Mercantile Nat'l Bank at Dallas v. Comm'r of Internal Revenue
| Decision Date | 22 April 1958 |
| Docket Number | Docket Nos 57631,65927. |
| Citation | 30 T.C. 84 |
| Parties | MERCANTILE NATIONAL BANK AT DALLAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Edward L. Wilson, Esq., and Hubert D. Johnson, Esq., for the petitioner.
Paul M. Newton, Esq., for the respondent.
1. EXCESS PROFITS TAX— BANKS— RECOVERIES OF BAD DEBTS.— Section 433(a)(1) (L) of the Internal Revenue Code of 1939, as added by the Excess Profits Tax Act of 1950, provides that for the purpose of computing excess profits net income, banks using the reserve method of accounting for bad debts shall deduct debts which became worthless within the taxable year in lieu of the amount allowable under the reserve method. Held, that neither subparagraph (L) nor any other provision of section 433(a) requires that there shall be included in excess profits net income or such a bank any income attributable to the recovery of bad debts which had been the subject of a deduction in prior excess profits tax years.
2. CAPITAL EXPENDITURES— EXPENSE DEDUCTIONS.— Costs of membership in athletic club, of moving building manager's office, and of installing new lighting system held to be capital expenditures and not deductible as ordinary and necessary business expenses.
The respondent determined deficiencies in income and excess profits taxes for the calendar years, and in the amounts as follows:
+--------------------------------------------+
¦1951¦Income tax ¦$8,282.98¦
+----+-----------------------------+---------¦
¦1952¦Income and excess profits tax¦61,777.97¦
+----+-----------------------------+---------¦
¦1953¦Income and excess profits tax¦24,459.69¦
+--------------------------------------------+
The major portion of the excess profits tax deficiencies arises out of the the respondent's action in increasing excess profits net income by the amounts recovered in the taxable years on account of debts which had either been charged off as bad debts or had been charged to the reserve for bad debts in prior excess profits tax years. The action of the respondent in so increasing excess profits net income is assigned as error. This issue is also raised for the year 1950 which is before us because of an unused excess profits carryover from that year to the taxable years.
The petitioner contends alternatively that its deduction for bad debts in 1950 resulted in a tax benefit, at the most, of only 184/365 thereof, and that therefore no more than that proportion of amounts recovered on account thereof in 1951, 1952, and 1953 should be included in excess profits net income of such latter years.
Other issues concern deductions for the costs of a club membership, relocating its building manager's office, and replacing a lighting system.
Most of the facts were stipulated and are incorporated herein by this reference.
The petitioner is a national bank incorporated in 1933 and has been doing business since that date under the laws of the United States, with principal office and place of business in Dallas, Texas. It timely filed corporation income and excess profits tax returns for the calendar years 1950, 1952, 1952, and 1953 with the collector or director of internal revenue at Dallas.
The petitioner regularly reports its income on the cash method of accounting, except with respect to bad debts. Prior to the calendar year 1944 the petitioner deducted specific bad debt items from gross income when determined to be worthless and included in gross income when received recoveries of bad debts previously deducted. In 1944 the respondent granted the petitioner's request to employ the reserve method of accounting for bad debts for Federal income tax purposes beginning with the calendar year 1944. On its income tax return for the year 1944 the petitioner adopted the reserve method and has employed that method of accounting for bad debts for Federal income tax purposes regularly since that year. Under the reserve method a reasonable reserve for bad debts was deductible by the petitioner in computing taxable income for the year 1944, and a reasonable addition thereto was deductible in computing taxable income for each subsequent year. Under that method debts are charged to the reserve when determined to be worthless and recoveries of bad debts previously charged to the reserve are credited to the reserve when received. On its income tax return for the year 1947, the petitioner adopted the 20-year moving average method of determining annual additions to the reserve for bad debts.1 The petitioner has employed the 20-year moving average method of determining the annual additions to the reserve for bad debts regularly since 1947 and during each of the calendar years 1951, 1952, 1953.
