficult, between those expenses that are currently deductible and those that are in the nature of capital expenditures, which, if deductible at all, must be amortized over the useful life of the asset.” Commissioner v. Tellier, supra at 689-690.
¶29The fact that a payment falls within a literal reading of section 162(a) does not necessarily mean that the payment is deductible. Sections 161 and 261, for example, except certain payments from the current deductibility provision of section 162(a). See INDOPCO, Inc. v. Commissioner, 503 U.S. at 84. Section 161 provides that “there shall be allowed as deductions the items specified in … [section 162(a)], subject to the exceptions provided in … sec. 261 and following, relating to items not deductible”. Section 261 provides that “no deduction shall in any case be allowed in respect of the items specified in this part”; i.e., part IX (Items Not Deductible).
¶30Section 263 is included in part IX. Section 263(a) provides, in language that dates back to the Revenue Act of 1864, sec. 117, 13 Stat. 282, see United States v. Hill, 506 U.S. 546, 556 n.6 (1993) (“section 263(a)(1) has one of the longest lineages of any provision in the Internal Revenue Code.”), that “No deduction shall be allowed for — (1) Any amount paid out for new buildings or for permanent improvements or better-ments made to increase the value of any property or estate.” The Treasury regulations interpret this text by listing the following item as an example of a capital expenditure: “The cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year.” Sec. 1.263(a)-2(a), Income Tax Regs.
¶31The determination of whether an expenditure is deductible under section 162(a) or must be capitalized under section 263(a) is not always a straightforward or mechanical process. “[E]ach case ‘turns on its special facts’ ”, and “the cases sometimes appear difficult to harmonize.” INDOPCO, Inc. v. Commissioner, supra at 86 (quoting Deputy v. du Pont, supra at 496).
¶32In accordance with the current law on capitalization, an expenditure may be deductible in one setting but capitalizable in a different setting. For example, in Commissioner v. Idaho Power Co., 418 U.S. at 13, the Supreme Court observed the following as to wages paid by a taxpayer in its trade or business:
Of course, reasonable wages paid in the carrying on of a trade or business qualify as a deduction from gross income. … But when wages are paid in connection with the construction or acquisition of a capital asset, they must be capitalized and are then entitled to be amortized over the life of the capital asset so acquired. …
¶33Similarly, in Ellis Banking Corp. v. Commissioner, 688 F.2d 1376, 1379 (11th Cir. 1982), affg. in part and remanding in part T.C. Memo. 1981-123, the Court of Appeals for the Eleventh Circuit observed as to business expenses in general:
an expenditure that would ordinarily be a deductible expense must nonetheless be capitalized if it is incurred in connection with the acquisition of a capital asset.6 …
¶34Accord American Stores Co. & Subs. v. Commissioner, 114 T.C. 458 (2000) (taxpayer required to capitalize legal fees incurred to defend against State antitrust suit arising out of, and connected to, prior stock acquisition); cf. Stevens v. Commissioner, 46 T.C. 492, 497 (1966) (otherwise deductible business expenses are capital expenditures when paid to acquire a capital asset), affd. 388 F.2d 298 (6th Cir. 1968); X-Pando Corp. v. Commissioner, 7 T.C. 48, 51-53 (1946) (salary, rent, advertising, and traveling expenses which would ordinarily be deductible may be a capital expenditure if made to cultivate or develop business, the benefits of which will be realized in future years).
¶35The just-quoted observations of the Supreme Court and the Court of Appeals for the Eleventh Circuit in the Idaho Power Co. and Ellis Banking Corp. cases, respectively, reflect a longstanding, firmly established body of law under which expenditures incurred “in connection with” the acquisition of a capital asset are considered capital expenditures includable in the acquired asset’s tax basis.
¶36Capitalizable expenditures are not limited to the actual price that the buyer pays to the seller for the asset but include, for example, the payment of legal, brokerage, accounting, appraisal and other “ancillary” expenses related to the asset’s acquisition. Woodward v. Commissioner, supra at 576-577; see United States v. Hilton Hotels Corp., 397 U.S. 580 (1970); see also Ellis Banking Corp. v. Commissioner, supra at 1379. Capitalizable expenditures also include compensation paid for services performed in connection with an asset’s acquisition, including “a reasonable proportion of the wages and salaries of employees who spend some of their working hours laboring on the acquisition”. Briarcliff Candy Corp. v. Commissioner, 475 F.2d 775, 781 (2d Cir. 1973), revg. on other grounds and remanding T.C. Memo. 1972-43; see Commissioner v. Idaho Power Co., supra at 13; see also Cagle v. Commissioner, 539 F.2d 409, 416 (5th Cir. 1976), affg. 63 T.C. 86 (1974); Perlmutter v. Commissioner, 44 T.C. 382, 404 (1965), affd. 373 F.2d 45 (10th Cir. 1967); cf. Strouth v. Commissioner, T.C. Memo. 1987-552 (costs of securing potential leases, including checking the lessee’s credit, reviewing the lease application, and drafting the lease documents are capital expenditures).
¶37When the Supreme Court was faced with the question as to the capitalization of litigation costs incurred appraising the stock of minority shareholders in connection with the majority shareholder’s acquisition of that stock, the Court held that the central inquiry was whether the expenditure originated in “the process of acquisition”. Woodward v. Commissioner, supra at 577. In other words, the Court set its focus on the. directness of the costs’ relationship to the acquisition and adopted a test under which costs originating in the process of acquiring a capital asset are considered capital expenditures.
¶38We believe that the application of the “process of acquisition” test is appropriate here.
¶39We apply the process of acquisition test to the facts at hand. The salaries and benefits are a capital expenditure if the underlying services were performed in the acquisition process, or, in other words, were directly related to ACC’s anticipated acquisition of installment contracts. See Woodward v. Commissioner, 397 U.S. 572 (1970); Honodel v. Commissioner, supra. We conclude that the underlying services were performed in that process; i.e., the services were directly related to ACC’s anticipated acquisition of installment contracts. Each of the employees spent a significant portion of his or her time working on credit analysis activities, which was the first (and, in ACC’s business, an indispensable) step in ACC’s acquisition process, and, but for ACC’s anticipated acquisition of installment contracts, ACC would not have incurred the salaries and benefits attributable to those activities.
¶40As to the overhead expenses, we conclude and hold differently. Those 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. We are unable to find that such was the case. 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. The items of rent and utilities, for example, 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. Nor did the printing expense have any such meaningful relation. In fact, ACC’s printing costs were less in 1994 than in 1993, even though ACC analyzed 18.3 percent more credit applications (and acquired 18.3 percent more installment contracts) in 1994 than in 1993. Although ACC’s telephone and computer costs did increase in 1994 from the prior year, we are unable to discern from the record any direct relationship between that increase and the increase from the prior year in credit applications analyzed and/or installment contracts acquired so as to require capitalization of those costs.
