Court Opinion

ID: 4597851
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:20:03.265173+00
Date Added: 2024-06-11T07:51:52.369914
License: Public Domain

FIRST TRUST & SAVINGS BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.First Trust & Sav. Bank v. CommissionerDocket No. 11746.United States Board of Tax Appeals11 B.T.A. 1034; 1928 BTA LEXIS 3669; May 4, 1928, Promulgated *3669  On the cash basis the petitioner did not receive taxable income to the extent of commissions deducted from the principal in making loans until the commissions were actually paid.  P. R. G. Sjostrom, Esq., and Wm. S. Hammer, Esq., for the petitioner.  S. Faulkner, Esq., for the respondent.  TRAMMELL*1034  This is a proceeding for the redetermination of deficiencies in income and profits taxes for 1920 and 1921 in the amounts of $1,000.74 and $3,154.04, respectively.  The deficiencies arise for each of the years on account of the action of the respondent in including in taxable income commissions claimed by the petitioner not to have been received or accrued during the years involved.  FINDINGS OF FACT.  The petitioner is a corporation organized and existing under the laws of Florida and is engaged in the business of banking.  It includes in its operations the making of real estate or mortgage loans upon which, in addition to the regular interest on the notes, the borrowers agree to pay an additional amount as commission for the making and marketing of the loan and other services in connection therewith.  The handling of real estate or mortgage*3670  loans constitutes one of the principal parts of the petitioner's business.  The method employed by the petitioner in making loans was as follows: An application is first secured from the borrower which is submitted to the board of directors for approval and after approval the borrower submits his abstract of title and papers; a mortgage is drawn on the property to secure the loan, a fee of about 2 per cent is made as a charge for the loan, which includes the negotiation of the loan to others and any services connected therewith, and the borrower receives the amount of the loan less this commission and the expenses in connection with the loan.  No payment of this commission is made by the borrower direct to the petitioner *1035  at the time of the loan or otherwise except by the deduction from the amount of the loan.  The commission charged on loans was credited by the petitioner to a separate account on its books and was shown as a liability, being treated as unearned.  When the loan is paid a charge is made against this unearned commission and a credit is made to commission earned.  If the note or mortgage is sold by the petitioner prior to maturity, the commission item*3671  is treated in the same way, that is, as if paid off.  The commission is not considered or handled upon the petitioner's books as having been earned until the note or mortgage is paid or sold.  The funds on deposit in the bank were used in making loans, but those funds available for loans represented only about 20 per cent of the loan business done by the petitioner.  To take care of this volume of business it was necessary to sell the notes to make funds available for other loans.  For 1920 the respondent included in the taxable income of the petitioner the sum of $2,638.57, and for 1921, $6,743.57, both amounts representing commissions on loans which were handled as aforesaid and which appeared upon the petitioner's books as unearned commissions, the loans represented by the said commissions not having been repaid or the notes given for said loans sold or discounted during the years involved.  During the years involved the petitioner kept its books and made its returns upon the cash basis.  OPINION.  TRAMMELL: There is no dispute about the facts in this case.  The question for decision is whether the petitioner received taxable income during the taxable years when it made*3672  loans from which it deducted the commission charges.  In our opinion, the commissions were not actually received when the loans were made.  The bank, upon the credit of the borrower's note and the security given by him, paid out to him cash amounting to the face of the loan less the agreed commission and certain expenses.  At that time the bank did not receive the commission exacted or agreed upon.  It received nothing in fact except the promise to pay in the future.  While in this case the transaction involves commissions instead of interest or discounts, as was involved in the cases of ; ; ; , we see no *1036  distinction in the principles involved.  Cf. . Upon the authority of those cases we must hold that the petitioner did not receive taxable income in the years involved as a result of the commission transactions involved. Judgment will be entered on 15 days' notice, under Rule 50.*3673