are especially vulnerable to bunching of bad debt losses, that
such bunched losses tend to occur in years of banks' lowest
income and that such an institution's bad debt experience over a
rather long (twenty years) as well as dramatic (including the
depression) period bears some relation to that bank's likely bad
debt experience in the future. He apparently also concluded that
while banks should be protected in the event of an economic
downturn they should not be allowed to create a mere contingency
reserve. The twenty year loss experience factor limited by the
ceiling provision is his compromise solution.
It is not for the Court to decide whether banks are entitled to
a special method of computing reserves, and a resultant tax
benefit, not accorded to other taxpayers. The Mimeo has never
been withdrawn. It applies generally to all banks. Accordingly,
plaintiff is entitled to its benefits.
4. Mimeograph 6209 Computation
The parties are in dispute with respect to certain principles
to be used in computing plaintiff's loss experience factor.
First, they disagree as to whether, for the years 1932-40, the
relevant bad debt experience is that of the New Bank only or that
of the New Bank combined with that of the Old Bank. The Court
concludes that Mimeo 6209 requires use of the latter method.
As already stated, the two banks represented in fact a single
and continuous banking operation. This finding is supported by
such evidence as the identity of location, employees, officers
and directors; the role of the Pullman Company in each bank; the
banks' use of section 12 of the Illinois Banking Act with the
intent that, when the depression dust cleared, a solvent Pullman
Bank would remain; and the form and implementation of the 1932
agreement extended in 1937. The different books, the technical
separation of the corporate entities, the separate audits, and
the somewhat divergent list of shareholders reflect more form
Furthermore, the reserve envisioned by Mimeo 6209 is one which
is the product of good and bad years. But the New Bank's years of
least bad debt losses were the depression years when it held only
the cream of the Old Bank's portfolio. In fact, plaintiff's loss
experience in 1956, concededly a low loss year, was as high or
higher than the loss experience sustained by the New Bank alone
during any year while the Old Bank was in liquidation.
Plaintiff's use of the Old Bank's loss experience during the
latter's period of liquidation does not constitute, as defendant
contends, utilization of a substituted loss experience; rather it
merely recognizes that plaintiff once consisted of two parts both
of which combined to comprise the whole.
Next, the parties disagree as to whether a write-down of an
account constitutes a bad debt loss within the meaning of the
Mimeo. Plaintiff concedes that some items appearing in its
calculation of the Old Bank's net charge-offs for 1930 and 1931
were mere write-downs.
Ordinarily, to be deductible a debt must clearly be worthless.
Cf. Spring City Foundry Co. v. Commissioner, 292 U.S. 182, 54
S.Ct. 644, 78 L.Ed. 1200 (1934); Loewi & Co. v. Commissioner,
232 F.2d 621 (7th Cir. 1956). No reason has been advanced as to why
the rule should be otherwise under Mimeo 6209. Accordingly, the
Court concludes that such write-downs do not constitute bad debt
Third, plaintiff seeks to include in the Old Bank's bad debt
losses for 1932 certain accounts which the State Auditor ordered
the Old Bank to write off in that year as worthless but with
which order the bank failed to comply. The Old Bank did not
report such losses on its 1932 federal income tax return.
While the Auditor's order is entitled to some weight in
establishing when, thirty years ago, these losses occurred, it
should not be accorded conclusive weight thereon. The Court holds
that these accounts did not become worthless for purposes of
Mimeo 6209 until they
were written off the bank's books. Cf. Hadley Falls Trust Co. v.
United States, 110 F.2d 887, 893 (1st Cir. 1940).
The parties should be able, within this framework, to calculate
plaintiff's loan base without further assistance from the Court
and shall endeavor between themselves to resolve any differences
which may remain as to the amount of any refund to which
plaintiff is entitled. They shall refer to the Court only those
questions on which they are unable to reach an accord. Within
thirty days, they shall report to the Court on their progress
toward such resolution.