Wilkins Pontiac v. CIR

• Decision Date: 26 December 1961
• Docket Number: No. 17299.,17299.
• Citation: 298 F.2d 893
• Parties: WILKINS PONTIAC, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. WILKINS PONTIAC, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

298 F.2d 893 (1961)

WILKINS PONTIAC, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. WILKINS PONTIAC, Respondent.

No. 17299.

United States Court of Appeals Ninth Circuit.

December 26, 1961.

F. Edward Little and Little, Curry & Hagen, Los Angeles, for petitioner.

John B. Jones, Jr., Acting Asst. Atty. Gen., Meyer Rothwacks and Carolyn R. Just, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before BARNES, MERRILL and BROWNING, Circuit Judges.

MERRILL, Circuit Judge.

Wilkins Pontiac, engaged in the operation of an automobile dealership in Van Nuys, California, has petitioned this court to review a decision of the Tax Court determining a deficiency in federal income tax for the year 1955.

In the course of its business, petitioner sold automobiles and received conditional sales contracts covering the balance due. Petitioner assigned these contracts to GMAC for the full face value without discount and guaranteed payment of the full amount due under the contracts. Petitioner since 1947 has maintained a reserve for losses sustained by virtue of its obligations as guarantor. At the end of each calendar year a credit has been made to this reserve and the amount of this credit has been deducted each year on its corporation income tax return. There is no issue as to the reasonableness of the 1955 additions to reserve. The sole issue presented by this petition is whether reasonable additions to this reserve may be deducted under § 166 of the Internal Revenue Code of 1954, 26 U.S.C. § 166.¹ The Tax Court has held that such additions are not deductible, 34 T.C. 1065.

It is conceded that under Putnam v. Commissioner, 1956, 352 U.S. 82, 77 S.Ct. 175, 1 L.Ed.2d 144, losses sustained by petitioner under its contracts of guaranty are deductible as bad debts under § 166 (a) (1). The court in Putnam stated at pages 85 and 86, of 352 U.S., at page 176 of 77 S.Ct.:

"The familiar rule is that, instanter upon the payment by the guarantor of the debt, the debtor\'s obligation to the creditor becomes an obligation to the guarantor, not a new debt, but, by subrogation, the result of the shift of the original debt from the creditor to the guarantor who steps into the creditor\'s shoes. Thus, the loss sustained by the guarantor unable to recover from the debtor is by its very nature a loss from the worthlessness of a debt. This has been consistently recognized in the administrative and the judicial construction of the Internal Revenue laws which until the decisions of the Courts of Appeals in conflict with the decision below, have always treated guarantors\' losses as bad debt losses. The Congress recently confirmed this treatment in the Internal Revenue Code of 1954 by providing that a payment by a noncorporate taxpayer in discharge of his obligation as guarantor of certain noncorporate obligations `shall be treated as a debt.\'"

In the case before us, the Tax Court ruled that for a reserve to qualify under § 166(c) it must be a reserve for debts owing to the taxpayer and not for debts owing to someone else. It states:

"There were no debts owing to petitioner until it was required to pay the debtor\'s obligation to GMAC as a result of petitioner\'s contract with GMAC."

Nowhere in the code or the regulations do we find any requirement that a § 166(c) reserve must relate to debts presently owing to the taxpayer. Rather, it would seem that it must relate to an existing debt as to which the taxpayer in the ordinary course of business may ultimately sustain a bad debt loss.

We know from Putnam that losses sustained by the taxpayer pursuant to its contracts of guaranty are to be deducted under § 166(a). Section 166(c) plainly states that in lieu of such deduction additions to a reserve may be deducted.

The commissioner directs attention to Treasury Regulations, § 1.166-1(2) (c), reading:

"Only a bona fide debt qualifies for

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