The reasonable addition to the petitioner's reserve for bad debts for each of the years 1951, 1952, and 1953 computed under the 20-year moving average method was as follows:
+-----------------+
¦1951¦$471,024.63 ¦
+----+------------¦
¦1952¦408,968.13 ¦
+----+------------¦
¦1953¦226,161.46 ¦
+-----------------+
The petitioner claimed and the respondent allowed these amounts as deductions in the computation of net income for purposes of the normal tax and the surtax. During each of the years 1951, 1952, and 1953 the petitioner recovered specific debts, which had been determined to be worthless and either deducted from gross income (before 1944) or charged to the reserve (since 1943), as follows:
+-----------------+
¦1951¦$123,160.36 ¦
+----+------------¦
¦1952¦159,288.57 ¦
+----+------------¦
¦1953¦113,655.12 ¦
+-----------------+
The amounts of these recoveries were properly credited to the reserve for bad debts but were not includible in net income for purposes of the normal tax and surtax.
During each of the years 1951, 1952, and 1953 specific debts owing to the petitioner became worthless in the following amounts:
+-----------------+
¦1951¦$394,631.38 ¦
+----+------------¦
¦1952¦67,609.68 ¦
+----+------------¦
¦1953¦446,734.28 ¦
+-----------------+
The amounts of these worthless debts were properly charged to the reserve for bad debts but were not deductible in computing net income for purposes of the normal tax and surtax.
In its excess profits tax returns for the years 1951, 1952, and 1953 the petitioner determined its excess profits net income by deducting the amount of the specific worthless debts which had been charged to the reserve for bad debts during each year in lieu of the amount allowable under the reserve method. This adjustment was made on Schedule EP-1 filed for each year by adding to normal tax net income the amount allowable under the reserve method and deducting the amount of the specific worthless debts.
In the notice of deficiency the respondent has increased the excess profits net income of the petitioner for each of the years 1951, 1952, and 1953 by taking into account in each year the recoveries of debts charged to the reserve in prior years, in amounts as follows:
+----------------+
¦1951¦$87,685.53 ¦
+----+-----------¦
¦1952¦113,677.59 ¦
+----+-----------¦
¦1953¦93,625.51 ¦
+----------------+
In each year the aforesaid amount was computed by subtracting from the total bad debt recoveries during the year ($123,160.36 in 1951; $159,288.57 in 1952; $113,655.12 in 1953) the amount of such recoveries relating to debts which had been deducted from gross income during taxable years beginning before January 1, 1940, or charged to the reserve for bad debts for years beginning after December 31, 1945, and ending before July 1, 1950 ($35,474.83 in 1951; $45,610.98 in 1952; $20,029.61 in 1953).
The bad debt recoveries by which the respondent has increased the petitioner's excess profits net income for each of the years 1951, 1952, and 1953 include those on debts originally charged to the reserve for bad debts during the taxable year 1950. The amounts so included are as follows:
+----------------+
¦1951¦$83,247.58 ¦
+----+-----------¦
¦1952¦74,585.79 ¦
+----+-----------¦
¦1953¦72,448.54 ¦
+----------------+
The reasonable addition to the petitioner's reserve for bad debts for the year 1950, computed under the 20-year moving average method, was $541,806.31. During the year 1950 the petitioner recovered specific debts which in prior years had been determined to be worthless and either charged to the reserve (since 1943) or deducted from gross income (before 1944) in the total amount of $121,151.21. Of this amount, specific debts were recovered which had been determined to be worthless in the years 1940 through 1945, as follows:
+--------------------------------+
¦Year of ¦Amount of recovery ¦
+-----------+--------------------¦
¦deduction ¦in 1950 ¦
+-----------+--------------------¦
¦1940 ¦$160.64 ¦
+-----------+--------------------¦
¦1941 ¦2.50 ¦
+-----------+--------------------¦
¦1942 ¦59.68 ¦
+-----------+--------------------¦
¦1943 ¦35.00 ¦
+-----------+--------------------¦
¦1944 ¦3,797.75 ¦
+-----------+--------------------¦
¦1945 ¦28,691.05 ¦
+-----------+--------------------¦
¦Total ¦32,746.62 ¦
+--------------------------------+
During the year 1950 certain specific debts of the petitioner became worthless in the amount of $848,041.83, which were charged to the reserve for bad debts but were not deducted in computing net income subject to normal tax and surtax. In its excess profits tax return for the year 1950, the petitioner determined its excess profits net income by deducting this amount in lieu of the amount allowable as a reasonable addition to the reserve.
The respondent determined that the excess profits net income of the petitioner for 1950 should be increased in the amount of the recoveries of debts which had been deducted from gross income (before 1944) or charged to the reserve (since 1943) during the years 1940 through 1945,...
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