## Facts

- Boylston Market Association, a Massachusetts corporation managing its own real estate, kept its books and filed returns using the cash receipts and disbursements method.
- The taxpayer regularly purchased fire and other insurance policies covering periods of three or more years.
- Since 1915, the taxpayer deducted each year only the portion of insurance premiums allocable to that year’s coverage, regardless of when the premium was paid.
- For tax years 1936 and 1938, the taxpayer had significant prepaid insurance on multi-year policies and deducted only the pro rata annual portion.
- The Commissioner determined income tax deficiencies for 1936 and 1938, allowing deductions only for the amounts of insurance premiums actually paid during each taxable year.
- The Board of Tax Appeals reversed the deficiencies; the Commissioner appealed.

## Issues

1. Whether a cash-method taxpayer may deduct, in the year of payment, the full cost of insurance premiums for policies extending beyond the taxable year.
2. Whether multi-year prepaid insurance must be allocated and deducted pro rata over the period of coverage to avoid distortion of annual income.

## Decision

- The First Circuit affirmed the Board of Tax Appeals.
- The court held that prepaid insurance securing protection for multiple years must be deducted on a prorated basis over the coverage period, even for a cash-method taxpayer.
- The court treated prepaid insurance as comparable to a capital-type expenditure because it creates an asset with a useful life extending beyond the taxable year.
- The court overruled its prior decision in *Welch v. De Blois*, which had permitted full deduction in the year of payment.

## Legal Principles

- An expenditure that creates an asset or benefit with a useful life extending substantially beyond the taxable year is not fully deductible in the year paid; it must be allocated over the period benefited.
- Prepaid insurance for multi-year coverage is an asset with continuing value (including the ability to surrender the policy) and therefore must be amortized over the policy term.
- The cash method does not permit deductions that materially distort annual income; matching the cost of multi-year protection to the years covered is required.
- Prepaid insurance is not meaningfully distinguishable from other advance payments (e.g., prepaid rent and certain lease-related costs) that are allocated over time.

## Conclusion

A taxpayer using the cash method must prorate and deduct multi-year prepaid insurance premiums over the policy’s coverage period, rather than deducting the full premium in the year of payment, because the payment produces a benefit extending beyond the current taxable year and immediate expensing would distort income.


Commissioner v. Boylston Mkt. Ass'n, 131 F.2d 966 (1st Cir. 1942)