                        T.C. Memo. 2002-168



                      UNITED STATES TAX COURT



        BARNETT BANKS, INC. & SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 4256-98, 4866-98.       Filed July 10, 2002.



     Philip C. Cook, Terence J. Greene, Timothy J. Peaden,

Michelle Marie Henkel, and Charles W. Wheeler, for petitioner.

     James F. Kearney, for respondent.



                        MEMORANDUM OPINION


     COHEN, Judge:   These consolidated cases are before the Court

on respondent’s Motion for Partial Summary Judgment With Respect

to Reserve for Bad Debts and on petitioner’s Motion for Summary

Judgment pursuant to Rule 121.   Respondent determined
                               - 2 -

deficiencies, additions to tax, and a penalty in petitioner’s

Federal income taxes as follows:

Docket No. 4256-98:
                             Additions to Tax
                          Sec.6653       Sec.6653        Penalty
  Year     Deficiency     (a)(1)(A)      (a)(1)(B)       Sec.6661

12/31/83   $2,406,964        –-             –-              –-
12/31/84       21,943        –-             –-              –-
12/31/85      472,184        –-             –-              –-
12/31/86    8,322,020     $468,607           *          $2,098,710
12/31/87   17,295,902      980,439           *              –-

*50 percent of the interest due on $8,394,838 and $15,047,884 for
1986 and 1987, respectively.

Docket No. 4866-98:

  Year            Deficiency

12/31/88           $452,426
12/31/89          1,983,005
12/31/90            404,620
12/31/91            772,825
12/31/92          8,017,277
12/31/93          4,300,188
12/31/94          2,900,914

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.   The issue for decision is whether petitioner is

entitled to use the reserve method of accounting for bad debts

under section 593 for the taxable years 1986 through 1994.

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Summary judgment may be
                                - 3 -

granted with respect to all or any part of the legal issues in

controversy “if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law.”   Rule 121(b); Stubbs v.

Commissioner, 797 F.2d 936 (11th Cir. 1986).   Respondent asserts

that there are material facts in dispute with respect to

petitioner’s satisfaction of certain tests to qualify for the

reserve method in dispute and thus argues that only partial

summary judgment is appropriate if we agree with petitioner’s

interpretation of relevant statutes and regulations.     The facts

material to the Court's disposition of the cross-motions for

summary judgment are stated solely for purposes of deciding the

motions and are not findings of fact for these cases.    See

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.

17 F.3d 965 (7th Cir. 1994).

                           Background

     During the taxable years 1986 through 1994, Barnett Banks,

Inc. (Barnett), was an accrual basis bank holding company

organized and existing under the laws of the State of Florida,

with its principal place of business in Jacksonville, Florida.

On January 9, 1998, Barnett merged into NB Holdings, a subsidiary

of NationsBank Corp., and thereafter was a wholly owned
                               - 4 -

subsidiary of NationsBank Corp.   On September 30, 1998, Bank

America Corp. merged into NationsBank Corp., and, as the

surviving entity, NationsBank Corp. changed its name to Bank

America Corp.   In April 1999, Bank America Corp. changed its name

to Bank of America Corp.   Bank of America Corp. & Subsidiaries is

the successor in interest to Barnett Banks, Inc. & Subsidiaries.

     United First Federal Savings and Loan Association (United

First Federal) was a Federal stock savings and loan association,

organized under the Home Owners' Loan Act (HOLA), ch. 64, 48

Stat. 128 (1933), and its principal place of business was in

Sarasota, Florida.   Home Federal Bank of Florida, F.S.B. (Home

Federal), was a Federal stock savings bank, organized under the

HOLA, and its principal place of business was in St. Petersburg,

Florida.

     On December 22, 1986, Barnett Bank of Southwest Florida

became the successor to United First Federal by conversion of

corporate charters under the laws of the State of Florida and

became a subsidiary of Barnett.   Barnett Bank of Southwest

Florida had its principal place of business in Jacksonville,

Florida.

     On July 26, 1987, Barnett Bank of Pinellas County became the

successor to Home Federal by conversion of corporate charters

under the laws of the State of Florida and became a subsidiary of

Barnett.   Barnett Bank of Pinellas County had its principal place
                                - 5 -

of business in Jacksonville, Florida.    On September 28, 1996,

Barnett Bank of Southwest Florida and Barnett Bank of Pinellas

County were merged into Barnett Bank, N.A., a subsidiary of

Barnett.

