RIO Grande Bldg. & Loan Ass'n v. Comm'r of Internal Revenue
| Decision Date | 12 July 1961 |
| Docket Number | Docket No. 72236. |
| Citation | 36 T.C. 657 |
| Parties | RIO GRANDE BUILDING & LOAN ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Howard J. Stafford, Jr., Esq., and Robert L. Schwarz, Esq., for the petitioner.
Robert L. Liken, Esq., for the respondent.
1. Petitioner, a savings and loan association, elected to claim its bad debt deductions under the reserve method for the years 1953 through 1955. For each of these years, petitioner deducted the full amount of its net income as a bad debt deduction. It bases its claim for such deductions on the ground that the amounts deducted were, by implication, determined to be reasonable reserve additions under the provisions of the applicable Internal Revenue Code. Only part of the amounts was credited to any reserve account. Held, that for each of the years in issue, petitioner's allowable bad debt deduction is limited to what it had determined at the end of each year to be a reasonable addition to its bad debt reserve, as evidenced by its actual transfers to bad debt accounts, and petitioner may not retroactively enlarge its reserve accounts for prior years, albeit the increased amounts would have been reasonable and allowable as deductions if timely made.
2. Petitioner's legal reserve account (bad debt) contained $110,000 accumulated before it was subject to Federal income taxation. During each of the years 1953 through 1955, petitioner transferred amounts to this reserve account from undivided profits and charged said account for payment of dividends totaling $32,500 with the intention that the latter be paid out of the pre-1952 accumulation. The legal reserve was never less than the amounts credited in the years 1953 through 1955. Held, that the payment of said dividends did not require petitioner to restore to taxable income any part of the legal reserve in any of the years in question and petitioner is allowed to deduct as bad debt expenses the full amount transferred to said account each year.
3. Held, that petitioner has failed to meet the burden of proving its reserve for contingencies was a reserve account for bad debts.
The Commissioner determined deficiencies in income tax of Rio Grande Building & Loan Association (hereinafter sometimes called the association) as follows:
+-----------------+
¦1953 ¦$14,520.00 ¦
+-----+-----------¦
¦1954 ¦17,234.21 ¦
+-----+-----------¦
¦1955 ¦22,522.26 ¦
+-----+-----------¦
¦Total¦54,276.47 ¦
+-----------------+
The issue for our determination is whether petitioner, during any or all of the years in issue, is to be allowed any deduction for bad debts under the reserve method, and, if so, in what amount under section 23(k)(1) of the 1939 Code and section 593 of the 1954 Code.
Some of the facts have been stipulated and are so found.
Petitioner is organized under the laws of Texas as a domestic savings and loan association. It is subject to the supervision of the banking commissioner of the State of Texas but it is not a member of the Federal Home Loan Bank System and its accounts are not insured by the Federal Savings and Loan Insurance Corporation.
During the years in issue, 1953 through 1955, all of the profits before bad debt deductions were transferred to an undivided profits account. Transfers were then made from this account to one or more reserve accounts. Petitioner, as of the end of 1955, had established on its books three separate reserve accounts and had credited various amounts to them over the 3-year period. These accounts were called the Legal Reserve, General Loss Reserve, and Reserve for Contingencies.
The legal reserve account was originally established pursuant to the regulations of the State Banking Department to provide a reserve against bad debts and loans. The balance of this account as of December 31, 1952, was $110,000. This amount was accumulated while petitioner was not subject to Federal income taxes.
After the Federal law went into effect providing for the taxation of the profits of the association and the allowable deduction for bad debts, the association in 1953 set up a general loss reserve account as an addition to a bad debt reserve account. The only transfer to this account was the amount of $5,371.21 in 1953.
On December 31, 1955 (the last day of the period in issue), the association established a third reserve account, Reserve for Contingencies, with the transfer of $35,629.78 from undivided profits.
The following Schedule A is a summary of the transactions concerning undivided profits and the various reserve accounts for the taxable years 1952 through 1955.
+-----------------------------------------------------------------------------+
¦SCHEDULE A ¦
+-----------------------------------------------------------------------------¦
¦ ¦ ¦Undivided ¦Legal ¦General ¦Reserve ¦Dividends¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦Year¦Transaction ¦profits ¦reserve ¦loss ¦for ¦stock and¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦ ¦ ¦ ¦reserve ¦contingencies¦cash ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Balance ¦$20,117.73 ¦$110,000¦ ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦1952¦(Profit for year ¦22,466.27 ¦ ¦ ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Dividends ¦(10,000.00)¦ ¦ ¦ ¦1 ¦
¦ ¦ ¦ ¦ ¦ ¦ ¦$20,500 ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦Balance ¦32,584.00 ¦110,000 ¦ ¦ ¦20,500 ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Profit for year ¦39,308.87 ¦ ¦ ¦ ¦ ¦
¦ ¦2 ¦ ¦ ¦ ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Dividends ¦(31,000.00)¦ ¦ ¦ ¦31,000 ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦1953¦(To reserves ¦(15,371.21)¦10,000 ¦$5,371.21¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Transfer for ¦ ¦ ¦3 ¦ ¦ ¦
¦ ¦unknown reasons ¦ ¦ ¦(662.00) ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Dividends from ¦ ¦(7,500) ¦ ¦ ¦7,500 ¦
¦ ¦reserve ¦ ¦ ¦ ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦Balance ¦25,521.66 ¦112,500 ¦4,709.21 ¦ ¦59,000 ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Profit for year ¦43,719.15 ¦ ¦ ¦ ¦ ¦
¦ ¦2 ¦ ¦ ¦ ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦1954¦(To reserves ¦(30,000.00)¦30,000 ¦ ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Dividends from ¦ ¦(15,000)¦ ¦ ¦15,000 ¦
¦ ¦reserves ¦ ¦ ¦ ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦Balance ¦39,240.81 ¦127,500 ¦4,709.21 ¦ ¦74,000 ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Profit for year ¦53,888.97 ¦ ¦ ¦ ¦ ¦
¦ ¦2 ¦ ¦ ¦ ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Dividends ¦(25,000.00)¦ ¦ ¦ ¦25,000 ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦1955¦(To reserves ¦(58,129.78)¦22,500 ¦ ¦$35,629.78 ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦(Dividends from ¦ ¦(10,000)¦ ¦ ¦10,000 ¦
¦ ¦reserves ¦ ¦ ¦ ¦ ¦ ¦
+----+-----------------+-----------+--------+---------+-------------+---------¦
¦ ¦Balance ¦10,000.00 ¦140,000 ¦4,709.21 ¦35,629.78 ¦109,000 ¦
+-----------------------------------------------------------------------------+
FN2 Before deduction for addition to bad debt reserve.FN3 Not established in record but presumably a bad debt writeoff.
Petitioner treated the pre-1952 accumulation in the legal reserve account of $110,000 as a free reserve and it was its intention that the dividends paid out of the account during the years in issue in the amount of $32,500 were to be taken from the accumulation rather than from the current additions during the years in issue.
The books, records, and income tax returns of the association were on a calendar year basis using an accrual method of accounting.
For the taxable years 1953 through 1955, petitioner filed its Federal corporation income tax returns (Form 1120) with the district director of internal revenue, Austin, Texas.
On December 13, 1956, petitioner and respondent executed Form 872 extending the statute of limitations for the taxable year 1953 to June 30, 1958.
On each of the returns...
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