50 T.C. 458">*459 The respondent determined deficiencies in income tax of the petitioner of $ 11,503.21 for its taxable year 1960, $ 1,708.28 for its taxable year 1961, and $ 10,319.77 for its taxable year 1962. The only issue remaining for decision is whether the petitioner may deduct additions to its reserve for bad1968 U.S. Tax Ct. LEXIS 113">*115 debts to provide for anticipated losses due to the prepayments of promissory notes by its customers.

FINDINGS OF FACT

All of the facts were stipulated, and those facts are so found.

The petitioner, Quality Chevrolet Co., Inc., was incorporated under the laws of the State of Kansas on April 3, 1958. Since that date, the petitioner has been engaged in the business of buying, selling, repairing, and servicing automobiles as an authorized Chevrolet dealer in Wichita, Kans., its principal place of business at the time the petition was filed in this case. The petitioner used the accrual method of accounting in maintaining its books and records and reporting its income for tax purposes. The petitioner has elected and established the reserve method of accounting for bad debts.

The petitioner sold substantially all of its automobiles and trucks on credit. When a sale was consummated, the customer executed a promissory note for the unpaid portion of the purchase price of the vehicle plus a carrying or finance charge and other incidental costs. The promissory note was an installment note for a term agreed upon by the petitioner and the customer.

During all of the years that the petitioner1968 U.S. Tax Ct. LEXIS 113">*116 has been a Chevrolet dealer, it has followed the practice of selling most of the promissory notes received from customers to several financial institutions on a discounted basis. Such notes were sold either with full recourse against the petitioner or recourse limited to the amount of the dealer reserve.

In a typical credit sale, the petitioner and the customer agreed upon a cash price for the vehicle and the portion to be paid immediately and the portion to be deferred. To the deferred amount, a "time-price differential" or "carrying or finance charge," together with other incidental costs, were added to arrive at a total "contract balance." The customer then executed a negotiable promissory note to the petitioner in the amount of the contract balance and agreed to pay such amount in equal monthly installments over a designated period of time, such as 3 years. The petitioner then sold the installment note to a financial institution at a discount. The financial institution paid the petitioner the principal amount of the note and credited a portion 50 T.C. 458">*460 of the finance charge to a dealer reserve account in the name of the petitioner. A typical sale may be illustrated by the1968 U.S. Tax Ct. LEXIS 113">*117 following example:

The $ 400 in the example credited to the dealer reserve account represented the petitioner's participation in the finance charge based upon its full collection by the financial institution. The petitioner reported as accrued income on its returns all amounts credited to its dealer reserve accounts by the several financial institutions. Such amounts totaled $ 78,749.69 for 1960, $ 87,334.90 for 1961, and $ 132,697.27 for 1962. As of December 31 of each year, the petitioner carried outstanding accounts receivable due from the several financial institutions and relating solely to dealer reserve accounts in the amounts of $ 47,016.89 for 1960, $ 52,145.71 for 1961, and $ 59,094.10 for 1962.

During the years involved in this case, section 16-509 of the General Statutes of Kansas required a reduction in the finance1968 U.S. Tax Ct. LEXIS 113">*118 charge in the event a customer prepaid the balance due on his note before its maturity date. In accord with the agreements between the petitioner and the financial institutions, when a prepayment occurred, the financial institution charged the petitioner's dealer reserve account with a proportionate part of the reduction in the finance charge, or the petitioner paid cash to the financial institution in the event that the dealer reserve account was insufficient to cover all of such charge. In the example given above, if the customer, after making a number of payments on the $ 3,720 note, prepaid the remaining balance of the note and was thereby entitled to a reduction of the finance charge in the amount of $ 160 under Kansas law, the financial institution would charge the petitioner's dealer reserve account for $ 88.89 or require the petitioner to pay that amount in cash. In the event of prepayment, the petitioner had no liability to the financial institution in excess of the amount originally credited to its dealer reserve account on each specific contract.