¶41We recognize that the Court in Perlmutter v. Commissioner, 44 T.C. at 403-405, required the taxpayer there to capitalize a portion of his utilities as sufficiently connected to a capital transaction. In that regard, the Perlmutter case is distinguishable from the case at hand in that the Perlmutter case preceded Woodward v. Commissioner, supra, and the related process of acquisition test. We also distinguish the printing costs at hand from the printing costs in A.E. Staley Manufacturing Co. & Subs. v. Commissioner, 119 F.3d at 492-493, the latter of which we and the Court of Appeals for the Seventh Circuit considered as associated with a capital transaction. The printing costs there, unlike those here, were required to be incurred by the taxpayer so as to facilitate communication with shareholders and others in connection with the transaction. See A.E. Staley Manufacturing Co. & Subs. v. Commissioner, 105 T.C. at 180, 197.
¶42Respondent argues that ACC’s payment of the overhead expenses produced for it a significant future benefit requiring capitalization under INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992). We disagree. On the basis of our discussion above, we conclude that any future benefit that ACC realized from these expenses was incidental to its payment of them so as not to require capitalization on that theory. See id. at 87-88.
¶43Petitioners argue that the salaries and benefits are ipso facto deductible because they are the routine, recurring expenses of ACC’s business.
¶44We disagree with petitioners’ argument that section 162(a) allows ACC to deduct the expenses that recur in the ordinary course of its business merely by virtue of the fact that the expenses are everyday and/or routine in nature. In order for a payment to be deductible under section 162(a), the underlying expense must not only be “normal, usual, or customary” in the type of business involved, Deputy v. du Pont, 308 U.S. at 495, it must be realized and exhausted in the year of payment, see Stevens v. Commissioner, 388 F.2d at 300. Although an employer’s payment of salaries and benefits similar to the ones at issue will usually generate for the employer benefits that will be realized and exhausted in the year of payment, the same is not true when those items are directly related to the employer’s acquisition of a capital asset such as an installment contract. The benefits which ACC will reap from the installment contracts; namely, interest and excess principal income,
¶45We find instructive to our decision the case of Helvering v. Winmill, 305 U.S. 79 (1938), revg. 93 F.2d 494 (2d Cir. 1937), revg. and remanding 35 B.T.A. 804 (1937). There, the taxpayer claimed that he could deduct as compensation brokerage commissions paid to acquire securities in the ordinary course of his business. The Commissioner had disallowed the deduction, determining that the payments were capital expenditures. The taxpayer argued that it could deduct the payments because, he asserted, they were an ordinary and necessary business expense. The taxpayer asserted that he was in the business of buying and selling securities. A divided Board of Tax Appeals sustained the Commissioner’s disallowance. See Winmill v. Commissioner, 35 B.T.A. 804 (1937). The Court of Appeals for the Second Circuit disagreed with the Board, holding that the payments were deductible if the taxpayer was in fact engaged in the business of buying and selling securities. See Winmill v. Commissioner, 93 F.2d 494 (2d Cir. 1937). The Supreme Court held that the payments were capital expenditures. The Supreme Court noted that the Treasury regulations (Regs. 77, art. 282 (1932)
¶46Petitioners argue that Helvering v. Winmill, supra, is irrelevant. Petitioners recognize that the taxpayer in the Winmill case, similar to petitioners here, relied on a provision in the regulations that provided specifically that compensation paid in the ordinary course of business qualified as a deductible expense. Petitioners distinguish the Winmill case by noting that another provision in those regulations provided specifically that “commissions paid in purchasing securities are a part of the cost price of such securities.” Regs. 77, art. 282 (1932). Petitioners conclude that the Supreme Court’s holding in the Winmill case rested solely on the presence of the second provision and assert that no similar provision exists here to preclude explicitly its deduction of the salaries and benefits. Petitioners also note that the instant facts are different than Winmill in that ACC is not a securities dealer, the installment contracts are not securities, and none of the installment contracts expenditures are commissions.
¶47We disagree with petitioners’ assertion that Helvering v. Winmill, supra, is irrelevant. We, like the Supreme Court in the Winmill case, focus on a specific, longstanding position set forth in the Treasury regulations to conclude that the salaries and benefits must be capitalized even though, in a different setting, those costs may have qualified for deduction under a more general regulatory provision. Specifically, whereas section 1.162-l(a), Treasury Income Tax Regs., provides generally that “the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business” are deductible expenses, section 1.263(a)-2(a), Income Tax Regs., provides specifically that capitalized expenditures include “The cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year.” We disagree with petitioners when they assert that this latter provision does not preclude explicitly ACC’s deduction of the salaries and benefits. The installment contracts, similar to the buildings, machinery and equipment, and furniture and fixtures listed specifically in section 1.263(a)-2(a), Income Tax Regs., have anticipated useful lives extending substantially beyond the taxable year of the related expenditures.
The Court recognized [in Helvering v. Winmill, supra,] that brokers’ commissions are “part of the [acquisition] cost of the securities,” Helvering v. Winmill, supra, 305 U.S. at 84, 59 S.Ct. at 47, and relied on the Treasury regulation, which had been approved by statutory re-enactment, to deny deductions for such commissions even to a taxpayer for whom they were a regular and recurring expense in his business of buying and selling securities.
in this case there can be no doubt that legal, accounting, and appraisal costs incurred by taxpayers in negotiating a purchase of the minority stock would have been capital expenditures. See Atzingen-Whitehouse Dairy, Inc. v. Commissioner, 36 T.C. 173 (1961). Under whatever test might be applied, such expenses would have clearly been “part of the acquisition cost” of the stock. Helvering v. Winmill, supra. …
¶48Accord Commissioner v. Wiesler, 161 F.2d at 999 (“the Winmill case … [follows] the well settled rule that expenditures incurred as an incident to the acquisition … of property are not ordinary and necessary business expenses, but are capital expenditures”); Ellis Banking Corp. v. Commissioner, T.C. Memo. 1981-123 (“Nor would the fact that petitioner was engaged in the business of acquiring bank stock entitle it to deduct such expenditures if the bank stock was a capital asset and the expenditures were incurred in the acquisition thereof. Helvering v. Winmill, supra”).
¶49We also apply the case of Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), revg. 477 F.2d 688 (9th Cir. 1973), revg. T.C. Memo. 1970-83. There, the taxpayer was a public utility engaged in the production, transmission, and sale of electricity. Throughout its long existence, the taxpayer regularly and routinely constructed additional transmission and distribution facilities using its own equipment and hundreds of its own employees. The Commissioner determined that the taxpayer had to capitalize the depreciation on its equipment to the extent used in the construction project. The Supreme Court agreed. The Court noted that a goal of Federal income tax accounting is to match income with the related expenses and observed that “ ‘It has long been recognized, as a general matter, that costs incurred in the acquisition . . . of a capital asset are to be treated as capital expenditures.’” Id. at 12 (quoting Woodward v. Commissioner, supra at 575; ellipsis in original). Further, the Court noted: “there can be little question that other construction-related expense items, such as tools, materials, and wages paid construction workers, are to be treated as part of the cost of acquisition of a capital asset.” Id. at 13. The Court concluded that requiring the taxpayer to capitalize its depreciation would maintain tax parity between it and another taxpayer who retained an independent contractor to construct the improvements and additions for it. In the latter case, the Court stated, the depreciation on the equipment used by the independent contractor would be part of the cost that the contractor charged on the project. The Court believed it unfair to allow a taxpayer to deduct the cost of constructing its facility if it has sufficient resources to do its own construction work, while requiring another taxpayer without such resources to capitalize its cost including the depreciation charged by the contractor.
