Commissioner v. Boylston Market Ass'n
131 F.2d 966 (1st Cir. 1942)

  • Boylston bought fire insurance for their market. They prepaid for most of the insurance years in advance, and each year after paid only a small amount for each year thereafter.
    • $6690 up front, and then $1082 extra one year and $890 the next year.
  • When they filed their taxes, Boylston took a deduction for the pro-rated cost of fire insurance. The IRS disagreed and assessed a deficiency.
    • Basically, Boylston deducted not only the $1082 and the $890, but they also deducted part of the $6690 that they 'used' during the year.
    • The IRS argued that the deductions were limited to the premiums actually paid during the year.
  • The Tax Court found for the Boylston. The IRS appealed.
  • The Appellate Court affirmed.
    • The Appellate Court found that the prepaid insurance was a capital expenditure.
    • The Court found that capital expenditures must be depreciated over the life of the asset (which in this case meant the number of years the insurance plan ran).
    • The Court found that if Boylston had been allowed to deduct the full cost of the insurance up front, that wouldn't be fair because it would have allowed them to take a big deduction immediately instead of having only small deductions each year for many years.
      • But, the Court found that Boylston was entitled to take the deduction sometime, so the fairest thing they could do was to pro-rate the deductions.
  • Basically, this case said that an expenditure which results in the creation of an asset that has a useful life extending "substantially beyond" the close of the taxable year may not be fully deducted in the year the payment is made. Instead the deductions must be pro-rated over the asset's useful life.