DocketNumber: Docket No. 12508
Citation Numbers: 12 T.C. 717, 1949 U.S. Tax Ct. LEXIS 207
Judges: Black
Filed Date: 5/6/1949
Status: Precedential
Modified Date: 1/13/2023
1949 U.S. Tax Ct. LEXIS 207">*207
In 1933 the Marine Bancorporation owned about 90 per cent of the stock of petitioner and six smaller banks. In 1933, pursuant to a plan of reorganization, the six smaller banks transferred all assets owned by them to petitioner and petitioner assumed all their liabilities. Preliminary to the transfer the smaller banks charged off their books certain debts considered to be worthless or subject to criticism by either state or national bank examiners. In the 1933 tax returns all of these charge-offs were taken as deductions, but no reduction in taxable income resulted because the net losses of these banks were greater than the deductions thus claimed. After the transfers petitioner did not carry as assets upon its books the debts thus charged off by the transferor banks. Recoveries were made by petitioner on such debts in 1934. In a decision involving the recoveries on such debts in 1934 the Board of Tax Appeals held that the recoveries on the debts charged off by the transferor banks were income to petitioner, subject to tax. In 1942 and 1943 further recoveries were made by petitioner on account of such debts. Respondent contends1949 U.S. Tax Ct. LEXIS 207">*208 that the decision in the proceedings involving the year 1934 makes the issue involving the years 1942 and 1943
12 T.C. 717">*717 The respondent determined a deficiency in petitioner's income tax for the years 1942 and 1943 in the respective amounts of $ 6,921.73 and $ 7,867.94. 1949 U.S. Tax Ct. LEXIS 207">*209 The deficiency is primarily due to the addition to petitioner's net income in the taxable years 1942 and 1943 of the respective amounts of $ 17,304.33 and $ 13,528.26 which were designated by it in its return as stockholders' contributions. These adjustments are explained in the deficiency notice as follows:
(a) It is held that the amounts of $ 17,304.33 and $ 13,528.26, designated as stockholders' contributions, constitute taxable income for the calendar years 1942 and 1943, respectively.
The petitioner contests these adjustments by appropriate assignments of error.
The questions presented are whether a decision of this tribunal in a prior proceeding is
The parties stipulated that if the petitioner's contentions in this proceeding are sustained the Court may enter its decision that there are deficiencies in income taxes due1949 U.S. Tax Ct. LEXIS 207">*210 from petitioner for the taxable years 1942 and 1943 in the respective amounts of $ 813.25 and $ 2,645.14, and that if the position of the respondent is sustained the Court may enter its decision that there are deficiencies in the respective years 1942 and 1943 in the amounts as determined in the statutory notice of deficiency.
FINDINGS OF FACT.
The facts which were stipulated are so found.
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 per cent of the capital stock of the Central National Bank of Commerce, 91 per cent of the capital stock of the Washington National Bank of Commerce, 93 per cent of the capital stock of the Capital National Bank, 94 per cent of the capital stock of the Grays Harbor National Bank, 94 per cent of the capital stock of the Bank of Elma, and 88 per cent of the capital stock of the Montesano State Bank. These banks were smaller than petitioner and had their place of business in Seattle1949 U.S. Tax Ct. LEXIS 207">*211 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 named above under which 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 per cent of the 12 T.C. 717">*719 capital stock of petitioner. At the time of such transfers petitioner assumed the liabilities of each of the banks, entering the value of the assets so transferred to it in an amount equal to the value of the "ledger" 1949 U.S. Tax Ct. LEXIS 207">*212 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, 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 per cent of the value of the security. The total amounts of the debts thus charged off on the books of the transferor banks prior to the transfers in question were as follows:
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, 1949 U.S. Tax Ct. LEXIS 207">*213 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.
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.
After the transfers had been made to petitioner in 1933 pursuant to the reorganization, the accounts which had been charged off the 12 T.C. 717">*720 books of the transferor banks and the accounts which had been charged off the books 1949 U.S. Tax Ct. LEXIS 207">*214 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 they 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.
