Columbia State Sav. Bank v. Commissioner , 15 B.T.A. 219 ( 1929 )

COLUMBIA STATE SAVINGS BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Columbia State Sav. Bank v. Commissioner

Docket Nos. 14831, 25129.

United States Board of Tax Appeals

15 B.T.A. 219; 1929 BTA LEXIS 2891;

February 6, 1929, Promulgated

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">*2891 The petitioner made real estate or mortgage loans during 1921 and 1922, bearing interest at a specified rate. In addition to the interest, a commission was charged and deducted from the face of each loan, and, in the event of payment before maturity, no rebate was made to the borrower of any part of the commission. The petitioner kept its books upon an accrual basis. Held, that the total amount of commissions on loans so made in the respective years constituted taxable income for such years. Chicago Acceptance Co.,12 B.T.A. 150">12 B.T.A. 150, distinguished.

Herman T. Reiling, Esq., and Hugh N. Smith, C.P.A., for the petitioner.

J. E. Mather, Esq., for the respondent.

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TRAMMELL

">*219 These are proceedings for the redetermination of a deficiency in income and profits taxes for the year 1921 in the amount of $2,687.31 and a deficiency in income tax for the year 1922 in the amount of $200.24. Pursuant to motion of the petitioner filed December 16, 1927, and thereafter duly granted, Docket Nos. 14831 and 25129 were consolidated for hearing and decision. The sole issue raised is whether discount or commission on mortgage notes constitutes">*2892 income for the taxable years in which the loans were made.

FINDINGS OF FACT.

The petitioner is a corporation organized and existing under the laws of Illinois, with its principal office in the City of Chicago, and is engaged in the business of banking.

It includes in its operations the making of real estate or mortgage loans upon which, in addition to the regular interest on the notes, ">*220 the borrowers agree to pay an additional amount as commission for the making of the loan.

The handling of real estate or mortgage loans constitutes one of the principal parts of the business of the petitioner.

The method employed by the petitioner in making loans was as follows: An application is first secured from the borrower which is submitted to the board of directors for approval, and, after approval, the borrower submits his abstract of title and papers; a mortgage is drawn on the property to secure the loan; a fee of from 1 per cent to 10 per cent is made as a charge for the loan, and the borrower receives the amount of the loan less this commission and the expenses in connection with the loan. No payment of this commission is made by the borrower direct to the petitioner">*2893 at the time of the loan or otherwise, except by the deduction from the face of the loan.

The commission charged on loans was treated on the books of the petitioner as earned income at the time the loan was made, and the respondent has likewise included the said commission in the petitioner's taxable income for the year in which the loan was made in determining the deficiencies that are subject of these appeals.

For 1921 the respondent included in the taxable income of the petitioner the sum of $6,930.25, and for 1922 the sum of $10,590.82, both amounts representing commissions on loans which had been made during those years and which appeared on the petitioner's books as earned commissions.

The funds on deposit in the bank were used in making loans, but those funds available for loans represented only about 33 1/3 per cent of the loan business done by the petitioner. To take care of this volume of business, it was necessary to sell the notes to make funds available for other loans.

In the event of the prepayment of any of the said loans before maturity, there was no rebate to the borrower of any part of the said commission. On the contrary, the borrower was usually required">*2894 to pay a premium to the then owner of the loan for the privilege of paying same before maturity.

During the years involved, the petitioner kept its books and made its returns upon an accrual basis.

The foregoing facts were stipulated by the parties.

OPINION.

TRAMMELL: In the original petition filed under Docket No. 14831, the petitioner sought the redetermination of its tax liability of the calendar years 1920 and 1921. No deficiency, however, was asserted for 1920, and we have no jurisdiction for that year. See Revenue Act of 1926, section 274(g); ; ">*221 ; . Accordingly, this appeal, in so far as it purports to involve the calendar year 1920, is dismissed.

With respect to the deficiency in tax determined by the respondent for the calendar years 1921 and 1922, the sole issue presented is whether taxable income, consisting of discounts or commissions, was derived by the petitioner in the year in which certain mortgage loans were made, under the circumstances set out in our findings of fact above.

">*2895 These discounts or commissions were treated on the books of the petitioner as earned income at the time the loans were made, and were included by the respondent in the petitioner's taxable income for the years in which the loans were made.

The petitioner contends substantially that it was in effect a dealer in securities, which it purchased at less than par with the object of reselling them at a profit, and that it could not be considered to have realized a profit until the securities were sold, or were paid at maturity, or otherwise.

With this contention of the petitioner, we are unable to agree. The stipulated facts, which we have adopted in our findings of fact, show that the petitioner made real estate or mortgage loans, bearing interest at a stated rate, on which, in addition to the interest, a fee of from 1 per cent to 10 per cent was charged for each loan. The borrower received from the petitioner the amount of the loan, less the discount and commission charged and the expenses incurred in connection therewith, and, in the event of the payment of a loan before maturity, there was no rebate to the borrower of any part of the commission charged by the petitioner. The">*2896 petitioner kept its books upon an accrual basis.

It thus appears that the commissions charged by the petitioner were in the nature of compensation for services rendered, and that when a loan was made the transaction was fully completed in so far as concerned the petitioner's right to its commission. The liability of the borrower to pay the commission was in no way contingent or dependent upon the passage of time, as is the case with respect to an obligation to pay interest for the use of borrowed money. Upon the execution of the note the borrower's liability to pay the commission became definitely fixed and determined. The petitioner's right to its commission definitely accrued at the time each loan was made, and since the petitioner kept its books of account upon an accrual basis, the aggregate amount of the commissions on loans made within each taxable year should have been accrued on the books as income for that year. It is shown that the petitioner treated the commissions on its books as earned income for the year in which ">*222 the loans were made, and this treatment, we think, correctly reflected the income.

">*2897 In , the petitioner purchased at less than par series of 12 notes payable one each month, and we held that only so much of the discount as was earned within the taxable year constituted income to the petitioner for that year. The petitioner there also kept its books upon an accrual basis. That case is distinguished from the present proceeding in that when notes were paid before the due date, the payer obtained a discount which reduced the petitioner's brokerage in a proportionate amount. Therefore, it could not be said that the liability of the borrower to pay the brokerage or commission became definitely fixed and determined at the time the loan was made. The liability was contingent upon the passage of time. Hence, we said in our opinion:

Manifestly no discount or profit accrued upon such notes until the discount thereon was earned. The principle involved is essentially no different than that of bank discount, wherein we have several times held that discount neither received nor accrued within a taxable year is not income subject to tax in that year. (Italics supplied.)

In the instant case, even if the income was">*2898 not received, it was accrued in the year in which the loans were made and constituted income subject to tax in such year, for the reason that it became at that time definitely fixed obligations of the makers of the notes and was not subject to reduction in the event of prepayment.

The action of the respondent is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.