Following the transaction, New Davenport carried on a banking business. New Davenport's main office was the same office as DBTC's, and New Davenport's branches were at the four locations at which DBTC had formerly operated (not including the main office) and at each of the three locations at which BBNA had formerly operated (including the location that had been BBNA's main office). New Davenport offered a wider array of products and services than DBTC had offered before the transaction and continued DBTC's tradition of being a charitable and community leader.

DBTC's board and management anticipated that the transaction would produce significant long-term benefits for DBTC and its shareholders, among others.

3. Costs Incurred by DBTC in 1991

During 1991, DBTC paid L&W $474,018 for services rendered ($460,000) and disbursements made ($14,018) during the year. DBTC deducted the $474,018 on its 1991 Federal income tax return.

Petitioner concedes that DBTC's $474,018 deduction was improper, alleging that the deduction should have been $111,270. DBTC paid $83,450 of the $111,270 for services rendered (and disbursements made) before July 21, 1991, in investigating the products, services, and reputation of Norwest and BBNA, ascertaining whether Norwest and BBNA would be a good business fit for DBTC, and ascertaining whether the proposed transaction with Norwest and BBNA would be good for the Davenport community. None of the $83,450 was for fees or disbursements related to services performed by L&W in negotiating price, working on the fairness opinion, advising DBTC's board with respect to fiduciary duties, or satisfying securities law requirements.

Twenty-three thousand, seven hundred dollars of the $111,270 related to services performed (and disbursements made) by L&W in late July and August 1991 in connection with Norwest's due diligence review. The remainder of the amount alleged to be deductible ($4,120) related to services performed (and disbursements made) by L&W in connection with investigating whether Norwest's director and officer liability coverage would protect DBTC's directors and officers following the transaction, for acts and omissions occurring

beforehand. At the time of the services, DBTC had a director and officer policy that was due to expire on January 23, 1992. Norwest agreed with DBTC to maintain insurance until at least January 18, 1995, that would protect DBTC's directors and officers against acts and omissions occurring before January 19, 1992, the effective date of the transaction. Norwest eventually bought such a policy.

During 1991, DBTC 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 officers 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.

OPINION

Following petitioner's concession that DBTC must capitalize most of the costs related to the transaction, we are left to decide whether DBTC may deduct the officers' salaries and some of its legal fees. Respondent argues that INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), requires that these costs be capitalized because, respondent states, the transaction here, like the transaction there, involved a friendly acquisition from which the parties thereto anticipated significant long-term benefits for the acquired entity. Petitioner argues that the costs are deductible currently. Petitioner asserts that the officers' salaries were part of the annual salaries that DBTC agreed to pay the officers to conduct DBTC's everyday banking business, and, although the officers worked on the transaction, this work was tangential to the specific duties they were hired to perform. Petitioner asserts that the other costs in dispute represent ordinary and necessary expenses which DBTC incurred primarily for investigatory and due diligence services related to the expansion of its business and which, for the most part, were incurred before

DBTC's management decided to enter into the transaction. Petitioner asserts that INDOPCO is not controlling because it did not overrule a long line of cases (e.g., Briarcliff Candy Corp. v. Commissioner, 475 F.2d 775 (2d Cir. 1973), revg. and remanding T.C. Memo. 1972-43, and NCNB Corp. v. United States, 684 F.2d 285 (4th Cir. 1982)), which allowed a deduction for investigatory and due diligence costs incurred incident to the expansion of an existing business. Petitioner asserts that section 195 and its application to corporate acquisitions support its position.

We agree with respondent that INDOPCO requires us to sustain his determination. Section 162(a) provides a deduction for an accrual method taxpayer like DBTC only for an expenditure that is: (1) An expense, (2) an ordinary expense, (3) a necessary expense, (4) incurred during the taxable year, and (5) made to carry on a trade or business. See Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345 (1971); see also Rule 142(a); INDOPCO, Inc. v. Commissioner, supra at 86; Welch v. Helvering, 290 U.S. 111, 114– 116 (1933). An expense that creates a separate and distinct asset is not "ordinary". See Commissioner v. Lincoln Sav. & Loan Association, supra at 354; see also FMR Corp. & Subs. v. Commissioner, 110 T.C. 402, 417 (1998); PNC Bancorp, Inc. v. Commissioner, 110 T.C. 349 (1998); Iowa-Des Moines Natl. Bank v. Commissioner, 68 T.C. 872, 878 (1977), affd. 592 F.2d 433 (8th Cir. 1979). Nor is an expense "ordinary" when it generates a significant long-term benefit that extends beyond the end of the taxable year. See INDOPCO, Inc. v. Commissioner, supra at 87-88; United States v. Mississippi Chem. Corp., 405 U.S. 298, 310 (1972); Central Tex. Sav. & Loan Association v. United States, 731 F.2d 1181, 1183 (5th Cir. 1984); FMR Corp. & Subs. v. Commissioner, supra at 426; Connecticut Mut. Life Ins. Co. & Consol. Subs. v. Commissioner, 106 T.C. 445, 453 (1996); see also In re Federated Dept. Stores, Inc., 171 Bankr. 603 (S.D. Ohio 1994). Recognizing income concomitantly with the recognition of the related expenses is a goal of our income tax system, and a proper matching is achieved when an expense is deducted in the taxable year or years in which the related income is recognized. See Newark Morning Ledger Co. v. United States, 507 U.S. 546, 565 (1993); Hertz Corp. v. United States, 364 U.S. 122, 126 (1960); Ellis Banking Corp. v. Commissioner,