Barnett's Strategic Plan for Increased Market Share in Florida

     During the taxable years 1985 to 1988, the stated mission of

Barnett, a bank holding company, was to provide the highest

quality of services and to use every opportunity to enhance its

position as the preeminent financial institution in the State of

Florida and as one of the leading financial institutions in the

Southeast.   The State of Florida was Barnett's primary focus for

expansion and growth.   One of Barnett's strategic goals in 1985,

1986, and 1987 was to increase its market share of total deposits

in all Florida financial institutions.    In 1983 and 1984, savings

and loan institutions accounted for more than 50 percent of the

deposit market share in the 10 largest counties in Florida,

including Pinellas County, Hillsborough County, and Sarasota

County.    In 1985, the savings and loan institutions accounted for

more than 50 percent of the deposit market share statewide.    In

1985 and 1986, 11 of Florida's top 15 largest financial

institutions in terms of total assets were savings and loan

institutions.

     In the first quarter of 1986, Barnett announced that it had

reached separate agreements to acquire United First Federal and
                              - 6 -

Home Federal in transactions that would be significantly larger

than any of its prior acquisitions.    Barnett, as a bank holding

company, could not make a direct acquisition of the stock of

United First Federal or Home Federal because of the Federal

Reserve Board’s policy that precluded a bank holding company from

making a direct acquisition of a healthy savings and loan

association or Federal savings bank.   As a result, United First

Federal and Home Federal were required to convert from a Federal

savings and loan association and a Federal savings bank,

respectively, to State banking corporations in multistep

transactions as a condition to obtaining the Federal Reserve

Board's approval for the acquisitions.

Barnett's Acquisition of United First Federal

     As of June 30, 1986, United First Federal had 38 branch

offices in seven Florida counties, with total assets of

$1.6 billion, total deposits of $1.5 billion, and shareholders’

equity of $80 million.

     United First Federal was a member of the Federal Home Loan

Bank System (FHLBS) and was subject to supervision and

examination by the Federal Home Loan Bank Board (FHLBB).    United

First Federal's deposits were insured by the Federal Savings and

Loan Insurance Corporation (FSLIC).

     Pursuant to the plan for merger, United First Federal

completed a two-step conversion of corporate charters under the
                                - 7 -

laws of the State of Florida on December 22, 1986.   First, United

First Federal converted from a Federal stock savings and loan

association into a Florida stock savings and loan association.

Second, United First Federal converted from a Florida stock

savings and loan association into a Florida banking corporation

known as Barnett Bank of Southwest Florida.

     On December 22, 1986, Barnett Bank of Southwest Florida,

N.A., a wholly owned subsidiary of Barnett, merged into Barnett

Bank of Southwest Florida (Southwest).   Thereafter, Southwest

became a subsidiary of Barnett and a member of its consolidated

group for Federal income tax purposes.

     Southwest's deposits were insured by the Federal Deposit

Insurance Corporation (FDIC) and, after enactment of the

Financial Institutions Reform, Recovery, and Enforcement Act

(FIRREA), Pub. L. 101-73, sec. 301, 103 Stat. 277 (1989), by the

Banking Insurance Fund (BIF).

     Southwest was the leader in residential lending in its

Florida markets and, from 1992 to 1995, was awarded the Sarasota

Herald-Tribune’s “Reader’s Choice Award” as the best mortgage

lender.   Southwest's board of directors was composed entirely of

persons who served as directors of either Barnett Bank of

Southwest Florida, N.A., or United First Federal.    In addition,

Southwest's executive officers included a combination of the

senior management of these two financial institutions.
                                - 8 -

     Immediately after the merger, Southwest conducted its

business in United First Federal’s facilities using the personnel

of both United First Federal and Barnett Bank of Southwest

Florida, N.A.

Barnett's Acquisition of Home Federal

     As of March 31, 1987, Home Federal had 28 branch offices in

four Florida counties and total assets of $1.4 billion, total

deposits of $1.3 billion, and shareholders’ equity of

$115 million.   Home Federal was the largest residential mortgage

lender in Pinellas County, and, on the basis of total assets, it

was the twenty-first largest savings institution in the State of

Florida.