¶50The Court of Appeals for the Eleventh Circuit also applied the case of Commissioner v. Idaho Power Co., supra, in Ellis Banking Corp. v. Commissioner, 688 F.2d 1376 (11th Cir. 1982), to require capitalization of certain acquisition-related expenditures. There, the taxpayer was a bank holding company that, under State law, had to acquire the stock of other banks or organize new banks in order to expand its business into new geographic markets. The taxpayer agreed with another bank (Parkway) and certain of Parkway’s shareholders to acquire all of Parkway’s stock in exchange for taxpayer stock. The agreement was contingent on the satisfaction of certain events. Prior to consummation of the acquisition, but in connection therewith, the taxpayer incurred various expenses conducting a due diligence examination of Parkway’s books. These expenses were for office supplies, filing fees, travel expenses, and accounting fees. The taxpayer deducted these expenses, and respondent disallowed the deduction. Respondent determined that the expenses had to be capitalized.
¶51We sustained respondent’s disallowance. We held that the expenses were capital expenditures because they were incurred in connection with the acquisition of a capital asset. The Court of Appeals for the Eleventh Circuit agreed. The taxpayer had argued that the expenses were “ordinary and necessary” because they were incurred in connection with its decision to acquire the stock and in evaluating the market in which Parkway was located. See id. at 1381. The taxpayer noted that the expenses were incurred before it was bound to buy Parkway’s stock. The Court of Appeals, in rejecting the taxpayer’s claim to current deductibility, stated:
Ellis also devotes a portion of its brief to arguing that it is in the business of promoting banks, so that the expenditures made in that business are deductible. It is not enough to establish that expenditures are incurred in carrying on a trade or business to qualify for a deduction under section 162 — all of the requirements set out above [namely, the five requirements for deductibility set forth in Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. at 352-353,] must be fulfilled. Indeed, if being in the business sufficed, Ellis would be able to deduct the purchase price of the Parkway stock. … [Id. at 1381 n.10.]
¶52The Court of Appeals went on to say that
the expenses of investigating a capital investment are properly allocable to that investment and must therefore be capitalized. That the decision to make the investment is not final at the time of the expenditure does not change the character of the investment; when a taxpayer abandons a project or fails to make an attempted investment, the preliminary expenditures that have been capitalized are then deductible as a loss under section 165. … As the First Circuit stated, “ … expenditures made with the contemplation that they will result in the creation of a capital asset cannot be deducted as ordinary and necessary business expenses even though that expectation is subsequently frustrated or defeated.” Union Mutual, 570 F.2d at 392 (emphasis in original). Nor can the expenditures be deducted because the expectations might have been, but were not, frustrated. [Id. at 1382.]
¶53Our opinion as to the salaries and benefits is further supported by the cases of Godfrey v. Commissioner, 335 F.2d 82 (6th Cir. 1964), affg. T.C. Memo. 1963-1, and Stevens v. Commissioner, 388 F.2d 298 (6th Cir. 1968). Godfrey v. Commissioner, supra, concerned deductions that the taxpayer claimed as to a joint venture in two parcels of real estate known as the Goose Pond and Adams Packing properties. Before taking title to the Goose Pond property, the taxpayer and his associates caused a use survey to be conducted on the property in order to ascertain its best commercial use. They concluded from the survey that the upper part of the tract was best suited for an automobile dealership and that the lower portion could best be used for a shopping center. They acquired the property and then discovered that it lacked the zoning classification necessary to use it in the manner indicated by the survey. They retained attorneys to try to change the property’s classification. Their attempt was unsuccessful. The taxpayer deducted his proportionate share of the cost of the survey and the attorney’s fee. The taxpayer also deducted travel and living expenses that he had paid in connection with acquiring both the Goose Pond and Adams Packing properties.
¶54We denied the deductions, holding that all of the expenditures were capital expenditures. We observed that the use survey “represented their first step in the contemplated development of the property; and its benefits were obviously expected to extend beyond the year in which the survey was made.” Godfrey v. Commissioner, T.C. Memo. 1963-1. We observed that the attorney’s fee was part of the cost of the development of a capital asset, in that it represented an unsuccessful attempt to have the Goose Pond property rezoned for certain commercial use. We observed that the travel and living expenses generally related to the acquisition and development of the property.
¶55The Court of Appeals for the Sixth Circuit agreed with us that all of the expenditures were capital expenditures. The court stated:
The Tax Court found that the cost of the “use survey” was a capital expenditure. The court said: “It represented their first step in the contemplated development of the property; and its benefits were obviously expected to extend beyond the year in which the survey was made.” The test of an ordinary business expense is whether it is of a recurring nature and its benefit is generally exhausted within a year. An expenditure is of a capital nature “where it results in the taxpayer’s acquisition or retention of a capital asset, or in the improvement or development of a capital asset in such a way that the benefit of the expenditure is enjoyed over a comparatively lengthy period of business operation.” Louisiana Land & Exploration Co. v. Commissioner, 7 T.C. 507, affd, 161 F.2d 842, C.A. 5 … The purpose of the use survey was to benefit the land in a permanent way so that the owners could derive income from it on the basis of its best use. We agree with the Tax Court that this was properly a capital expenditure.
We are of the opinion that the same reasoning is applicable to the expenditure for attorneys’ fee. Counsel for the … [taxpayer] concedes that if the effort had been successful the expenditure would not have been a deductible item. We think there can be no distinction. The purpose of the expenditure was to create a permanent benefit. The fact that it created neither a permanent nor exhaustible benefit does not change its character.
[Godfrey v. Commissioner, 335 F.2d at 85.22 ]
¶56In Stevens v. Commissioner, 46 T.C. 492 (1966), the taxpayer and another individual (Woody) entered into various joint ventures each of which involved acquiring a race horse and sharing that horse’s winnings or any proceeds from its sale. Woody paid the purchase price of each horse, and the taxpayer paid each horse’s maintenance and training expenses. We held that one-half of the otherwise deductible maintenance expenses were capital expenditures because they represented the taxpayer’s cost of acquiring a one-half interest in the horses. We stated:
We agree with respondent to the extent that at least some portion of these expenses, which would otherwise be deductible as ordinary and necessary business expenses, must be capitalized as petitioner’s acquisition costs in the particular factual circumstances here present. It is obvious that petitioner had some acquisition cost for his interests; these interests were not acquired for nothing. Although Woody paid the entire purchase price for each horse, he did not give petitioner a one-half interest in each without consideration. …
‡ iji % # # * #
In effect, Woody assumed petitioner’s half of the purchase price and as consideration for this, petitioner assumed Woody’s half of the expense burden. …
[Id. at 497.]
