DocketNumber: Docket Nos. 5843-66, 5844-66, 5845-66, 5846-66.
Citation Numbers: 29 T.C.M. 533, 1970 Tax Ct. Memo LEXIS 233, 1970 T.C. Memo. 125
Filed Date: 5/26/1970
Status: Non-Precedential
Modified Date: 11/21/2020
Memorandum Findings of Fact and Opinion
SCOTT, Judge: Respondent determined deficiencies in petitioners' income taxes for the years and in the amounts as follows:
Docket number | Petitioners | Year | Deficiency |
5843-66 | Jasper L. House, Jr., and Edra F. House | 1964 | $2,068.96 |
5844-66 | Jasper L. House, Jr. | 1963 | 2,391.91 |
5845-66 | Edra F. House | 1963 | 2,391.91 |
5846-66 | H.R.S. Corporation, dba Home Credit Company | 1964 | 3,090.65 |
One of the issues raised by the pleadings has been conceded by petitioners, leaving for our decision the following: Whether*235 the subchapter S status of petitioner, H.R.S. Corporation, and certain other small loan corporations of which petitioners Jasper L. and Edra F. House were shareholders, terminated under the provisions of
Findings of Fact
Some of the facts have been stipulated and are found accordingly.
Jasper L. House, Jr. (hereinafter referred to as House) and his wife, Edra F. House, resided in Waco, Texas, at the date of the filing of the petition in this case. They filed their Federal income tax returns for the calendar years 1963 and 1964 with the district director of internal revenue in Austin, Texas. For the calendar year 1963 House and his wife, Edra, each filed a separate income tax return and for 1964 they filed a joint income tax return.
H.R.S. Corporation, dba Home Credit Company (hereinafter referred to as H.R.S.), is a corporation organized under the laws of the State of Texas. Its home office and principal place of business was in Waco, Texas, at the time it filed its petition in this case, and it filed*236 its Federal income tax return for the calendar year 1964 with the district director of internal revenue in Austin, Texas.
H.R.S. and Lincoln Loans, Inc.; Hopitt No. 1, Inc.; HRST Finance Co., Inc.; Loan Management Co., Inc.; and Guaranty Finance and Thrift, Inc., all of which are corporations engaged in the business of making small loans (loans under $100) in the State of Texas have been subject from the date it became effective to the Texas Regulatory Loan Act, Acts of the 58th Legislature, Reg. Sess., 1963, chapter 205, p. 553. H.R.S. and each of the other corporations met all of the requirements of section 1371(a) in the proper manner and at the proper time so as to qualify as small business corporations under subchapter S unless such qualification is terminated under
House, in addition to being a shareholder in each corporation listed above, is actively engaged in the management of each such corporation. He supervises and directs the making of loans and the other day-to-day operations of these corporations. Under the Texas Regulatory Loan Act, a small loan*237 company is limited to making loans in amounts of $100 or less. In general the borrowers from small loan companies are people who lack collateral and who move and change jobs frequently. The maximum rate of interest including charges, are specifically described in section 17(b) of the Texas Regulatory Loan Act. 3 This Act 535 provides in the case of loans in excess of $19 for an "acquisition charge" for making the advance not in excess of one-tenth of the amount of the cash advance and for a monthly "handling charge" for each month the loan is outstanding. The duration of a loan of $19 or less is limited to 1 month and the charge permitted is $1 for each $5 advanced.
*238 All the corporations which are here involved made the maximum allowable charges for all loans which they made. For example if a borrower were given a cash advance of $60 for 4 months, the total charge would be $20, composed of $6 as "acquisition charges" and $3.50 per month or $14 as "installment handling charges." No other charge is made for "interest." The amount of the note would be $80 composed of the $60 advanced plus $14 plus $6. The $20 of "charges" is recorded as income of the loan company on the books at the time the loan is made and is reported as such for Federal income tax in the taxable year so recorded. When the loan is repaid, the entire sum paid is applied to the total note originally taken.
If the loan is paid in full prior to the expiration of the note, a specified portion of the installment handling charge is returned to the borrower, but none of the "acquisition charge" is refunded. No charge in addition to "acquisition charges" is allowable under Texas law or made by any of the corporations here involved to cover their expenses, if any, of checking credit, verifying jobs and making any investigation into the character and reputation of the borrower. Generally*239 these corporations check the credit of a borrower through the loan companies in town, the credit bureau, and other sources of such borrower's credit. These investigations and checks are sometimes conducted by persons who are not regular employees of the loan company.
The accounting method employed by the small loan companies involved herein does not make a segregation of the cost, if any, for investigation and credit checks for the loans made. No record is kept by these corporations from which their officers may know whether the acquisition charges are more or less than their costs of investigation in making a loan.
