First Nat'l Bank v. Commissioner

First National Bank in St. Louis, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent

First Nat'l Bank v. Commissioner

Docket No. 107793

United States Tax Court

1 T.C. 370; 1942 U.S. Tax Ct. LEXIS 6;

December 29, 1942, Promulgated

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Decision will be entered under Rule 50.

1. The additional capital stock tax (defense tax) imposed by section 205 of the Revenue Act of 1940, approved June 25, 1940, and applicable to the capital stock tax year beginning July 1, 1939, did not accrue prior to the date of its enactment and is not deductible by the petitioner in computing its taxable net income for the calendar year 1939.

2. For each of the years 1933, 1934, and 1935, the petitioner's income tax returns would have shown a net loss for income tax purposes had the debts charged off in those years as bad but recovered in subsequent years up to and including the year 1939 not been deducted. Held, that the debts recovered in 1939, which were deducted in such earlier years, did not result in a reduction of the taxpayer's income tax in the earlier years and are to be excluded from the petitioner's gross income for 1939. Sec. 116, Revenue Act of 1942.

Crawford Johnson, Esq., for the petitioner.

Gene W. Reardon, Esq., for the respondent.

Turner, Judge.

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TURNER

The respondent determined deficiencies in income tax and excess profits tax against the petitioner for 1939 in the respective amounts of $ 32,941.94 and $ 12,743.50. The issues are (1) whether the petitioner is entitled to accrue and deduct for the calendar year 1939 the additional capital stock tax, or defense tax, imposed by section 205 of the Revenue Act of 1940 for the capital stock tax year ended June 30, 1940; and (2) whether the respondent erred in including in taxable income bad debt recoveries in the amount of $ 224,942.07.

FINDINGS OF FACT.

The petitioner is a corporation created under the National Banking Act, with its principal office in St. Louis, Missouri. Its income tax return for 1939 was made for the calendar year from books kept on the accrual basis, and was filed with the collector for the first district of Missouri.

The declared values of capital stock reported by the petitioner in its capital stock tax returns for the capital stock tax years ended June 30, 1939, and June 30, 1940, were $ 15,500,000 and $ 17,254,190.28, respectively. In 1939 the petitioner paid capital stock tax in the amount of $ 15,500 for the capital stock tax year ended June 30, 1939, accrued the entire amount on its books when payment was made, and took it as a deduction in its income tax return for 1939. In 1939 it set up no liability on its books as capital stock tax for the capital stock tax year ended June 30, 1940, but did accrue the tax for that year on its books in 1940, when it was paid. In determining the deficiency herein the respondent disallowed the capital stock tax deduction of $ 15,500 claimed on the 1939 income tax return on the ground that the liability therefor accrued in 1938 and not in 1939. In lieu of the deduction disallowed, the respondent allowed a deduction of $ 17,253.99. This was the amount of capital stock tax liability for the capital stock tax year ended June 30, 1940, which the respondent determined had accrued in 1939, and was computed at the rate of $ 1 per $ 1,000 of adjusted capital stock valuation.

During 1933, 1934, and 1935 the petitioner charged off certain debts as totally or partially worthless. Certain of the debts charged off were taken and allowed as bad debt deductions in its income tax returns for the respective years. The remainder of the debts were neither claimed as deductions nor so allowed. The following is a statement of the petitioner's net income (or loss) for both normal tax and excess profits tax for 1933 through 1935, the bad debt deductions taken and allowed in computing such net income, recoveries prior to 1939 on said bad debts, and recoveries in 1939:

	Net income	Net income
	(or loss)	(or loss)
Year	subject	subject
	to normal	to excess	Bad debt	Recoveries	Recoveries
	tax	profits tax	deductions	prior to 1939	in 1939
1933	* $ 996,231.20	$ 1,836,477.00	$ 384,110.42	$ 108,214.29
1934	* 1,261,824.76	* 624,990.99	1,573,362.50	213,689.26	116,492.95
1935	* 675,165.49	154,646.85	859,749.78	42,892.69	234.81
Total					224,942.07

The following is a statement of the value of its capital stock as declared by the petitioner in its capital stock tax returns for the indicated years:

Year ended June 30, 1933	$ 16,400,000.00
Year ended June 30, 1934	16,000,000.00
Year ended June 30, 1935	18,331,873.35

In its income tax return for 1939 the petitioner did not report as income any portion of the bad debt recoveries of $ 224,942.07 made in that year. In determining the deficiency, the respondent included the entire amount in taxable income.