¶57In affirming our decision, the Court of Appeals for the Sixth Circuit held that the mere fact that the expenses were recurring and otherwise deductible business expenses was not enough to make the expenses deductible under section 162. The court noted that “Section 162 was primarily intended to cover recurring expenditures where the benefit derived from the payment is realized and exhausted within the taxable year” and that the benefit from the expenses would not be exhausted within the year. Stevens v. Commissioner, 388 F.2d at 300; accord Perlmutter v. Commissioner, 44 T.C. at 403-405 (taxpayer required to capitalize portion of salaries, utilities, insurance, depreciation, legal and audit expenses, office expenses, and vehicle and truck expenses allocable to the construction of shopping center buildings).
¶58We also are mindful of Wells Fargo & Co. & Subs. v. Commissioner, 224 F.3d 874 (8th Cir. 2000), affg. in part and revg. in part Norwest Corp. v. Commissioner, 112 T.C. 89 (1999). There, a bank (Davenport) entered into a transaction with another bank (Norwest) that resulted in Norwest’s owning all the stock of an entity of which Davenport was a part. Following the taxpayer’s concession that section 263(a) required that Davenport capitalize the costs which were directly related to the transaction, we were left to decide whether section 162(a) allowed Davenport to deduct investigatory costs of $87,570, due diligence costs of $23,700, and officers’ salaries of $150,000 which respondent had determined were attributable to the transaction. Most ($83,450) of the investigatory costs related to services rendered by a law firm, before Davenport agreed to participate in the transaction. The remaining ($4,120) investigatory costs related to services performed by the law firm in investigating whether, after the transaction, Norwest’s director and officer liability coverage would protect Davenport’s directors and officers for acts and omissions occurring before the transaction. The due diligence costs related to services performed by the law firm in connection with Norwest’s due diligence review. The disallowed officers’ salaries were attributable to services performed in the transaction.
¶59We held that section 162(a) did not let Davenport deduct any of the disputed costs. Our holding followed our conclusion that all of the costs bore a sufficient nexus to a transaction producing a significant long-term benefit to fall within the rules of capitalization as set forth primarily in INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992). Upon appeal, the Commissioner conceded that section 162(a) allowed Davenport to deduct the investigatory costs of $83,450 because they were attributable to the investigatory stage of the transaction. That concession followed the Commissioner’s release of Rev. Rul. 99-23, 1999-1 C.B. 998, 1000, which holds that
Expenditures incurred in the course of a general search for, or investigation of, an active trade or business in order to determine whether to enter a new business and which new business to enter (other than costs incurred to acquire capital assets that are used in the search or investigation) qualify as investigatory costs that are eligible for amortization as start-up expenditures under § 195. However, expenditures incurred in the attempt to acquire a specific business do not qualify as start-up expenditures because they are acquisition costs under § 263. The nature of the cost must be analyzed based on all the facts and circumstances of the transaction to determine whether it is an investigatory cost incurred to facilitate the whether and which decisions, or an acquisition cost incurred to facilitate consummation of an acquisition. [23 ]
¶60As to the remaining fees of $27,820 ($4,120 + $23,700), all of which were incurred after Davenport had made its final decision as to the acquisition, the Court of Appeals for the Eighth Circuit agreed with us that those amounts were capital expenditures. The Court of Appeals disagreed with us, however, as to the officers’ salaries and held that those costs were currently deductible. The court reasoned:
the distinction between the case at hand, and the INDOPCO case lies in the relationship between the expense at issue and the long term benefit. In INDOPCO, the expenses in question were directly related to the transaction which produced the long term benefit. Accordingly, the expenses had to be capitalized. See INDOPCO, 503 U.S. 79, 112 S.Ct. 1039, 117 L.Ed.2d 226. We conclude that if the expense is directly related to the capital transaction (and therefor, the long term benefit), then it should be capitalized. … See e.g. INDOPCO, 503 U.S. 79, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992). In this case, there is only an indirect relation between the salaries (which originate from the employment relationship) and the acquisition (which provides the long term benefit …).
Similarly, the instant case is distinguishable from Acer Realty Co. v. Commissioner22 , wherein this Court held that the salaries paid to two officers for “unusual, nonrecurrent services” had to be capitalized. 132 F.2d 512, 513 (8th Cir. 1942). The taxpayer was a corporation whose only business was leasing real estate to a related corporation. Its officers were paid no salaries prior to their undertaking a large building program, at which point the two officers began acting as general contractors and “performed all the services necessary to the management of the construction of the buildings.” Acer Realty, 132 F.2d at 514. Because the salaries were clearly and directly related to the capital project, this Court determined that most of the salaries paid were extraordinary or incremental expenses which had to be capitalized. Acer Realty Co. v. Commissioner, 132 F.2d 512 (8th Cir. 1942).
The instant case is easily distinguishable from Acer Realty because Davenport’s officers had always received salaries, even before the acquisition was a possibility. There was no increase in their salaries attributable to the acquisition, and they would have been paid the salaries whether or not the acquisition took place. Therefore, we determine that the salary expenses in this case originated from the employment relationship between the taxpayer and its officers. Indirectly, the payment of these salaries provided Davenport with a long term benefit.
¶61Judge Bright wrote a concurring opinion in Wells Fargo & Co. & Subs, to highlight the fact that the record did not allow for a determination as to the portion of the salaries which was directly related to the transaction. Judge Bright wrote:
I write separately to emphasize that the record in this case is inadequate to show that the portion of the salaries in question, $150,000, was directly or substantially related to the acquisition. Moreover, the tax court’s findings of fact on this issue does not address the direct or indirect relationship of the work of the officers to the acquisition. That finding recited:
During 1991, DBTC [Davenport] had 9 executives and 73 other officers (collectively, the officers). John Figge, James Figge, Thomas Figge, and Richard Horst worked on various aspects of the transaction, as did other officers. None of the offices were hired specifically to render services on the transaction; all were hired to conduct DBTC’s day-to-day banking business. DBTC’s participation in the transaction had no effect on the salaries paid to its officers. Of the salaries paid to the officers in 1991, $150,000 was attributable to services performed in the transaction. DBTC deducted the salaries, including the $150,000, on its 1991 Federal income tax return. Respondent disallowed the $150,000 deduction; i.e., the portion attributable to the transaction. …
This finding does not address whether some officers at any particular period of time devoted substantial work to the acquisition or whether the officers during the period of time in question only incidentally worked on the acquisition while doing regular banking duties.
In order to determine whether an allocation of officers’ salaries to an acquisition-transaction such as made here qualifies as a deduction from income or should be capitalized, the taxing authorities should require the taxpayer to show officers’ time devoted to the acquisition as compared to time spent on regular work during a particular and relevant time period. The finding made by the tax court here does not justify capitalization of the officers’ salaries.
[Id. at 889-890 (Bright, J., concurring).]
¶62We do not believe that our view as to the salaries and wages at hand is inconsistent with the Court of Appeals for the Eighth Circuit’s view as to the salaries at issue in Wells Fargo & Co. & Subs., supra. The cases are factually distinguishable. There, some of Davenport’s 82 officers spent a portion of their time performing services on a capital transaction; apparently, it was a relatively small portion, since the total salary attributable to work performed on the transaction by all of the officers was $150,000. The services which they performed as to the capital transaction were extraordinary in the daily course of their employment, and the capital transaction was extraordinary to their employer’s business. They would have been paid the same salaries regardless of whether the transaction was consummated.