     Home Federal was a member of the FHLBS and was subject to

supervision and examination by the FHLBB.     Home Federal's

deposits were insured by the FSLIC.

     Pursuant to the plan for merger, Home Federal completed a

two-step conversion of corporate charters under the laws of the

State of Florida on July 26, 1987.      First, Home Federal converted

from a Federal savings bank into a Florida stock savings and loan

association.    Second, Home Federal converted from a Florida stock

savings and loan association into a Florida banking corporation

known as Barnett Bank of Pinellas County.

     On July 26, 1987, Barnett Bank of Pinellas County, N.A., a

wholly owned subsidiary of Barnett, merged into Barnett Bank of
                                - 9 -

Pinellas County (Pinellas).    Thereafter, Pinellas became a

subsidiary of Barnett and a member of its consolidated group for

Federal income tax purposes.

     Pinellas’s board of directors consisted of the current

directors of Barnett Bank of Pinellas County, N.A., and Home

Federal.   In addition, Alfred T. May, the president and chief

executive officer of Home Federal, served as the president and

chief operating officer of Pinellas.    Pinellas also continued to

use all employees in the combined organization.

     Pinellas’s deposits were insured by the FDIC and, after

FIRREA, by the BIF.

Bad Debt Reserve Method of Accounting

     After their acquisitions by Barnett, Southwest and Pinellas

were members of Barnett's consolidated group for Federal income

tax purposes.   Barnett timely filed (pursuant to extensions) a

Form 1120, U.S. Corporation Income Tax Return, for each of its

taxable years 1986 through 1994.    For all relevant years,

petitioner used a fiscal year ended December 31.

     For each of the taxable years in issue, Barnett took the

position that Southwest and Pinellas qualified as "domestic

building and loan associations" within the meaning of section

7701(a)(19); as a result, Barnett claimed a deduction for

Southwest’s and Pinellas’s bad debts based on the reserve method

of accounting under former section 593.    Barnett attached the
                                   - 10 -

savings and loan qualifications tests for Southwest and Pinellas

to each of the returns for the years in issue.

     On December 11, 1997, a notice of deficiency was issued for

petitioner’s taxable years 1983 through 1987.        In this notice of

deficiency, respondent proposed adjustments to Barnett's taxable

income to reverse Southwest's and Pinellas’s bad debt reserves,

which were calculated under section 593, in the following amounts

and taxable years:

     Year           Pinellas        Southwest          Total

   12/31/86           –-           $15,848,132      $15,848,123
   12/31/87        $37,408,897          –-           37,408,897

     On December 22, 1997, a notice of deficiency was issued for

petitioner’s taxable years 1988 through 1994.        In this notice of

deficiency, respondent disallowed Barnett's deductions claimed

for Southwest's and Pinellas’s bad debt reserves under section

593 in the following amounts and taxable years:

            Year        Pinellas        Southwest       Total

        12/31/88     ($1,597,859)     $2,006,462      $408,603
        12/31/89       2,369,843         934,603     3,304,446
        12/31/90      (1,713,509)         20,778    (1,692,731)
        12/31/91       2,196,073        (192,019)    2,004,054
        12/31/92       1,854,512       1,544,816     3,399,328
        12/31/93         643,535        (914,984)     (271,449)
        12/31/94         599,905        (151,366)      448,539

Regulation and Supervision

     During the taxable years 1986 through 1994, chapter 655 of

title XXXVIII of the Florida Code provided the Florida Department
                               - 11 -

of Banking and Finance with the authority to supervise and

examine all financial institutions chartered under State law,

including savings and loan associations, banks, industrial

savings banks, trust companies, international bank agencies or

representative offices, and credit unions.   Banks and trust

companies were subject to the statutory provisions set forth in

chapter 658 of title XXXVIII of the Florida Code.   Savings,

savings and loan, and building and loan associations were subject

to the statutory provisions set forth in chapter 665 of title

XXXVIII of the Florida Code.   After FIRREA, the FDIC insured the

deposits of banking corporations and of savings and loan

associations.

Statutory and Regulatory Provisions

     The applicable statutory and regulatory provisions are

former section 593 (section 593), which provided a deduction for

reserves on bad debts, and section 7701(a)(19) and section

301.7701-13A, Proced. & Admin. Regs., which define “domestic

building and loan association” for section 593.

