T.C. Memo. 2002-168
UNITED STATES TAX COURT
BARNETT BANKS, INC. & SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 4256-98, 4866-98. Filed July 10, 2002.
Philip C. Cook, Terence J. Greene, Timothy J. Peaden,
Michelle Marie Henkel, and Charles W. Wheeler, for petitioner.
James F. Kearney, for respondent.
MEMORANDUM OPINION
COHEN, Judge: These consolidated cases are before the Court
on respondent’s Motion for Partial Summary Judgment With Respect
to Reserve for Bad Debts and on petitioner’s Motion for Summary
Judgment pursuant to Rule 121. Respondent determined
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deficiencies, additions to tax, and a penalty in petitioner’s
Federal income taxes as follows:
Docket No. 4256-98:
Additions to Tax
Sec.6653 Sec.6653 Penalty
Year Deficiency (a)(1)(A) (a)(1)(B) Sec.6661
12/31/83 $2,406,964 –- –- –-
12/31/84 21,943 –- –- –-
12/31/85 472,184 –- –- –-
12/31/86 8,322,020 $468,607 * $2,098,710
12/31/87 17,295,902 980,439 * –-
*50 percent of the interest due on $8,394,838 and $15,047,884 for
1986 and 1987, respectively.
Docket No. 4866-98:
Year Deficiency
12/31/88 $452,426
12/31/89 1,983,005
12/31/90 404,620
12/31/91 772,825
12/31/92 8,017,277
12/31/93 4,300,188
12/31/94 2,900,914
Unless otherwise indicated, all section 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. The issue for decision is whether petitioner is
entitled to use the reserve method of accounting for bad debts
under section 593 for the taxable years 1986 through 1994.
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Fla. Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be
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granted with respect to all or any part of the legal issues in
controversy “if the pleadings, answers to interrogatories,
depositions, admissions, and any other acceptable materials,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that a decision may be
rendered as a matter of law.” Rule 121(b); Stubbs v.
Commissioner, 797 F.2d 936 (11th Cir. 1986). Respondent asserts
that there are material facts in dispute with respect to
petitioner’s satisfaction of certain tests to qualify for the
reserve method in dispute and thus argues that only partial
summary judgment is appropriate if we agree with petitioner’s
interpretation of relevant statutes and regulations. The facts
material to the Court's disposition of the cross-motions for
summary judgment are stated solely for purposes of deciding the
motions and are not findings of fact for these cases. See
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.
17 F.3d 965 (7th Cir. 1994).
Background
During the taxable years 1986 through 1994, Barnett Banks,
Inc. (Barnett), was an accrual basis bank holding company
organized and existing under the laws of the State of Florida,
with its principal place of business in Jacksonville, Florida.
On January 9, 1998, Barnett merged into NB Holdings, a subsidiary
of NationsBank Corp., and thereafter was a wholly owned
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subsidiary of NationsBank Corp. On September 30, 1998, Bank
America Corp. merged into NationsBank Corp., and, as the
surviving entity, NationsBank Corp. changed its name to Bank
America Corp. In April 1999, Bank America Corp. changed its name
to Bank of America Corp. Bank of America Corp. & Subsidiaries is
the successor in interest to Barnett Banks, Inc. & Subsidiaries.
United First Federal Savings and Loan Association (United
First Federal) was a Federal stock savings and loan association,
organized under the Home Owners' Loan Act (HOLA), ch. 64, 48
Stat. 128 (1933), and its principal place of business was in
Sarasota, Florida. Home Federal Bank of Florida, F.S.B. (Home
Federal), was a Federal stock savings bank, organized under the
HOLA, and its principal place of business was in St. Petersburg,
Florida.
On December 22, 1986, Barnett Bank of Southwest Florida
became the successor to United First Federal by conversion of
corporate charters under the laws of the State of Florida and
became a subsidiary of Barnett. Barnett Bank of Southwest
Florida had its principal place of business in Jacksonville,
Florida.
On July 26, 1987, Barnett Bank of Pinellas County became the
successor to Home Federal by conversion of corporate charters
under the laws of the State of Florida and became a subsidiary of
Barnett. Barnett Bank of Pinellas County had its principal place
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of business in Jacksonville, Florida. On September 28, 1996,
Barnett Bank of Southwest Florida and Barnett Bank of Pinellas
County were merged into Barnett Bank, N.A., a subsidiary of
Barnett.