50 T.C. 458">*461 The amounts that were charged to the petitioner's dealer reserve account or paid in cash because of prepayments 1968 U.S. Tax Ct. LEXIS 113">*119 by customers totaled $ 15,396.31 for 1960, $ 12,730.78 for 1961, and $ 16,546.37 for 1962.

The petitioner elected on its first tax return to deduct bad debt losses on the reserve method of accounting. In computing its bad debt experience with respect to notes sold to financial institutions, the petitioner considered its loss experience from repossessions and also from prepayments by customers.

As of the date of trial, the statute of limitations was still open for assessment as to the petitioner's taxable years 1963, 1964, 1965, and 1966.

OPINION

Our question is whether the petitioner may anticipate losses due to the prepayment of promissory notes by its customers by means of additions to its reserve for bad debts. Initially, other issues were raised in this case, but the parties now agree that the amounts credited to the petitioner's reserve accounts are includable in its income and that the petitioner may deduct additions to a reserve with respect to its repossession losses. Since the petitioner does include in its income its share of the anticipated finance charge, it is apparent that whenever the petitioner is unable to collect all of such previously accrued income, a real, economic1968 U.S. Tax Ct. LEXIS 113">*120 loss is suffered, regardless of the reason for the inability to collect. The respondent concedes that such a loss is deductible at the time it occurs. However, the respondent's position is that a loss of anticipated income because of prepayment of a note is not a loss due to a "bad" debt, and therefore, such a loss may not be taken into consideration in computing a reserve for bad debts under section 166 of the Internal Revenue Code of 1954. ¹ The petitioner argues that a loss because of prepayment of a note is a loss arising from a debt -- a legal obligation to pay the total finance charges -- and that such a loss is due to the debt being partially uncollectible under State law.

Our basic issue, thus, is not the deductibility of the loss of anticipated income due to the prepayment of the notes; rather, it is the narrower question of whether such losses may be anticipated for tax purposes by the establishment of a reserve. 1968 U.S. Tax Ct. LEXIS 113">*121 Accordingly, we have again the question of whether a reserve is to be recognized for tax purposes. To view that question in proper perspective, let us review the history of the issue.

In Brown v. Helvering, 291 U.S. 193">291 U.S. 193 (1934), the taxpayer, a general agent for certain fire insurance companies, attempted to deduct additions 50 T.C. 458">*462 made to a reserve that had been established to provide for premium losses due to the cancellation of insurance policies. The Court stated that such additions were obviously not expenses paid during the taxable year; they were only bookkeeping charges. A liability may be treated as an expense incurred only if it has "accrued" during the taxable year, even though payment is not presently due. "But no liability accrues during the taxable year on account of cancellations which it is expected may occur in future years, since the events necessary to create the liability do not occur during the taxable year. Except as otherwise specifically provided by statute, a liability does not accrue as long as it remains contingent." (291 U.S. 193">291 U.S. at 200)

291 U.S. 193">Brown v. Helvering, supra,1968 U.S. Tax Ct. LEXIS 113">*122 has been thought to establish the general rule that deductions cannot be taken for additions to reserves for contingent liabilities in the absence of specific statutory authority. However, there have been cases in which deductions were allowed for estimates for future expenses or losses when the liability seemed assured. E.g., Schuessler v. Commissioner, 230 F.2d 722 (C.A. 5, 1956), reversing 24 T.C. 247">24 T.C. 247 (1955); Harrold v. Commissioner, 192 F.2d 1002 (C.A. 4, 1951), reversing 16 T.C. 134">16 T.C. 134 (1951).

With the passage of the Internal Revenue Code of 1954, Congress provided in section 462 for the use of reserves for estimated expenses; at the same time, Congress, in section 452, provided for the deferral of prepaid income. The two sections were designed to eliminate the variances between tax accounting and business accounting by more nearly attributing income to the year in which it was earned and allowing deductions attributable to the activities of earning that year's income. However, because of transitional problems, sections 452 and 462 were repealed retroactively1968 U.S. Tax Ct. LEXIS 113">*123 in the Act of June 15, 1955, ch. 143, 69 Stat. 134.

