National Bank of Commerce of Seattle v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 09 June 1939 |
| Docket Number | Docket No. 89720. |
| Parties | THE NATIONAL BANK OF COMMERCE OF SEATTLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Thomas N. Fowler, Esq., and C. L. Stone, C. P. A., for the petitioner.
B. H. Neblett, Esq., for the respondent.
This proceeding involves a deficiency in income tax liability of petitioner determined by respondent for the year 1934 in the sum of $2,896.54, and a claim for refund of taxes paid for that year in the sum of $3,076.94, denied by respondent. The parties have stipulated that "the taxes in controversy are income taxes for the year 1934 and in the amount of $5,833.23."
The parties hereto have filed two stipulations of fact and a number of exhibits in our record, which we include in our findings by reference. For specific details, where material, we refer to these stipulations and exhibits. In addition, oral testimony was given at the hearing herein. Our findings of fact set out below include the findings based upon such oral testimony and also a recitation of those facts contained in the stipulations which are necessary for an understanding of the issues presented by this proceeding.
FINDINGS OF FACT.
The petitioner is a banking corporation, with its principal place of business in Seattle, Washington. Most of the stock of petitioner was owned by the Marine Bancorporation during the years 1933 and 1934. In the year 1933, and prior to the transfers hereinafter described, the Marine Bancorporation was the owner of 94.5 percent of the capital stock of the Central National Bank of Commerce, 91 percent of the capital stock of the Washington National Bank of Commerce, 93 percent of the capital stock of the Capital National Bank, 94 percent of the capital stock of the Grays Harbor National Bank, 94 percent of the capital stock of the Bank of Elma, and 88 percent of the capital stock of the Montesano State Bank. These banks were smaller than petitioner and had their place of business in Seattle or its vicinity.
In the early part of 1933 the Marine Bancorporation evolved a plan of reorganization with regard to petitioner and the other banks above enumerated, whereby the assets of the six smaller banks were to be transferred to petitioner, subject to all their liabilities, and thereafter the business of the six smaller banks was to be carried on by petitioner through branches which would take the place of such smaller banks.
Pursuant to the plan of reorganization, the Central National Bank of Commerce and the Washington National Bank of Commerce transferred all of their assets to petitioner on April 1, 1933, the Capital National Bank and the Grays Harbor National Bank transferred all their assets to petitioner on September 1, 1933, and the Bank of Elma and the Montesano State Bank transferred all their assets to petitioner on December 1, 1933. Immediately after each of such transfers, the Marine Bancorporation was the owner of over 99 percent of the capital stock of petitioner. Petitioner, at the time of such transfers, assumed the liabilities of each of the banks making such transfers in an amount equal to the value of the "ledger" assets remaining upon the books of such transferor banks at the time of the transfers.
Immediately prior to the transfers set out above, each of the transferor banks, pursuant to the general plan of reorganization, went over its accounts and notes receivable and charged off its books all of such debts which it owned which were either worthless or which, while not worthless, might be considered as subject to criticism by either state or national bank examiners, such as loans made to companies in which some officer of the bank might be interested, or real estate loans not justified by 1933 appraisals, or real estate loans in excess of 50 percent of the value of the security. The total amount of the debts thus charged off on the books of the transferor banks prior to the transfers in question were in the following amounts:
Central National Bank of Commerce ____________ $30,074.90
Washington National Bank of Commerce _________ 18,839.49
Capital National Bank ________________________ 32,054.59
Grays Harbor National Bank ___________________ 169,544.37
Bank of Elma _________________________________ 54,505.98
Montesano State Bank _________________________ 120,664.03
Each of the transferor banks claimed deduction for worthless debts in the amounts set forth above in its original 1933 income tax return. In 1936, however, each of the six transferor banks filed an amended return for the year 1933 in which deductions for worthless debts were claimed in a lesser amount as follows:
Central National Bank of Commerce _____________ __________
Washington National Bank of Commerce __________ $157.79
Capital National Bank _________________________ 2,464.13
Grays Harbor National Bank ____________________ 55,675.13
Bank of Elma __________________________________ 10,027.99
Montesano State Bank __________________________ 14,418.84
The amended returns explained that the difference between the amount of such deductions claimed therein and those claimed in the original returns for 1933 represented loans partially or fully secured, and therefore, not deductible items. It was further explained that these items were charged off by way of capital adjustments and were deducted in the original returns by mistake.
