High Plains Agricultural Credit Corp. v. Comm'r of Internal Revenue

• Decision Date: 12 November 1974
• Docket Number: Docket No. 9170-72.
• Citation: 63 T.C. 118
• Parties: HIGH PLAINS AGRICULTURAL CREDIT CORPORATION, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

63 T.C. 118

HIGH PLAINS AGRICULTURAL CREDIT CORPORATION, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 9170-72.

United States Tax Court

Filed November 12, 1974.

Thomas H. Maxfield, for the petitioner.

Vivian T. Martinez, Jr., for the respondent.

Petitioner transferred to a bank with recourse loans made to ranchers and farmers. Held, under sec. 166(g)(2), petitioner, an endorser and a guarantor within the language of that provision, is prohibited from deducting additions to a reserve for bad debts to reflect the loans transferred. Held, further, the Commissioner did not abuse his discretion when he determined that, with regard to loans not transferred, no deduction for additions to a reserve was reasonable in the taxable years.

TIETJENS, Judge:

The Commissioner determined the following deficiencies in petitioner's income tax:

+-------------------------------+
                ¦TYE Sept. 30—   ¦Deficiency  ¦
                +------------------+------------¦
                ¦                  ¦            ¦
                +------------------+------------¦
                ¦1967              ¦$2,107.76   ¦
                +------------------+------------¦
                ¦1968              ¦5,868.36    ¦
                +------------------+------------¦
                ¦1969              ¦16,050.93   ¦
                +-------------------------------+
                

The questions for decision are: (1) Whether section 166(g)¹ allows petitioner to deduct additions to a reserve for bad debts when those additions reflect loans and notes transferred with recourse to a bank; and (2) whether the Commissioner abused his discretion when he determined that, with regard to loans retained, no deduction for an addition to the petitioner's reserve was reasonable in the taxable years ended September 30, 1967, September 30, 1968, and September 30, 1969.

This case was fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The facts which we deem necessary for decision will be referred to below.

Petitioner was incorporated under the laws of the State of Wyoming on July 10, 1961, and, at all times since that date, has been a corporation with its principal place of business in Cheyenne, Wyo. At all times relevant to this proceeding, petitioner was an accrual basis taxpayer. Petitioner's Federal income tax returns for its taxable years ending September 30, 1967, September 30, 1968, and September 30, 1969 (hereafter taxable years 1967, 1968, and 1969, respectively) were filed with the director, Service Center for the Southwest Region, Austin, Tex.

Petitioner ‘rediscounts' loans made to farmers and ranchers with the Federal Intermediate Credit Bank (hereafter FICB) in Omaha, Nebr. All loans are made for a 1-year period or less. Notes are transferred pursuant to an agreement entitled ‘General Rediscount, Loan, and Pledge Agreement’ between petitioner and the FICB, dated September 22, 1961. Relevant portions of that agreement follow:

GENERAL REDISCOUNT, LOAN, AND PLEDGE AGREEMENT between

FEDERAL INTERMEDIATE CREDIT BANK OF OMAHA andHIGH PLAINS AGRICULTURAL CREDIT CORPORATION, A Wyoming Corporation

WHEREAS, it is contemplated that the Federal Intermediate Credit Bank of Omaha, hereinafter called the ‘Bank,‘ will extend or continue financial accommodations to High Plains Agricultural Credit Corporation, a corporation organized under the laws of Wyoming, with its principal place of business at Cheyenne. Wyoming, hereinafter called the ‘Corporation,‘ by discounting for or purchasing from the Corporation, with its endorsement, notes, drafts, or other such obligations of farmers or ranchers representing loans made for agricultural purposes, and by making loans or advances to the Corporation which shall pledge with the Bank approved collateral to secure such loans and advances and generally to secure all obligations discounted or purchased by the Bank and any and all other obligations of the Corporation to the Bank, as authorized by section 202 of the Federal Farm Loan Act, as now or hereafter amended (12 U.S.C. 1031-1033), it is mutually agreed by and between the Bank and the Corporation as herein provided.

1. Obligations of Farmers or Ranchers to be Offered

The Corporation (petitioner) may offer to the Bank (FICB) for discount or purchase or as security for direct loans or advances, or as general collateral for any purposes, notes, drafts, or other such obligations of farmers or ranchers which meet the requirements of section 202 of the Federal Farm Loan Act, as now or hereafter amended (12 U.S.C. 1031-1033), and regulations of the Farm Credit Administration. As to all such obligations so offered, the Corporation represents, warrants, and agrees as follows:

(a) The proceeds of each obligation will have been advanced or used in the first instance for an agricultural purpose, including the breeding, raising, fattening, or marketing of livestock.

