Hastie, Chief Judge, and McLaughlin and Van Dusen, Circuit Judges. Van Dusen, Circuit Judge (dissenting).
GERALD McLAUGHLIN, Circuit Judge.
This is an appeal from a decision of the Tax Court of the United States assessing deficiencies in the income tax liabilities of appellant Marsh & McLennan, Inc., a Pennsylvania corporation, of $1,783.22 and $7,246.27 for the respective tax years, 1961 and 1962. 51 T.C. 56 (1968); C.C.H. Dec. 29, 190.*fn1 Specifically, the Tax Court affirmed the Commissioner's disallowance of certain depreciation deductions made by taxpayer relating to the cost of acquired insurance expiration information.
Marsh & McLennan, Inc., a Delaware corporation, the parent company of appellant, is engaged nationwide in the insurance brokerage business, serving mainly large industrial and commercial clients. Its clients include about half of the 500 largest corporations in the United States, and in 1967 it earned commissions totalling roughly $76 million. Handling, as it does, primarily largerisk business clients, the insurance written by Marsh & McLennan is customized to each client's needs unlike, for example, standardized home owner or automobile insurance policies; the coverage which Marsh & McLennan writes is placed with various domestic and foreign insurers.
The Marsh & McLennan organization expanded rapidly, partly through acquisitions of other brokerage firms, in the decade 1957-67, and it currently has approximately 25 domestic subsidiaries alone. Appellant, Marsh & McLennan, Inc., the Pennsylvania corporation with its principal place of business in Pittsburgh, is the successor corporation to Stokes, Packard & Smith, Inc., which it acquired in September 1961. Appellant purchased all of the assets of Stokes, Packard & Smith, Inc. for the sum of $265,383, and assumed Stokes' liabilities of $384,283.82. It received in exchange from Stokes, all property, including all of Stokes' insurance "expirations", to which a value of $69,550.78 was attributed. The sole issue before us is whether the Tax Court was correct in holding that the cost of those "expirations" was not depreciable.
The nature of the "expirations" is crucial to an understanding of the decision below. The Tax Court found that "insurance expirations" consist of:
"* * * the records of the firm, including copies of the insurance policies, showing the name of the insured, the amount and nature of the insurance coverage, the location of the risk, the policy expiration date, the premium, and other data concerning insurance carried by the client. Such insurance expirations aid * * * in obtaining renewals of the business of the acquired broker's accounts by supplying information pertinent to the insurance needs of the accounts, and permitting it an advantage over competitors for the business by furnishing it an entree to the insured which would not otherwise be available." (Emphasis supplied.) 51 T.C. 56, 58,
Information of this nature is, of course, business confidential, and competition in the insurance brokerage business clearly is vigorous to say the least.
As indicated above, $69,550.78 of the total purchase price paid for the assets of the Stokes corporation represented the calculated value of certain of Stokes' insurance expirations; that sum was over and above the calculated net worth of Stokes. Because Marsh & McLennan was motivated to acquire Stokes by a desire to obtain the latter's five or six large commercial accounts (or clients) and the valuable "expirations" relating thereto, appellant contends, in effect, that the $69,550.78 was the acquisition cost of these five or six expirations, and that for tax purposes, it was entitled to depreciate this cost over the useful life of those five or six large-client related expirations under Subsection 167(a) of the Internal Revenue Code of 1954 (26 U.S.C.A. § 167(a)), and Section 1.167(a)-3 of the Income Tax Regulations.*fn2 Section 1.167(a)-3 of the Regulations reads with respect to intangible business assets, in pertinent part, as follows:
"If an intangible asset is known from experience or other factors to be of use in the business * * * for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible may be the subject of a depreciation allowance * * * An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. * * * No deduction for depreciation is allowable with respect to goodwill. * * *"
Relying on the Regulation, the Tax Court held:*fn3
"It is our conclusion that the expirations * * * were so inextricably linked with goodwill that they cannot be considered as having an existence separate ...