Barnett's Strategic Plan for Increased Market Share in Florida
During the taxable years 1985 to 1988, the stated mission of
Barnett, a bank holding company, was to provide the highest
quality of services and to use every opportunity to enhance its
position as the preeminent financial institution in the State of
Florida and as one of the leading financial institutions in the
Southeast. The State of Florida was Barnett's primary focus for
expansion and growth. One of Barnett's strategic goals in 1985,
1986, and 1987 was to increase its market share of total deposits
in all Florida financial institutions. In 1983 and 1984, savings
and loan institutions accounted for more than 50 percent of the
deposit market share in the 10 largest counties in Florida,
including Pinellas County, Hillsborough County, and Sarasota
County. In 1985, the savings and loan institutions accounted for
more than 50 percent of the deposit market share statewide. In
1985 and 1986, 11 of Florida's top 15 largest financial
institutions in terms of total assets were savings and loan
institutions.
In the first quarter of 1986, Barnett announced that it had
reached separate agreements to acquire United First Federal and
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Home Federal in transactions that would be significantly larger
than any of its prior acquisitions. Barnett, as a bank holding
company, could not make a direct acquisition of the stock of
United First Federal or Home Federal because of the Federal
Reserve Board’s policy that precluded a bank holding company from
making a direct acquisition of a healthy savings and loan
association or Federal savings bank. As a result, United First
Federal and Home Federal were required to convert from a Federal
savings and loan association and a Federal savings bank,
respectively, to State banking corporations in multistep
transactions as a condition to obtaining the Federal Reserve
Board's approval for the acquisitions.
Barnett's Acquisition of United First Federal
As of June 30, 1986, United First Federal had 38 branch
offices in seven Florida counties, with total assets of
$1.6 billion, total deposits of $1.5 billion, and shareholders’
equity of $80 million.
United First Federal was a member of the Federal Home Loan
Bank System (FHLBS) and was subject to supervision and
examination by the Federal Home Loan Bank Board (FHLBB). United
First Federal's deposits were insured by the Federal Savings and
Loan Insurance Corporation (FSLIC).
Pursuant to the plan for merger, United First Federal
completed a two-step conversion of corporate charters under the
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laws of the State of Florida on December 22, 1986. First, United
First Federal converted from a Federal stock savings and loan
association into a Florida stock savings and loan association.
Second, United First Federal converted from a Florida stock
savings and loan association into a Florida banking corporation
known as Barnett Bank of Southwest Florida.
On December 22, 1986, Barnett Bank of Southwest Florida,
N.A., a wholly owned subsidiary of Barnett, merged into Barnett
Bank of Southwest Florida (Southwest). Thereafter, Southwest
became a subsidiary of Barnett and a member of its consolidated
group for Federal income tax purposes.
Southwest's deposits were insured by the Federal Deposit
Insurance Corporation (FDIC) and, after enactment of the
Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA), Pub. L. 101-73, sec. 301, 103 Stat. 277 (1989), by the
Banking Insurance Fund (BIF).
Southwest was the leader in residential lending in its
Florida markets and, from 1992 to 1995, was awarded the Sarasota
Herald-Tribune’s “Reader’s Choice Award” as the best mortgage
lender. Southwest's board of directors was composed entirely of
persons who served as directors of either Barnett Bank of
Southwest Florida, N.A., or United First Federal. In addition,
Southwest's executive officers included a combination of the
senior management of these two financial institutions.
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Immediately after the merger, Southwest conducted its
business in United First Federal’s facilities using the personnel
of both United First Federal and Barnett Bank of Southwest
Florida, N.A.
Barnett's Acquisition of Home Federal
As of March 31, 1987, Home Federal had 28 branch offices in
four Florida counties and total assets of $1.4 billion, total
deposits of $1.3 billion, and shareholders’ equity of
$115 million. Home Federal was the largest residential mortgage
lender in Pinellas County, and, on the basis of total assets, it
was the twenty-first largest savings institution in the State of
Florida.
Home Federal was a member of the FHLBS and was subject to
supervision and examination by the FHLBB. Home Federal's
deposits were insured by the FSLIC.
