Bolling v. Commissioner, Docket No. 2552-62 — 2555-62.
| Decision Date | 22 May 1964 |
| Docket Number | Docket No. 2552-62 — 2555-62. |
| Citation | 1964 TC Memo 143,23 TCM (CCH) 865 |
| Parties | Glenn L. Bolling and Ila L. Bolling, et al. v. Commissioner. |
| Court | U.S. Tax Court |
William H. Curtis and Roy C. Hormberg, Bryant Bldg., Kansas City, Mo., for the petitioners. Arthur B. Bleecher, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent has determined the following deficiencies in income tax:
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1958 1959 1960 1961
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Glenn L. Bolling and Ila L. Bolling .. ....... $6,632.292 $14,323.112
Mae L. Hausmann ...................... ....... 2,755.082 4,716.412
Fairhills Company .................... $830.033 5,242.503 4,452.243
B & H Homes, Inc. .................... ....... ........ ........ $20,071.164
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The issues remaining before us are as follows:
(1) Whether accrual basis home builders and sellers acting as loan guarantors for customers must include in income in the year of sale portions of sales proceeds pledged as loan security to the lender, which lender thereby granted loans to the sellers' customers in excess of the usual maximum amounts; and, if so,
(2) Whether petitioners are entitled to deductions for additions to bad debt reserves pursuant to section 166(c).5
Some of the facts have been stipulated and are so found.
Petitioners' income tax returns for the taxable periods in question, excepting those of petitioner Mae L. Hausmann (hereinafter called Hausmann), were timely filed with the district director of internal revenue, Kansas City, Missouri. Hausmann timely filed her income tax returns for the calendar years 1959 and 1960 with the district director of internal revenue, Wichita, Kansas.
The petitioners were engaged in the construction and sale of low and moderate priced homes in the Kansas City, Missouri area during some or all of the periods in issue. Glenn L. Bolling (hereinafter called Bolling) and Hausmann operated through two accrual basis partnerships' Bolling-Hausmann Builders (hereinafter called Builders) and Bolling-Hausmann Development Company (hereinafter called Development), and two accrual basis corporations, Fairhills Company (hereinafter called Fairhills) and B & H Homes, Inc. (hereinafter called B & H).
Prospective purchasers of petitioners' housing could not usually afford large down payments. An arrangement was therefore entered into with Home Savings Association of Kansas City, a savings and loan association incorporated in Missouri (hereinafter called Association). Association's usual policy was to limit home loans to a maximum of 80 percent of appraised value. In the instant context, Association agreed to lend up to 95 percent of appraised value to customers of petitioners. In return, the relevant seller-petitioner agreed to assign to Association as collateral a share account of Association equal to the difference between 90 percent of Association's appraised value and the amount loaned. (In some sales by Fairhills, the collateralized amount was the difference between 80 percent of Association's appraised value and the amount loaned). A minimum down payment of 5 percent of the appraised value was usually required; the collateral share accounts averaged approximately 3.5 percent of the face value of the loans; and the Mortgage Guarantee Insurance Company, a stock insurance company, guaranteed the upper 20 percent of some of the loans to Association, but never in excess of 90 percent of the appraised value.
Collateral assigned by a seller and deposited as security for a loan to a home purchaser was credited to one of three pooled accounts, that is, to a pooled account in the name of Builders, Fairhills or B & H. In the event Association sustained a foreclosure loss regarding a loan to a home purchaser, which loss might include sale, repair, title and unearned interest expenses, the entire amount of such loss would be reimbursed from the pooled account of the relevant petitioner. Interest was paid on amounts in these accounts; deposits were credited on Association's books to the relevant petitioner; but no pass books were issued to petitioners regarding these accounts. Petitioners did not contemplate release of amounts in the security deposit accounts until several years after deposits.
The Association entered into separate agreements with Builders, Fairhills and B & H, but the essential operative paragraphs of those instruments were similar and provided substantially the following:
In addition to an agreement akin to the above, Fairhills and Association entered into another agreement, which provided inter alia the following:
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