¶63Here, by contrast, each of the disputed employees spent a significant portion of his or her time (in fact, in 8 of the 15 cases, all of his or her time) working on capital asset acquisitions which occurred in the ordinary course of ACC’s business.
¶64The record here indicates specifically the portion of ACC’s total compensation that was directly related to ACC’s acquisition of the installment contracts, and, in accordance with Supreme Court precedent (as well as jurisprudence from the Second Circuit, Fifth Circuit, and this Court), we consider as capital expenditures that “proportion of the wages and salaries of employees who spend some of their working hours laboring on the acquisition”. Briarcliff Candy Corp. v. Commissioner, 475 F.2d at 781; see Commissioner v. Idaho Power Co., 418 U.S. at 13; see also Cagle v. Commissioner, 539 F.2d at 416; Perlmutter v. Commissioner, 44 T.C. at 404.
¶65Petitioners are mistaken when they assert that established jurisprudence provides that section 162(a) always allows a taxpayer to deduct the everyday, recurring costs of its business. The primary cases upon which petitioners rely, i.e., the credit card cases, did not merely rest on facts that the costs at issue there were everyday and recurring in nature. All of those cases involved costs which were incurred in the businesses’ startup phase and which did not produce any separate or distinct asset. In Colorado Springs Natl. Bank v. United States, 505 F.2d at 1192, for example, the Court of Appeals for the Tenth Circuit noted that “The start-up expenditures here challenged did not create a property interest. They produced nothing corporeal or salable.” Similarly, in First Natl. Bank of South Carolina v. United States, 558 F.2d at 723, the Court of Appeals for the Fourth Circuit noted that “Membership in ASBA is not a separate and distinct additional asset created or enhanced by the payments in question.” Likewise, in Iowa-Des Moines Natl. Bank v. Commissioner, 68 T.C. at 879, we noted that the costs “did not create or enhance a separate and distinct asset or property interest.”
¶66Petitioners also rely on PNC Bancorp, Inc., v. Commissioner, 212 F.3d 822 (3d Cir. 2000), revg. 110 T.C. 349 (1998). When this case was tried, the Court of Appeals for the Third Circuit had not yet released its opinion in that case, and petitioners took the view that our opinion there was inapplicable to this case because, they claimed, the cases were factually distinguishable. We held in PNC Bancorp, Inc., v. Commissioner, supra, that loan origination costs were capital expenditures. The Court of Appeals for the Third Circuit disagreed, holding that the costs were deductible expenses. Petitioners now assert that PNC Bancorp, Inc. is relevant to our inquiry.
¶67We do not believe that PNC Bancorp, Inc. v. Commissioner, supra, is so factually distinguishable from the instant case as to support contrary results. Although the cases are obviously distinguishable by virtue of the fact that PNC (as defined below) was a loan originator and ACC is a loan acquirer, we do not believe that this bare distinction is meaningful enough to, support contrary results in the cases, especially given the Supreme Court’s statements in Commissioner v. Idaho Power Co., supra at 12-13, to the effect that the creation of an asset is subject to the same set of capitalization rules as the acquisition of an asset. Given the additional fact that the Court of Appeals for the Third Circuit disagreed with our view as to the rules of capitalization applicable to the loan origination costs in PNC Bancorp, Inc., we believe it appropriate to reconsider our opinion there in light of the contrary view set forth by the Court of Appeals for the Third Circuit in reversing our decision. We have carefully done so, giving due regard to the contrary view. For the reasons set forth below, we continue to adhere to our view on the rules of capitalization as expressed in PNC Bancorp, Inc., respectfully disagreeing with the contrary view expressed by the Court of Appeals for the Third Circuit.
¶68PNC was the successor in interest to two banks (collectively, PNC) which had deducted expenditures paid to market, research, and originate loans to PNC’s customers. These expenditures included: (1) Amounts paid to record security interests, (2) amounts paid to third parties for property reports, credit reports, and appraisals, and (3) an allocable portion of salaries and benefits paid to employees for evaluating a borrower’s financial condition, evaluating guaranties, collateral, and other security arrangements, negotiating loan terms, preparing and processing loan documents, and closing loan transactions. PNC capitalized and amortized these costs for financial accounting purposes but deducted them for Federal income tax purposes. PNC argued that the costs were deductible for tax purposes because they (1) were recurring expenses in the banking business, (2) were integral to PNC’s daily operation, and (3) provided PNC with only short-term benefits.
¶69We found that PNC incurred the costs to create separate and distinct assets, i.e., the loans, and that the costs produced for PNC long-term benefits in the form of the interest to be received in later years. The Court of Appeals for the Third Circuit disagreed with both of these findings. The Court of Appeals focused primarily on the everyday meaning of the word “ordinary” and, without any reference to Helvering v. Winmill, 305 U.S. 79 (1938), and with only a passing reference to Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), which the Court of Appeals cited for the proposition that capitalization prevents the distortion of income in the case of depreciable property, concluded that the loan origination costs were ordinary business expenses for purposes of section 162(a) because the costs were normal and routine to the business of a bank. See PNC Bancorp, Inc., v. Commissioner, 212 F.3d at 828-829, 834-835. The court saw no meaningful distinction between PNC’s loan origination costs and the costs incurred as “ordinary expenses” by banks in general. The court stated that PNC’s deduction of the loan origination costs would not distort its income because it incurred those costs regularly. See id. at 834 — 835.
¶70The Court of Appeals for the Third Circuit also stated that PNC’s costs did not create any separate and distinct asset within the meaning of Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345 (1971). Unlike the assets in Lincoln Sav. & Loan Association, which were not used by the taxpayer in its everyday business, -PNC used its loans as part of its everyday business. The Court of Appeals distinguished the respective assets in the cases by this fact. The Court of Appeals also distinguished PNC’s costs from the payments in Lincoln Sav. & Loan Association by noting that the payments in Lincoln Sav. & Loan Association had formed the corpus of the asset, whereas PNC’s costs were not included in the principal of the loans. The Court of Appeals analogized PNC’s costs to the expenditures at issue in the credit card cases, concluding that the costs were deductible under that line of cases. PNC Bancorp, Inc., v. Commissioner, 212 F.3d at 830-831.
¶71We do not believe that the “normal and routine” nature of the expenses in question dictates their deductibility. As discussed above, payments made with a sufficiently direct connection to the acquisition, creation, or enhancement of a capital asset must be capitalized even when those payments are made in the course of the payee’s regular business operations. See, e.g., Woodward v. Commissioner, 397 U.S. at 575, 577-578; Helvering v. Winmill, supra. Nor do we believe that any of the long line of cases addressing this acquisition-related capitalization requirement supports a conclusion that a payment is a capital expenditure only if it creates, enhances, or becomes part of an asset that is unrelated to the taxpayer’s daily business. An expense that recurs in a taxpayer’s business is a capital expenditure when it is incurred in direct connection with the acquisition, creation, or enhancement of a separate and distinct asset, or provides the taxpayer with a significant future benefit. See, e.g., INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992); Commissioner v. Idaho Power Co., supra at 13; Woodward v. Commissioner, supra; Helvering v. Winmill, supra; see also Ellis Banking Corp. v. Commissioner, T.C. Memo. 1981-123 (citing Woodward v. Commissioner, supra) (fact that a taxpayer “incurs expenditures … on a recurring basis does not ensure their characterization as ‘ordinary if they are incurred in the acquisition of a capital asset”). The mere fact that an expense may have been deductible in the credit card cases (or any other case for that matter) does not necessarily mean that the same type of expense is ipso facto deductible in another setting such as the one found in PNC Bancorp, Inc., v. Commissioner, 212 F.3d 822 (3d Cir. 2000). See, e.g., Commissioner v. Idaho Power Co., supra at 13.