Pursuant to the plan for merger, Home Federal completed a
two-step conversion of corporate charters under the laws of the
State of Florida on July 26, 1987. First, Home Federal converted
from a Federal savings bank into a Florida stock savings and loan
association. Second, Home Federal converted from a Florida stock
savings and loan association into a Florida banking corporation
known as Barnett Bank of Pinellas County.
On July 26, 1987, Barnett Bank of Pinellas County, N.A., a
wholly owned subsidiary of Barnett, merged into Barnett Bank of
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Pinellas County (Pinellas). Thereafter, Pinellas became a
subsidiary of Barnett and a member of its consolidated group for
Federal income tax purposes.
Pinellas’s board of directors consisted of the current
directors of Barnett Bank of Pinellas County, N.A., and Home
Federal. In addition, Alfred T. May, the president and chief
executive officer of Home Federal, served as the president and
chief operating officer of Pinellas. Pinellas also continued to
use all employees in the combined organization.
Pinellas’s deposits were insured by the FDIC and, after
FIRREA, by the BIF.
Bad Debt Reserve Method of Accounting
After their acquisitions by Barnett, Southwest and Pinellas
were members of Barnett's consolidated group for Federal income
tax purposes. Barnett timely filed (pursuant to extensions) a
Form 1120, U.S. Corporation Income Tax Return, for each of its
taxable years 1986 through 1994. For all relevant years,
petitioner used a fiscal year ended December 31.
For each of the taxable years in issue, Barnett took the
position that Southwest and Pinellas qualified as "domestic
building and loan associations" within the meaning of section
7701(a)(19); as a result, Barnett claimed a deduction for
Southwest’s and Pinellas’s bad debts based on the reserve method
of accounting under former section 593. Barnett attached the
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savings and loan qualifications tests for Southwest and Pinellas
to each of the returns for the years in issue.
On December 11, 1997, a notice of deficiency was issued for
petitioner’s taxable years 1983 through 1987. In this notice of
deficiency, respondent proposed adjustments to Barnett's taxable
income to reverse Southwest's and Pinellas’s bad debt reserves,
which were calculated under section 593, in the following amounts
and taxable years:
Year Pinellas Southwest Total
12/31/86 –- $15,848,132 $15,848,123
12/31/87 $37,408,897 –- 37,408,897
On December 22, 1997, a notice of deficiency was issued for
petitioner’s taxable years 1988 through 1994. In this notice of
deficiency, respondent disallowed Barnett's deductions claimed
for Southwest's and Pinellas’s bad debt reserves under section
593 in the following amounts and taxable years:
Year Pinellas Southwest Total
12/31/88 ($1,597,859) $2,006,462 $408,603
12/31/89 2,369,843 934,603 3,304,446
12/31/90 (1,713,509) 20,778 (1,692,731)
12/31/91 2,196,073 (192,019) 2,004,054
12/31/92 1,854,512 1,544,816 3,399,328
12/31/93 643,535 (914,984) (271,449)
12/31/94 599,905 (151,366) 448,539
Regulation and Supervision
During the taxable years 1986 through 1994, chapter 655 of
title XXXVIII of the Florida Code provided the Florida Department
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of Banking and Finance with the authority to supervise and
examine all financial institutions chartered under State law,
including savings and loan associations, banks, industrial
savings banks, trust companies, international bank agencies or
representative offices, and credit unions. Banks and trust
companies were subject to the statutory provisions set forth in
chapter 658 of title XXXVIII of the Florida Code. Savings,
savings and loan, and building and loan associations were subject
to the statutory provisions set forth in chapter 665 of title
XXXVIII of the Florida Code. After FIRREA, the FDIC insured the
deposits of banking corporations and of savings and loan
associations.
Statutory and Regulatory Provisions
The applicable statutory and regulatory provisions are
former section 593 (section 593), which provided a deduction for
reserves on bad debts, and section 7701(a)(19) and section
301.7701-13A, Proced. & Admin. Regs., which define “domestic
building and loan association” for section 593.
SEC. 593. RESERVES FOR LOSSES ON LOANS.
(a) Reserve for bad debts.--
(1) In general.--Except as provided in
paragraph (2), in the case of–-
(A) any domestic building and loan
association,
(B) any mutual savings bank, or
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(C) any cooperative bank without capital
stock organized and operated for mutual
purposes and without profit,
there shall be allowed a deduction for a
reasonable addition to a reserve for bad debts.
Such deduction shall be in lieu of any deduction
under section 166(a).