     SEC. 593.   RESERVES FOR LOSSES ON LOANS.

          (a) Reserve for bad debts.--

               (1) In general.--Except as provided in
          paragraph (2), in the case of–-

                      (A) any domestic building and loan
                 association,

                      (B) any mutual savings bank, or
                                  - 12 -

                       (C) any cooperative bank without capital
                  stock organized and operated for mutual
                  purposes and without profit,

          there shall be allowed a deduction for a
          reasonable addition to a reserve for bad debts.
          Such deduction shall be in lieu of any deduction
          under section 166(a).

               (2) Organization must meet 60-percent asset
          test of section 7701(a)(19).-–This section shall
          apply to an association or bank referred to in
          paragraph (1) only if it meets the requirements of
          section 7701(a)(19)(C).

Section 7701 provides:

     SEC. 7701.    DEFINITIONS.

          (a) When used in this title, where not otherwise
     distinctly expressed or manifestly incompatible with
     the intent thereof–-

                    *    *    *     *      *   *   *

               (19)Domestic building and loan association.--
          The term “domestic building and loan association”
          means a domestic building and loan association, a
          domestic savings and loan association, and a
          Federal savings and loan association–-

Section 301.7701-13A, Proced. & Admin Regs., provides:

     SEC. 301.7701-13A. Post-1969 domestic building and
     loan association.--(a) In general. For taxable years
     beginning after July 11, 1969, the term “domestic
     building and loan association” means a domestic
     building and loan association, a domestic savings and
     loan association, a Federal savings and loan
     association, and any other savings institution
     chartered and supervised as a savings and loan or
     similar association under Federal or State law which
     meets the supervisory test (described in paragraph (b)
     of this section), the business operations test
     (described in paragraph (c) of this section), and the
     assets test (described in paragraph (d) of this
     section). * * *
                             - 13 -

                           Discussion

     The nature of the transactions leading to the dispute in

these cases is described by petitioner as follows:

          The acquisitions of United First Federal and Home
     Federal were undertaken pursuant to Barnett’s strategic
     plan to expand its market share of deposits and real
     estate lending in the State of Florida. Barnett would
     have preferred to acquire these two thrifts pursuant to
     their existing charters and continue to conduct their
     business without modification. However, a misguided
     Federal Reserve Board policy effective at the time of
     the acquisitions (but subsequently withdrawn) precluded
     a bank holding company from owning an entity chartered
     as a stock savings and loan association unless the
     entity was failing. Therefore, Barnett was precluded
     from directly acquiring the stock of United First
     Federal and Home Federal. In order to obtain the
     Federal Reserve Board’s approval of the acquisitions,
     United First Federal and Home Federal were required to
     convert to state banking corporations. United First
     Federal was immediately merged with a newly organized
     subsidiary of Barnett that was chartered as a bank
     under Florida law and continued its residential lending
     business in Florida as Southwest. Similarly, Home
     Federal was immediately merged with a newly organized
     subsidiary of Barnett that was chartered as a bank
     under Florida law and continued its residential lending
     business in Florida as Pinellas. [Citations omitted.]

The question presented is whether, in carrying out its strategic

plan to acquire Southwest and Pinellas, Barnett gave up the

favorable tax treatment of accounting for bad debt reserves under

section 593 that was previously enjoyed by the two acquired

entities.

     Simply stated, respondent’s position is that Southwest and

Pinellas lost qualification to use the reserve method of section

593 when they obtained bank charters and relinquished their
                              - 14 -

savings and loan charters in order to be acquired by Barnett

Bank.   Respondent interprets the language of section 7701(a)(19)

and of section 301.7701-13A(a), Proced. & Admin. Regs., to

preclude use of section 593 by any entity chartered as a bank.

Respondent relies on legislative history emphasizing the

historically different tax treatment afforded to banks, on the

one hand, and to savings and loan associations, on the other.

     Petitioner contends that the language of the applicable

statutes allows for use of the reserve method of accounting under

former section 593 by any association actually functioning as a

savings and loan.   Petitioner asserts that Southwest and Pinellas

functioned the same before and after the change in their

charters.   Petitioner argues that precedents in the subject areas

repeatedly apply substance over form analysis, even when a

taxpayer is attempting to repudiate the form that the taxpayer

has chosen.   Thus, petitioner concludes, the position taken by

respondent as to the conclusiveness of the charter should be

rejected.

