305 Findings of Fact the Superintendent of Building and Loan Associations of Ohio on September 28, 1955. A plan of dissolution was adopted on October 28, 1955. Berea surrendered and abandoned its corporate authority and franchises on November 16, 1955. 6. On November 1, 1955, Berea sold and transferred to plaintiff all of its business and property, subject to its liabilities, in exchange for approximately $414,900 which was thereafter on November 1 and 2, 1955, transferred to a special trustees' account for the benefit of Berea's stockholders and in complete liquidation of Berea. Berea's business was thereafter operated as a branch of the plaintiff, with more than 99.6 percent of Berea's depositors continuing as depositors of the plaintiff. 7. Included in the property transferred to plaintiff by Berea were capital assets in the form of mortgage loans in the face amount of $3,160,805.56, representing amounts of cash advanced by Berea to borrowers in the course of its business. 8. (a) On March 16, 1953, Berea filed with the Director of Internal Revenue, Cleveland, Ohio, a corporation income tax return (form 1120) for the calendar year 1952, in which it reported its "Net income" as "None." (b) On March 4, 1954, Berea filed with the District Director of Internal Revenue, Cleveland, Ohio, a similar return for the calendar year 1953, in which it likewise reported its "Net income" as "None." (c) On March 11, 1955, Berea filed with said District Director a similar return for the calendar year 1954, in which it reported its "Taxable income * as "None." (d) On June 15, 1956 (which was within the period for filing as duly extended), Berea filed with the Director of Internal Revenue, Cleveland, Ohio, a similar return for the calendar year 1955, in which it likewise reported its "Taxable income ***" as "None." This was Berea's final return and covered its operations through October 31, 1955. (e) In the above returns, there was in each case listed under "Deductions" (from "Gross Income" in order to determine net income or taxable income) an item captioned 154 Ct. Cl. Findings of Fact "Bad Debts." In said returns, Berea entered the following amounts under said caption: (f) The amounts set forth in paragraph (e) were computed as being equivalent to its net income for the years in question, and said amounts were in each instance credited to Berea's "Federal Insurance Reserve", which Berea described as "our Bad Debt Reserve." Berea's treatment and determination of this calculation in computing its net or taxable income is illustrated in its "Bad Debts" Schedule (Schedule F) attached to its final 1955 return, as follows: THE BEREA SAVINGS AND LOAN COMPANY 44 E. Bridge Street Berea, Ohio October 31, 1955 Schedule F.-Bad debts 12% of Savings Accounts ($3,601,657.44) October 31, 1955. 432, 198. 89 Less Surplus and Reserves, December 31, 1954: Allowable deduction for bad debts may not exceed the 56, 266. 30 Note: Total Net Income of $56,266.30 has been credited to Federal Insurance Reserve which is our Bad Debt Reserve. Taxpayer's surplus, undivided profits and reserves at January 1, 1955 amounted to less than 12 per cent of its total deposits or with 305 Findings of Fact drawable accounts at October 31, 1955. Pursuant to Section 593 of the Internal Revenue Code, taxpayer has elected the reserve method of computing bad debts in arriving at net income for Federal Income Tax purposes. For the ten months (January 1, 1955-October 31, 1955) taxpayer's net income before any deductions for bad debts, amounts to $56,266.30. Accordingly, pursuant to Section 593 taxpayer has taken a deduction in arriving at net income for an addition to the Reserve for Bad Debts in an amount equal to the net income hereinbefore referred to. Also, taxpayer has set aside the amount of such deduction in the reserve account designated as Federal Insurance Reserve which is the Bad Debt Reserve. In the event of the taxpayer's net income (before deduction for bad debts) is finally determined to be different from such net income hereinbefore referred to, taxpayer hereby reserves the right to revise its deduction for an addition to the Reserve for Bad Debts so that such revised deduction will equal the net income (before any deduction for bad debts) as finally determined. Also, taxpayer hereby reserves the right to so revise the amount of such deduction set aside in the Reserve for Bad Debts on its regular books of account. 9. As of October 31, 1955, the total amount carried by Berea in its Federal Insurance Reserve was $216,715.93, as shown on the following Schedule (Schedule L) containing a "Balance Sheet" for said date (and for December 31, 1954), which Schedule was attached to its aforementioned final income tax return: All Assets and Liabilities were sold to Citizens Federal Savings and Loan Association as at close of business October 31, 1955. Form 966 U.S. Return of information under Section 148 (d) of The Internal Revenue Code to be Filed by Corporations within 30 days after Adoption of Resolution or Plan of Dissolution or Complete or Partial Liquidation, was duly filed as were forms 1099L. Final Liquidating Dividends, totaling $414,927.00, were deposited with Trustees at October 31, 1955. The corporate charter was subsequently surrendered. 10. The Federal Insurance Reserve was set up as an account on Berea's books on December 20, 1950, when Berea was first issued a certificate of insurance by the Federal Savings and Loan Insurance Corporation. Prior to January 1, 1952, Berea was entirely exempt from Federal income taxes. Thereafter, during the years 1952 through 1955, its net income was treated as described in finding 8(f), resulting in no tax liability and in the addition of such net income to its Federal Insurance Reserve. 11. As shown by its returns, the amounts added to Berea's Federal Insurance Reserve and, as set forth in finding 8(f), the "Bad Debts" amounts deducted by it for tax purposes (on the cash, calendar-year basis) were as follows: 13 The correct figure should be $216,715.93, as set forth in finding 9. The reconcilement is as follows: In 1953, the amount credited to the Reserve should have been greater by $1.27, representing interest erroneously deducted twice by Berea. In 1955, the amount credited to the Reserve should have been greater by $25, representing a contribution erroneously charged to the Reserve. Also, an erroneous understatement of interest expense by $28.63 would reduce the Reserve by that amount. Thus, the following corrections should be made to the total amount added to the Reserve to arrive at the correct balance on October 31, 1955, as set forth in finding 9: 12. In its final Federal income tax return, referred to in finding 8(d), Berea, relying on Section 337 of the Internal Revenue Code of 1954, did not report any gain on the sale of its property to the plaintiff, but disclosed in the return the fact that the sale had occurred. 13. Upon audit of Berea's final 1955 return, which, as stated, covered the period beginning in January and ending on October 31, 1955, the Commissioner of Internal Revenue determined that the amounts charged by Berea on its books to the account styled "Federal Insurance Reserve" and deducted by Berea for the years 1952 through 1954, and for the period ending October 31, 1955, aggregating $133, 361. 17, should be lumped together and taxed all in one year as additional income for the period ending October 31, 1955. Plaintiff, as transferee of Berea, was so advised in a so-called 30day letter dated August 15, 1957, from the District Director of Internal Revenue, which forwarded, as an enclosure thereto, an Internal Revenue Agent's Report dated June 26, 1957. The Report set forth the Agent's position to be that, because of the sale in 1955 of Berea's assets and the assump |