Columbia State Sav. Bank v. Commissioner

COLUMBIA STATE SAVINGS BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Columbia State Sav. Bank v. Commissioner Docket No. 45261. United States Board of Tax Appeals 31 B.T.A. 685; 1934 BTA LEXIS 1049; November 22, 1934, Promulgated *1049 Where books of taxpayer engaged in the making of interestbearing real estate mortgage loans are kept on an accrual basis, commissions or discounts deducted from the principal are income in the year the loans are made. H. N. Smith, C.P.A., for the petitioner. B. M. Coon, Esq., for the respondent. MCMAHON *685 This proceeding is for the redetermination of an asserted deficiency in income tax for 1927 in the amount of $809.14. It is alleged in the petition that the respondent, in his determination of the asserted deficiency, erred "in including in taxable income, at the time of acquisition, a so-called commission or discount on real estate bonds and mortgages acquired by the petitioner from the original borrower." This proceeding was submitted upon a written stipulation of facts and testimony. Only such facts established by the testimony and not covered by such stipulation as are necessary to the determination of the issue in controversy are set forth in our findings of fact. FINDINGS OF FACT. The facts stipulated by the parties are as follows: (1) The petitioner is a corporation organized and existing under the laws of Illinois, *1050 and during the taxable year involved, 1927, and prior thereto, was engaged in the business of banking. (2) It included in its operations during 1927, the making of interest bearing, real estate or mortgage loans. In making the said loans the bank deducted *686 from the face of the loan a so-called discount or commission, paying to the borrower the difference. (3) The amount of said commission or discount, deducted by the bank from the face of the loans, was determined by the following factors: (a) The risk involved: The higher the grade of the security and the lower the ratio of the amount of the loan to the value of the security, the lower the commission or discount. (b) The interest rate: The higher the interest rate, the lower the commission or discount, all else being equal. (c) The length of time the loan was for: The longer the time the loan was for, the higher the discount or commission. For example, a loan for one year might be made at 1% commission or discount, while if the same loan was for 10 years the discount or commission might be 5 to 7%. (4) The handling of real estate or mortgage loans constituted one of the principal parts of the petitioner's*1051 business during 1927. (5) The method employed by the petitioner in making loans was as follows: An application was first secured from the borrower which was submitted to the Board of Directors for approval, and after approval the borrower submitted his abstrate of title and papers, a mortgage was drawn on the property to secure the loan, a commission or discount of from 1% to 7%, which included the negotiation of the loan to others and any service connected therewith, was deducted by the bank from the face of the loan, and the balance paid to the borrower. No payment of this commission or discount was made by the borrower direct to the petitioner at the time of the loan or otherwise, except by the deduction from the amount of the loan. (6) The petitioner Bank maintained a bond department for the express purpose of retailing these loans to its customers as rapidly as possible, so as to realize the said discount or commission and be able to re-invest the proceeds. (7) During the years involved the petitioner kept its books and made its return upon the accrual basis. (8) Petitioner included in taxable income for 1927 all of said discounts or commissions on loans made during*1052 1927 that were sold or otherwise disposed of during that year; and also the discounts or commissions on all similar loans made in prior years that were sold or otherwise disposed of, or paid at maturity, in 1927. (9) The commissioner has included the said commission or discounts in petitioner's taxable income for the year in which the loan was made, in determining the deficiency that is the subject of this appeal. (10) If the said commissions or discounts are not taxable income until the loan is sold or otherwise disposed of, or paid at maturity, as contended for by petitioner, there is no deficiency. (11) If the said commissions or discounts should be included in taxable income, on the accrual basis, by pro-rating same over the life of the loan, or some other basis than outlined in paragraphs (9) and (10), the correct tax liability will be determined under rule #50. The primary purpose of petitioner in making these mortgage loans was to resell them to its patrons. All mortgage loans were sold at par. No mortgage loan ran for a period of less than one year or more than five years. About 80 to 85 percent of the loans made were mortgage loans and 10 to 15 percent were*1053 loans in the form of bond issues on larger apartment buildings. The mortgage loans were *687 mostly placed upon small dwellings and about 10 to 15 percent on small business properties. Most of the loans were around $5,000, but ranged from $1,000 to $75,000. However, very few ran as high as $25,000. Some were in the amount of $50,000. The petitioner limited the number of its loans to possible sales. It received commissions as low as $25 and as high as $700 to $1,000. After loans were made it was necessary for the petitioner to collect the interest, see that taxes were paid and insurance renewed, and make an occasional inspection of the properties. When loans were sold it was necessary for the petitioner to see that the purchaser of the loan received