The income statement of H.R.S. shown on its 1964 Federal income tax return which is in the same form as the income statements made by the other corporations here involved is as follows:
Income: | ||||
Other income - acquisition and handling charges: | $63,841.95 | |||
Gross income: | $63,841.95 | |||
Expenses (Deductions) | ||||
Salaries and wages | $17,918.22 | |||
Repairs | 311.94 | |||
Bad debts | 4,207.15 | |||
Rent | 1,620.00 | |||
Taxes | 947.59 | |||
Interest | 1,784.14 | |||
Contributions or gift | 73.50 | |||
Depreciation | 898.84 | |||
Advertising | 2,312.87 | |||
Other deductions: | ||||
Supervision fees | $3,125.00 | |||
Utilities | 867.97 | |||
Office supplies | 1,126.56 | |||
Leased equipment | 62.44 | |||
Other deductions - continued | ||||
Telephone & telegraph | $1,357.99 | |||
Dues & subscriptions | 299.78 | |||
Credit & Collections | 854.31 | |||
Postage & box rent | 2,297.03 | |||
Automobile allowance | 691.42 | |||
Travel & entertainment | 61.88 | |||
Janitor & supplies | 392.88 | |||
Insurance & bonds | 259.13 | |||
Refunds | 6,587.73 | |||
Legal & professional | 580.06 | |||
Bond service charges | 11.41 | |||
Miscellaneous expense | 1,143.70 | |||
Total other deductions | $19,719.29 | |||
Total expenses | $49,793.54 | |||
Net income: | $14,048.41 |
Loan payments are not broken down on the books of any of the corporations here involved between principal and interest or principal and charges but such a breakdown is computable from analysis of each company's collection records. The following shows the amount of notes received, installment handling charges, acquisition charges, and refunds or rebates for Hopitt No. 1, Inc., and Lincoln Loans, Inc., for 1963 and for Hopitt No. 1, Inc.; HRST Finance, Inc.; H.R.S.; Guaranty Finance and Thrift Corp.; Lincoln Loans, Inc.; and Loan Management Co., Inc., for 1964:
"Collections | "Installment | |||
on notes | handling | "Acquisition | "Refunds | |
receivable" 1 | charges" | charges" | or rebates" | |
1963 | ||||
Hopitt No. 1, Inc. | $ 21,724.63 | $ 5,640.00 | $ 2,126.70 | $ 516.12 |
Lincoln Loans, Inc. | 15,515.45 | 5,992.30 | 2,135.90 | 174.99 |
1964 | ||||
Hopitt No. 1, Inc. | 174,705.93 | 34,367.00 | 13,885.10 | 5,789.11 |
HRST Finance, Inc. | 97,585.57 | 18,825.50 | 7,693.45 | 2,298.19 |
H.R.S. | 229,638.34 | 43,708.50 | 17,550.50 | 6,587.73 |
Guaranty Finance and Thrift Corp. | 205,415.54 | 39,629.00 | 15,884.80 | 4,963.45 |
Lincoln Loans, Inc | 150,315.67 | 33,775.00 | 13,457.10 | 4,293.74 |
Loan Management Co., Inc | 243,119.49 | 41,533.50 | 17,409.70 | 4,953.33 |
The figures for 1963 for Hopitt No. 1, Inc., and Lincoln Loans, Inc., represent only 2 months of operation for each of the corporations and do not make allowances for all the refunds which ultimately may have been made on the "installment handling charges."
House and his wife, Edra, each computed his 1963 income tax liability on the basis that Lincoln Loans, Inc., and Hopitt No. 1, Inc., were qualified small business corporations under subchapter S and that each of their proportionate shares of the net operating loss of each of the corporations was reportable by them as "shareholders." On this basis each claimed losses on his Federal income tax return of $3,977.47 composed of losses from Lincoln Loans, Inc., of $1,504.11 and from Hopitt No. 1, Inc., of $6,450.82 for a total of $7,954.93 or $3,977.46 each.
House and Edra on their joint income tax return for 1964 computed their tax liability on the basis that HRST Finance, Inc.; Loan Management Co., Inc.; Hopitt No. 1, Inc.; Guaranty Finance and Thrift Corp.; Lincoln Loans, Inc.; and H.R.S. were qualified small business corporations*242 under subchapter S and that the named corporations had ordinary income of $3,146.52 4 and net operating losses of $12,803.83 which was reportable by them as "shareholders."
537
Respondent in his notice of deficiency to H.R.S. computed its corporate income tax for 1964 on the amount of taxable income shown on its Form 1120-S "U.S. Small Business Corporation Return of Income" for that calendar year with the explanation that it did not qualify as a small business corporation.
Respondent in his notices of deficiency to each House and Edra for 1963 and to them jointly for 1964 disallowed to them the reported losses of the small loan corporations with respect to which they had reported losses and reduced their reported income by the gains reported from those corporations which had gains with the explanation that none of these corporations qualified as small business corporations.
