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
$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.