Harry Blackmun

“ What is important and controlling, we feel, is that the $404 (d) payment serves to create or enhance for Lincoln what is essentially a separate and distinct additional asset and that, as an inevitable consequence, the payment is capital in nature and not an expense, let alone an ordinary expense, deductible under § 162 (a) in the absence of other factors not established here. We note the following: A. The § 404 (d) payment to FSLIC, when made, is subject to positive and rigid continuing controls. The payment must flow into the Secondary Reserve. ”

“ FSLIC maintains a separate account for each insured institution's share of the Secondary Reserve. It submits to the institution annually a statement disclosing that share and the interest credited to it. [8] Under regulations issued by the California Savings and Loan Commissioner and by the Federal Home Loan Bank Board, Lincoln reports its interest in FSLIC's Secondary Reserve as an asset on its balance sheet and treats the interest earned on its pro rata share of the Secondary Reserve as income. ”

“ D. The compulsory character of the payment imposed both by the governing statute and the economic facts of life. Lincoln concedes, however, 'Compulsion, whether legal or economic, should have no bearing upon the question whether a payment is an expense or a capital expenditure.' [10]
E. The annual accounting concept of the income tax. This factor is relevant when the year of deduction is in issue. It has less consequence in the determination of whether an item is or is not an ordinary expense. ”

“ Section 404 (a) now requires FSLIC to establish two reserves, namely, a Primary Reserve 'which shall be the general reserve,' and a Secondary Reserve. The requirement for the annual premium of 1/12 of 1% is continued, but the level of the general reserve was lowered from 5% to 2% of the total of accounts plus creditor obligations. ”