Deductibility of exit and entrance fees paid to the FDIC.

• Author: Ossen, Carolyn
• Position: Federal Deposit Insurance Corporation

In a divisive decision, the Tax Court concluded in Metrocorp, Inc., 116 TC 211 (2001), that exit and entrance fees paid to the Federal Deposit Insurance Corporation (FDIC) were currently deductible under Sec. 162. The FDIC administers and maintains the Savings Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF), to which a taxpayer paid exit and entrance fees, respectively, as part of its acquisition of a failed savings and loan, which the taxpayer then converted from a savings association into a bank.

Future-Benefit Test

This decision reflects a narrowing of the significant-future-benefit test of INDOPCO, Inc., 503 US 79 (1992). In Metrocorp, the court clearly differentiated between significant benefits and incidental (and thus insignificant) benefits. The IRS argued that the taxpayer reaped incidental benefits, demonstrated by the ability to subject itself to one regulatory scheme and continue its association with the BIF (which was more stable than the SAIF). According to the Tax Court, any alleged advantages flowing from the benefits of these associations were incidental, allowing the fees to be deductible currently.

Despite its conclusion that the exit and entrance fees did not produce a significant future benefit, the court nonetheless left the door open for a misconstruction of its position when it commented on the IRS's failure to argue that the fees at issue required capitalization because the taxpayer incurred them in a capital transaction. According to the court, if "[the IRS] had made such a determination or argument, [the taxpayer] may well have wanted to offer evidence relating to it." This statement suggests that the court might have required capitalization if that argument had been raised; the taxpayer would have been forced to show that the fees were not incurred in a capital transaction.

The IRS did not appeal Metrocorp. It was appealable to the Seventh Circuit, which decided A.E. Staley Mfg. Co., 119 F3d 482 (1997), rev'g and remd'g 105 TC 166 (1995). In that case, the court concluded that certain legal and investment banking fees incurred to defend a taxpayer against a hostile takeover were currently deductible. In Metrocorp, a concurring opinion noted that "in analyzing costs allegedly incurred in connection with the acquisition or creation of a capital asset, three Courts of Appeals have reversed all or part of recent Tax Court opinions," referring to A.E. Staley, as well as Wells Fargo & Co., 224 F3d...