First Security Bank of Idaho, N. A. v. Commissioner, 63 T. C. 644 (1975)

Initial costs incurred by banks in adopting a consumer credit card plan are deductible as ordinary and necessary business expenses under Section 162 of the Internal Revenue Code.

Summary

In First Security Bank of Idaho, N. A. v. Commissioner, the U. S. Tax Court ruled that the initial costs paid by banks to join the BankAmericard system were deductible as ordinary and necessary business expenses under Section 162. The banks, seeking to expand their installment credit operations, paid a licensing fee to BankAmerica Service Corp. for various services and the right to use the BankAmericard system. The court, following precedent from the Tenth Circuit, determined these costs were not capital expenditures but rather current expenses related to the banks’ existing business of financing consumer transactions.

Facts

First Security Bank of Idaho and First Security Bank of Utah, both national banking associations, decided to expand their installment credit operations by initiating a consumer credit card plan in 1966. They entered into licensing agreements with BankAmerica Service Corp. (BSC), paying $25,000 collectively for services including computer programming, advertising aids, training, and the right to use the BankAmericard system and its distinctive design. The banks deducted these costs on their 1966 federal income tax returns, but the Commissioner disallowed the deductions, claiming they were capital expenditures.

Procedural History

The banks filed petitions with the U. S. Tax Court challenging the Commissioner’s disallowance of their deductions. The cases were consolidated due to common issues of law and fact. The Tax Court, following the Tenth Circuit’s decision in Colorado Springs National Bank v. United States, ruled in favor of the banks, allowing the deductions.

Issue(s)

1. Whether the costs incurred by First Security Bank of Idaho and First Security Bank of Utah in adopting the BankAmericard consumer credit card plan are deductible as ordinary and necessary business expenses under Section 162 of the Internal Revenue Code?

Holding

1. Yes, because the court found these costs to be ordinary and necessary expenses related to the banks’ existing business operations, following the precedent set by the Tenth Circuit in Colorado Springs National Bank v. United States.

Court’s Reasoning

The court relied on the Tenth Circuit’s decision in Colorado Springs National Bank v. United States, which held that similar costs for joining the Master Charge system were deductible under Section 162. The court dismissed the Commissioner’s argument that these were preoperating costs of a new business, finding instead that the credit card program was an extension of the banks’ existing business of financing consumer transactions. The court also rejected the Commissioner’s alternative argument that the costs represented capital expenditures, noting that the services received (computer programming, advertising aids, training) were for current operations rather than creating long-term assets. The court clarified that the $10,000 fee for the right to use the BankAmericard service marks was not part of the initial costs but rather for support and instructional services, making the entire $12,500 paid by each bank deductible.

Practical Implications

This decision clarifies that banks can deduct initial costs associated with joining a consumer credit card system as ordinary and necessary business expenses. This ruling impacts how banks should approach tax planning for such expenditures, potentially encouraging more banks to adopt credit card programs without fear of capitalizing these costs. The decision also sets a precedent for similar cases involving the deductibility of startup costs for services that enhance existing business operations. Subsequent cases have followed this precedent, and it has influenced how the IRS views similar expenditures in the banking industry.