     Addressing first the language of section 7701(a)(19) and the

related regulation, a straightforward interpretation is that a

domestic building and loan association qualifies for the reserve

method of accounting under section 593 if it meets three tests--

the supervisory test, the business operations test, and the asset

tests set forth in section 7701(a)(19).   Petitioner, however,
                              - 15 -

contends that an institution that satisfies these tests thereby

qualifies as a domestic savings and loan association.    Section

301.7701-13A(a), Proced. & Admin. Regs., adds to the list of

institutions that are domestic building and loan associations

“any other savings institution chartered and supervised as a

savings and loan or similar association under Federal or State

law which meets the * * * [three tests]”.   According to

petitioner, the effect of this regulation is to allow the use of

the reserve method of accounting under section 593 by any

“similar association” that meets the three tests.    Both parties

cite the evolution of the term “building and loan association” in

the Code and associated legislative history in support of their

respective positions.

     The definition of a “building and loan association” under

section 101(4), I.R.C. 1939, was expanded to include “a domestic

building and loan association, a domestic savings and loan

association, and a Federal savings and loan association,

substantially all the business of which is confined to making

loans to members” by the Revenue Act of 1951, ch. 521, sec. 313,

65 Stat. 490.   In that Act, Congress eliminated the exemption

from Federal income tax for domestic building and loan

associations and instead enacted generous rules for calculating

deductions for additions to bad debt reserves.    Revenue Act of

1951, ch. 521, sec. 313(e), 65 Stat. 490-491.    The legislative
                             - 16 -

history for the 1951 Act indicates:    “This amendment is of a

clarifying nature and is not intended to change the existing

meaning of a domestic building and loan association”.    S. Rept.

781, 82d Cong., 1st Sess. (1951), 1951-2 C.B. 563-564.

Petitioner cites this report in support of its position that,

although the definition of a domestic building and loan

association has expanded, the law has never required a specific

type of charter, thereby excluding those institutions whose

substantial business would otherwise qualify for the benefits of

the bad debt reserve calculation.

     Congress again altered the rules for calculating bad debt

reserves for building and loan associations by deleting the

reference to “loans to members” and replacing it with the

supervisory test, business operations test, and assets test,

codified in section 7701(a)(19).    Revenue Act of 1962, Pub. L.

87-834, sec. 6(c), 76 Stat. 977.

     Respondent asserts that, throughout the evolution of the

definition of a domestic building and loan association, the

introductory language quoted supra p. 12 has remained in the

statute, demonstrating congressional intent to distinguish

between entities classified as domestic building and loan

associations and banks.

     The introductory language of section 7701(a)(19) is also

found in section 301.7701-13A(a), Proced. & Admin. Regs.    That
                              - 17 -

regulation includes in the definition of a domestic building and

loan association “any other savings institution chartered and

supervised as a savings and loan or similar association under

Federal or State law” that meets the supervisory test, business

operations test, and assets test.    Sec. 301.7701-13A(a), Proced.

& Admin. Regs.   (Emphasis added.)   Petitioner seizes upon the

phrase “similar association” in an attempt to fit within the

definition of a domestic building and loan association.

     Petitioner’s interpretation of the regulation would have the

effect of substituting “any financial institution” for the

introductory language in the regulation.    The regulation may have

been intended to give some flexibility to institutions chartered

in States that do not apply the same labels for “building and

loan association”; however, to interpret the phrase “similar

association” to include any financial institution that meets the

supervisory test, business operations test, and assets test of

the regulation would require us to ignore the introductory

language.   We decline to do so in light of the clear intent of

Congress to distinguish among financial institutions by

incorporating the term “domestic building and loan association”

in sections 593(a)(1)(A) and 7701(a)(19).

     Respondent also points to the relationship among sections

581, 585, and 593 as confirming the congressional intent to

devise a comprehensive statutory scheme for the treatment of
                                - 18 -

financial institutions.   Section 581 provides a broad definition

for the term “bank”, while section 585 provides for the reserves

for losses on loans to banks.    Section 581 provides:

     SEC. 581.   DEFINITION OF BANK.

