T.C. Memo. 1996-172

UNITED STATES TAX COURT

CENTRAL PENNSYLVANIA SAVINGS ASSOCIATION AND SUBSIDIARIES

n.k.a. GREAT VALLEY SAVINGS BANK, Petitioner v.

 COMMISSIONER OF INTERNAL REVENUE, Respondent*

Docket No. 19498-89. Filed April 10, 1996.

Zachary P. Alexander and James F. Podheiser, for petitioner.

Thomas M. Rath, for respondent.

SUPPLEMENTAL MEMORANDUM OPINION

TANNENWALD, Judge: This case is again before us because of

differing computations for entry of decision under Rule 155

submitted to implement our earlier opinion (104 T.C. 384 (1995)).

 

* This opinion supplements Central Pennsylvania Savings

Association v. Commissioner, 104 T.C. 384 (1995).
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1 All statutory references are to the Internal Revenue Code

in effect for the years in issue, and all Rule references are to

the Tax Court Rules of Practice and Procedure.

In that opinion, we held that petitioner was required to take net

operating losses into account in computing additions to its bad

debt reserve under the percentage of taxable income method set

forth in section 593(b)(2)(A).1 In so doing, we upheld such

requirement as provided in section 1.593-6A(b)(5)(vi) and (vii),

Income Tax Regs.

Respondent's computation is based upon the use of the

percentage of taxable income method. Petitioner's computation

for some of the years involved is based upon the use of the

experience method, an alternative method permitted by section

593(b)(4). Respondent objects to petitioner's use of the

experience method on the ground that it raises a new issue not

permitted under the principles governing the operation of Rule

155. We agree with respondent.

The prior proceeding herein involved a motion for summary

judgment by each party. Both motions clearly stated that the

only issue remaining in the case was whether net operating losses

should be taken into account in determining petitioner's taxable

income for the purpose of utilizing the percentage of taxable

income method. At no time, either in its pleadings, motion

papers, or briefs, did petitioner assert that the experience

method might produce a more favorable result than the percentage
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2 Sec. 593(b)(1)(B) provides that the addition to the bad

debt reserve shall not exceed the larger of the amount produced

by the percentage of taxable income and experience methods.

 

3 See also Vest v. Commissioner, T.C. Memo. 1995-188;

Estate of Street v. Commissioner, T.C. Memo. 1994-568, and cases

discussed therein.

of taxable income method, if its position that net operating

losses should not be taken into account in computing taxable

income should be rejected, and therefore provide the basis for

applying the limitation on the addition to the bad debt reserve

under section 593(b)(1)(B).2

Clearly, the utilization of the experience method raises a

new issue and one which would require the reopening of the record

and the taking of additional evidence. Raising such an issue

clearly is not permissible in a Rule 155 proceeding. 

Chilingirian v. Commissioner, 918 F.2d 1251, 1255 (6th Cir.

1990), affg. T.C. Memo. 1986-463; Cloes v. Commissioner, 79 T.C.

933 (1982) (taxpayer not permitted to use income averaging,

raised for the first time in the Rule 155 computation, after

losing the issue of includability of an item in income).3

Petitioner attempts to avoid the impact of the foregoing

circumstances by two assertions. First, it asserts that the

determination of which of the two methods applies is mechanical

and therefore is permitted in a Rule 155 proceeding citing Home

Group, Inc. v. Commissioner, 91 T.C. 265, 268-271 (1988), affd.

on another issue 875 F.2d 377 (2d Cir. 1989). In making this
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4 The following is a quotation from the affidavit of its

Executive Vice President and Chief Financial Officer in support

of petitioner's motion for summary judgment:

During certain of the taxable years ended December

31, 1968 through December 31, 1982, Petitioner

calculated the annual addition to its reserve for bad

debts under the percentage of taxable income method

provided in §593(b)(2) of the Code and deducted such

addition in each such taxable year on its federal

income tax returns. In conjunction with Petitioner's

filing of its Tentative Refund Applications stemming

from its carryback of the NOL from the 1980 tax year

(as well as NOLs from other tax years) to the tax years

at issue herein, Petitioner, in redetermining its

taxable income and federal income tax for such years,

recomputed its allowable bad debt deductions under the

percentage of taxable income method for such affected

assertion, petitioner overlooks an essential element; namely that

the mechanical application of the two methods must be preceded by

a determination of the factual foundations for determining

taxable income and experience. It is the foundation of

petitioner's experience that is missing and would need to be

supplied. In this connection, we note that apparently petitioner

first utilized the experience method in certain of the years

involved herein in Forms 1139 which it filed to claim tentative

refunds. Those forms were never submitted in the prior

proceeding and were brought to the attention of the Court for the

first time as attachments to petitioner's objections to

respondent's computation for entry of decision. Moreover, in its

motion for summary judgment, petitioner represented that it had

used the percentage of income method in filing its tentative

refund application; i.e., its Forms 1139.4 This representation
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tax years in accordance with Treas. Reg. §1.593-

6A(b)(5)(vi) and (vii) which requires that taxable

income reflect any NOL carryback before deduction for

the addition to the bad debt reserve is computed. This

recomputation resulted in a smaller loan loss reserve

deduction.

led to the Court's inclusion of such use of the percentage of

income method in its opinion. See Central Pennsylvania Savings

Association v. Commissioner, 104 T.C. 384,386 (1995). Petitioner

did not move to revise our opinion. Under these circumstances,

the oblique reference to "certain of the taxable years", see

supra note 4, and the mere fact that the Forms 1139 were filed

prior to the issuance of the notice of deficiency herein are

simply insufficient to sustain petitioner's position.

Second, petitioner asserts that it is respondent who is

raising the new issue because she did not include the experience

method of calculation in her computation. Whatever may be the

situation where there is an alternative ground for supporting a

deficiency, we see no reason to impose on respondent, after

winning the case, an obligation to construct a lesser deficiency

on a basis other than that represented to the Court as the sole

issue for decision. Cf. Paccar, Inc. v. Commissioner, 849 F.2d

393, 399 (9th Cir. 1988), affg. 85 T.C. 754 (1985).

We think it was incumbent upon petitioner to raise the use

of the experience method as an alternative basis for calculating

the additions to its bad debt reserves, in the event that its

position as to the invalidity of respondent's regulations in
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respect of the impact of net operating losses on the percentage

of income method was rejected. If petitioner had done so,

respondent and the Court would have had an opportunity to

consider the appropriateness of a motion for summary judgment by

either party and the possibility that the issue of the validity

of respondent's regulations should have been disposed of by way

of a motion to sever such issue.

The long and the short of the matter is that it is simply

too late for petitioner to claim the use of the experience method

of calculating the additions to its bad debt reserves for

purposes of computing the deficiencies for the years at issue.

In view of the foregoing, respondent's computation for entry

of decision is adopted. Additionally, petitioner's motion to

amend its petition to raise the experience method issue will be

denied.

Decision will be entered in

accordance with respondent's 

computation.