1934 BTA LEXIS 1277">*1277 1. Where all income and expense accounts in petitioner's books of account were kept on the cash receipts and disbursements basis, and only one account therein showed discounts charged on loans made during the year, but only discounts actually received upon payment or sale of loans were treated as income, held that the petitioner was on the cash receipts and disbursements basis.
2. Part of petitioner's business consisted of making real estate loans on which it charged the borrower a commission in addition to the interest on the face value of the loans. This commission was deducted, along with other charges, from the amount which the borrower actually received. These loans were made by the petitioner with a view to their sale to its customers at or about the face value of the loans, thereby enabling petitioner to make a profit of the difference between the amount of the petitioner's actual cash outlay and the face value of the loans, this difference being represented by the commission charge. During 1927 certain of these loans had not been repaid to or disposed of by the petitioner. Held, since petitioner employed the cash receipts and disbursements method of accounting, 1934 BTA LEXIS 1277">*1278 the commissions charged upon such loans, which had not been repaid or disposed of, did not constitute income to the petitioner in the year 1927.
30 B.T.A. 717">*718 This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1927 in the amount of $2,476.44.
FINDINGS OF FACT.
The parties entered into a stipulation of facts which, in so far as it contains facts, we adopt as a part of our findings, as follows:
The petitioner is a corporation organized on February 20, 1922 under the laws of the State of Illinois for the purpose of engaging in the business of real estate brokerage and of dealing in real estate securities.
The questions at issue in this proceeding, which involves the petitioner's income tax liability for the calendar year 1927, are as follows:
(1) Did the petitioner keep its books of account of the so-called accrual basis of accounting or on the so-called cash receipts and disbursements basis of accounting?
(2) Should the petitioner have included in its taxable net income for the calendar year 1927 an amount1934 BTA LEXIS 1277">*1279 of $18,344.00 representing commissions on real estate loans which had not been sold to petitioner's customers nor repaid by the borrowers as at December 31, 1927?
All of the petitioner's income and expense accounts were kept on the so-called cash receipts and disbursements basis with the single exception of an account called "Commissions on Loans" and the petitioner made its income tax returns in accordance with its books with the single exception of the said account called "Commissions on Loans."
A large part of the petitioner's business consisted of making real estate loans on which it charged the borrower with a commission at various percentages of said loans in addition to the interest on the face value of the loans. This commission was not evidenced by separate notes, but was charged against the total loan together with other expenditures such as title investigation costs, insurance premiums, tax stamps, bond printing costs, etc. The balance of the 30 B.T.A. 717">*719 loan after deducting the foregoing charges could then be drawn against by the borrower.
These loans were made by the petitioner with a view to their sale to its customers at or about their face value, thereby enabling1934 BTA LEXIS 1277">*1280 the petitioner to make a profit of the difference between the amount of petitioner's actual cash outlay and the face value of the loans, this difference being represented by the commission charge.
During the time the loans were held by the petitioner, it collected interest at the rate specified on the respective loans. The total interest collected during the calendar year 1927 amounted to $17,188.96 and the total interest paid during the same year amounted to $18,011.02, the difference of $822.06 being reported as a net interest deduction in the petitioner's return for 1927.
At the end of each year the petitioner listed all real estate loans on hand, computed the unrealized commissions on said loans by multiplying the balance of each loan on hand by the commission percentage applicable to said loan and excluded from its taxable net income the total amount of the unrealized commissions so computed. The result of this procedure was to take into taxable income in its returns the total commissions realized in cash through the sale or repayment of the loans and to exclude from each year's taxable income the commissions applicable to loans on hand at the end of each taxable year. 1934 BTA LEXIS 1277">*1281 The amount of $18,344.00 added to the petitioner's reported taxable net income for the calendar year 1927 by the respondent represents unrealized commissions on real estate loans arrived at in the manner set out above. The sum of $74,343.50 shown under Item #4 - Gross Income - in the schedule attached to the petitioner's return and designed therein as "Profits on Sale of Real Estate Bonds and Mortgages" represents the portion of the commissions on loans included in taxable income on the said return.