¶72We also do not believe that the fact that PNC’s loan origination costs were recurring in nature means that PNC’s current deduction of them would allow for an appropriate matching of income and expense. See PNC Bancorp, Inc., v. Commissioner, supra at 834-835. The Supreme Court stated explicitly in INDOPCO, Inc. v. Commissioner, supra at 84, that our Federal income tax system endeavors to match expenses with the related revenue in the taxable period for which the income is recognized. The Court stated in Commissioner v. Idaho Power Co., supra at 16, that “The purpose of section 263 is to reflect the basic principle that a capital expenditure may not be deducted from current income. It serves to prevent a taxpayer from utilizing currently a deduction properly attributable, through amortization, to later tax years when the capital asset becomes income producing.” The thrust of these statements, in our minds, is that an expenditure must be deducted in accordance with its own individual identity, regardless of the possible recurrence in the taxpayer’s business of that type of expense. A taxpayer’s income will be distorted if the taxpayer currently deducts a recurring expense that should be capitalized and the amount of that expense fluctuates meaningfully between taxable years. For example, when the amount of such an expenditure increases significantly from one year to the next, the deduction of the expenditure may result in the taxpayer’s income being understated in the first year and overstated in the second, and the profits of the business may appear to be sinking, when in fact it is enjoying great success, or rising, when in fact it may be seriously diminished. See Electric & Neon, Inc. v. Commissioner, 56 T.C. 1324, 1332-1333 (1971), affd. without published opinion 496 F.2d 876 (5th Cir. 1974). Such an inaccurate reporting of this fluctuation thwarts, rather than fosters, “a major objective of efficient tax policy.” Cabintaxi Corp. v. Commissioner, 63 F.3d 614, 619 (7th Cir. 1995), affg. in part, revg. in part, and remanding on another issue T.C. Memo. 1994-316.
¶73Nor do we read anything in section 263 or the related regulations that hinges section 263(a)’s applicability to an expenditure on a finding that an asset acquired or created by the expenditure was used outside of the taxpayer’s daily business. In fact, if such was the case, the costs incurred to acquire manufacturing equipment would arguably be deductible because that equipment is indispensable to the daily operation of the manufacturer’s business. Moreover, in the case of an appraisal, the costs of which are clearly capital expenditures when incurred in connection with the purchase of property, the appraisal neither adds value to the appraised property nor has a long-term life. We also note our disagreement with the concept that a cost is a capital expenditure only if it becomes part of an asset. To be sure, the depreciation of the equipment used to construct the facilities in Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), did not become an actual part of those facilities.
¶74Nor do we find persuasive PNC’s argument to the Court of Appeals for the Third Circuit that our application of the “separate and distinct asset test” of Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. at 354, was too expansive in that it would require capitalization of costs incurred “in connection with” or “with respect to” the acquisition of an asset. PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 830. Such an argument conflicts directly not only with the Supreme Court’s reasoning in Commissioner v. Idaho Power Co., supra at 12-14, and Woodward v. Commissioner, 397 U.S. at 575-576, but with the reasoning of various Courts of Appeals that have required capitalization of amounts incurred “in connection with” the acquisition of an asset. See, e.g., Johnsen v. Commissioner, 794 F.2d at 1162; Central Tex. Sav. & Loan Association v. United States, 731 F.2d at 1184; Ellis Banking Corp. v. Commissioner, 688 F.2d at 1379.
¶75Nor do we believe that the fact an expenditure is somehow connected to the “needs of current income production” is enough to qualify that expenditure as a current deduction. PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 829, 833-834 (citing National Starch & Chem. Corp. v. Commissioner, 918 F.2d 426 (3d Cir. 1990), affd. sub nom. INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992)). In our minds, an expenditure that produces both a current and a long-term benefit is neither 100 percent deductible nor 100 percent capitalizable. Instead, regardless of whether the expenditure’s primary or predominant purpose is to benefit significantly the business’ current operation, on the one hand, or its long-term operation, on the other hand, the expenditure is a capital expenditure to the extent that it produces a significant long-term benefit and deductible to the remaining extent. See Woodward v. Commissioner, 397 U.S. at 577-579; Commissioner v. Idaho Power Co., supra; Great N. Ry. v. Commissioner, 40 F.2d 372 (8th Cir. 1930), affg. on other grounds 8 B.T.A. 225 (1927); Southern Natural Gas Co. v. United States, 188 Ct. Cl. 302, 412 F.2d 1222, 1264-69 (1969).
¶76Having rejected petitioners’ first argument as to the salaries and benefits, we now turn to petitioners’ second argument that the salaries and benefits are outside the reach of section 263 because, they contend, those items are not described in that section. Petitioners make three assertions in support of this argument. First, they assert that section 263(a) applies only when an expenditure creates or adds value to a separate and distinct capital asset
In the case of an existing business, eligible startup expenditures do not include deductible ordinary and necessary business expenses paid or incurred in connection with an expansion of the business. As under present law, these expenses will continue to be currently deductible. [H. Rept. 96-1278, at 11 (1980), 1980-2 C.B. 709, 712.]
¶77Third, they assert that the salaries and benefits did not generate a future benefit to ACC. They contend that the salaries and benefits are not directly related to the acquisition of any specific installment contract. They contend that the salaries and benefits were predecisional expenses which generated predominantly short-term benefit. They contend that the salaries and benefits did not themselves generate future income but only allowed ACC to decide whether it would acquire an installment contract.
¶78We reject petitioners’ second argument. As to their first assertion, we disagree with them that acquisition costs are capitalizable under section 263(a) only if they create or add value to a capital asset.
¶79In making this assertion, petitioners focus solely on the latter part of the text in section 263(a)(1); to wit, the phrase “made to increase the value of any property”. We do not do likewise. A proper reading of that section in full reveals that the phrase relates to “permanent improvements or better-ments” and not to “new buildings”.
¶80The amicus for FNMA expands on petitioners’ first assertion by reference to section 1.263(a)-l(b), Income Tax Regs. That section provides: “In general, the amounts referred to in paragraph (a) of this section include amounts paid or incurred (1) to add to the value, or substantially prolong the useful life, of property owned by the taxpayer … or (2) to adapt property to a new or different use.” The amicus also references the following passage from this Court’s Memorandum Opinion in Mayer v. Commissioner, T.C. Memo. 1994-209: “It appears from the record that these transaction fees consisted in large part of general overhead rather than costs specifically allocable to individual purchases and sales. These expenses are not capitalizable under section 263.”