Respondent determined that the above amount of $ 4,935.48 constituted income to the petitioner. In a proceeding before the Board of Tax Appeals1949 U.S. Tax Ct. LEXIS 207">*215 (
In 1942 and 1943 the petitioner made further recoveries on accounts which were charged off by the predecessor banks in 1933 before their acquisition by petitioner, and were carried as "nonledger assets" on petitioner's books after 1933. The 1933 indebtedness and the amount of the recoveries and the branches through which the recoveries were made were1949 U.S. Tax Ct. LEXIS 207">*217 as follows:
1933 indebtedness | Prior | Uncollected | |
collection | on 1/1/42 | ||
University Branch: | |||
Chris Williamson | $ 1,940.69 | $ 755.01 | $ 1,185.68 |
E. J. Tjernagle | 2,000.00 | 405.00 | 1,595.00 |
Capital Branch: | |||
Mills & Austin | 3,500.00 | 900.00 | 2,600.00 |
Grays Harbor Branch: | |||
E. D. Anderson | 8,104.87 | 4,074.70 | 4,030.17 |
E. R. Beasley | 1,500.00 | 860.00 | 640.00 |
Frank O. Dole | 318.36 | 100.96 | 217.40 |
General Bond & Mortgage Co | 15,850.00 | 5,166.36 | 10,683.64 |
G. W. McIntosh | 941.85 | 5.00 | 936.85 |
John Merila | 6,509.96 | 209.48 | 6,300.48 |
C. A. Cooper | 4,250.00 | 1,549.65 | 2,700.35 |
Mrs. Lillian Wade | 160.00 | 11.00 | 149.00 |
Montesano Branch: | |||
J. A. Chambers | 610.00 | 610.00 | |
Elma Branch: | |||
Elmonte Investment Co | 10,000.00 | 5,500.00 | 4,500.00 |
Total | 55,685.73 | 19,537.16 | 36,148.57 |
Reconciliation: | |||
Recoveries on which no proof is offered | |||
1942 exceptions in petition at paragraph (a-4) | |||
1943 exceptions (less Ogle & Davis $ 224.06 which | |||
was not included in deficiency letter and | |||
should not have appeared | |||
in the exceptions in the petition) | |||
Total per page 2 of deficiency letter |
Collections | ||
1942 | 1943 | |
University Branch: | ||
Chris Williamson | $ 272.04 | $ 409.49 |
E. J. Tjernagle | 153.72 | 741.28 |
Capital Branch: | ||
Mills & Austin | 600.00 | 1,000.00 |
Grays Harbor Branch: | ||
E. D. Anderson | 4,030.17 | |
E. R. Beasley | 501.80 | 138.20 |
Frank O. Dole | 61.30 | 60.14 |
General Bond & Mortgage Co | 3,975.89 | 6,707.75 |
G. W. McIntosh | 700.00 | |
John Merila | 375.00 | 697.30 |
C. A. Cooper | 2,700.35 | |
Mrs. Lillian Wade | 77.50 | |
Montesano Branch: | ||
J. A. Chambers | 525.00 | |
Elma Branch: | ||
Elmonte Investment Co | 4,601.31 | |
Total | 15,271.23 | 13,057.01 |
Reconciliation: | ||
Recoveries on which no | ||
proof is offered 1942 | 1,846.30 | 125.00 |
exceptions in | ||
petition at paragraph | 186.80 | |
(a-4) 1943 exceptions | ||
(less Ogle | ||
& Davis $ 224.06 which | ||
was not included in | ||
deficiency letter and | ||
should not have appeared | ||
in the exceptions in the | ||
petition) | 346.25 | |
Total per page 2 | ||
of deficiency | ||
letter | 17,304.33 | 13,528.26 |
1949 U.S. Tax Ct. LEXIS 207">*218 No reduction in the taxable income of the above predecessor banks resulted from the deduction of these debts in their returns for 1933, inasmuch as said banks sustained net losses in the year 1933 which were in excess of the amounts of the debts charged off. None of the above debts on which recoveries were made in 1942 and 1943 and which are here in controversy were in controversy in the previous case of petitioner involving the year 1934, with the exception of Lillian Wade (Grays Harbor Branch) in the amount of $ 160, as to which $ 6 was in controversy in 1934.
OPINION.