At the time of the reorganization and transfers described above, petitioner charged off its books notes and accounts receivable which it owned in the amount of $531,597.63 and claimed as a deduction for worthless debts those amounts in its original 1933 income tax return. In an amended return submitted for 1933 petitioner claimed as such a deduction the sum of $366,269.97. A similar explanation was made with regard to the discrepancy between the amount of the deduction claimed in the amended return and that claimed in the original return.
With the exception of the Central National Bank of Commerce, each of the transferor banks sustained a net loss in the year 1933 in an amount greater than the bad debts claimed as a deduction in its original return. Petitioner also sustained a net loss for that year in an amount greater than the bad debts claimed as a deduction in its original return for the year 1933. The taxable gain of the Central National Bank of Commerce for 1933 amounted to $1,333.03 after excluding $30,074.90 of bad debts which had been claimed on its original return for the year 1933. Petitioner made recoveries on such debts in 1934 in the sum of $3,110.33.
After the transfers had been made to petitioner in 1933 pursuant to the reorganization, all as above described, the accounts which had been charged off the books of the transferor banks and the accounts which had been charged off the books of petitioner were carried as nonledger assets of the petitioner, that is, they were charged off the general ledger of petitioner or the transferor banks, and after the transfers and the reorganization, were carried by petitioner as nonledger accounts in the form of cards which were periodically checked by officers of the bank, but which did not appear in the asset account of the bank. Many of these accounts, while not carried as assets of the bank, were considered of value.
In 1934 petitioner made recoveries in the amount of $11,835.16 on accounts charged off by it in 1933 and claimed as deductions for bad debts in its original 1933 income tax return, and also made recoveries in the amount of $26,230.90 on debts charged off by the transferor banks and claimed by them as deductions for worthless debts in their income tax returns for 1933. In 1934 petitioner reported as income all of such recoveries except recoveries in the amount of $4,935.48 which were had on account of debts which petitioner had received from the Montesano State Bank.
In its income tax return for 1934 petitioner claimed as a deduction bad debts in a total amount of $4,357.44 made up of 16 items, 4 of which in a total amount of $525 had been charged off by petitioner, and 12 of which in a total amount of $3,832.44 had been charged off by the transferor banks in 1933, after which charge-offs and transfers they had been carried as nonledger accounts by petitioner. Deductions for these debts had been claimed in the original income tax return of petitioner and the transferor banks in 1933. They were ascertained by petitioner to be worthless in 1934, but no charge-off was made as to these debts upon the books of petitioner in the year 1934.
Petitioner has stipulated that recoveries made by it in 1934 in the amount of $1,132.24 are taxable.
The primary question presented by this proceeding is whether the recoveries of debts charged off as worthless in previous years by a bank on its own initiative constitute taxable income in the year of their recovery by such bank, even though the prior charge-off accomplished no reduction in tax liability in the year in which they were charged off.
It is now well settled that where amounts previously deducted from income for losses, expenses, bad debts, taxes, etc., which effect an offset of taxable income, are recovered in subsequent years, such recoveries "should be reported as a part of gross income for the year in which * * * recovered." Estate of William H. Block, 39 B. T. A. 338; Dixie Margarine Co., 38 B. T. A. 471. The converse of this proposition is also true — that if such amounts so deducted did not effect an offset of taxable income for the year in which deducted, then recoveries in subsequent years should not be included in gross income in the years of recovery. Central Loan & Investment Co., 39 B. T. A. 981. Therefore, regardless of whether the debts were charged off, in the instant proceeding, on the bank's own initiative or on the order of a bank examiner, if the charge-off accomplished no reduction in tax...
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