Opinion
No. 9837.
June 13, 1934.
Petition to Review Decision of United States Board of Tax Appeals.
Petition by Guy T. Helvering, Commissioner of Internal Revenue, to review an order of the Board of Tax Appeals redetermining a deficiency in the tax imposed against Martin-Stubblefield, Inc., by the Commissioner of Internal Revenue.
Affirmed.
S. Dee Hanson, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for petitioner.
Bryan Wilson, of St. Louis, Mo. (James V. Dunbar, W. Donald Dubail, and Charles R. Judge, all of St. Louis, Mo., on the brief), for respondent.
Before GARDNER, WOODROUGH, and VAN VALKENBURGH, Circuit Judges.
This is an appeal from an order of the Board of Tax Appeals involving corporate income taxes for the years 1927 and 1928. The respondent is a Missouri corporation engaged in lending money on real estate mortgages, and has its principal office and place of business at St. Louis, Mo. Its books are kept on the basis of cash receipts and disbursements. In its "Unearned Commissions" account at the end of the calendar years 1927 and 1928 appeared credit balances in the amounts of $3,605.40 and $25,427.53, respectively. These amounts were not reported by the respondent as income in its returns for those years. The Commissioner in determining the deficiencies involved in these proceedings included in the taxable income of the respondent for the years 1927 and 1928 the amounts so credited to the "Unearned Commissions" account.
The facts as stipulated and found by the Board of Tax Appeals may be stated briefly. When a borrower's application for a loan and the security which he offers as collateral are approved he executes his promissory note in favor of the respondent for the amount of the loan and a mortgage on certain real estate to secure it. He then receives in return the amount of the loan less 2 per cent., retained by respondent as a commission for its services, which is credited to the "Unearned Commissions" account on its books. When the loan is repaid or the notes sold by the respondent at a discount the commission is then treated as earned, at which time the net amount is determinable. The respondent then makes a charge against the "Unearned Commissions" account and a corresponding credit is entered on the "Earned Commissions" account.
The Board of Tax Appeals held that the Commissioner erred in increasing respondent's gross income by the amount of the commissions here in controversy, and redetermined the tax liability for the years 1927 and 1928 accordingly. The sole question presented is whether the commissions so deducted when the loans are made constitute taxable income as of that year.
In Blair Commissioner v. First Trust Savings Bank (C.C.A.) 39 F.2d 462, the identical issue involved here was presented to the Circuit Court of the Fifth Circuit. The court affirmed the order of the Board of Tax Appeals holding that when the taxpayer's accounts are kept on the cash receipts and disbursements basis commissions deducted at the time the loans are made do not constitute taxable income until the notes are paid or sold. In its opinion the court said: "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 gets 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."
It is evident that income from this source is uncertain until the notes are paid or sold before maturity. The evidence establishes that it was respondent's practice to rediscount these notes before the loans matured. It seems clear, therefore, that the income actually earned could not be definitely ascertained at the time the loan was made, but only when the loan was actually repaid or the notes were sold.
The petitioner relies upon Columbia State Savings Bank v. Commissioner (C.C.A.) 41 F.2d 923, 924. In that case, however, the court observed that the taxpayer kept its books on the accrual basis, and it distinguished the cases as follows: "Blair, Commissioner, v. First Trust Savings Bank of Miami (C.C.A.) 39 F.2d 462, is clearly distinguishable by the there recited fact that `respondent keeps its books and makes its return on the cash basis,' and, further, as stated by the Board of Tax Appeals in passing on that case, the taxpayer's books treated the commission as unearned until such time as the notes were paid or sold."
The findings and conclusions of the Board of Tax Appeals find substantial support in the evidence, and its decision is affirmed.