Western Exch. Bank v. Commissioner

*66 The respondent has asserted a deficiency in income and profits tax for the year 1918 in the amount of $9,828.24. For its causes of action the petitioner asserts, (1) that the respondent erroneously increased its income for the taxable year by adding thereto the amount of $14,395.65, which it alleges represents unearned discounts on paper held by it at December 31 of such year, and (2) that the respondent erred in denying its request that its tax liability for the year 1918 should be determined by the application of the provisions of section 328 of the Revenue Act of 1918.

FINDINGS OF FACT.

The petitioner is a Missouri corporation with its principal office at Kansas City where it is engaged in the general banking business.

For some years prior to 1918 the petitioner credited all discounts to a discount account as of the dates that loans were*3613 made and semiannually closed such discount account into profit and loss without any distinction as to when paper matured or discounts were earned, and returned the whole amount of such discounts as income in the years in which the loans were made and it was so credited.

*67 In the year 1918 the petitioner changed its method of accounting for discounts. At the close of such year it subtracted from the total of discounts for such year as indicated by its books the amount of $14,395.65, which represented unearned discounts on paper held by it at December 31, 1918. The Commissioner added this amount to the petitioner's gross income for the taxable year.

The petitioner's net income for the year 1911 was $34,986.52; for 1912, $13,718.30; and for 1913, $34,390.77. In the year 1912 it sustained a loss in the amount of $22,000 resulting from the embezzlement of its property by one of its employees. Such loss reduced the average of its prewar net income from $33,506.44 to $26,173.11.

For the year in controversy, the petitioner has heretofore paid income and profits tax equal to 17.1 per cent of its net income. If the deficiency here in controversy is affirmed, its total*3614 tax for the taxable year will be 32.73 per cent of its net income. An official publication of the Bureau of Internal Revenue discloses that the average total tax paid by 72.78 per cent of the finance, banking, insurance and similar corporations of the United States for the year 1918 was 17.5 per cent of the total net income of such corporations.

For services rendered by its officers in the taxable year the petitioner paid salaries as follows:

OPINION.

LANSDON: The first issue to be determined here is whether the respondent erroneously added the amount of $14,395.65 to petitioner's income for the taxable year in the circumstances set forth in our findings of fact. In our opinion this action of the respondent was erroneous. In many prior decisions, involving the same state of facts, we have set forth our views on this point. ; ; *3615 . See also several other decisions of like import in subsequent volumes of our reports.

Although not so stated in the petition, the counsel for the taxpayer has indicated in his brief that the claim for special assessment is submitted as an alternative contention in the event that the claim for readjustment of income on account of unearned discounts is not allowed. We have decided that issue in favor of the petitioner. Our findings disclose that the petitioner has already paid taxes for *68 the year in question in the amount of 17.1 per cent of its income for that year and that, if the deficiency here in controversy is allowed, its tax will be 32.73 per cent of its income for such year. The effect of our decision above is to disallow all, or substantially all, of the asserted deficiency. This indicates that the petitioner, on final adjustment of its tax liability, will pay almost exactly the average rate of tax that was paid in that year by three-fourths of the similar institutions in the United States. There is no evidence that the total tax of the petitioner as finally recomputed in conformity with*3616 this report, will result in any exceptional hardship. There is no reason, therefore, for any consideration of the evidence adduced by the petitioner in support of its claim for special assessment, which accordingly is denied.

Judgment will be entered under Rule 50.