          For purposes of sections 582 and 584, the term
     “bank” means a bank or trust company incorporated and
     doing business under the laws of the United States
     (including laws relating to the District of Columbia)
     or of any State, a substantial part of the business of
     which consists of receiving deposits and making loans
     and discounts, or of exercising fiduciary powers
     similar to those permitted to national banks under the
     authority of the Comptroller of the Currency, and which
     is subject by law to supervision and examination by
     State, or Federal authority having supervision over
     banking institutions. Such term also means a domestic
     building and loan association.

Section 585 provides:

     SEC. 585.   RESERVES FOR LOSSES ON LOANS OF BANKS.

          (a) Reserve for Bad Debts.--

               (1) In general.--Except as provided in
          subsection (c), a bank shall be allowed a
          deduction for a reasonable addition to a reserve
          for bad debts. Such deduction shall be in lieu of
          any deduction under section 166(a).

                 (2) Bank.--For purposes of this section–-

                      (A) In general.--The term “bank” means
                 any bank (as defined in section 581) other
                 than an organization to which section 593
                 applies. [Emphasis added.]

Section 585 and former section 593 provided two different methods

for accounting for reserves for bad debts.    Prior to the repeal

of the bad debt reserve method for thrift savings associations

under section 593, section 585 provided deductions for reasonable
                                - 19 -

additions to reserves for bad debts for banks, as defined in

section 581, and specifically excluded organizations to which

section 593 applied.   The distinction between banks and thrift

institutions for purposes of the bad debt deduction is also

evident in committee reports to the Tax Reform Act of 1986,

Pub. L. 99-514, 100 Stat. 2376, that define commercial banks to

which section 585 applies as:

     a domestic or foreign corporation, a substantial
     portion of whose business consists of receiving
     deposits and making loans and discounts, or of
     exercising fiduciary powers similar to those permitted
     national banks, and who are subject by law to
     supervision and examination by State or Federal
     Authority having supervision over banking institutions
     (sec. 581). For the purpose of determining the
     deductions for bad debts, the term “commercial bank”
     does not include domestic building and loan
     associations, mutual savings banks or cooperative
     nonprofit mutual banks (“thrift institutions”). [H.
     Conf. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 574; H.
     Conf. Rept. 99-841 (1986), 1986-3 C.B. (Vol. 4) 326;
     emphasis added.]

Although, historically, thrift institutions enjoyed more

favorable tax treatment than other financial institutions,

Congress recognized in the Tax Reform Act of 1986, Pub. L.

99-514, 100 Stat. 2376, that changes in regulatory policies had

expanded the activities of thrift institutions and encouraged

other institutions to expand their activities in areas that were

traditionally serviced by the thrift industry.      H. Conf. Rept.

99-426, supra, 1986-3 C.B. at 581.       Acknowledging that other

financial institutions were in direct competition with thrift
                               - 20 -

institutions, Congress substantially reduced the bad debt

deduction available to thrift institutions.    By reducing rather

than eliminating the bad debt deduction, “the committee continues

to believe that there should be some incentive for thrift

institutions to provide residential mortgage loans”.     Id. at 582.

Explanation of the new provisions for calculating bad debt

deductions for thrift institutions included the language:     “Any

institution meeting the definition of a thrift institution and

holding at least 60 percent of its assets as qualifying assets,

will be eligible for the full 5 percent of taxable income

deduction.”   Id.   (Emphasis added.)   The legislative history

cited by both parties demonstrates that, while the activities of

thrifts and commercial banks began to overlap during the years in

issue, a significant distinction remained in both fiscal and

regulatory policy that lends credence to respondent’s

determination that an institution chartered as a bank does not

meet the threshold requirements of section 7701(a)(19).

     Petitioner relies on several decided cases that, according

to petitioner, establish that the laws in this area have been

more concerned with the substance of an institution’s activities

than with the form of its State charter.    For example, in

Staunton Indus. Loan Corp. v. Commissioner, 120 F.2d 930 (4th

Cir. 1941), revg. 42 B.T.A. 1030 (1940), the Court of Appeals for

the Fourth Circuit applied a functional test to determine whether
                               - 21 -