his interest and principal when due. In selling the loans the petitioner did not guarantee in writing the payment thereof and entered into no written contract with purchaser to repurchase the mortgage loan on default. The printed form of application used by petitioner contained an agreement by the applicant to pay the petitioner " per cent commission and usual expenses" upon approval of the loan applied for. OPINION. *1054 MCMAHON: The question to be determined is whether commissions or discounts deducted from the principal or face of real estate mortgage loans are income in the year in which the loans are made, the books of account being kept on an accrual basis. The petitioner included in taxable income for 1927 all commissions or discounts on loans sold or otherwise disposed of during 1927 whether made in 1927 or prior thereto. It contends that under the facts in this proceeding, while admittedly on an accrual basis, it did not derive income from the deduction of discount or commissions from the face of the loans until such loans were sold or otherwise disposed of. A similar contention made by this petitioner involving its income for the years 1921 and 1922 was decided adversely to the petitioner in Columbia State Savings Bank,15 B.T.A. 219, affirmed in Columbia State Savings Bank, 41 Fed.(2d) 923. This question, involving similar facts, was also before the Board in North-Western Trust & Savings Bank,20 B.T.A. 365, and *1055 Bonded Mortgage Co. of Baltimore,27 B.T.A. 965, affirmed in Bonded Mortgage Co. v. Commissioner, 70 Fed.(2d) 341, wherein it was held that commissions deducted from the face of real estate loans are income to the maker of the loan in the year in which such loan is made when the books of account of the lender are kept on an accrual basis, following Columbia State Savings Bank, supra. Cf. Cosmopolitan Bond & Mortgage Co.,30 B.T.A. 717. *688 The petitioner contends that the evidence in this proceeding, showing that the petitioner serviced the loans after the sale thereof and that the amount and rate of commission charged on each loan depended upon the term, interest rate, and risk involved therein, was not presented in petitioner's prior case, Columbia State Savings Bank, supar, and that because of this additional evidence this proceeding is distinguishable from the prior proceeding. In our opinion, giving due consideration to all the additional facts shown by the evidence in this proceeding, not shown in the prior case, we must conclude, as in the prior case, that: It thus appears that the commissions charged*1056 by the petitioner were in the nature of compensation for services rendered, and that when a loan was made the transaction was fully completed in so far as concerned the petitioner's right to its commission. The liability of the borrower to pay the commission was in no way contingent or dependent upon the passage of time, as is the case with respect to an obligation to pay interest for the use of borrowed money. Upon the execution of the note the borrower's liability to pay the commission became definitely accrued at the time each loan was made, and since the petitioner kept its books of account upon an accrual basis, the aggregate amount of the commissions on loans made within each taxable year should have been accrued on the books * * *. At the time the loans were made the obligation of the borrower to pay, and the right of the petitioner to receive, the whole of the commissions became definitely fixed and determined. That the sale of such loans at par or the payment of such loans in full were not absolutely certain at the time when made is immaterial. The possibility of nonpayment is inherent in every obligation to pay. However, the evidence discloses that all mortgages and*1057 bonds sold were sold at par. The commissions represented payment for the granting of loans and it is immaterial that the rate of commission charged in each instance was based upon the term of the loan, interest rate, and risk involved. It was testified that it was necessary for petitioner to service its loans after they were made by collecting the interest, seeing that taxes were paid and insurance renewed, inspecting the properties occasionally, and seeing that the owner of the loan received his interest and principal when due. The collection of interest, checking of payment of taxes and maintenance of insurance, and occasional inspection of property mortgaged are services incidental to the business of making real estate mortgage loans, whether performed in its own behalf or in behalf of its customers. It was also testified that it was petitioner's policy, dependent however on the rate of commission paid to its salesmen, to repurchase from its customers mortgages sold at par. It does not appear that this policy was carried into effect in a single instance. However, this servicing and policy have no bearing upon the accrual of the commission, since they *689 were performed*1058 and maintained to facilitate and make sales. The services were performed for the purchaser of the loan and not for the maker of the loan. The liability of the maker of the loan for the commission or discount was not contingent upon the servicing of the loan for the benefit of the purchaser thereof. It is immaterial to the borrower whether his loan is sold. He is interested merely in the granting of it. In our opinion it would serve no useful purpose to discuss the cases cited by petitioner on brief, since all are distinguishable on the facts presented. The action of the respondent in including in petitioner's 1927 income commissions or discounts deducted from the principal or face of mortgage loans made in 1927 is approved. Decision will be entered for the respondent.