Leesburg Fed. Sav. & Loan Ass'n v. Comm'r of Internal Revenue, Docket No. 299-69.

• Decision Date: 02 December 1970
• Docket Number: Docket No. 299-69.
• Citation: 55 T.C. 378
• Parties: LEESBURG FEDERAL SAVINGS AND LOAN ASSOCIATION, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

55 T.C. 378

LEESBURG FEDERAL SAVINGS AND LOAN ASSOCIATION, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 299-69.

United States Tax Court

Filed December 2, 1970.

[55 T.C. 379]

Carroll V. McKinney, for the petitioner.

Clarance E. Barnes, for the respondent.

T, a domestic building and loan association, claimed deductions on its Federal income tax returns for additions made to a bad debt reserve account for qualifying real property loans. Except for information contained in its tax returns, T did not maintain any ledgers or accounts relating to bad debt reserves. Held, assuming that copies of the income tax returns could otherwise qualify as part of petitioner's books of account, petitioner has failed to establish that any such copies were in fact maintained as a permanent part of its regular books of account as required by sec. 1.593-7(a), Income Tax Regs. Held further, in the alternative, copies of tax returns do not meet the bookkeeping requirements of sec. 593 and the regulations under that section.

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

+--------------------------------------+
                ¦ ¦ ¦Addition to tax, ¦
                +------+------------+------------------¦
                ¦ ¦ ¦sec.6651(a), ¦
                +------+------------+------------------¦
                ¦Year ¦Deficiency ¦I.R.C.1954 ¦
                +------+------------+------------------¦
                ¦ ¦ ¦ ¦
                +------+------------+------------------¦
                ¦1965 ¦$22,885 ¦$1,145 ¦
                +------+------------+------------------¦
                ¦1966 ¦20,640 ¦ ¦
                +--------------------------------------+
                

The only question remaining for decision is whether, in each of the years in issue, petitioner has satisfied the accounting requirements of section 593, I.R.C. 1954, and the regulations promulgated thereunder, and is therefore entitled to deductions for additions made to its accounts for bad debt reserves.

FINDINGS OF FACT

The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference. No other evidence was presented.

During the years in question, Leesburg Federal Savings & Loan Association (hereinafter referred to as petitioner) was a domestic building and loan association within the meaning of section 593, I.R.C. 1954. It was organized under the laws of the State of Ohio and was incorporated in February 1884. At the date of the filing of the petition in this case, petitioner's principal office and place of business was at Leesburg, Ohio. It filed its corporate income tax returns (Form 1120) for the calendar years 1965 and 1966 with the district director of internal revenue, Cincinnati, Ohio. Petitioner was on the accrual basis of accounting.

On its tax return for the taxable year 1965 petitioner claimed a deduction of $47,678 for ‘Bad debts.’ Schedule F of petitioner's tax return disclosed that petitioner used the reserve method of accounting for bad debts and that it was for additions to these reserves for bad debts that petitioner claimed the deduction. Of the several supplements petitioner attached to its 1965 tax return, two were related to this

[55 T.C. 380]

deduction for additions to its bad debt reserves. One (‘Reconciliation of General Reserves') read as follows:

+---------------------------------------------+
                ¦LEESBURG FEDERAL SAVINGS AND LOAN ASSOCIATION¦
                +---------------------------------------------¦
                ¦ ¦
                +---------------------------------------------¦
                ¦LEESBURG, OHIO ¦
                +---------------------------------------------¦
                ¦ ¦
                +---------------------------------------------¦
                ¦Year ended December 31, 1965 ¦
                +---------------------------------------------¦
                ¦ ¦
                +---------------------------------------------¦
                ¦RECONCILIATION OF GENERAL RESERVES ¦
                +---------------------------------------------¦
                ¦ ¦
                +---------------------------------------------¦
                ¦ ¦
                +---------------------------------------------+
                

 Supervisory reserves Bad
                 _________________ debts
                

Title Federal Balance, charge Reserve
                 insurance 1/1/65 off allocation Balance
                 reserve
                

I Nonqualifying loan reserve 0 0 0 0 0
                II Qualifying loan reserve $223,461 $223,461 $3,669 1 $50,857 $270,649
                

III Supplementary reserve 199,019 199,019
                IV Pres-1952 reserve 41,067 41,067
                

 463,547 463,547 3,669 1 50,857
                Loss on sale of real estate -3,669
                Allowable bad debt reduction [sic] 47,678
                Excess transfer 3,179
                Bal. 12/31/65 510,735 510,735
                

The above table represented that the petitioner transferred $47,678 to its ‘Qualifying Loan Reserve,‘ for which it claimed a deduction (the word ‘reduction’ in the table was obviously a typographical error, intended to be ‘deduction’) for additions to bad debt reserves, along with an additional $3,179 for which no deduction was claimed. The other supplement to the 1965 tax return explained that the amount of the deduction for allocation to bad debt reserves for qualifying loans was computed as 60 percent of taxable income.

+-----------------------------------------------------------------------------+
                ¦Schedule F-BAD DEBTS ¦ ¦ ¦
                +----------------------------------------------------------+----------+-------¦
                ¦ ¦ ¦ ¦
                +---------------------------------------------------------------------+-------¦
                ¦Taxable income before deduction for bad debts and contributions, but ¦$79,464¦
                ¦after dividends-received deduction ¦ ¦
                +---------------------------------------------------------------------+-------¦
                ¦Bad debt deduction-60 percent thereof ¦ ¦47,678 ¦
                +----------------------------------------------------------+----------+-------¦
                ¦6 per cent of qualifying loans ($6,313,548) ¦$378,813 ¦ ¦
                +----------------------------------------------------------+----------+-------¦
                ¦Less qualifying loan reserve at Dec. 31, 1964 ¦223,461 ¦ ¦
                +----------------------------------------------------------+----------+-------¦
                ¦Maximum allowable deduction ¦155,352 ¦ ¦
                +-----------------------------------------------------------------------------+
                

The petitioner did not claim a deduction in 1965 for any addition to a bad debt reserve for nonqualifying loans.

On its 1966 income tax return petitioner claimed $43,000 as a deduction for additions to its reserves for bad debts in a similar fashion as in 1965. The petitioner again attached supplements to its tax return. One of the supplements was to Schedule L-Balance Sheets of the tax form. It read:

+-----------------------------------------------------------------------------+
                ¦LEESBURG FEDERAL SAVINGS AND LOAN ASSOCIATION ¦
                +-----------------------------------------------------------------------------¦
                ¦LEESBURG, OHIO ¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦Year ended December 31, 1966 ¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦ ¦ ¦ ¦ ¦ ¦
                +-----------------------------------------------------------------------------¦
                ¦SCHEDULE L, LINE 23-RECONCILIATION OF SUPERVISORY RESERVES AND FEDERAL INCOME¦
                ¦TAX BAD DEBT RESERVES ¦
                +-----------------------------------------------------------------------------¦
                ¦ ¦Supervisory ¦1966 Results ¦
                ¦ ¦reserves ¦ ¦

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