Grace Nat'l Bank v. Commissioner , 15 T.C. 563 ( 1950 )

Grace National Bank of New York, Petitioner, v. Commissioner of Internal Revenue, Respondent

Grace Nat'l Bank v. Commissioner

Docket No. 21969

United States Tax Court

15 T.C. 563; 1950 U.S. Tax Ct. LEXIS 55;

October 24, 1950, Promulgated

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Decision will be entered for the respondent.

Petitioner paid $ 5,000 as an admission fee to the New York Clearing House Association. This payment is required of all new members and is made but once. It is in addition to the periodic assessment made against each member to provide for the expenses of the organization. Held, the payment of the admission fee for membership in the Association is a capital expenditure and is not deductible as an "ordinary" business expense.

Gerard L. Carroll, Esq., for the petitioner.

Oscar L. Tyree, Esq., for the respondent.

Harron, Judge.

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HARRON

The respondent has determined that there is a deficiency in income tax for the year 1943 in the amount of $ 1,150. The petitioner denies that there is a deficiency and claims a refund of tax for 1943 in the amount of $ 850.

The deficiency results from disallowance of a deduction of $ 5,000 which the petitioner claimed as an ordinary business expense under section 23 (a) of the Internal Revenue Code. The petitioner paid a fee of $ 5,000 to the New York Clearing House Association in 1943 for admission to membership. The only question is whether the admission fee is deductible under section 23 (a).

The petitioner filed its return with the collector for the second district of New York.

The record in this proceeding consists of oral testimony and various exhibits.

FINDINGS OF FACT.

The petitioner is a national bank which was incorporated in 1924 pursuant to Federal law. Its principal place of business is located in New York City. The petitioner makes its returns and keeps its books on an accrual method of accounting.

On December 31, 1943, the petitioner paid $ 5,000 as an admission fee to the New York Clearing House Association, hereinafter referred to as "Association." Upon payment of this fee it became a member of the Association. The primary function of the organization is to provide a single place for the effecting of daily exchanges and collections of checks and drafts among banks located in theNew York City area and to expedite the necessary transactions. The general objectives of the Association also include the promotion of the interests of its members and the maintenance of conservative banking practices through wise and intelligent cooperation among its members. Memship in the clearing house is available only to banking institutions which have unimpaired capital in excess of $ 1,000,000. The business affairs of the Association are managed by its Clearing House Committee, which is comprised of officers of member banks. A new member is admitted only upon the recommendation of the Clearing House Committee and the affirmative vote of a majority of the members of the Association. Upon being accepted, a new member is required to pay an admission fee of $ 5,000. The admission fee is paid only when a bank first becomes a member of the Association. All new members must pay the same admission fee, without regard to their size, contemplated use of the facilities of the Association, or any other factor. A membership in the Association cannot be sold or otherwise transferred, and no part of the admission fee may be returned to a member upon resignation or expulsion for cause.

The facilities of the Association for the purpose of making exchanges and collections are also available to non-members who may clear their checks and drafts through a member bank by the payment, in advance, of an annual charge of $ 1,500. In addition, the Federal Reserve Bank of New York is accorded membership status for the purpose of effecting exchanges and collections of checks and drafts. From the date of its incorporation in 1924 until it became a member of the Association, the petitioner, as a member of the Federal Reserve System, cleared its checks and drafts through the Federal Reserve Bank of New York. About the middle of January 1944, the facilities of the Association became available to the petitioner, and thereafter the petitioner made its clearances through the Association.

The Association is a nonprofit organization. Each member of the organization pays a pro rata share of the clearing house's expenses, based upon the total number of items which it sends to the Association for clearance. In addition, the admission fees paid by new members are commingled with the general funds of the Association and used to pay current expenses.

In his deficiency notice, the respondent explained his determination as follows:

It is held that payment of $ 5,000.00 in 1943 representing a qualification and admission fee to the New York Clearing House Association does not constitute an allowable deduction as a current operating expense.

OPINION.

The only question presented is whether a payment of $ 5,000 which the petitioner made for admission to the New York Clearing House Association was an ordinary and necessary business expense incurred during the taxable year, as the petitioner contends, or whether the payment was a capital expenditure, as the respondent alleges. If the payment was an ordinary and necessary business expense, it is properly deductible from gross income by the petitioner under section 23 (a). However, if it was a capital expenditure, it is not properly deductible from gross income as an "ordinary" business expense. Acer Realty Co. v. Commissioner, 132 Fed. (2d) 512; section 24 (a) (2), of the Code.

The $ 5,000 fee was paid by the petitioner in order to become a member of the Association. This fee is charged but once and has no fixed relation to any period of time or to the special services rendered by the organization. It is in addition to the annual dues periodically assessed against each member to provide for the expenses of the organization and is to be distinguished from such annual dues. The admission fee is a payment required by the Association of a member-elect as a condition precedent to its becoming a member. It is not a recurring expense, and its benefits are not limited to the taxable year in which it was paid or incurred but will last as long as petitioner elects to remain a member of the Association. It has utility long beyond the tax period involved. As such, it is a capital expenditure rather than an "ordinary" business expense incurred during the taxable year. Charles J. Bradley, 41 B. T. A. 153; Duesenberg, Inc. of Delaware, 31 B. T. A. 922, affd., on another issue, 84 Fed. (2d) 921; Clark Thread Co., 28 B. T. A. 1128; affd., 100 Fed. (2d) 257; cf. Shellabarger Grain Products Co., 2 T. C. 75, 89, affd., 146 Fed. (2d) 177, 185; Bush Terminal Buildings Co., 7 T. C. 793, 818-19.

We have given careful consideration to the evidence introduced by petitioner with respect to the use which the Association made of the $ 5,000 paid by the bank for admission to the clearing house. However, we fail to see how the use made of the funds after their payment can be determinative of the issue in this proceeding. Payments made to purchase bonds from a corporation, for example, are not either ordinary and necessary expenses or capital expenditures, depending upon the use which the corporation makes of the funds so secured. Similarly in this proceeding, the use which the Association elects to make of the funds received as a condition precedent to the admission of a member-elect is not determinative of the essential nature of the payment as made by the petitioner.

The respondent's determination is sustained.

Decision will be entered for the respondent.