(2) Organization must meet 60-percent asset
test of section 7701(a)(19).-–This section shall
apply to an association or bank referred to in
paragraph (1) only if it meets the requirements of
section 7701(a)(19)(C).
Section 7701 provides:
SEC. 7701. DEFINITIONS.
(a) When used in this title, where not otherwise
distinctly expressed or manifestly incompatible with
the intent thereof–-
* * * * * * *
(19)Domestic building and loan association.--
The term “domestic building and loan association”
means a domestic building and loan association, a
domestic savings and loan association, and a
Federal savings and loan association–-
Section 301.7701-13A, Proced. & Admin Regs., provides:
SEC. 301.7701-13A. Post-1969 domestic building and
loan association.--(a) In general. For taxable years
beginning after July 11, 1969, the term “domestic
building and loan association” means a domestic
building and loan association, a domestic savings and
loan association, a Federal savings and loan
association, and any other savings institution
chartered and supervised as a savings and loan or
similar association under Federal or State law which
meets the supervisory test (described in paragraph (b)
of this section), the business operations test
(described in paragraph (c) of this section), and the
assets test (described in paragraph (d) of this
section). * * *
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Discussion
The nature of the transactions leading to the dispute in
these cases is described by petitioner as follows:
The acquisitions of United First Federal and Home
Federal were undertaken pursuant to Barnett’s strategic
plan to expand its market share of deposits and real
estate lending in the State of Florida. Barnett would
have preferred to acquire these two thrifts pursuant to
their existing charters and continue to conduct their
business without modification. However, a misguided
Federal Reserve Board policy effective at the time of
the acquisitions (but subsequently withdrawn) precluded
a bank holding company from owning an entity chartered
as a stock savings and loan association unless the
entity was failing. Therefore, Barnett was precluded
from directly acquiring the stock of United First
Federal and Home Federal. In order to obtain the
Federal Reserve Board’s approval of the acquisitions,
United First Federal and Home Federal were required to
convert to state banking corporations. United First
Federal was immediately merged with a newly organized
subsidiary of Barnett that was chartered as a bank
under Florida law and continued its residential lending
business in Florida as Southwest. Similarly, Home
Federal was immediately merged with a newly organized
subsidiary of Barnett that was chartered as a bank
under Florida law and continued its residential lending
business in Florida as Pinellas. [Citations omitted.]
The question presented is whether, in carrying out its strategic
plan to acquire Southwest and Pinellas, Barnett gave up the
favorable tax treatment of accounting for bad debt reserves under
section 593 that was previously enjoyed by the two acquired
entities.
Simply stated, respondent’s position is that Southwest and
Pinellas lost qualification to use the reserve method of section
593 when they obtained bank charters and relinquished their
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savings and loan charters in order to be acquired by Barnett
Bank. Respondent interprets the language of section 7701(a)(19)
and of section 301.7701-13A(a), Proced. & Admin. Regs., to
preclude use of section 593 by any entity chartered as a bank.
Respondent relies on legislative history emphasizing the
historically different tax treatment afforded to banks, on the
one hand, and to savings and loan associations, on the other.
Petitioner contends that the language of the applicable
statutes allows for use of the reserve method of accounting under
former section 593 by any association actually functioning as a
savings and loan. Petitioner asserts that Southwest and Pinellas
functioned the same before and after the change in their
charters. Petitioner argues that precedents in the subject areas
repeatedly apply substance over form analysis, even when a
taxpayer is attempting to repudiate the form that the taxpayer
has chosen. Thus, petitioner concludes, the position taken by
respondent as to the conclusiveness of the charter should be
rejected.
Addressing first the language of section 7701(a)(19) and the
related regulation, a straightforward interpretation is that a
domestic building and loan association qualifies for the reserve
method of accounting under section 593 if it meets three tests--
the supervisory test, the business operations test, and the asset
tests set forth in section 7701(a)(19). Petitioner, however,
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contends that an institution that satisfies these tests thereby
qualifies as a domestic savings and loan association. Section
301.7701-13A(a), Proced. & Admin. Regs., adds to the list of
institutions that are domestic building and loan associations
“any other savings institution chartered and supervised as a
savings and loan or similar association under Federal or State
law which meets the * * * [three tests]”. According to
petitioner, the effect of this regulation is to allow the use of
the reserve method of accounting under section 593 by any
“similar association” that meets the three tests. Both parties
cite the evolution of the term “building and loan association” in
the Code and associated legislative history in support of their
respective positions.