the taxpayer, chartered as an industrial loan corporation under

Virginia State law, qualified as a bank within the meaning of the

Revenue Act of 1936, ch. 690, sec. 104, 49 Stat. 1677.    Although

Virginia State law made a distinction between industrial loan

corporations and banks, the court noted that “peculiarities in

individual state laws” are not controlling in the interpretation

of section 104.   Staunton Indus. Loan Corp. v. Commissioner,

supra at 933.   After analyzing the “sum total of * * *

[taxpayer’s] business activities”, the court concluded that the

taxpayer functioned as a bank that Congress intended to include

for purposes of section 104.   Id.   Similarly, in Mut. Sav. & Loan

Co. v. Commissioner, 44 B.T.A. 1204 (1941), although the taxpayer

was organized as an industrial loan association and not a bank

under State law, the substance of its activities qualified for

treatment as a bank within the meaning of the Revenue Act of

1936, ch. 690, sec. 104, 49 Stat. 1677.   In both cases, the Court

rejected State law distinctions between banks and other entities

when at odds with the definition of a bank under the Federal

statute.   Petitioner urges that, under the Staunton and Mutual

approach, Southwest and Pinellas continue to qualify as domestic

building and loan associations because they functioned the same

before and after the mergers and meet the supervisory test,

business operations test, and assets test of section 7701(a)(19).
                              - 22 -

     Respondent distinguishes the cases on which petitioner

relies and argues that United States v. Cambridge Loan & Bldg.

Co., 278 U.S. 55 (1928), is most directly on point.   While the

Federal statutes at issue in Staunton and Mutual provided a

definition for “bank”, the statutes in Cambridge and Perpetual

Bldg. & Loan Association of Columbia v. Commissioner, 34 T.C. 694

(1960), affd. sub nom. Estate of Cooper v. Commissioner, 291 F.2d

831 (4th Cir. 1961), did not define the term “building and loan

association”.

     In Cambridge, the taxpayer was incorporated in Ohio and was

recognized and conducted its business as a building and loan

association in accordance with the laws of the State of Ohio.

The Revenue Act of 1918, ch. 18, sec. 231, 40 Stat. 1076, and the

Revenue Act of 1921, ch. 136, sec. 231, 42 Stat. 253, provided an

exemption from income tax for building and loan associations but

did not further define such an entity.   The U.S. Supreme Court

accepted the State’s classification of a building and loan

association in the absence of a definition in the Federal

statute, provided that there had not been a “gross misuse of the

name”.   United States v. Cambridge Loan & Bldg. Co., supra at 59.

Respondent also relies on Perpetual Bldg. & Loan Association of

Columbia v. Commissioner, supra, in which we stated that, for a

building and loan association to qualify for exemption under

section 101(4), I.R.C. 1939, the association must first come
                                - 23 -

within the classification of a building and loan association and

that, second, substantially all of its business must be confined

to making loans to members.     Id. at 710.   Because the definition

of a building and loan association was not codified in State law,

the analysis focused on State law interpretation of the

characteristics of a building and loan association, consistent

with the second requirement in section 101(4), that substantially

all of an association’s business must be confined to making loans

to members.   Id. at 710-711.   The Court concluded:

     if a corporation does not substantially meet the
     generally recognized criteria of a bona fide building
     and loan association, it is not such a tax exempt
     association as is contemplated by the statute,
     regardless of what name it may have or how it may be
     designated or classified by the State statute under
     which it was organized. [Id. at 715.]

     Respondent asserts that, under the Cambridge analysis, when

the Federal statute does not provide a definition, we must rely

on the law of the chartering jurisdiction to determine the

appropriate definition.   Respondent argues that the chartering

jurisdiction provides for the separate treatment of entities

classified as building and loan associations from that afforded

to other financial institutions.    Both Southwest and Pinellas

were chartered as Florida banking corporations and were,

therefore, subject to and operated under the regulatory authority

of the Florida Department of Banking and Finance, as were all
                                - 24 -

financial institutions chartered in the State of Florida.     Fla.

Stat. Ann. secs. 655.012, 655.005, 665.012 (West 1984).

     Under the Florida financial institutions code, chapter 655

applies to financial institutions generally and provides for

“general regulatory powers to be exercised by the Department of

Banking and Finance in relation to the regulation of financial

institutions”.    Fla. Stat. Ann. sec. 655.001 (West 1984).

However, the statutory framework for banks is found in chapter

658, while chapter 665 provides guidance to associations.     Fla.

Stat. Ann. secs. 658.165, 665.0211, 665.0501, 665.0711 (West

1984).   As defined in chapter 658, the term “bank” does not

include an association.    Fla. Stat. Ann. sec. 658.12 (West 1984).

