Cent. Pennsylvania Sav. Ass'n & Subsidiaries v. Comm'r of Internal Revenue, 19498-89.
| Citation | 104 T.C. 384,104 T.C. No. 19 |
| Decision Date | 30 March 1995 |
| Docket Number | No. 19498-89.,19498-89. |
| Parties | CENTRAL PENNSYLVANIA SAVINGS ASSOCIATION AND SUBSIDIARIES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Zachary P. Alexander and William S. Pilling III, Philadelphia, PA, for petitioner.
Paul J. Sude and Lisa Primavera-Femia, Philadelphia, PA, for respondent.
During the taxable years at issue, P deducted additions to its bad debt reserve utilizing the percentage of taxable income method set forth in sec. 593(b)(2)(A), I.R.C. In its calculations of taxable income for this purpose, P did not take into account net operating losses (NOL's) as provided in sec. 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs. Held, upon reconsideration, we no longer adhere to our prior holdings that such regulation is invalid; P must take NOL's into account in computing its taxable income under sec. 593(b)(2)(A), I.R.C., as required by such regulation. Georgia Federal Bank v. Commissioner, 98 T.C. 105 (1992), vacated and remanded per agreement of the parties (11th Cir., July 12, 1994); Bell Federal Savings & Loan Association v. Commissioner, T.C. Memo. 1991-368, revd. 40 F.3d 224 (7th Cir. 1994); Leader Federal Savings & Loan Association of Memphis v. Commissioner, T.C. Memo. 1991-334; Peoples Federal Savings & Loan Association of Sidney v. Commissioner, T.C. Memo. 1990-129, revd. 948 F.2d 289 (6th Cir. 1991); Pacific First Federal Savings v. Commissioner, 94 T.C. 101 (1990), revd. 961 F.2d 800 (9th Cir. 1992), no longer followed.
1
This case is before us on petitioner's motion and respondent's cross-motion for summary judgment. Rule 121.2 The sole issue is whether section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., is valid to the extent that it requires petitioner, in using the “percentage of taxable income method” to calculate additions to its bad debt reserve under section 593(b)(2)(A), to reflect the carryback of petitioner's net operating loss (NOL) from 1980 and later years in the computation of taxable income for the years at issue. The issue is not new to this Court. See infra pp. 5-8.
Summary judgment is appropriate in this case because there is no genuine issue of material fact and the decision can be made as a matter of law. Rule 121(b); Northern Indiana Public Service Co. v. Commissioner, 101 T.C. 294, 295 (1993). For the purposes of this motion, the relevant facts, set forth in an affidavit of petitioner's executive vice president and chief financial officer, are not in dispute and are so found.
Petitioner is a chartered mutual savings and loan association with its principal place of business in Shamokin, Pennsylvania. During the years at issue, petitioner was an institution described in section 593(a)(1), and filed Federal income tax returns on a calendar year basis with the Internal Revenue Service, Philadelphia, Pennsylvania.
For its 1980 tax year, petitioner claimed an NOL under section 172(c), which it carried back to certain tax years from 1970 through 1979 pursuant to section 172(b). Petitioner also claimed NOL's in subsequent years that affect certain of the years at issue herein.3 The carryback of the 1980 NOL resulted in the carryback of investment tax credits to petitioner's 1968 and 1969 tax years. Petitioner timely filed Corporation Applications for Tentative Refund (Form 1139) for all tax years affected by the NOL carrybacks and related investment tax credit carryovers and carrybacks.
During certain tax years from 1968 to 1982, petitioner calculated the annual addition to its reserve for bad debts under the percentage of taxable income method provided in section 593(b)(2)(A) and deducted such addition in each such tax year on its Federal income tax returns in accordance with section 166(c). In conjunction with petitioner's filing of its tentative refund applications stemming from its carryback of the 1980 NOL, petitioner recomputed its allowable bad debt deductions under the percentage of taxable income method for such affected years in accordance with the then existing section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs. The recomputation resulted in a smaller loan loss reserve deduction.
