Schuylkill Haven Trust Co. v. United States, Civ. A. No. 32104.

• Decision Date: 15 March 1966
• Docket Number: Civ. A. No. 32104.
• Citation: 252 F. Supp. 557
• Parties: The SCHUYLKILL HAVEN TRUST COMPANY v. UNITED STATES of America.
• Court: U.S. District Court — Eastern District of Pennsylvania

252 F. Supp. 557

The SCHUYLKILL HAVEN TRUST COMPANY v. UNITED STATES of America.

Civ. A. No. 32104.

United States District Court E. D. Pennsylvania.

March 15, 1966.

Gordon W. Gerber, of Dechert, Price & Rhoads, Philadelphia, Pa., for plaintiff.

Drew J. T. O'Keefe, U. S. Atty., Philadelphia, Pa., Richard M. Roberts, Acting Asst. Atty Gen., David A. Wilson, Jr., and Arthur L. Stern, Attys., Dept. of Justice, Washington, D. C., for defendant.

BODY, District Judge.

The principal question presented by the government's motion for summary judgment is whether a downward adjustment on taxpayer's books and records of the value of its bank building, furniture and fixtures in compliance with the Pennsylvania banking law constitutes a deductible loss within the meaning of Section 165 of the Internal Revenue Code of 1954.

The relevant facts have been stipulated by the parties. The plaintiff Trust Company instituted this civil action on September 26, 1962 to recover taxes assessed, collected and returned by the defendant, acting through the Commissioner of Internal Revenue, for the calendar years 1954, 1955 and 1956.

Taxpayer is a Pennsylvania corporation engaged in the business of banking. In October 1956 taxpayer moved the location of its office from 6 East Main Street, Schuylkill Haven, Pennsylvania, to 24-28 East Main Street in the same borough. Plaintiff's new bank had a cost value of $189,891.09 and the furniture and fixtures therein had a cost value of $61,629.70.

The Banking Code of the Commonwealth of Pennsylvania¹ requires that a banking institution allocate no more than twenty-five percent of its combined capital and surplus to its banking house furniture and fixtures.

In 1956 taxpayer complied with the abovementioned statute by making a downward adjustment on its books and records of the value of its banking house and furniture and fixtures in the total amount of $101,510.79. The adjustment or "write down" was made as follows:

                                           Furniture &amp
                              Building       Fixtures
                Unadjusted:  $189,891.09   $61,629.70
                Adjustment:    98,232.97     3,277.82
                             ___________   __________
                Balance:     $ 91,658.12   $58,341.88
                

This downward adjustment satisfied the requirements of the state banking law since the costs on taxpayer's books of its building ($91,658.12) and furniture and fixtures ($58,341.88) then totalled $150,000.00 which was twenty-five percent of its capital ($150,000.00) plus surplus ($450,000.00), or exactly one-fourth of $600,000.00.

Taxpayer claimed a deduction of $101,510.79 on its federal income tax return for 1956. This deduction, which represented the total adjustment made by taxpayer, was disallowed in full and on October 23, 1959 the Internal Revenue Service assessed a deficiency of $7,813.14 plus interest thereon of $1,175.80 for the calendar year 1956. Taxpayer paid the deficiency under protest and on February 24, 1960 it filed timely claims for refund for the years 1954, 1955 and 1956.

The 1956 claim by taxpayer in the amount of $7,813.14 was based on the alleged ground that the adjustment of its asset values on its books pursuant to the banking law of Pennsylvania had given rise to a deductible loss in 1956.²

In 1956 the bank also dedicated to the borough in which it is presently located a strip of its property worth $4,000.00, and also the cost of a new sidewalk, curbing and retaining wall ($4,380.00). Taxpayer argues that these dedications totalling $8,380.00 constituted a charitable contribution under Section 170 of the Internal Revenue Code, entitling it to an additional refund.

Plaintiff contends that its pre-trial memorandum, filed on February 17, 1964, clearly reveals at least the following two factual issues which are sufficient to preclude the entry of summary judgment in favor of the government:

1. Whether the "write down" by taxpayer of $101,510.79 was made voluntarily or solely because it was required to do so by state statute under threat and risk of irreparable harm³; and

2. Whether the property donated by the bank to the borough in 1956 was a gift made for public purposes and, if so, what was the value of the gift.⁴

The basis of the government's present motion under Federal Rule of Civil Procedure 56 is that these factual issues now raised by the plaintiff are irrelevant and therefore, even if they are admitted by the government, the Court must enter judgment in its behalf as a matter of law.

In order for the Court to properly dispose of the instant motion, we will discuss the allegations of the parties in two parts: first, with respect to the main issue of the "write down" made by the taxpayer on its books and records in 1956; and secondly, with respect to the property contributed to the borough by taxpayer in 1956.

