Home Sav. v. Comm'r of Internal Revenue , Docket No. 3083-80.
| Decision Date | 23 March 1983 |
| Docket Number | Docket No. 3083-80. |
| Parties | HOME SAVINGS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, a savings and loan association, used the reserve method of accounting for bad debts in 1975 and, under the reserve method, used the experience method of computing its bad debt deduction for 1975. Petitioner maintained as a permanent part of its books and records (1) certain tax reserve accounts which are required for the use of the reserve method, (2) a reconciliation of these tax reserve accounts with its other reserve accounts, and (3) its Federal income tax return for 1975 which explained the entries made to the tax reserve accounts. Held, petitioner complied with the requirements of sec. 593, I.R.C. 1954,1 and is entitled to its claimed bad debt deduction for 1975. Held, further, petitioner is not entitled to a deduction for the minimum tax on tax preference items. Standard Oil Co. (Indiana) v. Commissioner, 77 T.C. 349 (1981). Edwin J. Walker, Jr., and Richard M. Hutson II, for the petitioner.
Eric B. Jorgensen, for the respondent.
The Commissioner determined deficiencies in petitioner's Federal income tax for the taxable years and in the amounts as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1969 ¦$263.15 ¦
+------+-------------¦
¦1970 ¦398.24 ¦
+------+-------------¦
¦1971 ¦996.19 ¦
+------+-------------¦
¦1972 ¦271,034.31 ¦
+------+-------------¦
¦1973 ¦316,649.09 ¦
+------+-------------¦
¦1974 ¦155,511.66 ¦
+------+-------------¦
¦1975 ¦423,503.48 ¦
+------+-------------¦
¦1976 ¦8,941.68 ¦
+--------------------+
After concessions by the parties, the issues for decision are: (1) Whether the petitioner complied with the requirements of section 593, I.R.C. 1954, as amended, with respect to the reserve method of accounting for bad debts so as to be entitled to a bad debt deduction in the amount of $1,961,508 for its taxable year ending December 31, 1975; and (2) whether the petitioner is entitled to a deduction under section 162 or section 164 for the minimum tax for tax preference items imposed by section 56 for its taxable years ending December 31, 1973, and December 31, 1974, in the amounts of $35,065 and $21,611, respectively.
Some of the facts have been stipulated. The stipulation of facts and stipulated exhibits are incorporated herein by this reference.
The petitioner is a corporation incorporated under the laws of the State of North Carolina and a federally chartered mutual savings and loan association without capital stock represented by shares. Its principal place of business was Durham, N.C., at the time its petition in this case was filed.
The petitioner filed its Federal corporate income tax return for the taxable year ending December 31, 1969, on the cash basis. Beginning with its taxable year ending December 31, 1970, the petitioner changed its method of accounting from the cash receipts and disbursements method to the accrual method. The petitioner filed its Federal corporate income tax returns for the taxable years 1970 through 1976 on the accrual basis.
The petitioner filed an amended Federal income tax return, compiled on the cash method of accounting, for the taxable year 1969.
The petitioner filed, on March 2, 1976, corporate applications for tentative refunds for the taxable years 1969 through 1974 in the amounts of $263.15 for 1969, $236.84 for 1970, $592.69 for 1971, $271,034.31 for 1972, $316,649.09 for 1973, and $73,305.16 for 1974. The amounts for 1972, 1973, and 1974 were refunded to petitioner on or about May 4, 1976. The amounts for 1969, 1970, and 1971 were refunded to petitioner on or about June 17, 1976. These refunds were created by the carryback of a net operating loss from 1975 to 1972 in the amount of $1,553,619.02, which created unused investment credits for 1972 which were carried back by the petitioner to 1969, 1970, and 1971. Of the $1,553,619.02, $913,066.95 and $167,798.21 were carried over to 1973 and 1974, respectively.
The petitioner filed amended Federal corporate income tax returns, compiled on the accrual method of accounting, for the taxable years 1973 and 1974 on March 16, 1977, and March 15, 1978, respectively. In these amended returns, the petitioner claimed deductions for its minimum tax for the tax preference items in the amount of $35,065 for 1973 and $21,611 for 1974.
The petitioner, as a federally chartered mutual savings and loan association, is under the jurisdiction of, and subject to, the regulations of the Federal Home Loan Bank.
