Home Grp., Inc. v. Comm'r of Internal Revenue

• Decision Date: 18 August 1988
• Docket Number: Dkt. No. 17739-82
• Parties: 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
• Court: U.S. Tax Court

57 USLW 2130

91 T.C. 265

91 T.C. No. 23

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

Filed 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. 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 * * *.

» 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- 6A(a)(l), Income Tax Regs., applicable to taxable years beginning after July 11, 1969, and which was not in effect for petitioner's 1969 taxable year.

Pursuant to these provisions, petitioner's subsidiary, for its 1969 taxable year, elected on the consolidated return to claim the maximum permissible addition under section 593 to its bad debt reserve of $938,762. Because of respondent's adjustments to petitioner's consolidated 1969 return, ³ the maximum limit to said bad debt reserve was raised by the amounts of $1,634 and $44,209 in different parts of respondent's notice of deficiency.

As part of the Rule 155 activity between the parties, they exchanged letters and computational proposals. Petitioner advised respondent that it wished to forego all of the $938,762 reserve additions originally claimed and the $1,634 and $44,209 additions ‘determined‘ by respondent. Respondent agreed that the petitioner may exercise its discretion to forego the $44,209 reserve addition, but disagreed that petitioner is entitled to forego the $938,762 addition claimed on the return. ⁴

Respondent contends that petitioner is not entitled to forego the $938,762 amount on two grounds: (1) Petitioner's choice to forego the amount originally claimed on the return and not again raised until after our opinion (City Investing Co. v. Commissioner, T.C. Memo. 1987-36) constitutes the raising of a new issue prohibited during the Rule 155 portion of the proceeding; and (2) section 1.593- 6(a), Income Tax Regs., prohibits petitioner from now changing the reserve addition because it is ‘post-year tax planning.‘ ⁵

The difference in the parties' proposed computations result in about a $20,000 difference in petitioner's tax liability for the years before us, but may have a larger effect, in a subsequent year, in connection with petitioner's basis in its subsidiary savings bank which was sold in 1982. Interestingly, petitioner's computation results in a larger deficiency because it seeks to forego the $44,209 and $1,634 additions presented by respondent in the statutory notice.

RULE 155 - IS THIS MATTER A NEW ISSUE?

Under Rule 155 parties are required to submit ‘computations pursuant to the Court's determination of the issues, showing the correct amount of the deficiency * * * to be entered as the decision.‘ Parties are not permitted to raise new issues or matters in connection with the Rule 155 computations. Bankers Pocahontas Coal Co. v. Burnet, 287 U.S. 308 (1932). The starting point for the computation is the statutory notice of deficiency from which the parties compute the redetermined deficiency based upon matters agreed by the parties or ruled upon by the Court. Whitham v. Commissioner, a Memorandum Opinion of this Court dated January 30, 1953, 12 T.C.M. 71, 22 P-H Memo T.C. par. 53,031.

The Court's redetermination and the parties' agreed items usually affect items of income and deductions which raise or lower taxable income. It is also normal and usual for certain purely mathematical adjustments to be triggered by the change of taxable income, adjusted gross income, etc. Some examples of the automatic mathematical changes are the percentage limit on contributions, medical deductions, or investment tax credits. See Lustman v. Commissioner, T.C. Memo. 1960-116, affd. 322 F.2d 253 (3d Cir. 1963). On occasion a change in basis may generate a concomitant change in depreciation. See Superior Yarn Mills, Inc. v. Commissioner, 228 F.2d 736 (4th Cir. 1955). To some extent this case is analogous to the Superior Yarn Mills, Inc. v. Commissioner, supra. Here the $44,209 and $1,634 increases in the section 593 limitation for reserve additions did not become available to petitioner until the redetermined deficiency was calculated. Petitioner should have the discretion under section 593(b) and the regulations to decide how much, if any, the reserve addition is to be increased up to the newly calculated limit. That clearly is not a new issue and fits within the same category as other purely mathematically generated computational items.

A more difficult question concerns the treatment of the $938,762 addition to the reserves representing the maximum amount petitioner was entitled to and did utilize on its 1969 consolidated income tax return. There is nothing in the parties' agreements or our opinion which automatically triggers consideration of this specific portion of the reserve.

The parties' agreed issues, however, did generally open the question of the reserve by permitting it to increase, if petitioner desired. Conversely, our opinion and/or the parties' agreement could have mandatorily reduced the maximum reserve limit permissible under the regulation. Here, petitioner seeks to voluntarily reduce it now that our opinion is known and all factors have been considered.

In another regard, section 593 and pertinent regulations permit liberal discretion to taxpayers to determine the amount of the reserve, up to the limit. Section 593 and the regulation ⁶ do not limit this selection or election to the time of filing the original return. Respondent does not possess statutory authority to rule upon such elections because the statute vests the election solely within the discretion of taxpayers. Accordingly, so long as a taxable year remains open, it would not seem to make a difference when a taxpayer determined to increase or forego some portion of a potential reserve allowance. Moreover, a taxpayer...