¶81We disagree with the additional arguments set forth by the amicus for FNMA as to petitioners’ first assertion. The rule of section 1.263(a)-l(b), Income Tax Regs., upon which the ami-cus relies is merely a general rule that is not intended to contain the sole parameters of capitalization under section 263(a). Nor do the amici rely correctly on our Memorandum Opinion in Mayer v. Commissioner, supra. There, the taxpayer was an individual who argued that he could capitalize his investment-related expenses. We held he could not because he failed to meet his burden of proof.
¶82Nor are we persuaded by petitioners’ second assertion that a body of law treats the salaries and benefits as deductible expansion costs. As to the body of cases relied upon by petitioners, we have discussed at length our disagreement with their reading of these cases and adhere to our belief that none of the cases supports the result that they desire. Nor does the record at hand persuade us that any of the salaries and benefits were incurred in expansion of ACC’s business.
¶83We also are unpersuaded by petitioners’ third assertion that the salaries and benefits did not generate a significant future benefit to ACC. These costs contributed directly to ACC’s receipt in later years of interest and excess principal income. This income significantly benefited ACC in that it was the bread and butter of its operation. Because ACC’s payment to its employees of the disputed salaries and benefits provided ACC with such a significant long-term benefit, they are capital expenditures. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992); see also Commissioner v. Idaho Power Co., 418 U.S. 1 (1974); Woodward v. Commissioner, 397 U.S. 572 (1970); United States v. Hilton Hotels Corp., 397 U.S. 580 (1970); cf. Colonial Am. Life Ins. Co. v. Commissioner, 491 U.S. 244, 251 n.5 (1989) (“the important point is … whether the taxpayer is investing in an asset or economic interest with an income-producing life that extends substantially beyond the taxable year”).
¶84The amicus for FNMA concludes as to the salaries and benefits that capitalizing these costs will administratively burden ACC. We disagree. It was ACC that identified these costs for its auditors in order to capitalize the costs for financial accounting purposes. Contrary to the amicus’ assertion, under the facts of this case, it is not “impossible” to identify the portion of the salaries and benefits which are attributable to each installment contract.
¶85We now turn to the PPM-related expenditures. Respondent determined and argues that ACC must capitalize these expenditures. Respondent points to the fact that the repayment of the notes extended beyond the year of their issuance. Petitioners maintain that the PPM expenditures are currently deductible. Petitioners repeat many of the same arguments which we have rejected as to the salaries and benefits, stressing their assertion that ACC issued the notes in order to obtain funds to acquire installment contracts in the ordinary course of its business. Petitioners also add, with citations to Bonded Mortgage Co. v. Commissioner, 70 F.2d 341 (4th Cir. 1934), revg. and remanding 27 B.T.A. 965 (1933), and Franklin Title & Trust Co. v. Commissioner, 32 B.T.A. 266 (1935), that financing companies such as ACC may currently expense commissions connected to the issuance of long-term debt.
¶86We agree with respondent that the PPM expenditures are capital expenditures.
It is not the purpose for which the loan is made that is important. It is the purpose of the expenditure for loan discounts and expenses. That purpose is to obtain financing or the use of money over a fixed period extending beyond the year of borrowing. When we analyze the reason behind the rule of amortizing such debt expenses, the distinction between this case and S. & L. Building Corporation and Longview Hilton Hotel Co. vanishes. Here, as in the cited cases, the mortgage discounts and expenses represent the cost of money borrowed for a period extending beyond the year of borrowing. It matters not that the proceeds of the loans be used to build an income — producing warehouse as in Julia Stow Lovejoy, or “to purchase additional properties” as in S. & L. Building Corporation or to buy the mortgaged premises, as in the instant case. In all such cases the expenditure represents an expenditure for the cost of the use of money and not a capital expenditure for the cost of any asset obtained by the use of the proceeds of the money borrowed.
¶87As to the two cases upon which petitioners rely to support their additional argument, those cases are factually distinguishable from the cases at hand and require no further discussion.
¶88We have considered each of the arguments made by the parties and by the amici. We have rejected all arguments not discussed herein as meritless.
¶89Decisions will be entered under Rule 155.
¶90Reviewed by the Court.
¶91 James Blasius is Edward Blasius’ son.
¶92 Unless otherwise indicated, section references are to the Internal Revenue Code applicable to the relevant years. Rule references are to the Tax Court Rules of Practice and Procedure.
¶93 ACC services all of the installment contracts it acquires.
¶94 ACC’s approval of an application did not always result in its acquisition of the related installment contract. An applicant sometimes decided for one reason or another not to accept ACC’s financing arrangement.
¶95 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).
¶96 The record does not indicate why ACC’s auditors believed that the amendment was required under SFAS 91. Whereas SFAS 91 provides explicitly for the deferral of “direct loan origination costs”, it does not provide similarly as to the direct costs of acquiring loans. SFAS 91 provides as to the acquisition of loans that “15. The initial investment in a purchased loan or group of loans shall include the amount paid to the seller plus any fees paid or less any fees received. … All other costs incurred in connection with acquiring purchased loans or committing to purchase loans shall be charged to expense as incurred.” We note in passing, however, that rules such as SFAS 91 which are compulsory for financial accounting purposes do not control the proper characterization of an item for Federal income tax purposes. See Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 542-543 (1979); see also Old Colony R.R. Co. v. Commissioner, 284 U.S. 552, 562 (1932).
¶97 Respondent made no adjustment to ACC’s deduction of installment contracts expenditures for 1994.
¶98 We allow ACC to deduct under sec. 165(a) the portion of those expenditures that was attributable to the installment contracts which it never acquired. ACC may deduct those amounts for the respective years in which it ascertained that it would not acquire the related contracts. See Ellis Banking Corp. v. Commissioner, 688 F.2d 1376, 1382 (11th Cir. 1982), affg. in part and remanding in part T.C. Memo. 1981-123. See generally PNC Bancorp, Inc. v. Commissioner, 110 T.C. 349, 359, 362 (1998) (Commissioner allowed banks to deduct loan origination costs expended in connection with loans which were not successfully approved), revd. on other grounds 212 F.3d 822 (3d Cir. 2000). Respondent argues that petitioners have failed to prove the portion of the expenditures attributable to the installment contracts which it never acquired. We disagree. We have found as a fact that ACC did not acquire approximately 62 percent of the installment contracts which were offered to it in each of the subject years. We hold that ACC may deduct for 1993 and 1994 62 percent of the installment contracts expenditures attributable to installment contracts which in those years it decided not to acquire. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).
¶99 We, like the Court of Appeals for the Eleventh Circuit in Ellis Banking Corp. v. Commissioner, supra at 1379, understand the term “capital asset” to be used for this purpose in its accounting sense to encompass any asset with a useful life exceeding 1 year. See also United States v. Akin, 248 F.2d 742, 744 (10th Cir. 1957) (“it may be said in general terms that an expenditure should be treated as one in the nature of a capital outlay if it brings about the acquisition of an asset having a period of useful life in excess of one year”. Such an understanding is directly consistent with the Secretary’s interpretation set forth in sec. 1.263(a)-2(a), Income Tax Regs., of examples of property for which the costs of acquisition are capital expenditures.