The definition of a “building and loan association” under
section 101(4), I.R.C. 1939, was expanded to include “a domestic
building and loan association, a domestic savings and loan
association, and a Federal savings and loan association,
substantially all the business of which is confined to making
loans to members” by the Revenue Act of 1951, ch. 521, sec. 313,
65 Stat. 490. In that Act, Congress eliminated the exemption
from Federal income tax for domestic building and loan
associations and instead enacted generous rules for calculating
deductions for additions to bad debt reserves. Revenue Act of
1951, ch. 521, sec. 313(e), 65 Stat. 490-491. The legislative
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history for the 1951 Act indicates: “This amendment is of a
clarifying nature and is not intended to change the existing
meaning of a domestic building and loan association”. S. Rept.
781, 82d Cong., 1st Sess. (1951), 1951-2 C.B. 563-564.
Petitioner cites this report in support of its position that,
although the definition of a domestic building and loan
association has expanded, the law has never required a specific
type of charter, thereby excluding those institutions whose
substantial business would otherwise qualify for the benefits of
the bad debt reserve calculation.
Congress again altered the rules for calculating bad debt
reserves for building and loan associations by deleting the
reference to “loans to members” and replacing it with the
supervisory test, business operations test, and assets test,
codified in section 7701(a)(19). Revenue Act of 1962, Pub. L.
87-834, sec. 6(c), 76 Stat. 977.
Respondent asserts that, throughout the evolution of the
definition of a domestic building and loan association, the
introductory language quoted supra p. 12 has remained in the
statute, demonstrating congressional intent to distinguish
between entities classified as domestic building and loan
associations and banks.
The introductory language of section 7701(a)(19) is also
found in section 301.7701-13A(a), Proced. & Admin. Regs. That
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regulation includes in the definition of a domestic building and
loan association “any other savings institution chartered and
supervised as a savings and loan or similar association under
Federal or State law” that meets the supervisory test, business
operations test, and assets test. Sec. 301.7701-13A(a), Proced.
& Admin. Regs. (Emphasis added.) Petitioner seizes upon the
phrase “similar association” in an attempt to fit within the
definition of a domestic building and loan association.
Petitioner’s interpretation of the regulation would have the
effect of substituting “any financial institution” for the
introductory language in the regulation. The regulation may have
been intended to give some flexibility to institutions chartered
in States that do not apply the same labels for “building and
loan association”; however, to interpret the phrase “similar
association” to include any financial institution that meets the
supervisory test, business operations test, and assets test of
the regulation would require us to ignore the introductory
language. We decline to do so in light of the clear intent of
Congress to distinguish among financial institutions by
incorporating the term “domestic building and loan association”
in sections 593(a)(1)(A) and 7701(a)(19).
Respondent also points to the relationship among sections
581, 585, and 593 as confirming the congressional intent to
devise a comprehensive statutory scheme for the treatment of
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financial institutions. Section 581 provides a broad definition
for the term “bank”, while section 585 provides for the reserves
for losses on loans to banks. Section 581 provides:
SEC. 581. DEFINITION OF BANK.
For purposes of sections 582 and 584, the term
“bank” means a bank or trust company incorporated and
doing business under the laws of the United States
(including laws relating to the District of Columbia)
or of any State, a substantial part of the business of
which consists of receiving deposits and making loans
and discounts, or of exercising fiduciary powers
similar to those permitted to national banks under the
authority of the Comptroller of the Currency, and which
is subject by law to supervision and examination by
State, or Federal authority having supervision over
banking institutions. Such term also means a domestic
building and loan association.
Section 585 provides:
SEC. 585. RESERVES FOR LOSSES ON LOANS OF BANKS.
(a) Reserve for Bad Debts.--
(1) In general.--Except as provided in
subsection (c), a bank shall be allowed a
deduction for a reasonable addition to a reserve
for bad debts. Such deduction shall be in lieu of
any deduction under section 166(a).
(2) Bank.--For purposes of this section–-
(A) In general.--The term “bank” means
any bank (as defined in section 581) other
than an organization to which section 593
applies. [Emphasis added.]