Subsequent to the filing of the tentative refund applications, respondent conducted an examination of petitioner's tax returns for the 1968 to 1982 tax years. Following the examination, respondent mailed petitioner a notice of deficiency disallowing petitioner's treatment of two items not now at issue herein and determining the following deficiencies in petitioner's Federal income taxes:
+-----------------+
¦¦year¦Deficiency ¦
+-----------------¦
¦ ¦
+-----------------¦
¦¦1969¦$ 24 ¦
++----+-----------¦
¦¦1970¦61,365 ¦
++----+-----------¦
¦¦1973¦51,543 ¦
++----+-----------¦
¦¦1974¦125,107 ¦
++----+-----------¦
¦¦1976¦83,786 ¦
++----+-----------¦
¦¦1977¦174,393 ¦
++----+-----------¦
¦¦1978¦167,275 ¦
++----+-----------¦
¦¦1979¦157,909 ¦
++----+-----------¦
¦¦1980¦31,309 ¦
+-----------------+
Thereafter, in 1990, this Court held section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., invalid to the extent that it required that taxable income reflect any NOL carryback in calculating the addition to the bad debt reserve under the percentage of taxable income method, in a case involving a similarly situated taxpayer and essentially the same set of circumstances. Pacific First Federal Savings v. Commissioner, 94 T.C. 101 (1990), revd. 961 F.2d 800 (9th Cir. 1992) ( Pacific First).
Petitioner thereafter, without objection by respondent, amended its petition herein to raise the issue of the application of section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., claiming that, if the regulation is invalid, it is entitled to a refund for overpayments of income tax.
The issues which were the subject of respondent's notice of deficiency having been settled, the sole remaining issue for our decision is the issue raised by the amended petition,4 the validity of section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs.
In Pacific First Federal Savings v. Commissioner, supra, a Court-reviewed decision, we held section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., to be invalid insofar as it requires the application of NOL carrybacks before the computation of bad debt reserves under the percentage of taxable income method provided for by section 593(b)(2)(A). Thereafter, we continued to hold the regulation invalid. Bell Federal Savings & Loan Association v. Commissioner, T.C. Memo. 1991-368, revd. 40 F.3d 224 (7th Cir. 1994) ( Bell Federal); Leader Federal Savings & Loan Association v. Commissioner, T.C. Memo. 1991-334 ( Leader Federal); Peoples Federal Savings & Loan Association v. Commissioner, T.C. Memo. 1990-129, revd. 948 F.2d 289 (6th Cir. 1991) ( Peoples Federal).
The first case to reach an appellate court was Peoples Federal Savings & Loan Association v. Commissioner, supra, where the Court of Appeals for the Sixth Circuit reversed the decision of this Court, and held the regulation in question valid.
Thereafter, we were again asked to decide the validity of section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs. In another Court-reviewed decision, we adhered to our original holding in Pacific First and, because the decision was not appealable to the Court of Appeals for the Sixth Circuit, we again held the regulation invalid.5 Georgia Federal Bank v. Commissioner, 98 T.C. 105 (1992), vacated and remanded (11th Cir., July 12, 1994) ( Georgia Federal). Respondent appealed our decision to the Court of Appeals for the Eleventh Circuit, but before that court decided the merits of our decision, it was vacated and remanded for entry of a decision in accordance with a settlement reached by the parties.
Shortly after our decision in Georgia Federal, the Court of Appeals for the Ninth Circuit reversed our decision in Pacific First Federal Savings v. Commissioner, 961 F.2d 800 (9th Cir. 1992), revg. 94 T.C. 101 (1990). More recently, the Court of Appeals for the Seventh Circuit reversed our decision in Bell Federal Savings & Loan Association v. Commissioner, 40 F.3d 224 (7th Cir. 1994), revg. T.C. Memo. 1991-368. In the only other case involving the validity of section 1.593-6A(b)(5)(vi) and (vii), Income Tax Regs., the District Court for the Eastern District of Washington upheld the regulation. First Federal Savings Bank of Washington v. United States, 766 F.Supp. 897 (E.D. Wash. 1991), affd. without opinion 995 F.2d 947 (9th Cir. 1993).
Petitioner argues that, based on the established principles of stare decisis and the absence of a controlling decision in the Court of Appeals for the Third Circuit to which an appeal in this case could lie, see Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971), we should adhere to our prior position and hold the regulation invalid. Respondent, on the other hand, argues that we should reconsider our position in light of the reversals and uphold the regulation.
Section 593(b) limits the deduction of an addition to petitioner's bad debt reserve to “the applicable percentage of the taxable income” for the year. 6
From 1956 to 1978, the regulation reflected the interpretation of section 593(b)(2)(A) urged by petitioner whereby, for purposes of that section, taxable income is computed without regard to NOL carrybacks. The first regulation interpreting section 593(b)(2)(A) provided that taxable income was to be computed “without regard to any section providing for a deduction the amount of which is dependent upon the amount of taxable income”. Sec. 1.593-1(b)(1), Income Tax Regs., T.D. 6188, 1956-2 C.B. 310, 321. In Rev. Rul. 58-10, 1958-1 C.B. 246, the preceding statement was relied upon to provide that, for purposes of calculating the bad debt reserve addition under the percentage of taxable income method, taxable income was to be determined befo...
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