Rev. Rul. 70-413

The purpose of this Revenue Ruling is to update and restate under the current statute and regulations the positions set forth in G.C.M. 13148, C.B. XIII-1, 67 (1934), and G.C.M. 23587, C.B. 1943, 213.

The question presented is whether a taxpayer using the cash receipts and disbursements method of accounting can deduct, in the year paid, the full three-year insurance premium paid in advance for the three-year period the policy covers.

In 1969, a calendar year corporation organized in 1969 that uses the cash receipts and disbursements method of accounting, paid the premium on a three-year fire insurance policy covering the property used in its business.

Section 1.461-1 of the Income Tax Regulations provides that if an expenditure results in the creation of an asset having a useful life that extends substantially beyond the close of the taxable year, the expenditure may not be deductible in its entirety when paid.

In Commissioner v. Boylston Market Association 131 F. 2d 966 (1942), Ct. D. 1573, C.B. 1943, 1024, affirming Board of Tax Appeals memorandum decision of November 6, 1941, the court stated that it was unable to distinguish between the prepayment of rentals and prepaid insurance. Advance rentals, and payments of bonuses for acquisition and cancellation of leases, are all matters that the taxpayer amortizes over the life of the lease and whether the payments are considered to be the cost of the exhaustible asset as in the case of rentals, or the cost of acquiring the asset as in the case of bonuses, the payments are pro-rated primarily because the life of the asset extends beyond the taxable year. To permit a full deduction in the year of payment would distort the income of the year. The court concluded that prepaid insurance presented the same problem and should be solved the same way. It stated that prepaid insurance for a period of three years may be easily allocated, that it is clearly an asset having a longer life than a single taxable year, and should be treated as a capital expense.

The payment in advance of insurance premiums by a taxpayer filing returns on the cash receipts and disbursements basis results in the creation of an asset, prepaid insurance, that is used up ratably over the period covered by the insurance contract.

Accordingly, in the instant case, only the pro rata portion of the insurance premium applicable to the year 1969 is an allowable deduction for the taxable year 1969.

G.C.M. 13148 and G.C.M. 23587 are hereby superseded, since the positions stated therein are restated under current law in the Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.