The petitioner used the reserve method of accounting for bad debts for the taxable years 1969 through 1976. Under this reserve method, the petitioner computed its addition to the reserve for bad debts using the percentage of taxable income method, under section 593(b)(2), for all of the taxable years except 1975. For the taxable year 1975, petitioner computed the addition to its reserve for bad debts using the experience2 method under section 593(b)(4).
The petitioner's books and records included certain reserves. These reserves were established on permanent subsidiary ledger cards. For the taxable year 1975, the petitioner also retained a copy of both its 1975 tax return and a copy of its 1975 Allocation and Reconciliation of Reserves Schedule as part of its permanent books and records. The following accounts and subaccounts are among the above-mentioned reserves established and maintained by petitioner:
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¦Account ¦Account No. ¦
+--------------------------------------------------------+-------------¦
¦ ¦ ¦
+--------------------------------------------------------+-------------¦
¦Federal insurance reserves ¦2731 ¦
+--------------------------------------------------------+-------------¦
¦Reserves for losses on nonqualifying real property loans¦2726 ¦
+--------------------------------------------------------+-------------¦
¦Reserves for losses on qualifying real property loans ¦2727 ¦
+--------------------------------------------------------+-------------¦
¦Supplemental reserves ¦2728 ¦
+--------------------------------------------------------+-------------¦
¦General loss reserves ¦2732 ¦
+--------------------------------------------------------+-------------¦
¦Special bad debt reserve ¦2729 ¦
+--------------------------------------------------------+-------------¦
¦Balance of general loss reserves ¦2730 ¦
+--------------------------------------------------------+-------------¦
¦Undivided profits ¦2741 ¦
+----------------------------------------------------------------------+
The three subaccounts of the Federal insurance reserve account comprise the three tax bad debt reserves required by section 593. The Federal insurance reserve account and most of the other mentioned accounts are required by the Federal Home Loan Bank.
At the petitioner's executive committee meeting on November 21, 1974, petitioner's directors approved the establishment of a valuation allowance reserve for possible loss on first mortgage loans and real estate owned (valuation reserve) in the amount of $1,250,000 for possible losses on three loans:
+------------------------------------+
¦Loan ¦Amount ¦
+---------------------------+--------¦
¦ ¦ ¦
+---------------------------+--------¦
¦DR20023 Fletcher Woods ¦$600,000¦
+---------------------------+--------¦
¦DR20482 Gregory Real Estate¦400,000 ¦
+---------------------------+--------¦
¦DR20465 Heritage Hills ¦250,000 ¦
+------------------------------------+
Petitioner effected the action of its directors by making appropriate entries in its financial and bank regulatory books and records (a “book” entry as opposed to a tax entry)3 to create this valuation reserve by transfers from general loss reserve accounts.
At petitioner's board of directors meeting on October 9, 1975, the directors approved an increase in the valuation reserve in the amount of $806,298. This amount reflects the total amount by which certain outstanding loans exceeded the appraised value of the collateral securing the loans. The loans and amounts were:
+-----------------------------------+
¦Loan ¦Amount ¦
+--------------------------+--------¦
¦ ¦ ¦
+--------------------------+--------¦
¦DR20189 Wakefield IV ¦$430,229¦
+--------------------------+--------¦
¦DR20139 Wakefield I ¦144,612 ¦
+--------------------------+--------¦
¦DR20242 Chapel Towers II ¦10,497 ¦
+--------------------------+--------¦
¦DR20212 Penrith Associates¦220,960 ¦
+-----------------------------------+
Petitioner made appropriate book (as opposed to tax) entries to reflect this action.
At petitioner's board of directors meeting on November 13, 1975, the directors approved reducing the amount of the valuation reserve set aside for the Wakefield I loan (DR20139) from $144,612 to $51,612 and for the Wakefield IV loan (DR20189) from $430,229 to $132,730. At that time, the directors also approved an increase to the valuation reserve in the amount of $18,701 for the foreclosure of the Kavanau Real Estate Trust loan. The petitioner made appropriate book entries to reflect these actions.
At the petitioner's board of directors meeting on December 11, 1975, the directors approved an increase to the valuation reserve by $188,300 for the foreclosed Heritage Hills loan based on the appraised...
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