A correct copy of the balance sheets as at December 31, 1926, and as at December 31, 1927, is attached to petitioner's 1927 return, which is filed herewith as joint Exhibit #1 of the parties. They show various accounts receivable and accounts payable, none of which accounts originated from transactions in which the offsetting credits and debits represented income and expense, respectively. The accounts receivable represent bills received by the petitioner from insurance brokers and from title companies, which bills were charged to petitioner's customers and which bills were credited to accounts payable to said brokers and title companies.
The parties to this proceeding hereby1934 BTA LEXIS 1277">*1282 hereby agree that the Board may accept the foregoing statement of facts as the basis of its Findings of Fact.
In the petitioner's return for the year 1927, referred to in the above stipulation, there are listed 8 sources of income or income accounts and 16 items of deductions or expense accounts. In the return the amount of $18,344 in question herein was described as "unrealized discount" and was not included as income.
In determining the deficiency herein involved the respondent added this item of $18,344 to the petitioner's reported net income with the statement:
In accordance with Solicitor's Memorandum 3820, Cumulative Bulletin IV-2-2327, unrealized discount is not deductible from gross receipts in determining net income.
30 B.T.A. 717">*720 OPINION.
MCMAHON: Section 212(b) of the Revenue Act of 1926 1 provides that the net income shall be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. The stipulated facts show that all of the petitioner's income and expense accounts were kept on the cash receipts and disbursements basis, with the single exception of an account called "commissions on loan", and that the petitioner1934 BTA LEXIS 1277">*1283 made its income tax returns in accordance with its books, with the single exception of the account "commissions on loans", and reported only discounts actually received. The account "commissions on loans" in our opinion is at most a memorandum account kept for purposes of information. There is no evidence that petitioner was on the accrual basis. On the other hand, the stipulation shows that it was on the cash receipts and disbursements basis and filed its return for the year before us on that basis. We hold that it was then on such basis. First Nat. Bank of Stoughton, Wis.,2 B.T.A. 586">2 B.T.A. 586. See Merchants Nat. Bank,6 B.T.A. 1167">6 B.T.A. 1167. Cf. Maine Dairy Co.,4 B.T.A. 375">4 B.T.A. 375.
1934 BTA LEXIS 1277">*1284 Since the petitioner kept its accounts upon the cash receipts and disbursements basis, it derived no income in the year 1927 upon unrealized commissions on the real estate loans described in the stipulation of facts. In First Trust & Savings Bank,11 B.T.A. 1034">11 B.T.A. 1034, where the facts were substantially the same as in the instant proceeding, we stated:
* * * The question for decision is whether the petitioner received taxable income during the taxable years when it made 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.
* * *
In affirming 11 B.T.A. 1034">First Trust & Savings Bank, supra, the United States Circuit Court of Appeals for the Fifth Circuit, in 1934 BTA LEXIS 1277">*1285 Blair v. First Trust & Savings Bank, 39 Fed.(2d) 462, stated:
It is plain that until the loan is paid or rediscounted the respondent has earned no profit, but has simply parted with its funds on the faith of the security. The commission is not actually received until respondent get back what it has previously paid out plus the commission. The deduction of the commission from the face of the loan brings nothing into the coffers of the bank.
Certiorari was denied in the above case in 282 U.S. 85">282 U.S. 85.
To the same effect are 2 B.T.A. 586">First Nat. Bank of Stoughton, Wis., supra;First Nat. Bank of Sonora, Tex.,6 B.T.A. 555">6 B.T.A. 555; and Chicago City Bank & Trust Co.,24 B.T.A. 892">24 B.T.A. 892.
The instant proceeding is distinguishable from Columbia State Savings Bank,15 B.T.A. 219">15 B.T.A. 219; affirmed in Columbia State Savings Bank v. Commissioner, 41 Fed.(2d) 923; and Bonded Mortgage Co. of Baltimore,27 B.T.A. 965">27 B.T.A. 965; reversed upon another point in 1934 BTA LEXIS 1277">*1286 Bonded Mortgage Co. v. Commissioner, 70 Fed.(2d) 341, since in each of those cases the taxpayer kept its books upon an accrual basis.
The respondent was in error in including the amount of $18,344 in the petitioner's taxable income for the year 1927.
Reviewed by the Board.
Decision of no deficiency as to the year 1927 will be entered.
Footnotes
1. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * * ↩