* * *

(c) Each obligation shall be offered to the Bank with the endorsement of the Corporation, in form acceptable to the Bank; and the President, or any Vice President, or the Treasurer, or any Assistant Treasurer, of the Bank is authorized to endorse in the name and in behalf of the Corporation, as its attorney-in-fact, any such obligation that may be delivered to the Bank by the Corporation without its endorsement.

* * *

(e) The Bank may reject at its discretion any and all such obligations so offered by the Corporation.

* * *

(g) As to any such obligation discounted, purchased, or accepted as collateral by the Bank, which is not paid when due according to its terms or at any accelerated maturity date duly fixed by the holder, the Corporation agrees, upon request of the Bank, to repurchase such obligation or to transfer or assign to the Bank in substitution therefor other eligible obligations of like or greater value acceptable to the Bank. In lieu of making such a request and in the event the Corporation fails to comply with such a request if made, the Bank, at its option, may, without demand or notice to the Corporation, bring suit to collect such obligation not paid when so due, foreclose or sell any security therefor transferred or assigned to the Bank under the last preceding paragraph hereof, and take such other or additional steps to collect such obligation as the Bank deems appropriate, including extending the time of payment or renewing such obligation, directly and in the name of the Bank, without releasing the Corporation from its liability by reason of its endorsement of such obligation or its liability under this agreement, and without in any manner or to any extent releasing any collateral. If the Bank is unable to collect the full amount of the deficiency.

(h) In the event the Bank incurs any expense in collecting or attempting to collect any such obligation, or files suit to collect thereon, the Corporation will pay to the Bank all such expense, court costs, and expenses of suit including a reasonable attorney's fee.

The following table sets forth information concerning the bad debt reserve for the petitioner for each of the years indicated, including the total amounts of loans receivable, the loans rediscounted to the FICB, and the claimed additions to the bad debt reserve account.

+--------------------------------------------------------------+
                ¦              ¦Total loans  ¦Loans        ¦Claimed additions  ¦
                +--------------+-------------+-------------+-------------------¦
                ¦              ¦receivable   ¦discounted   ¦to bad debt        ¦
                +--------------+-------------+-------------+-------------------¦
                ¦Taxable year  ¦outstanding  ¦To FICB      ¦reserve account    ¦
                +--------------+-------------+-------------+-------------------¦
                ¦              ¦             ¦             ¦                   ¦
                +--------------+-------------+-------------+-------------------¦
                ¦9/30/65       ¦$1,211,247.55¦$1,069,526.37¦$1,111.20          ¦
                +--------------+-------------+-------------+-------------------¦
                ¦9/30/66       ¦1,940,130.89 ¦1,774,823.44 ¦9,537.28           ¦
                +--------------+-------------+-------------+-------------------¦
                ¦1/31/67       ¦1,916,324.18 ¦1            ¦3,249.58           ¦
                +--------------+-------------+-------------+-------------------¦
                ¦9/30/67       ¦1,899,683.77 ¦1,741,878.34 ¦6,663.78           ¦
                +--------------+-------------+-------------+-------------------¦
                ¦9/30/68       ¦1,960,854.71 ¦1,803,011.77 ¦11,376.49          ¦
                +--------------+-------------+-------------+-------------------¦
                ¦9/30/69       ¦2,625,434.81 ¦2,488,778.37 ¦30,399.50          ¦
                +--------------+-------------+-------------+-------------------¦
                ¦              ¦             ¦             ¦                   ¦
                +--------------------------------------------------------------+
                

Prior to the taxable year ended September 30, 1969, petitioner made no charges against the bad debt reserve account. In 1961, the year of petitioner's incorporation; it had no bad debt experience of its own on which to base a reasonable reserve for bad debts. As set forth in minutes of the board of directors of petitioner dated May 19, 1964, petitioner's reserve for bad debts was formally established ‘using a basis of one-half of one percent of the total outstanding loans as of the last business day of each fiscal year until such time as the reserve would equal three and one-half percent of the total loans at the end of any fiscal period.

Three accounts were charged off against petitioner's bad debt reserve balance during the taxable year ended September 30, 1969. The three accounts were the Melvin L. Hoke (hereafter Hoke) account, the Jimmy R. and Olinda McBride (hereafter McBrides) account, and the Paul Dean and Jean Ragland (hereafter Raglands) account.

On June 27, 1969, Hoke's loan balance with petitioner was $36,241 with a maturity date of January 31, 1969. On July 10, 1969, Hoke executed a new note to petitioner in the amount of $39,512.17 as a renewal of his then-existing balance plus interest up to and including that date. The note of July 10, 1969, was payable on or before January 10, 1970. On September 30, 1969, petitioner charged...