Deductibility of Investigatory Expenses Incurred in Business Expansion: North Carolina National Bank v. United States

Section 162 of the Internal Revenue Code allows the current deduction of "all the ordinary and necessary expenses paid or incurred . . . in carrying on any trade or business . . . .” Exactly which business expenditures meet the requirements of section 162, however, has not been easy for courts to determine. In an attempt to enunciate a standard that is easily applicable to complex business transactions, courts have refused to allow current deduction of business expenditures which result in a benefit or advantage with a useful life which continues beyond the taxable year. In North Carolina National Bank v. United States, however, the Court of Appeals for the Fourth Circuit ruled that bank expansion expenditures will be allowed as current deductions, even if the life of the benefit exceeds the taxable year, unless the expenditures result in the acquisition of a "separate and distinct additional asset." North Carolina National Bank is a national banking association with its principal office and place of business in Charlotte, North Carolina. In addition to its main office, the bank maintains branch banking services statewide. During the tax periods involved, the years 1965 through 1968, North Carolina National Bank expended large sums investigating new branch office locations. These expenditures were mainly for two types of planning activities: metro planning and feasibility studies. Metro planning studies sought to identify regions of North Carolina that would require banking services in the future and to determine how the bank might meet those needs. When metro planning studies indicated that a new branch should be established in a particular location, feasibility studies were then undertaken for each proposed new branch location in order to provide the bank's expansion planners with more closely focused economic information. Expenditures were also made in applying to the Comptroller of the Currency for permission to expand.