¶100 We do not use the term “capital asset” in the restricted sense of section 1221. Instead, we use the term in the accounting sense, to refer to any asset with a useful life extending beyond one year.
¶101 The Commissioner has had a similar longstanding view. See, e.g., Rev. Rnl. 73-580, 1973-2 C.B. 86 (portion of compensation paid by corporation to its employees that is attributable to services performed in connection with corporate acquisitions is a capital expenditure); Rev. Rul. 69-331, 1969-1 C.B. 87 (bonuses and commissions paid by gas distributor to secure long-term leases for hot water heaters are capital expenditures); Rev. Rul. 57-400, 1957-2 C.B. 520 (commissions paid by bank to brokers and other third parties for introduction of acceptable applicants for mortgage loans are capital expenditures).
¶102 This approach is consistent with a test suggested by the amicus for FHLMC.
¶103 As a matter of fact, ACC admitted as much in its PPM when it stated:
In the event only a minimal amount of Notes are sold pursuant to this Offering, the Company [ACC] would have to downsize its operations and could, in fact, operate with its current portfolio of retail installment contracts with as few as three (3) individuals, including the President of the Company, James Blasius.
¶104 To the extent that the specific work performed by each individual as to the acquisition process is not contained in the record, petitioners bear the consequences of any deficiency in the record as they bear the burden of disproving respondent’s determination that the costs of the services and benefits at issue are capital expenditures.
¶105 The amicus for FNMA also advances this argument.
¶106 Petitioners also rely on Bankers Dairy Credit Corp. v. Commissioner, 26 B.T.A. 886 (1932).
¶107 We use the term “excess principal” to refer to the principal on the installment contracts that exceeded 65 percent of their face value.
¶108 The salaries and benefits were instrumental to the production of that income in that ACC would not have acquired any of the installment contracts without performing its credit analysis activities. In this regard, we disagree with the amicus representing FNMA that all of ACC’s salaries and benefits are indirect expenses to which sec. 263(a) does not apply in the first place.
¶109 The substance of these regulations regarding commissions paid to acquire securities has been carried forward into sec. 1.263(a>-2(e), Income Tax Regs.
¶110 Petitioners argue that the installment contracts are not “similar” to the examples in the regulations and, hence, expenditures connected thereto need not be capitalized. We disagree. We understand the word “similar” to encompass any property that, like the examples, has a useful life extending substantially beyond the taxable year of the related expenditure. Petitioners’ narrow interpretation of the regulations fails to recognize that the Supreme Court has consistently taken a wider view as to capital expenditures. See, e.g., Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345 (1971) (contributions to depository reserve fund were capital expenditures); Helvering v. Winmill, 305 U.S. 79 (1938) (taxpayer required to capitalize the regular and recurring costs incurred in acquiring securities).
¶111 The amicus for FHLMC would limit the Supreme Court’s tax parity rationale to cases of self-created assets. We read nothing that would so limit that rationale.
¶112 The court held that our findings as to the remaining expenses were not clearly erroneous. See Godfrey v. Commissioner, 335 F.2d 82, 86 (6th Cir. 1964), affg. T.C. Memo. 1963-1.
¶113 The Commissioner’s position as to the deductibility of investigatory expenditures incurred to acquire specific assets is set forth in Rev. Rul. 74-104, 1974-1 C.B. 70. There, the costs were “evaluation” expenditures which the taxpayer incurred in its business of acquiring residential property to renovate and sell to the public. Before acquiring the property, the taxpayer evaluated certain localities to ascertain the feasibility of selling the property in that locality. The taxpayer incurred a cost to secure an initial report from an independent agent and other costs to evaluate the report and the locality involved. The ruling holds that the costs are capital expenditures because they were incurred in connection with acquiring the residential property and provide benefits beyond the current taxable year through the sale of the renovated property.
¶114 Acer Realty is the only case in our Circuit, that we are aware of, which denies the taxpayer a deduction for salary expenses.
¶115[Wells Fargo & Co. & Subs. v. Commissioner, 224 F.3d at 887-888.]
¶116 Of the total compensation paid to the disputed employees in 1993 and 1994, 76 percent ($213,028/$280,222) and 65.4 percent ($273,212/$418,065), respectively, was attributable to the acquisition of installment contracts.
¶117 We also bear in mind the statement in ACC’s PPM discussed supra note 13.
¶118 In First Security Bank of Idaho, N.A. v. Commissioner, 592 F.2d 1050 (9th Cir. 1979), affg. 63 T.C. 644 (1975), the Court of Appeals for the Ninth Circuit adopted as the law of that circuit the decision of the Tenth Circuit in Colorado Springs Natl. Bank v. United States, 505 F.2d 1185 (10th Cir. 1974).
¶119 Nor do we read Bankers Dairy Credit Corp. v. Commissioner, 26 B.T.A. 886 (1932), to hold that salaries and benefits are ipso facto deductible when they are recurring costs.
¶120 In Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), the Supreme Court held that the taxpayer had to capitalize the portion of depreciation on transportation equipment allocable to part-time use in constructing improvements and other capital facilities for the taxpayer. In Great N. Ry. v. Commissioner, 40 F.2d 372 (8th Cir. 1930), affg. on other grounds 8 B.T.A. 225 (1927), the Court of Appeals for the Eighth Circuit held that a railway had to capitalize the cost of operating its regular trains to the extent it was attributable to the transportation of the railway’s workmen and materials to construction sites. In Southern Natural Gas Co. v. United States, 188 Ct. Cl. 302, 412 F.2d 1222, 1264-69 (1969), the Court of Claims held that depreciation on automotive equipment used primarily for operating and maintaining a pipeline system, but occasionally used in construction operations, had to be capitalized to the extent it was attributable to the construction.
¶121 The amici for FNMA also advance this argument.
¶122 As mentioned above, we understand the term “capital asset” to be used in its accounting sense and not in accordance with its meaning under sec. 1221. We add to our prior discussion that the term as applied to capitalization issues does not arise from the Code but is a byproduct of judicial interpretation. On the basis of our understanding of the meaning of the term, we reject petitioners’ contention that costs related to an “ordinary” asset under sec. 1221 can never be a capital expenditure.
¶123 Under the Treasury Department’s longstanding interpretation of sec. 263(a) as set forth in sec. 1.263(a)-2(a), Income Tax Regs., the cost of acquiring a long-term asset is an example of a capital expenditure.
¶124 This passage is likewise referenced by the amicus for FHLMC.
¶125 In fact, petitioners’ assertion that the costs were related to an expansion of ACC’s business is inconsistent with their primary argument that the expenditures were incurred routinely in ACC’s everyday business.
¶126 Nor is a cost deductible merely because it preceded the final decision as to the acquisition of a specific asset.
¶127 The amicus also raises an issue as to whether ACC’s income was reflected clearly, within the meaning of sec. 446(b), by its deduction of the salaries and benefits. This issue was not raised by the parties and is not before the Court. We decline the amicus’ invitation to address it.
¶128 In contrast with respondent, however, we allow ACC to deduct for 1994, under sec. 165(a), the portion of those expenditures that was attributable to the offering that was abandoned in that year. See Ellis Banking Corp. v. Commissioner, 688 F.2d at 1382.