Section 585 and former section 593 provided two different methods
for accounting for reserves for bad debts. Prior to the repeal
of the bad debt reserve method for thrift savings associations
under section 593, section 585 provided deductions for reasonable
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additions to reserves for bad debts for banks, as defined in
section 581, and specifically excluded organizations to which
section 593 applied. The distinction between banks and thrift
institutions for purposes of the bad debt deduction is also
evident in committee reports to the Tax Reform Act of 1986,
Pub. L. 99-514, 100 Stat. 2376, that define commercial banks to
which section 585 applies as:
a domestic or foreign corporation, a substantial
portion of whose business consists of receiving
deposits and making loans and discounts, or of
exercising fiduciary powers similar to those permitted
national banks, and who are subject by law to
supervision and examination by State or Federal
Authority having supervision over banking institutions
(sec. 581). For the purpose of determining the
deductions for bad debts, the term “commercial bank”
does not include domestic building and loan
associations, mutual savings banks or cooperative
nonprofit mutual banks (“thrift institutions”). [H.
Conf. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 574; H.
Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 326;
emphasis added.]
Although, historically, thrift institutions enjoyed more
favorable tax treatment than other financial institutions,
Congress recognized in the Tax Reform Act of 1986, Pub. L.
99-514, 100 Stat. 2376, that changes in regulatory policies had
expanded the activities of thrift institutions and encouraged
other institutions to expand their activities in areas that were
traditionally serviced by the thrift industry. H. Conf. Rept.
99-426, supra, 1986-3 C.B. at 581. Acknowledging that other
financial institutions were in direct competition with thrift
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institutions, Congress substantially reduced the bad debt
deduction available to thrift institutions. By reducing rather
than eliminating the bad debt deduction, “the committee continues
to believe that there should be some incentive for thrift
institutions to provide residential mortgage loans”. Id. at 582.
Explanation of the new provisions for calculating bad debt
deductions for thrift institutions included the language: “Any
institution meeting the definition of a thrift institution and
holding at least 60 percent of its assets as qualifying assets,
will be eligible for the full 5 percent of taxable income
deduction.” Id. (Emphasis added.) The legislative history
cited by both parties demonstrates that, while the activities of
thrifts and commercial banks began to overlap during the years in
issue, a significant distinction remained in both fiscal and
regulatory policy that lends credence to respondent’s
determination that an institution chartered as a bank does not
meet the threshold requirements of section 7701(a)(19).
Petitioner relies on several decided cases that, according
to petitioner, establish that the laws in this area have been
more concerned with the substance of an institution’s activities
than with the form of its State charter. For example, in
Staunton Indus. Loan Corp. v. Commissioner, 120 F.2d 930 (4th
Cir. 1941), revg. 42 B.T.A. 1030 (1940), the Court of Appeals for
the Fourth Circuit applied a functional test to determine whether
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the taxpayer, chartered as an industrial loan corporation under
Virginia State law, qualified as a bank within the meaning of the
Revenue Act of 1936, ch. 690, sec. 104, 49 Stat. 1677. Although
Virginia State law made a distinction between industrial loan
corporations and banks, the court noted that “peculiarities in
individual state laws” are not controlling in the interpretation
of section 104. Staunton Indus. Loan Corp. v. Commissioner,
supra at 933. After analyzing the “sum total of * * *
[taxpayer’s] business activities”, the court concluded that the
taxpayer functioned as a bank that Congress intended to include
for purposes of section 104. Id. Similarly, in Mut. Sav. & Loan
Co. v. Commissioner, 44 B.T.A. 1204 (1941), although the taxpayer
was organized as an industrial loan association and not a bank
under State law, the substance of its activities qualified for
treatment as a bank within the meaning of the Revenue Act of
1936, ch. 690, sec. 104, 49 Stat. 1677. In both cases, the Court
rejected State law distinctions between banks and other entities
when at odds with the definition of a bank under the Federal
statute. Petitioner urges that, under the Staunton and Mutual
approach, Southwest and Pinellas continue to qualify as domestic
building and loan associations because they functioned the same
before and after the mergers and meet the supervisory test,
business operations test, and assets test of section 7701(a)(19).
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Respondent distinguishes the cases on which petitioner
relies and argues that United States v. Cambridge Loan & Bldg.
