that are relevant in the instant case to the issue as to the capitalization of fees paid because they allegedly provided to Metrobank significant future benefits.

In Wells Fargo & Co. & Subs. v. Commissioner, 224 F.3d at 885-887, the Court of Appeals for the Eighth Circuit explained as follows:

it is not proper to decide that a cost must be capitalized solely because the fact finder determines that the cost is "incidentally connected" with a long term benefit. This is supported by both Lincoln Savings and INDOPCO.

***

*

*

The INDOPCO case addressed costs which were directly related to the acquisition, while *** [Wells Fargo] involves costs which were only indirectly related to the acquisition. * * * 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* * *).

Based on the above analysis of the Court of Appeals for the Eighth Circuit, salary and investigatory costs indirectly relating to the acquisition of a capital asset and indirectly providing the taxpayer with future benefits were not required to be capitalized under INDOPCO because they did not directly provide significant future benefits to the taxpayer. See id. at 889.

In PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 829, involving expenses paid for credit reports, appraisals, and salaries relating to consumer loans, the Court of Appeals for the Third Circuit refused to conclude that

in performing credit checks, appraisals, and other tasks intended to assess the profitability of a loan, the banks "stepped out of [their] normal method of doing business" so as to render the expenditures at issue capital in nature. Encyclopaedia Britannica, Inc. v. Commissioner, 685 F.2d 212, 217 (7th Cir. 1982).

The Court of Appeals for the Third Circuit, in PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 830, continued as follows (quoting from a portion of the taxpayer's brief):

the Tax Court proceeded from the clearly accurate premise that the expenses in question were associated with the loans, incurred in connection with the acquisition of the loans, or "directly related to the creation of the loans," *** to the faulty conclusion that these expenses themselves created the loans. We conclude that the term "create" does not

stretch this far. In Lincoln Savings, it was the payments themselves that formed the corpus of the Secondary Reserve; therefore, it naturally follows that these payments "created" the reserve fund. In *** [the taxpayer's] case, however, the expenses are merely costs associated with the origination of the loans; the expenses themselves do not become part of the balance of the loan. *** [Citation omitted.]

While purporting to apply the Lincoln Savings language, both the Tax Court and the government effectively have transformed that language, by subtle but significant degrees, from a test based on whether a cost "creates" a separate and distinct asset, into a much more sweeping test

**

In PNC Bancorp, Inc. v. Commissioner, 110 T.C. at 370, we concluded that the costs in issue were "assimilated" into the asset that was acquired. In contrast, the Court of Appeals for the Third Circuit held that the costs reflected "recurring, routine day-to-day business" costs that may be currently deducted as the costs were not incurred for significant future benefits. PNC Bancorp, Inc. v. Commissioner, 212 F.3d at 834. While the benefits from the consumer loans would continue for years, the Court of Appeals for the Third Circuit resolved not to expand the type of costs that must be capitalized "so as to drastically limit what might be considered as 'ordinary and necessary' expenses." Id. at 830.

A.E. Staley Manufacturing Co. & Subs. v. Commissioner, 119 F.3d 482 (7th Cir. 1997), involved fees paid to investment bankers to explore alternative transactions in connection with an unsuccessful defense of a hostile tender offer. In reversing the Tax Court's holding that the fees had to be capitalized, the Court of Appeals for the Seventh Circuit relied on the "well-worn notion" that costs incurred in defending a business are currently deductible. Id. at 487.

As noted in A.E. Staley Manufacturing by the Court of Appeals for the Seventh Circuit, the test to apply under INDOPCO is difficult to articulate and to apply. See id. The test is very factual and practical. In an effort to partially reconcile the various statements of the INDOPCO test and, in particular, in light of the recent Courts of Appeals opinions reversing the Tax Court's application of the INDOPCO test, I offer the following:

Under INDOPCO, direct and indirect (e.g., overhead) costs that are similar to routine expenses incurred by a taxpayer in the ordinary and normal course of its business (e.g., sala

ries and insurance fees) need not be capitalized unless they directly relate to the acquisition, creation, or enhancement of a specific capital asset or unless they directly produce significant benefits to the taxpayer that accrue to the taxpayer in

future years.

