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154 Ct. Cl. Conclusion of Law ing or inadequate. Defendant's service personnel, Soklosky, Andrews, and Hunn, who testified as to difficulties with particular machines, admitted they had not read the patents in suit.

28. A report of defendant's Armed Services Medical Material Standardization Committee dated July 31, 1956, over one year subsequent to the filing date of plaintiffs' petition herein, recommends deletion of the accused machines from the Armed Services Medical Stock List for Navy. An official of plaintiff Fisher Scientific Company testified that defendant's U.S. Public Health Service at Norfolk purchased a washing machine constructed under the patents here in suit during the summer of 1957, and testified that 689 of such machines having a total sales value of approximately one-half million dollars have been sold by Fisher Scientific Company

INFRINGEMENT

29. The parties have stipulated that plaintiff Fisher Scientific Company furnished a washing machine and drawings to defendant's Armed Services Medical Procurement Agency at the time of an early bid, that these items were used by defendant in the preparation of specifications forming part of an invitation for bids on the procurement accused herein, and that the bid of Southern Cross Manufacturing Company on this procurement was lower than that of plaintiff Fisher Scientific Company.

30. Counsel for defendant has agreed that the accused washing machine procured by defendant is in fact made in accordance with the disclosure of the '518 patent and the evidence does establish that the accused machine responds in terms to the recitals of the several patent claims upon which plaintiffs rely.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are not entitled to recover, and their petition is therefore dismissed.

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670-595 O - 63 (Face p. 304)

Syllabus

CITIZENS FEDERAL SAVINGS AND LOAN AS

SOCIATION OF CLEVELAND V. THE UNITED STATES

(No. 502–58. Decided June 7, 1961)

ON THE PROOFS

Taxes, income; bad debt reserves—restoration of unneeded balance

to income.-In an action by plaintiff as transferee of the assets and liabilitiies of a liquidated building and loan association to recover Federal income taxes alleged to have been erroneously assessed and collected when the Commissioner of Internal Revenue treated the loan company's bad debt reserves as ordinary income for tax purposes when the company's assets were sold to plaintiff in 1955, rather than according the transaction the no gain or loss treatment under sections 336 or 337 of the Internal Revenue Code of 1954, or treating the balance in the reserve account as capital gain for tax purposes, it is held that (1) the bad debt reserve set up by the loan company under section 23(k) (1) of the Internal Revenue Code of 1939 (as amended by section 313(e) of the Revenue Act of 1951, 65 Stat. 452, 490) was deductible in the statutory amount each year, but when the loans or mortgages insured by the reserve were sold and the need for the reserve ceased, the balance in the reserve account became income; (2) the balance in the reserve account on transfer of the loans was taxable as ordinary income to the extent that the loan company had enjoyed a tax benefit and was not taxable as a capital gain under sections 336 or 337 of the Internal Revenue Code of 1954; and (3) the in. come in question must be taxed at the rates applicable to the year of liquidation rather than at the rates applicable to the years when the additions to the bad debt reserve were

made. Petition dismissed. Taxes, income; bad debt reserves-deduction—not exemption.—The

addition to a reserve for bad debts authorized for domestic building and loan associations by section 23(k) (1) of the Internal Revenue Code of 1939 (26 U.S.C. § 23(k) (1) (1952) ; section 313(e) of the Revenue Act of 1951, 65 Stat. 452, 490) is in the nature of a reserve for bad debts and is an allowable deduction from gross income and does not amount to an ex

emption from taxation. Internal Revenue m 658 Taxes, income; income-bad debt reserve-restoration of unneeded

balance to income.—When the need for maintaining a reserve for bad debts by a building and loan association ceases, any balance in the reserve account becomes income in the year 154 Ct. Cl. Opinion of the Court in which such need for the reserve ceases. Arcadia Savings and Loan Association, et al. v. Commissioner, 34 T.C. 679 aff'd.

300 F. 2d 247. Internal Revenue O 658 Taxes, income; bad debt reserve-nature of reserve.-A reserve for

bad debts is not based on the fact that a loss has occurred, but rather upon a probability that the loss may occur, and thus differs from a depreciation reserve which is founded upon the fact of loss or the fact that an asset has actually been used

up. Internal Revenue on 658 Taxes, income; income-bad debt reserves-liquidation of building

and loan association.Where a building and loan association which has established reserves for bad debts under section 23(k) (1) of the Internal Revenue Code of 1939 liquidates and transfers or sells all of its assets to another corporation, the balance remaining in its bad debt reserve after the sale of the assets which the reserve complements, must be considered as ordinary income rather than capital gain which would be subject to the non-recognition provisions of sections 336 and 337 of the Internal Revenue Code of 1954 and as ordinary income it is taxable to the extent that the credits to the reserve had con

ferred a tax benefit on the building and loan association. Internal Revenue Om 409.2 Taxes, income; bad debt reserves unneeded balance restored to in

come; rates applicable.--Income realized by a building and loan association when the sale of its assets rendered unnecessary a bad debt reserve, is taxable as ordinary income at the rate applicable to the year of the sale of the assets and not at the rate applicable to the years when the additions to the bad

debt reserve were made. Internal Revenue On 761

Harlan Pomeroy for plaintiff. Norman A. Sugarman was on the briefs.

Jerry M. Hamovit, with whom was Assistant Attorney General Louis F. Oberdorfer for defendant. Lyle M. Turner and Eugene Emerson were on the brief.

DURFEE, Judge, delivered the opinion of the court:

The general question presented by this suit is whether or not a "Federal Insurance Reserve" deducted from income in previous years by a liquidated domestic building and loan association is taxable to a transferee building and loan association for the year in which it acquired all of the assets and liabilities of the liquidated association.

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