Co., 278 U.S. 55 (1928), is most directly on point. While the
Federal statutes at issue in Staunton and Mutual provided a
definition for “bank”, the statutes in Cambridge and Perpetual
Bldg. & Loan Association of Columbia v. Commissioner, 34 T.C. 694
(1960), affd. sub nom. Estate of Cooper v. Commissioner, 291 F.2d
831 (4th Cir. 1961), did not define the term “building and loan
association”.
In Cambridge, the taxpayer was incorporated in Ohio and was
recognized and conducted its business as a building and loan
association in accordance with the laws of the State of Ohio.
The Revenue Act of 1918, ch. 18, sec. 231, 40 Stat. 1076, and the
Revenue Act of 1921, ch. 136, sec. 231, 42 Stat. 253, provided an
exemption from income tax for building and loan associations but
did not further define such an entity. The U.S. Supreme Court
accepted the State’s classification of a building and loan
association in the absence of a definition in the Federal
statute, provided that there had not been a “gross misuse of the
name”. United States v. Cambridge Loan & Bldg. Co., supra at 59.
Respondent also relies on Perpetual Bldg. & Loan Association of
Columbia v. Commissioner, supra, in which we stated that, for a
building and loan association to qualify for exemption under
section 101(4), I.R.C. 1939, the association must first come
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within the classification of a building and loan association and
that, second, substantially all of its business must be confined
to making loans to members. Id. at 710. Because the definition
of a building and loan association was not codified in State law,
the analysis focused on State law interpretation of the
characteristics of a building and loan association, consistent
with the second requirement in section 101(4), that substantially
all of an association’s business must be confined to making loans
to members. Id. at 710-711. The Court concluded:
if a corporation does not substantially meet the
generally recognized criteria of a bona fide building
and loan association, it is not such a tax exempt
association as is contemplated by the statute,
regardless of what name it may have or how it may be
designated or classified by the State statute under
which it was organized. [Id. at 715.]
Respondent asserts that, under the Cambridge analysis, when
the Federal statute does not provide a definition, we must rely
on the law of the chartering jurisdiction to determine the
appropriate definition. Respondent argues that the chartering
jurisdiction provides for the separate treatment of entities
classified as building and loan associations from that afforded
to other financial institutions. Both Southwest and Pinellas
were chartered as Florida banking corporations and were,
therefore, subject to and operated under the regulatory authority
of the Florida Department of Banking and Finance, as were all
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financial institutions chartered in the State of Florida. Fla.
Stat. Ann. secs. 655.012, 655.005, 665.012 (West 1984).
Under the Florida financial institutions code, chapter 655
applies to financial institutions generally and provides for
“general regulatory powers to be exercised by the Department of
Banking and Finance in relation to the regulation of financial
institutions”. Fla. Stat. Ann. sec. 655.001 (West 1984).
However, the statutory framework for banks is found in chapter
658, while chapter 665 provides guidance to associations. Fla.
Stat. Ann. secs. 658.165, 665.0211, 665.0501, 665.0711 (West
1984). As defined in chapter 658, the term “bank” does not
include an association. Fla. Stat. Ann. sec. 658.12 (West 1984).
An “association” is defined as a mutual or capital stock savings
association, savings and loan association, building and loan
association, or savings bank. Fla. Stat. Ann. sec. 665.012 (West
1984). The name of every “association” must include either the
words “savings association”, “savings bank”, or “savings and loan
association”. Fla. Stat. Ann. sec. 665.0211 (West 1984).
Chapter 665 also requires associations to invest at least
50 percent of nonliquid assets in real estate loans or interests
in home property or primarily residential property. Fla. Stat.
Ann. sec. 665.0711 (West 1984). The absence of the same
requirement for banks and trusts under chapter 658 demonstrates
the distinction between financial institutions chartered as
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“banks” and those chartered as “savings banks” or “savings and
loan associations”. This treatment is consistent with the
Federal revenue policy that recognizes that thrift institutions
have historically been the primary source of residential home
mortgages.
Alternatively, petitioner argues that Southwest and Pinellas
qualify as “mutual savings banks” as defined in section 591(b).
Section 591(b) expands the definition of a “mutual savings bank”
for purposes of section 591. Section 591 provides:
SEC. 591. DEDUCTION FOR DIVIDENDS PAID ON DEPOSITS.