The principal question for our determination in this proceeding is whether the petitioner herein, as the successor bank, having acquired the assets of the smaller banks in a reorganization, is entitled to certain "recovery exclusions" from its taxable income in 12 T.C. 717">*722 1942 and 1943 within the meaning of
1949 U.S. Tax Ct. LEXIS 207">*219 Respondent contends that the issue herein is
In 1933 Marine Bancorporation owned about 90 per cent of the stock of the petitioner and six smaller banks. In 1933, pursuant to a plan of reorganization, the assets of the six smaller banks were 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. Immediately prior to the transfer the smaller banks charged off their books certain debts considered to be worthless or subject to criticism by either state or national bank examiners. Deductions were claimed for some of such debts in the income tax returns for 1933. In 1934 petitioner made recoveries on some of the1949 U.S. Tax Ct. LEXIS 207">*220 debts which had been charged off in 1933, but in its income tax return for 1934 it claimed that such recoveries were not income, but a return of capital. Respondent determined that the recoveries should be included in income, and, on petition to redetermine the deficiency, the Board upheld the respondent, which was affirmed by the Circuit Court of Appeals for the Ninth Circuit. We found that the debts at the time of the transfer had a zero basis in the hands of the predecessor banks for the reason that they had been ascertained to be worthless and charged off in a prior year and, therefore, held that the recoveries in 1934 were taxable income to the petitioner. As we have already stated, our decision was affirmed by the Ninth Circuit in
In
These same concepts are applicable in the federal income1949 U.S. Tax Ct. LEXIS 207">*221 tax field. Income taxes are levied on an annual basis. Each year is the origin of a new liability and of a separate cause of action. Thus if a claim of liability or non-liability relating to a particular tax year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year. But if the later proceeding is concerned with a similar or unlike claim relating to a different tax year, the prior judgment acts as a collateral estoppel only as to those matters in the second proceeding which were actually presented and determined in the first suit. Collateral estoppel operates, in other words, to relieve the government and the taxpayer of "redundant litigation of the identical question of the statute's application to the taxpayer's status."
* * * *
And so where two cases involve income taxes in different taxable years, collateral estoppel must be used with its limitations carefully in mind so as to avoid injustice. It must be confined to situations where the matter raised in the second suit is identical in all respects with that decided1949 U.S. Tax Ct. LEXIS 207">*222 in the first proceeding and where the controlling facts and applicable legal rules remain unchanged.
Since our decision in Docket No. 89720, Congress enacted section 116 of the Revenue Act of 1942 (
On the merits petitioner contends that, since none1949 U.S. Tax Ct. LEXIS 207">*223 of the deductions in the 1933 returns of the smaller banks involved herein resulted in a reduction of taxable income to the predecessor banks in view of other losses disclosed upon their returns, the predecessor banks, therefore, would, if they were still in existence, be entitled to the benefit of the "recovery exclusion" provided for in
The charge-off herein was made by the predecessor1949 U.S. Tax Ct. LEXIS 207">*224 banks, which were entities separate and distinct from the petitioner. We think it is clear that the same entity must charge off and recover in order to be entitled to the "recovery exclusion" under
Taxpayer relies heavily on this amendment. The amendment was not before the Tax Court at the time of its decision. The Government claims it is inapplicable for two reasons: (1) It was not this taxpayer's tax which had been affected by the payment, but the predecessor's; * * *
It is to be noted that the amendment provides that the exclusion shall be applicable to instances where the expense involved the reduction of
We think also
* * * The
Moreover, as to the petitioner here, 1949 U.S. Tax Ct. LEXIS 207">*227 the debt was not bad; the petitioner had never charged off any deduction for loss, and, therefore, for that reason it was not interested in the question of restoration of income, or whether in the deduction it had a tax benefit -- concepts inhering in this question. It simply acquired an asset with a basis of zero, as admitted, and, therefore, ordinarily would properly be charged with income when it recovered thereon. * * *
While in the
We hold, therefore, that, since the deductions in 1933 in question were not made by petitioner, but by the predecessor banks, the petitioner is not entitled to the benefit of the "recovery exclusion" provided for under
1.
* * * *
(b) Exclusions From Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter:
* * * *
(12) Recovery of bad debts, prior taxes, and delinquency amounts. -- Income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to such debt, tax, or amount. For the purposes of this paragraph:
* * * *
(D) Definition of Recovery Exclusion. The term "recovery exclusion", with respect to a bad debt, prior tax, or delinquency amount, means the amount, determined in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, of the deductions or credits allowed, on account of such bad debt, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer's tax under this chapter (not including the tax under section 102) or corresponding provisions of prior revenue laws, reduced by the amount excludible in previous taxable years with respect to such debt, tax or amount under this paragraph.↩