Court Opinion

ID: 4480903
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:35.256279+00
Date Added: 2024-06-11T14:53:59.996983
License: Public Domain

Oppei?, /., dissenting: My disagreement with the opinion in this case stems largely from the statement that “Net income would be exactly the same in each year regardless of which method were used, [that is, reporting as gross income or crediting to the reserve] and there is no reason to suppose that Congress intended excess profits net income and the resulting tax to be different, depending upon the choice of method used.” The two methods in their accounting consequences are widely divergent.- Only by accident will the resulting income be the same. For example, had the recoveries in the present year exceeded the charge-offs, the difference between the two would not, under petitioner’s system, be gross income. Thé amount would go into the reserve and would merely swell it to a size which would have to be taken into account1 in making additions in future years — a result which could not occur where all recoveries go into gross income. See Ohio Loan & Discount Co., 3 T. C. 849. It appears to me to be obvious that, for purposes of determining excess profits for a given year, the system of showing all recoveries in gross income and the method of the present petitioner of crediting them to a reserve are radically different and lead to different taxation. As a matter of fact, a strict analysis of petitioner’s method demonstrates how tenuous is the relationship between these recoveries and even the most liberal reading of the statutory reference to “income attributable to the recovery of a bad debt.” Crediting these recoveries to the bad debt reserve, which is what petitioner’s system was designed to accomplish, could not possibly affect its current income. That is the purpose of a bad debt reserve. The short cut adopted, which appeared to take the form of setting off the recoveries against a proposed excessive addition to the reserve, need not obscure the true operation. The reserve was actually increased by the amount of the recoveries. It was then of such a size that a “reasonable addition” to it, for which alone the deduction is permitted,2 was no more than the actual amount which petitioner deducted from income. To say that the recoveries became income because they reduced this addition is comparable to saying that a decrease in bad debt charge-offs is income because it, likewise, reduces the amount required to constitute a reasonable addition.3  If taxpayers computing their income as petitioner does are permitted to deduct from excess profits net income the recoveries of debts charged off to a reserve in base period years, even though such debts are not included in gross income, it seems to me inescapable that their excess profits tax liability must be distorted. Yet that is how the opinion reads the Congressional intent. That, to my mind, is precisely the opposite of what the Tax Court held in J. F. Johnson Lumber Co., 3 T. C. 1160. There we took occasion to note that “The Commissioner has disregarded the fact that the taxpayer has, in computing its net income for income tax purposes, always included bad debt recoveries in its gross income and has never credited them to the bad debt reserve.” The Commissioner there was making the same argument the opinion accepts here: “* * * at the hearing his position was that it makes no difference whether the recoveries were ‘charged’ to the reserve or to the income account, because, since petitioner used the reserve method, its duty was to ‘charge’ the recoveries to the reserve.” It was rejected wholly on the authority of Ohio Loan & Discount Co., supra. If the result would have been the same under either system, the entire basis of decision in the Johnson Lumber Go. case was redundant. On the contrary, however, its true holding can be gathered from its language. “* * * Bad debt recoveries of a taxpayer using the reserve method may properly be accounted for regularly and consistently as gross income for the purpose of computing taxable net income. Since that doctrine is established by the Ohio Loan decision, it inevitably follows that such gross income, if it is attributable to bad debts which were deducted prior to 1940, shall, for the purpose of excess-profits tax, by virtue of section 711 (a) (1) (E), be excluded from excess profits net income, even though the taxpayer uses the reserve method of accounting for bad debts. Regulations 109, section 30.711 (a)-2, in so far as it is contrary, is disapproved.” Respondent so understood the Johnson case, and amended his regulations to conform to it but to exclude the situation of the present petitioner. T. D. 5421, 1944 I. R. B. No. 24, p. 10. As I have said, this seems to me a reasonable, and, in fact, necessary, interpretation of the statute, and I think it should be followed.   “* * * But tlie effect of respondent's proposed treatment of the recoveries here is to include in income in the year of receipt only part of the recoveries to the extent of $10,992.86 and the balance, $14,517.42, in income for succeeding years by the reduction or elimination of deductions for additions to the reserve for those years. * * *” Ohio Loan & Discount Co., 3 T. C. 849, 852.    Internal Revenue Code, sec. 23 (k) (1).    See, e. g., McMullen, Federal Income Tax Accounting (1939), p. 177 : “If a taxpayer using the reserve method collects debts previously charged against the reserve, the amount collected should be credited to the reserve for bad debts, and need not be reported as income. However, statutory net income will be indirectly affected as the amount of the reasonable provision allowable as a deduction will be reduced." (Emphasis added.)