Bank Must Capitalize Cost of Acquiring Credit Card Receivables

In FSA 200136010, the Service concluded that a bank had to capitalize the costs of acquiring credit card receivables, including the costs of investigating whether to purchase the receivables and which receivables to purchase.

A bank purchased credit card receivables or accounts from other institutions. After purchasing credit card accounts from another issuer, the bank integrated the account information into its computer system, which took several weeks. After integrating the information, the bank entered into securitization arrangements for the acquired accounts. Under those arrangements, the bank exchanged a portfolio of credit card receivables for sellers' certificates in a trust. In turn, it sold the certificates to trust investors, who received investor certificates from the trust. With the sellers' certificates, however, the bank retained all interests in the trust not held by the owners of the investor certificates. Similarly, both the bank and the trust considered the bank to be the owner of the receivables for Federal income tax purposes.

On its return, the bank deducted the costs of acquiring and securitizing the credit card receivables. The examining agent disallowed the deductions, and the bank conceded the adjustments. The bank then filed for a refund based on the disallowed deductions. The bank argued that it should be allowed to deduct the costs of (1) acquiring the receivables (including making the decision to buy and how much to pay), (2) integrating the receivables into its accounting system and (3) assembling and selling receivables to the trust (which, in turn, sells certificates to investors).

Citing INDOPCO Inc., 503 US 79 (1992), the IRS concluded that the bank had to capitalize the cost of acquiring the credit card receivables. In reaching that conclusion, it noted that the receivables were separate and distinct assets that provided the bank with significant future benefits, including an interest income stream. Moreover, the bank incurred the costs while acquiring capital assets.

The Service noted, however, that the bank's characterization of some of the acquisition costs as investigatory raised questions about whether capitalization of those costs was consistent with Rev. Rul. 99-23, which concluded that costs incurred in searching for or investigating an active trade or business to determine whether to enter that business are investigatory costs, amortized as Sec. 195 start-up expenses. In this case, according to the IRS, the bank did not incur its costs while investigating whether to purchase a new business or which new business to purchase. Rather, it incurred the costs while investigating the purchase of a specific capital asset for its already existing business. As such, the Service concluded that capitalization of those investigatory expenses was consistent with Rev. Rul. 99-23.

As for the other costs, the IRS concluded that capitalization might be required, depending on the facts of the case. Capitalization would be required for the integration costs if they added life or value to the newly acquired receivables or adapted them to a new or different use. Capitalization of the securitization costs would depend on the borrowing costs at issue and the nature and extent of the bank employees' involvement in the securitization process. Note: Securitization costs, if required to be amortized, would be amortized over the term of the collateralized debt issued, not over the life of the credit card receivables.

From Kyle Klein, Washington, DC