Commissioner v. Lincoln Savings and Loan Association
The Supreme Court held that a required additional premium paid into an FSLIC secondary reserve, in which the institution kept a pro rata interest, was a capital outlay and not a current §162(a) expense.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- A payment that creates or enhances a separate and distinct asset is capital.
- INDOPCO later said a separate asset is sufficient but not necessary for capitalization; future benefit also matters.
- Current building work is tested under Treas. Reg. §1.263(a)-3, not by asking only whether a new “asset” appeared.
- Educational information, not tax advice.
Case record
- Court
- U.S. Supreme Court
- Citation
- 403 U.S. 345 (1971)
- Decision date
- 1971-06-14
- Facts
- Lincoln Savings and Loan Association, a California institution insured by the Federal Savings and Loan Insurance Corporation, paid two 1963 amounts to FSLIC: a regular §404(b)(1) premium of $135,760.52, which the Commissioner allowed as a deduction, and a §404(d) “additional premium” of $882,636.86 credited to FSLIC’s Secondary Reserve. Each insured institution had a pro rata share in that reserve, received a stated return on it, reported the share as an asset, and could recover it in specified termination or liquidation events. The additional premium was measured as 2 percent of the net increase in insured accounts, reduced by required Federal Home Loan Bank stock purchases.
- Issue
- Was the §404(d) additional premium a deductible ordinary and necessary business expense under §162(a)?
- Holding
- No. The payment was a capital expenditure. The Tax Court was affirmed in result; the Ninth Circuit was reversed. INDOPCO later described Lincoln Savings as holding that an outlay creating or enhancing a separate and distinct asset is capital — a sufficient, not a necessary, condition for capitalization.
- Reasoning
- Justice Blackmun listed the §162(a) requirements and found the additional premium was not an “expense,” let alone an ordinary one. Unlike the regular premium, which the institution never owned, the additional premium purchased a distinct property interest in the Secondary Reserve. That interest was accounted for as an asset, earned a return, and was recoverable in defined circumstances. The Court treated the payment as creating or enhancing a separate and distinct additional asset.
- Relevance to cost segregation
- Lincoln Savings is a general capitalization authority. Building repairs and improvements are now tested under Treas. Reg. §1.263(a)-3. The case is history for that regulation, not a substitute for betterment, restoration, and adaptation tests, and it is not a depreciation-classification case.
Commissioner v. Lincoln Savings & Loan Association, 403 U.S. 345 (1971), is a Supreme Court case about a savings-and-loan insurance premium, not about buildings. Congress had required insured institutions to prepay an additional premium into FSLIC’s Secondary Reserve. Lincoln deducted both the regular premium and the additional premium as ordinary and necessary expenses. The Commissioner allowed only the regular premium.
The Court reversed the Ninth Circuit. The Secondary Reserve was available for FSLIC losses only after other accounts were exhausted. Each institution’s share was tracked, credited with a return, reported as an asset under federal and California rules, and refundable if insurance terminated or the institution went into liquidation. That package, the Court said, was a separate and distinct additional asset. The regular premium, by contrast, disappeared into FSLIC’s Primary Reserve, in which institutions had no property interest.
Twenty-one years later, INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), told readers not to over-read Lincoln Savings. Creating a separate asset is a sufficient reason to capitalize. It is not a prerequisite. National Starch’s takeover fees had to be capitalized because they produced significant benefits beyond the tax year, even though they did not create a distinct new asset. Together the two opinions are why “we did not buy a new machine” is not enough to expense a building outlay.
For cost segregation, Lincoln Savings belongs on the repairs-and-capitalization page, not on a structural-component page. If work is a current repair under today’s tangible property regulations, there is nothing to classify as a depreciable improvement. If the work is capitalized, a study may then ask which recovery class the improvement belongs in. Super Intelligence, as proposed on this site, does not change that sequence.
This page is educational information, not tax advice. The holding is national and narrow: a 1963 FSLIC additional premium was capital.
What INDOPCO added
INDOPCO rejected the argument that Lincoln Savings announced an exclusive “separate asset” test. The Court said deductions are exceptions to the norm of capitalization, and that realization of benefits beyond the year of the expenditure is undeniably important. Incidental future benefit is not enough; significant future benefit can be.
Neither opinion is a building-systems case. They supply the older capitalization vocabulary that Treasury later refined for tangible property.
Current building rules
Treas. Reg. §1.263(a)-3 now tests betterment, restoration, and adaptation against defined units of property, including a building and listed building systems. Cite Lincoln Savings for the separate-asset idea and INDOPCO for future-benefit capitalization. Do not use either case as a stand-in for those regulations.
How a study should use the case
Ask the capitalization question first. If the outlay is a current repair under Treas. Reg. §1.263(a)-3, there is no depreciable improvement to classify as 5-year, 15-year, or 39-year property. If the outlay is capital, move to HCA, Whiteco, and Scott Paper for classification and to Idaho Power or a purchase-price allocation for basis.
Lincoln Savings does not decide whether a roof, a chiller, or a parking lot is personal property. INDOPCO does not either. Both opinions are why “we did not create a new asset” is an incomplete expense argument once significant future benefit is on the table.
Educational information, not tax advice. The 1971 holding is about a 1963 FSLIC additional premium.
Verification. Verified from the Justia U.S. Reports text (argued February 23, 1971; decided June 14, 1971). INDOPCO’s reading of the holding is from the opened Cornell LII text of 503 U.S. 79.