(a) In General.-–In the case of mutual savings
banks, cooperative banks, domestic building and loan
associations, and other savings institutions chartered
and supervised as savings and loan or similar
associations under Federal or State law, there shall be
allowed as deductions in computing taxable income
amounts paid to, or credited to the accounts of,
depositors or holders of accounts as dividends or
interest on their deposits or withdrawable accounts, if
such amounts paid or credited are withdrawable on
demand subject only to customary notice of intention to
withdraw.
(b) Mutual Savings Bank to Include Certain Banks
With Capital Stock.-–For purposes of this part, the
term “mutual savings bank” includes any bank–-
(1) which has capital stock represented by
shares, and
(2) which is subject to, and operates under,
Federal or State laws relating to mutual savings
bank.
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Section 591(b) was enacted in response to changing regulations in
the banking industry that allowed mutual savings banks to convert
to stock savings banks. H. Conf. Rept. 97-215, at 284-285
(1981). In order to facilitate the conversions and not frustrate
regulatory policy, section 591(b) provided that, “for purposes of
this part, the term ‘mutual savings bank’ includes any bank * * *
which has capital stock represented by shares, and * * * which is
subject to, and operates under, Federal or State laws relating to
mutual savings bank”. Accordingly, mutual savings banks that
converted to stock savings banks continued to qualify as mutual
savings banks for purposes of the reserve method of accounting
for thrift institutions under section 593. The amendments were
intended to “apply to both mutual savings banks which convert
into stock associations and to newly formed stock associations so
long as the institution is operated as a savings institution and
is subject to the same Federal or State regulatory scheme as a
mutual savings bank chartered under Federal or State law”.
H. Conf. Rept. 97-215, at 284-285 (1981).
Petitioner argues that Pinellas and Southwest qualify as
mutual savings banks because they were chartered as banks with
capital stock represented by shares, as required by section
591(b), and were subject to and operated under the regulatory
authority of the Florida Department of Banking and Finance, as
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were all State-chartered mutual savings banks. Fla. Stat. Ann.
secs. 655.012, 655.005, 665.012 (West 1984). Respondent’s
position with respect to section 591(b) is a reiteration of the
position that Southwest and Pinellas, as commercial banks, are
necessarily excluded from the types of institutions eligible for
the special reserve method of accounting under section 593.
As previously discussed, although chapter 655 applies to
financial institutions generally, Florida law distinguishes
between institutions chartered as mutual savings banks under
chapter 665 and those chartered as banks under chapter 658. Fla.
Stat. Ann. secs. 665.012, 655.005 (West 1984). Both Southwest
and Pinellas were chartered as banks under chapter 658 and,
therefore, were not subject to and were not operated under the
same statutory provisions that apply to mutual savings banks and
associations as contemplated by section 591(b).
The nature of the disputes between the parties in these
cases convinces us that the emphasis that respondent places on a
charter is justified. If any financial institution were
permitted to use the reserve method of accounting under section
593 and then, when challenged, to argue that the nature of its
operations was controlling, the administration of section
7701(a)(19), section 593, and related regulatory provisions would
be a practical nightmare. Petitioner’s position would add
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confusion and uncertainty to the law, while the statutory history
shows an intention by Congress to provide certain tax benefits to
savings and loan institutions while denying them to banks. By
incorporating a definition or “meaning” into the statute,
Congress attempted to draw the line, while recognizing that
different terminology was used in different State laws and under
different State regulatory or supervisory structures.
Petitioner’s strategic decision to expand its market share
in Florida was undertaken with the knowledge that the acquisition
of thrift institutions would require their conversion to banking
corporations under Florida law. As the U.S. Supreme Court has
often stated: “while a taxpayer is free to organize his affairs
as he chooses, nevertheless, once having done so, he must accept
the tax consequences of his choice, whether contemplated or
not, * * * and may not enjoy the benefit of some other route he
might have chosen to follow but did not.” Commissioner v. Natl.
Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974).
Based on the statutory framework and relevant legislative
history, we conclude that a financial institution chartered as a
bank cannot meet the threshold requirements of section
7701(a)(19). Therefore, because Pinellas and Southwest were
chartered as banks under Florida law, petitioner is not entitled
to use the reserve method of accounting for bad debts under
- 29 -
section 593. Respondent’s Motion for Partial Summary Judgment
with Respect to Bad Debts will be granted, and petitioner’s
Motion for Summary Judgment will be denied.
To reflect the foregoing,
An appropriate order
will be issued.