Applying this statement of the INDOPCO capitalization test to the fees involved in this case, it becomes clear that the fees should be currently deductible. Relevant aspects of the fees are described on pages 221-225 of the majority's opinion. I would emphasize that the fees

(1) Were paid to the FDIC, the Federal governmental agency which routinely supervises Metrobank in the normal course of its business, not to Community, the transferor of the deposit liabilities and not to third parties such as lawyers and financial advisers for a specific service necessary to consummate the conversion transaction;

(2) were similar to other insurance fees that were routinely paid by Metrobank to the Federal Government in the normal course of Metrobank's banking business;

(3) both in amount paid per year ($71,518) and in the total cumulative amount paid over 5 years ($352,904), were generally less than Metrobank's total regular insurance premiums paid into the FDIC funds in a single year (in 1993 and 1994, $465,046 and $463,583 respectively, and in 1995, $322,245);

(4) did not provide Metrobank with any additional insurance coverage with regard to its deposit liabilities (including those transferred from Community) and were not paid in lieu of the regular future annual insurance premiums due;

(5) once paid by Metrobank into the insurance funds, were not refundable to Metrobank and were available for use by the FDIC to assist any participant in the funds;

(6) were triggered by and were coincidental with the conversion transaction, but had the origin and purpose, and were assessed and paid not because thereof but because of the broader purpose to shore up the financial strength of the FDIC's insurance funds, the financial strength of which was of ongoing and necessary concern not just to the FDIC but to the entire financial community (and which concern reflected the same purpose for which Metrobank and others paid the annual premiums into the FDIC insurance funds). In other words, the FDIC, Metrobank, Community, and all other

contributors into the insurance funds had the same purpose for paying the annual premiums and for paying the exit and entrance fees (i.e., the maintenance of the financial integrity of the Federal Government's depository liability insurance programs, essential not just to the government, but also to every participant in the financial community-the Government, the banks and savings and loans, and even you and I, the depositors who hope and trust that we will always be able to get our money back).

For the reasons stated, I respectfully concur.

CHIECHI, J., concurring: Respondent chose to ask the Court to decide the issue of whether the exit fee and the entrance fee should be capitalized solely on the basis of respondent's theory that those fees generated certain significant future benefits for Metrobank. The majority states that it will "decide this case as framed by respondent". Majority op. p. 217. However, the majority rejects respondent's reliance on Darlington-Hartsville Coca-Cola Bottling Co. v. v. United States, 273 F. Supp. 229 (D.S.C. 1967), affd. 393 F.2d 494 (4th Cir. 1968), and Rodeway Inns of Am. v. Commissioner, 63 T.C. 414 (1974),1 because: "The taxpayer in each of those cases purchased a capital asset incident to the payment of the expenses in dispute there." Majority op. p. 225 note 10. I am concerned that such language by the majority could be read to suggest its view on what the result in this case would have been if respondent had argued that the exit fee and the entrance fee should be capitalized because such fees constitute amounts expended to acquire an asset with a life extending substantially beyond the taxable year of acquisition. See, e.g., Commissioner v. Idaho Power Co., 418 U.S. 1, 13 (1974); Woodward v. Commissioner, 397 U.S. 572, 575– 576 (1970); 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; American Stores Co. & Subs. v. Commissioner, 114 T.C. 458, 468-470 (2000). If the majority intended to express no opinion on what the result in this

1 On brief, respondent described those two cases as cases in which "the courts held that the taxpayers could not deduct expenses that were part of a plan to produce a positive business benefit for future years."

case would have been if respondent had advanced such an argument, the majority should not have used language that, in my view, could be construed to suggest such an opinion.2 I have considered and resolved the issue of whether the exit fee and the entrance fee should be capitalized solely on the basis of respondent's theory that those fees produced certain significant long-term benefits for Metrobank. On the record presented, I, like the majority, reject respondent's theory that the benefits which respondent asserts the fees in question produced are significant long-term benefits requiring capitalization of those fees.3 However, I disagree with the majority that the exit fee is a "final premium for insurance that it had already received", majority op. p. 223, and that the entrance fee is a "premium * * * paid for the current year's insurance", majority op. p. 223. In my view, the record and 12 U.S.C. secs. 1815 and 1817 (1994) regarding the nature, use, and purpose of those nonrefundable fees, which were paid in five annual installments, belie the majority's analogy of the exit fee and the entrance fee to premiums paid for insurance coverage provided.

THORNTON, J., agrees with this concurring opinion.

RUWE, J., dissenting: The majority refuses to consider whether the exit and entrance fees should be capitalized as costs incurred in connection with the acquisition of a capital asset because the majority believes that respondent failed to include this theory in his determination. The majority reads the notice of deficiency too narrowly. Respondent's determination, as contained in the notice of deficiency, states:

It has been determined that your deductions for the entrance and exit fee paid to the Federal Deposit Insurance Corporation for the transfer of your insured deposits from one depository insurance to another depository insurance fund is a non-deductible capital expenditure that is not subject to depreciation or amortization.

2 Similarly, if the majority decided this case "as framed by respondent”, majority op. p. 217, the majority should not have concluded that, although respondent does not argue that the facts presented in this case are similar to the facts in Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345 (1971), see majority op. p. 226, the facts in the instant case are not similar to those facts, see id.

3 Unlike the majority, I have not considered whether there are any benefits other than those alleged by respondent that are significant future benefits generated for Metrobank by the fees in question. See majority op. p. 222.