I. WHETHER THE ADJUSTMENT MADE BY TAXPAYER IN 1956 CONSTITUTES A DEDUCTIBLE LOSS UNDER SECTION 165 OF THE INTERNAL REVENUE CODE

The government's position is that a book entry such as that made by taxpayer in the instant case does not constitute a loss within the meaning of Section 165 of the Internal Revenue Code of 1954 which reads as follows:

(a) General Rule.—There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. 26 U.S.C.1958 ed., Sec. 165

Since Section 165 contemplates only a substantive economic loss, Treasury Regulations on Income Tax (1954 Code), § 1.165-1(b); Electric Reduction Co. v. Lewellyn, 11 F.2d 493, 494 (3rd Cir. 1926), according to the government's theory, a mere "write down" cannot qualify as such regardless of whether it was made voluntarily by taxpayer bank or whether it was done in order to comply with the banking laws of Pennsylvania.

To be deductible a loss must also be evidenced by a closed and completed transaction during the taxable year. Treasury Regulations on Income Tax (1954 Code), § 1.165-1(d) In the present case, taxpayer merely alleges that by reason of the "write down" its business somehow declined in value because it was restricted in its ability to make loans. This decline in value, if any, cannot of itself qualify as a loss under Section 165. United States v. S. S. White Dental Mfg. Co., 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120 (1927); Gulf Power Co. v. Commissioner, 10 T.C. 852 (1948).

Here the loss allegedly sustained by taxpayer has not been realized in the form of a sale of assets below cost, the abandonment of a piece of property as worthless, or some other fixed and identifiable event. In fact, all that occurred was the making of a formal bookkeeping entry which did not reflect a parting with any assets. 5 Mertens, Federal Income Taxation, § 28.05

Plaintiff nevertheless maintains that whenever state law requires conduct on the part of the taxpayer, the Internal Revenue Service is bound by the tax consequences produced by taxpayer's compliance with that law. The Court cannot agree with this general principle as stated by taxpayer. The law is clear that accounting rules and other regulations of both state and federal regulatory bodies are not binding for the purpose of determining federal income tax consequences.⁵

Taxpayer has misplaced its reliance on the authorities cited in its brief.⁶ Federal courts are not bound by state law when interpreting the meaning of the federal tax law. The determination of what constitutes a loss under Section 165 of the Internal Revenue Code is clearly a federal question. I have already concluded that under federal law this bookkeeping adjustment is not a loss cognizable under Section 165 regardless of whether it was made voluntarily or solely for the purpose of complying with state law.⁷

In conclusion, then, the government is entitled to summary judgment as to this segment of the case since the taxpayer is not entitled to the refund even if the Court decides the factual issues in taxpayer's favor.

II. WHETHER THE COURT HAS JURISDICTION OVER TAXPAYER'S CLAIM TO A DEDUCTION UNDER SECTION 170 OF THE INTERNAL REVENUE CODE OF 1954

On this question the government's argument, simply stated, is that the only issue properly before the Court is whether taxpayer is entitled to a loss deduction because of the required accounting adjustment, an issue which we have already decided against taxpayer. Therefore, the government contends that summary judgment must also be entered in its behalf with regard to the claim of the alleged charitable contribution of $8,380.00 made by taxpayer in 1956 because the Court lacks jurisdiction to consider the latter claim, regardless of the existence of factual issues.

The government indicates, and the Court finds as a fact, that taxpayer did not include this item, representing the value of the property dedicated to the borough, in its tax return for 1956. Neither does the item appear in the claim for refund filed on February 24, 1960 for the years 1954, 1955 and 1956⁸ or in its complaint.

It is therefore the government's position that taxpayer cannot now raise this charitable deduction claim because it was not included in the original refund claims and the statute of limitations for amending the claims for refund has already run.

Both the Code⁹ and the Regulations¹⁰ require the filing of a refund claim prior to the institution of a civil suit for refund. This procedure is designed to apprise the Commissioner of what subject matter to review and he can take the claim at face value and examine only those grounds to which his attention has been directed. United States v. Garbutt Oil Co., 302 U.S. 528, 58 S.Ct. 320, 82 L.Ed. 405 (1938). As a corollary to this general principle, a taxpayer may not advance one ground or legal theory in his claim filed with the Commissioner and rely upon an entirely different ground or theory in a subsequent suit for refund. United States v. Felt & Tarrant Mfg. Co., 283 U.S. 269, 51 S.Ct. 376, 75 L.Ed. 1025 (1931); Carmack v. Scofield, 201 F.2d 360 (5th Cir. 1953). Neither may a claimant raise a...