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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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
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.
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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
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.
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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
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
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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
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.
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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.