Since the repeal of sections 452 and 462, the courts have considered a number of cases in which taxpayers sought to defer income or anticipate expenses without specific statutory authorization to do so. On three occasions, the issue has been presented to the Supreme Court, and it has consistently refused to approve of the use of such accounting methods without statutory authorization. Schlude v. Commissioner, 372 U.S. 128">372 U.S. 128 (1963); American Automobile Assn. v. United States, 367 U.S. 687">367 U.S. 687 (1961); Automobile Club of Michigan v. Commissioner, 353 U.S. 180">353 U.S. 180 (1957). In the American Automobile Assn. case, the Court said:

To recapitulate, it appears that Congress has long been aware of the problem this case presents. In 1954 it enacted § 452 and § 462, but quickly repealed them. Since that time Congress has authorized the desired accounting only in the instance of prepaid subscription income, which, as was pointed out in Michigan, is ratably earned by performance on "publication dates after the tax year." * * * 50 T.C. 458">*463 It 1968 U.S. Tax Ct. LEXIS 113">*124 has refused to enlarge § 455 to include prepaid membership dues. At the very least, this background indicates congressional recognition of the complications inherent in the problem and its seriousness to the general revenue. We must leave to the Congress the fashioning of a rule which, in any event, must have wide ramifications. The Committees of the Congress have standing committees expertly grounded in tax problems, with jurisdiction covering the whole field of taxation and facilities for studying considerations of policy as between the various taxpayers and the necessities of the general revenues. The validity of the long-established policy of the Court in deferring, where possible, to congressional procedures in the tax field is clearly indicated in this case. * * * [367 U.S. 687">367 U.S. at 697]

The Tax Court has also considered a variety of situations in which taxpayers adopted one of these accounting methods, but in the light of the legislative history and the holdings of the Supreme Court, we have uniformly refused to approve of the deferral of income or the anticipation of expenses. E.g., Artnell Co., 48 T.C. 411">48 T.C. 411 (1967), on1968 U.S. Tax Ct. LEXIS 113">*125 appeal (C.A. 7, Oct. 23, 1967); Hagen Advertising Displays, Inc., 47 T.C. 139">47 T.C. 139 (1966), on appeal (C.A. 6, Apr. 3, 1967); Simplified Tax Records, Inc., 41 T.C. 75">41 T.C. 75 (1963).

In the meantime, Congress has decided to allow the use of these methods of accounting under restricted circumstances. See sec. 166(g), infra; sec. 455 (prepaid subscription income); section 456 (prepaid dues income of certain membership organizations). Congress has acted on a case-by-case basis, and after considering the needs of the specific situation, it has allowed the deferral of income or the anticipation of expenses with appropriate restrictions and conditions.

From this history, we infer the proposition that the decision as to whether a taxpayer is to be permitted to defer income or anticipate expenses in any specific situation is to be left to Congress. The courts will not authorize the use of either of such accounting methods without specific statutory authorization. ² When Congress does act, we will of course attempt to carry out the purpose of the legislation by approving of the reserves contemplated by Congress, but we should not extend1968 U.S. Tax Ct. LEXIS 113">*126 the application of the legislation by analogy to other situations not contemplated by Congress. ³

1968 U.S. Tax Ct. LEXIS 113">*127 50 T.C. 458">*464 The petitioner in this case attempts to bring its cause within one of the new statutory authorizations, section 166(g), enacted in 1966 (Act of Nov. 2, 1966, Pub. L. 89-722, 80 Stat. 1151). This provision was enacted as a result of the controversy over whether dealers in personal property were entitled to establish reserves with respect to their liability as guarantors on the obligations which they accepted in payment for the property they sold and which they discounted with a financial institution. Section 166(g)(1) provides:

SEC. 166. BAD DEBTS.

(g) Reserve for Certain Guaranteed Debt Obligations. --

(1) Allowance of deduction. -- In the case of a taxpayer who is a dealer in property, in lieu of any deduction under subsection (a), there shall be allowed (in the discretion of the Secretary or his delegate) for any taxable year ending after October 21, 1965, a deduction --