Decided February 10, 1960.
Taxation — Dealers in intangibles — Lending money on real estate — Annual return — Section 5725.14, Revised Code — Percentage allowed for bad-debt reserve, computed, how.
APPEAL from the Board of Tax Appeals.
Allied Building Credits, Inc., appellant herein, is a foreign corporation qualified to do and doing business in Ohio as a dealer in intangibles and primarily engaged in lending money on real estate. The instant action involves annual intangible tax returns for the years 1956 and 1957 filed by appellant with the Tax Commissioner, appellee herein, as required by Section 5725.14, Revised Code.
In each of its reports, appellant listed the total book value of shares of invested capital and assigned a specified per cent thereof as taxable in Ohio. In computing its net worth, the appellant, in valuing its accounts, contracts, notes, mortgages and advances receivable as shown in its balance sheet, allowed itself a specific amount as a reserve for bad debts for total outstanding receivables. In computing the fair value of appellant's receivables, the Tax Commissioner determined that an excessive reserve for bad debts had been computed, reduced it and increased the net value of appellant's shares of invested capital subject to taxation.
The commissioner employed the bad-debt formula approved in Capital Finance Corp. v. Glander, Tax Commr., 153 Ohio St. 50, and Personal Finance Co. v. Glander, Tax Commr., 156 Ohio St. 379, which is computed by dividing the total bad debts charged off, less recoveries, for the preceding five years by the total amount of business on account of loans effected, discounted or renewed for the previous five years. To this resulting percentage is added one-half of one per cent as a correction factor.
At various times appellant would sell with recourse notes receivable to banks under a purchase agreement whereby the banks withheld a part of the purchase price as a fund from which they could reimburse themselves for any defaulted notes. Such fund was carried on the books of appellant as an account receivable. (The record indicates that all notes sold with recourse were actually repurchased by the taxpayer before loss occurred, and any loss actually occasioned thereby is reflected in the taxpayer's five-year experience of bad debts.)
The commissioner, in computing the reserve for bad debts, applied the bad-debt percentage figure against only accounts receivable which were assets of the appellant during each report period and refused to take into consideration those notes which appellant had sold with recourse to banks and had not repurchased.
The controversy seems to be in ascertaining the value of the accounts receivable. The accounts-receivable figure against which appellant would apply the bad-debt percentage figure is the total of all loans made during the period, which were outstanding and unpaid, whether owned by appellant or not.
On appeal the Board of Tax Appeals affirmed the order of the Tax Commissioner.
An appeal as of right brings the cause to this court for review.
Messrs. Powell, Powell Carpenter, for appellant.
Mr. Mark McElroy, attorney general, and Mr. Robert J. Kosydar, for appellee.
The issue presented is whether the bad-debt formula hereinbefore referred to was correctly applied or, in other words, whether the percentages computed pursuant to the formula should be applied against the amount of receivables on hand and carried on the books of appellant as of December 31 in each year involved or should be applied against such figure plus the amount of notes sold and discounted and held by banks upon which an amount was still due.
After an examination of the record, this court is of the opinion that the bad-debt formula as applied by the Tax Commissioner was not unreasonable or unlawful, and that the Board of Tax Appeals was not in error in affirming the order of the commissioner.
The decision of the Board of Tax Appeals is affirmed.
WEYGANDT, C.J., ZIMMERMAN, MATTHIAS, BELL, HERBERT and PECK, JJ., concur.
TAFT, J., dissents.