*1574 The petitioner in making loans deducted the commissions for making the loans from the principal and delivered to the borrower the balance. Notes, however, we prepared for the full amount of the Loan. The petitioner was on the cash basis. Held, that the commissions may not be considered as received by the petitioner until the notes are paid or sold.
*892 This proceeding arises as the result of a deficiency in income tax as determined by the Commissioner for 1921 in the amount of $171.15. The only question involved is whether the petitioner, which was on the cash basis, received taxable income, to the extent of discount (including commissions and expenses) deducted from the principal in making loans, at the time the loans were made or when the loans were paid.
FINDINGS OF FACT.
The following stipulation was submitted:
1. The taxpayer is an Illinois corporation with its principal office at Chicago where it is engaged in the general banking business as a State bank, and among *893 other departments*1575 it includes a Real Estate Loan Department which is maintained for making, buying, and selling mortgage loans as well as keeping the records thereof while they are outstanding, said loans bearing varying rates of interest, but usually at the rate of six per cent (6%) per annum, payable semi-annually, with usual maturities from three to five years, but in rare instances from seven to ten years;
2. That petitioner's mortgage loans are acquired on the following basis: A prospective borrower is requested to furnish all pertinent facts relating to the property which is to secure the loan; on the basis of the data so secured and the amount of the loan desired, the rate of discount is determined, taking into consideration the risk involved; practically all the loans are later sold either to regular customers of the bank, or to other banks or brokers; when sold to regular customers, they are usually sold at par, but when sold in large quantities or to other banks or brokers, a discount is usually allowed; when the loan is negotiated the borrower receives the amount of the loan less the discount and the expenses in connection with the loan; no payment of this discount is made by the borrower*1576 direct to the petitioner at the time of the loan or otherwise except by the deduction from the amount of the loan;
3. The loans are made payable to bearer to permit ready negotiation and sale, and most of them are of serial maturities, i.e., a relatively small annual payment on the principal is provided for, but the bulk of the loan falls due at the date of the last maturity, and the larger loans are divided into denominations of $100, 500, and $1,000, either in the form of notes or bonds to make them more readily saleable;
4. The discount above referred to ranges from three per cent (3%) to five per cent (5%) of the face value of the loan, based on the maturity, in practically every case being one per cent (1%) for each year the loan has to run;
5. The books and records of the petitioner have at all times been kept on the cash receipts and cash disbursements basis, and the Federal Income Tax Returns for the year 1921 and for prior and subsequent years have been prepared and filed and the taxes paid on the basis of cash receipts and cash disbursements;
6. The records of the petitioner disclose entries of this discount as a credit to an income account named Commission on*1577 Real Estate Loans immediately upon the negotiation of the loans for the year under consideration and for the years prior and immediately following, and also correcting entries showing the unearned and uncollected sums at the ends of the respective years;
7. By deferring the discount on mortgage loans made during the year 1921 to years when said loans were sold or paid, and adding discount on mortgage loans made in prior years but sold or paid in 1921, an overassessment or an overpayment will result; if the discount is held to be income at the time of the negotiation of the loans there will be a deficiency of $171.15, as stated in the petition.
OPINION.
SEAWELL: The principal error assigned in the petition was:
The failure of the Commissioner to find that the taxable net income of the taxpayer for the calendar year 1921 included certain discounts or so-called commissions on mortgage loans that were neither earned nor collected during that year.
*894 However, other parts of the petition, the Commissioner's answer, the proof submitted and the theory under which both parties have presented the case show that the error assigned improperly states the question at issue. *1578 The petitioner is engaged in making loans and when such loans are made the petitioner deducts the commission from the principal of the loan and then delivers to the borrower the balance. The petitioner is on the cash basis. The Commissioner included the commissions in taxable income for the year in which the loans were made, on the theory that the commissions were then received, whereas the petitioner contends that the commissions can not be considered as received until the loans are paid or sold and that therefore the Commissioner was in error in determining that the commissions should be considered as income received by petitioner prior to the time the loans were paid or, in the event the notes representing the loans were sold, when the notes were sold. However, in view of the acts and agreement of the parties and in view of the further consideration that permission might be given to amend the pleadings to conform to the proof, the question will be considered on the basis of the understanding of the parties as to the issue presented.
We are unable to distinguish the question here presented from that considered by us in *1579 (affd., ; certiorari denied, ), wherein we held that a taxpayer on the cash basis did not receive taxable income to the extent of commissions deducted from the principal in making loans until the loans were paid. The case of (affd., ), to which the Commissioner refers, is distinguishable from the aforementioned case as well as the case at bar in that the taxpayer there concerned was on the accrual basis, whereas the petitioners in the case at bar and in the First Trust & Savings Bank case were on the cash basis. The contention of the petitioner is accordingly sustained.
Errors were also assigned with regard to certain adjustments to invested capital, but no evidence was offered in those respects and therefore the invested capital as determined by the Commissioner will not be disturbed.
Judgment will be entered under Rule 50.