CALLING PAYMENTS AN EXPENSE DOESN'T MEAN THEY ARE

A recent Tax Court decision serves as a reminder that refundable deposits are not deductible as a business expense as long as the payor has a right to recover the deposit.

The case (Ernest N. Zweifel v. Commissioner, T.C. Memo 2012-93, March 28, 2012) involved a bail bond company that was required by state law to deposit amounts into a buildup fund. The fund was held by the surety company that underwrote the bail bonds.

As long as the person covered by the bond made the court appearance, the buildup fund remained intact. However, if the surety company had to pay off the bond, it could take the amount of the payment from the fund.

Each year, the bail bond company made a deposit into the fund equal to a fixed percentage of the bonds that were guaranteed by the surety company. The bail bond company deducted these payments. Funds in the buildup fund were invested, and the investment earnings were added to the fund.

The IRS argued that payments into the buildup fund were not expenses at the time deposited because the bail bond company continued to have legal title to the funds. Any deduction would be available only when funds were transferred to the surety to cover its losses.

The bail bond company argued that the buildup fund account was analogous to the payment of insurance premiums. However, the court agreed with the IRS.

The payments into the fund were specifically tied to individual bail bonds and were the sole, legal property of the bail bond company. Unlike insurance, it was not a general contractual agreement to indemnify against unforeseen losses.

 
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