91 T.C. 265 (1988), 17739-82, Home Group v. C.I.R.

Docket Nº:Dkt. 17739-82
Citation:91 T.C. 265
Opinion Judge:GERBER, JUDGE:
Party Name:THE HOME GROUP, INC., AS AGENT UNDER THE PROVISIONS OF TREASURY REGULATION SECTION 1.1502-77(d) FOR CITY INVESTING COMPANY AND THE CONSOLIDATED GROUP OF WHICH CITY INVESTING COMPANY WAS THE COMMON PARENT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:John S. Breckinridge, Jr. and F. Brook Voght, for the petitioner. David N. Brodsky and Robert J. Foley, for the respondent.
Judge Panel:NIMS, CHABOT, PARKER, WHITAKER, KORNER, SHIELDS, HAMBLEN, CLAPP, SWIFT, JACOBS, WRIGHT, PARR, WILLIAMS, WELLS, RUWE, and WHALEN, JJ., agree with this opinion.
Case Date:August 18, 1988
Court:United States Tax Court
 
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Page 265

91 T.C. 265 (1988)

THE HOME GROUP, INC., AS AGENT UNDER THE PROVISIONS OF TREASURY REGULATION SECTION 1.1502-77(d) FOR CITY INVESTING COMPANY AND THE CONSOLIDATED GROUP OF WHICH CITY INVESTING COMPANY WAS THE COMMON PARENT, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Dkt. No. 17739-82

United States Tax Court

August 18, 1988

S, a consolidated subsidiary of P, was a qualified organization entitled to claim a bad debt reserve addition under the provisions of sec. 593, I.R.C. 1954. Sec. 593, I.R.C. 1954, affords qualified taxpayers broad discretion to determine the amount of the reserve addition, up to the maximum limit set out in three statutory formulae. Sec. 1.593-6(a)(3), Income Tax Regs., would prohibit qualified taxpayers from subsequently (after return filed) going back and reducing the reserve ‘ for purposes of obtaining a larger deduction in a later year.‘ During 1978, sec. 1.593-6A, Income Tax Regs., was issued, effective for taxable years beginning after July 11, 1969, without the above-mentioned prohibition. Respondent argues that S is not entitled to reduce its reserve in the circumstances of this case (for its 1969 taxable year), partly because sec. 1.593-6(a)(3), Income Tax Regs., prohibits such reduction. Petitioner argues that the restrictive language is contrary to the broad discretion and liberal intent of sec. 593, I.R.C. 1954. HELD, the restrictive portion of sec. 1.593-6(a)(3), Income Tax Regs., in controversy is contrary to the statute and invalid.

Page 266

John S. Breckinridge, Jr. and F. Brook Voght, for the petitioner.

David N. Brodsky and Robert J. Foley, for the respondent.

OPINION

GERBER, JUDGE:

This controversy was generated by the parties' differing computations under Rule 155, [1] pursuant to our opinion rendered in this case. [2] The Rule 155 controversy centered about section 593, which places limits upon the addition to the reserve for bad debts of certain savings banks. See section 593(b)(1). During the taxable year in question, petitioner's consolidated subsidiary was a savings bank subject to section 593. This section also permits a taxpayer broad discretion to determine the amount of the addition to the reserve, not to exceed the limits set forth in section 593(b). Section 593b)(1) provides, in pertinent part, as follows:

SEC. 593. RESERVES FOR LOSSES ON LOANS.

* * *

(b) Additions to Reserves for Bad Debts. -

(1) In general. - For purposes of section 166(c), the REASONABLE ADDITION for the taxable year to the reserve for bad debts for any taxpayer described in subsection (a) SHALL BE an amount equal to the sum of -

(A) THE AMOUNT DETERMINED under section 166(c) to be a reasonable addition to the reserve for losses on nonqualifying loans, plus

(B) THE AMOUNT DETERMINED BY THE TAXPAYER to be a reasonable addition to the reserve for losses on qualifying real property loans * * *.

»

Page 267

Emphasis added; the statutory language was modified for 1970, but the emphasized portion was unchanged from that in effect for 1968 and 1969.�› ›

The regulations further amplify a taxpayer's freedom and discretion to reduce or increase (up to the limits) the amount of the bad debt reserve addition, as follows:

the addition to the reserve for losses * * * for any taxable year beginning before July 12, 1969, is the amount which the taxpayer determines to constitute a reasonable addition to such reserve for such year -

» This amount cannot exceed the statutory limitations under three alternate methods.�

* * * in the case of a subsequent adjustment * * * which has the effect of permitting an increase, or requiring a reduction, in the amount claimed » for the reserves,� * * * » the amount� of such addition may be recomputed under whichever method the taxpayer selects for the purposes of such recomputation, irrespective of the method initially applied for such taxable year. However, a taxpayer may not subsequently reduce the amount claimed in the return * * * for the purpose of obtaining a larger deduction in a later year. » Sec. 1.593-6(a), Income Tax Regs.�

These regulations were changed by T.D. 7549, filed May 17, 1978, 1978-1 C.8.185. The change significant to this proceeding concerned the elimination of the last sentence of section 1.593-6(a)(3), Income Tax Regs., prohibiting reductions in the reserve allowance for the purpose of obtaining a larger deduction in a later year. Accordingly, the regulation section for taxable years beginning after July 11, 1969, had no similar regulatory restriction. See section 1.593-...

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