OPINION.

Beginning with the year ending June 30, 1939, and for each such year thereafter, section 1200 of the Internal Revenue Code imposed a capital stock tax at the rate of $ 1 for each $ 1,000 of adjusted declared value of corporate capital stock. Section 1203 provides that capital stock tax returns shall be filed within one month after the close of the year in respect of which such tax is imposed, unless the time for filing is extended by the Commissioner, while section 1205 provides that the tax shall be due and payable before the expiration of the period for filing the return, unless the time for payment is similarly extended. Section 205 of the Revenue Act of 1940, approved June 25, 1940, amended section 1200 of the Code by providing that for the year ending June 30, 1940, and for the four succeeding years the rate should be $ 1.10 in lieu of $ 1.

The petitioner contends that, being on the accrual basis, the full amount of its capital stock tax liability for the capital stock tax year ended June 30, 1940, accrued on July 1, 1939, and that for income tax and excess profits tax purposes it is entitled to a deduction in 1939 for capital stock tax computed at the rate of $ 1.10 per $ 1,000 of the adjusted declared value of its capital stock, or $ 18,979.40, instead of $ 17,253.99, the amount allowed by the respondent, this latter amount being the amount of such tax computed under the statute as it stood prior to the enactment of the Revenue Act of 1940.

In United States v. Anderson, 269 U.S. 422">269 U.S. 422, the Supreme Court held that a tax accrues in the year when all the events have occurred which fix the amount of the tax and determine the liability of the taxpayer to pay it. The event which fixed the amount of the petitioner's capital stock tax at an amount in excess of that allowed by the respondent and made the petitioner liable to pay such excess was the enactment in June 1940 of section 205 of the Revenue Act of 1940. Obviously prior to that time the petitioner had no liability to pay such excess. Since no event occurred in 1939 which fixed the amount of the petitioner's liability for capital stock tax at an amount in excess of that allowed by the respondent, no greater amount accrued in 1939, and the petitioner is not entitled to take any greater amount as a deduction in 1939. Union Bleachery v. Commissioner, 97 Fed. (2d) 226; Schuster & Co. v. Williams, 283 Fed. 115;James Bliss Coombs, 17 B. T. A. 279; affd. per curiam (C. C. A., 2d Cir.), Feb. 5, 1931; Strong v. Willcuts, U. S. Dist. Ct., Dist. of Minn., Nov. 26, 1935. The question decided in Budd International Corporation, 45 B. T. A. 737, relied on by the petitioner, is an entirely different question and that case is not in point.

It is the claim of the petitioner that the respondent erred in including in taxable income for 1939 bad debt recoveries in that year in the amount of $ 224,942.07, the argument being that the deductions in the years 1933, 1934, and 1935 as bad debts of the amounts recovered in 1939 did not for the years in which deducted effect an offset of taxable income and may not therefore be regarded as taxable income in the year of recovery. Among the cases cited by the petitioner are: Central Loan & Investment Co., 39 B. T. A. 981; National Bank of Commerce of Seattle, 40 B. T. A. 72; Amsco-Wire Products Corporation, 44 B. T. A. 717; Estate of James N. Collins, 46 B. T. A. 765; andJohn V. Dobson, 46 B. T. A. 770. The respondent argues that, the said amounts having been charged off as bad debts in the earlier year, claimed as deductions by the petitioner on its returns for those years and allowed by the respondent, are taxable in the year when recovered, regardless of the presence or absence of tax benefit in the earlier year.

Since submission of this case, Congress, in section 116 of the Revenue Act of 1942, has provided for the exclusion from gross income of amounts recovered on debts previously charged off and taken as deductions on returns for prior years where the deductions previously taken did not result in a reduction of the taxpayer's tax under chapter 1 of the Internal Revenue Code, not including the tax imposed by section 102. The income tax falls under chapter 1 of the Code, but the excess profits tax does not. Section 116 is effective with respect to all taxable years beginning after December 31, 1938. The tax year here is 1939, making that section applicable.

For each of the years 1933, 1934, and 1935, the petitioner's returns would have shown a net loss for income tax purposes had the debts charged off in those years as bad but recovered in subsequent years up to and including the year 1939 not been deducted. It is thus apparent that the deductions in the earlier years of the debts recovered in 1939 did not result in a reduction of the taxpayer's income tax in such earlier years, and under section 116, supra, the 1939 recoveries are to be excluded from gross income.

Decision will be entered under Rule 50.

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Footnotes

• *. Loss.↩