Opinion
Under the provisions of
Since small loan corporations normally derive more than 20 percent of their gross receipts from interest, petitioners contend that such corporations should be excluded from the provisions of
*244 In
In our view there is no distinction in petitioners' contention in the instant case and the contention of the taxpayer in
In our view petitioners' contention in the instant case is disposed of by our holding in
Petitioners rely for support of their position on
There is nothing in subchapter S which specifically excludes from gross receipts the amount received for repayment of such loans.
It is obvious that if the defendant's position is correct, finance or loan companies are excluded from the benefits of subchapter S for their gross receipts under the defendant's theory are for all practical purposes limited to receipts of interest.
We find nothing in subchapter S or in its legislative history that indicates that*246 congress had any such intent. The act itself indicates that congress intended
Since subchapter S does not expressly or by implication exclude from gross receipts the repayments of the principal of the plaintiff's loans and installment contracts, the court concludes that
It is to be noted that the Court did not hold that because a loan company was excluded from the definition*247 of a personal holding company as set forth in
In the alternative petitioners contend that more than 20 percent of the gross receipts of each of the corporations here involved was not from "interest." To reach this conclusion petitioners contend that repayments of loans should be included in gross receipts and respondent's regulations to the contrary should be held invalid.6 Since if both acquisition charges and installment handling charges are considered as "interest" more than 20 percent of the gross receipts of each of the corporations here involved was from interest even if repayments of loans are considered as "gross receipts," petitioners further contend that acquisition charges are not "interest" within the meaning of
*250 In
Since in our view the acquisition charges are "interest" within the meaning of
Decision will be entered for respondent.
1. Proceedings of the following petitioners are consolidated herewith: Jasper L. House, Jr., Docket No. 5844-66; Edra F. House, Docket No. 5845-66; and H.R.S. Corporation, dba Home Credit Company, Docket No. 5846-66.↩
2. All references are to the Internal Revenue Code of 1954.↩
3. Tex. Regulatory Loan Act, ch. 205, sec. 17(b) (1963) reads as follows:
(b) On loans of One Hundred Dollars ($100) or less, a licensee may charge, in lieu of charges specified in Section 17(a)(1) of this Act, the following amounts:
(1) On any amount up to and including Nineteen Dollars ($19) a charge may be added at the ratio of One Dollar ($1) for each Five Dollars ($5) of cash or credit advanced to the borrower and such advance of cash or credit shall be for a period of one (1) month only.
(2) On any cash advance in an amount in excess of Nineteen Dollars ($19) up to and including the amount of Thirty-five Dollars ($35) there shall be allowed an acquisition charge for making the advance not in excess of one-tenth (1/10th) of the amount of the cash advance. In addition thereto, an installment account handling charge shall be allowed not to exceed Three Dollars ($3) per month and such advance of cash or credit shall be for a period of either one (1) or two (2) months.
(3) On any cash advance of an amount in excess of Thirty-five Dollars ($35) but not more than Seventy Dollars ($70) there shall be allowed an acquisition charge for making the advance not in excess of one-tenth (1/10th) of the amount of the cash advance. In addition thereto, an installment account handling charge shall be allowed not to exceed Three Dollars Fifty Cents ($3.50) per month and such advance of cash or credit shall be for a period of not less than one (1) month nor more than four (4) months.
(4) On any cash advance of an amount in excess of Seventy Dollars ($70) but not in excess of One Hundred Dollars ($100) there shall be allowed an acquisition charge for making the advance not in excess of one-tenth (1/10th) of the amount of the cash advance. In addition thereto, an installment account handling charge shall be allowed not to exceed Four Dollars ($4) per month, and such contract of loan shall not contain a maturity date of less than one (1) month nor more than six (6) months.
(5) On such loans under this subsection, no insurance premium charges or any other charges of any nature whatsoever shall be permitted.
(6) The acquisition charge authorized herein shall be deemed to be earned at the time a loan is made and shall not be subject to refund. On the prepayment of any loan under this subsection the installment account handling charge shall be subject to the provisions of subsection (a) herein as it relates to refunds. Provisions of subsection (a) herein relating to default charges on loans and the extension of loans shall apply to loans made under this subsection.↩
1. Notes receivable consist of "cash advanced," "handling charges," and"acquisition charges."↩
4. The statutory notice of deficiency stated the figure as $3,346.52 based on a dividend reported as $2,770. Since the actual dividend reported was $2,970, the proper figure is $3,146.52.↩
5.
(5) Personal holding company income. - An election under subsection (a) made by a small business corporation shall terminate if, for any taxable year of the corporation for which the election is in effect, such corporation has gross receipts more than 20 percent of which is derived from royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities (gross receipts from such sales or exchanges being taken into account for purposes of this paragraph only to the extent of gains therefrom). Such termination shall be effective for the taxable year of the corporation in which it has gross receipts of such amount, and for all succeeding taxable years of the corporation.↩
6.
(ii) Gross receipts. (a) The term "gross receipts" as used in