688 F.2d 1376, 1379 (11th Cir. 1982), affg. in part and remanding in part on an issue not relevant herein T.C. Memo. 1981-123; Liddle v. Commissioner, 103 T.C. 285, 289 (1994), affd. 65 F.3d 329 (3d Cir. 1995); Simon v. Commissioner, 103 T.C. 247, 253 (1994), affd. 68 F.3d 41 (2d Cir. 1995).

In INDOPCO, Inc. v. Commissioner, supra, the Supreme Court set forth its most recent elucidation on the subject of capitalization. There, the taxpayer was a public corporation, the two largest shareholders of which were approached in October 1977 about selling their stock in a friendly transaction. The shareholders indicated that they would part with their stock if a transaction was structured under which they could do so tax free. A tax-free acquisition plan was formulated under which the shareholders could transfer their stock to the acquirer. Shortly thereafter, the taxpayer's board of directors retained an investment banking firm to evaluate the formal offer for the stock, render a fairness opinion, and generally assist in the event of the emergence of a hostile tender offer. The transaction was consummated in August 1978.

The Commissioner determined that section 162(a) did not let the taxpayer deduct the direct costs that it incurred to facilitate the transaction; namely: (1) Investment banking fees and expenses and (2) legal fees and expenses related to advice given to the taxpayer and its board on their legal rights and obligations with respect to the transaction, the participation in negotiations, the preparation of documents, and the preparation of a request for a ruling from the Commissioner on the tax-free acquisition plan. We agreed. We found that it was in the taxpayer's long-term interest to shift ownership of its stock to the acquirer. See National Starch & Chem. Corp. v. Commissioner, 93 T.C. 67 (1989), affd. 918 F.2d 426 (3d Cir. 1990), affd. sub nom. INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992). We stated that the expenses were capitalizable because they were incurred incident to a shift in ownership the benefits of "which could be expected to produce returns for many years in the future.'" Id. at 75 (quoting E.I. du Pont de Nemours & Co. v. United States, 432 F.2d 1052, 1059 (3d Cir. 1970)).

Our holding was affirmed by the U.S. Court of Appeals for the Third Circuit, which rejected the taxpayer's argument,

based on Commissioner v. Lincoln Sav. & Loan Association, supra at 354, that the expenses were not capitalizable because they did not create or enhance a separate and distinct asset. See National Starch & Chem. Corp. v. Commissioner, 918 F.2d at 428-433. The Supreme Court also rejected this argument. The Court stated that Lincoln Savings stands merely for the proposition that an expense must be capitalized under section 263(a)(1) when it serves to create or enhance a separate and distinct asset. The Court noted, however, that the creation or enhancement of a separate asset is not the sole determinant for capitalization. The Court clarified its holding in Lincoln Savings, stating:

Nor does our statement in Lincoln Savings that "the presence of an ensuing benefit that may have some future aspect is not controlling" prohibit reliance on future benefit as a means of distinguishing an ordinary business expense from a capital expenditure. Although the mere presence of an incidental future benefit-"some future aspect"-may not warrant capitalization, a taxpayer's realization of benefits beyond the year in which the expenditure is incurred is undeniably important in determining whether the appropriate tax treatment is immediate deduction or capitalization. Indeed, the text of the Code's capitalization provision, section 263(a)(1), which refers to "permanent improvements or betterments,” itself envisions an inquiry into the duration and extent of the benefits realized by the taxpayer. [INDOPCO, Inc. v. Commissioner, supra at 87-88; fn. ref. and citations omitted.]

The Court concluded that the professional fees before them fell within the longstanding rule that expenses directly incurred in reorganizing or restructuring a corporate entity for the benefit of future operations are not deductible under section 162(a). The purpose for which these expenses are made, the Court stated, "has to do with the corporation's operations and betterment * * * for the duration of its existence or for the indefinite future or for a time somewhat longer than the current taxable year'". Id. at 90 (quoting General Bancshares Corp. v. Commissioner, 326 F.2d 712, 715 (8th Cir. 1964), affg. 39 T.C. 423 (1962)).

On two occasions, we have applied INDOPCO to require capitalization of acquisition-related expenditures. First, in Victory Mkts., Inc. & Subs. v. Commissioner, 99 T.C. 648 (1992), we held that INDOPCO prohibited a taxpayer from currently deducting expenses for professional services incurred incident to a takeover that was not hostile. It