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We disagree with respondent's determination. For reasons
stated below, because petitioner ceased to conduct business in
the year in issue, petitioners are entitled to deduct the entire
cost of the Policy in 1993, irrespective of whether or not the
Policy is a capital asset. We therefore do not decide whether
the Policy is a capital asset.
Section 162(a) allows taxpayers to deduct "all the ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on a trade or business." To qualify as a deduction
under section 162(a), an item must be (1) paid or incurred during
the taxable year; (2) for carrying on any trade or business; (3)
an expense; (4) a necessary expense; and (5) an ordinary expense.
See Commissioner v. Lincoln Sav. & Loan Association, 403 U.S.
345, 352 (1971). An expense is not "ordinary", and therefore not
currently deductible, if it is in the nature of a capital
expenditure. See Commissioner v. Tellier, 383 U.S. 687, 689-690
(1966); see also sec. 263. Rather, a capital expenditure is
amortized and depreciated over the life of the asset.3 INDOPCO,
3 Although we need not decide whether the Policy is a
capital asset, we note that a business asset is a capital asset
if it provides a significant long-term benefit to the taxpayer.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992). Thus,
insurance premiums that constitute prepayment of future insurance
coverage provide significant benefits to the taxpayer beyond the
year in issue and therefore constitute a capital expenditure.
See Black Hills Corp. v. Commissioner, 73 F.3d 799, 806 (8th Cir.
1996), affg. 102 T.C. 505 (1994). Such premiums, therefore, are
(continued...)
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