An “association” is defined as a mutual or capital stock savings

association, savings and loan association, building and loan

association, or savings bank.    Fla. Stat. Ann. sec. 665.012 (West

1984).   The name of every “association” must include either the

words “savings association”, “savings bank”, or “savings and loan

association”.    Fla. Stat. Ann. sec. 665.0211 (West 1984).

Chapter 665 also requires associations to invest at least

50 percent of nonliquid assets in real estate loans or interests

in home property or primarily residential property.    Fla. Stat.

Ann. sec. 665.0711 (West 1984).    The absence of the same

requirement for banks and trusts under chapter 658 demonstrates

the distinction between financial institutions chartered as
                               - 25 -

“banks” and those chartered as “savings banks” or “savings and

loan associations”.   This treatment is consistent with the

Federal revenue policy that recognizes that thrift institutions

have historically been the primary source of residential home

mortgages.

     Alternatively, petitioner argues that Southwest and Pinellas

qualify as “mutual savings banks” as defined in section 591(b).

Section 591(b) expands the definition of a “mutual savings bank”

for purposes of section 591.   Section 591 provides:

     SEC. 591.   DEDUCTION FOR DIVIDENDS PAID ON DEPOSITS.

          (a) In General.-–In the case of mutual savings
     banks, cooperative banks, domestic building and loan
     associations, and other savings institutions chartered
     and supervised as savings and loan or similar
     associations under Federal or State law, there shall be
     allowed as deductions in computing taxable income
     amounts paid to, or credited to the accounts of,
     depositors or holders of accounts as dividends or
     interest on their deposits or withdrawable accounts, if
     such amounts paid or credited are withdrawable on
     demand subject only to customary notice of intention to
     withdraw.

          (b) Mutual Savings Bank to Include Certain Banks
     With Capital Stock.-–For purposes of this part, the
     term “mutual savings bank” includes any bank–-

               (1) which has capital stock represented by
          shares, and

                (2) which is subject to, and operates under,
          Federal or State laws relating to mutual savings
          bank.
                              - 26 -

Section 591(b) was enacted in response to changing regulations in

the banking industry that allowed mutual savings banks to convert

to stock savings banks.   H. Conf. Rept. 97-215, at 284-285

(1981).   In order to facilitate the conversions and not frustrate

regulatory policy, section 591(b) provided that, “for purposes of

this part, the term ‘mutual savings bank’ includes any bank * * *

which has capital stock represented by shares, and * * * which is

subject to, and operates under, Federal or State laws relating to

mutual savings bank”.   Accordingly, mutual savings banks that

converted to stock savings banks continued to qualify as mutual

savings banks for purposes of the reserve method of accounting

for thrift institutions under section 593.   The amendments were

intended to “apply to both mutual savings banks which convert

into stock associations and to newly formed stock associations so

long as the institution is operated as a savings institution and

is subject to the same Federal or State regulatory scheme as a

mutual savings bank chartered under Federal or State law”.

H. Conf. Rept. 97-215, at 284-285 (1981).

     Petitioner argues that Pinellas and Southwest qualify as

mutual savings banks because they were chartered as banks with

capital stock represented by shares, as required by section

591(b), and were subject to and operated under the regulatory

authority of the Florida Department of Banking and Finance, as
                              - 27 -

were all State-chartered mutual savings banks.    Fla. Stat. Ann.

secs. 655.012, 655.005, 665.012 (West 1984).   Respondent’s

position with respect to section 591(b) is a reiteration of the

position that Southwest and Pinellas, as commercial banks, are

necessarily excluded from the types of institutions eligible for

the special reserve method of accounting under section 593.

     As previously discussed, although chapter 655 applies to

financial institutions generally, Florida law distinguishes

between institutions chartered as mutual savings banks under

chapter 665 and those chartered as banks under chapter 658.    Fla.

Stat. Ann. secs. 665.012, 655.005 (West 1984).    Both Southwest

and Pinellas were chartered as banks under chapter 658 and,

therefore, were not subject to and were not operated under the

same statutory provisions that apply to mutual savings banks and

associations as contemplated by section 591(b).

     The nature of the disputes between the parties in these

cases convinces us that the emphasis that respondent places on a

charter is justified.   If any financial institution were

permitted to use the reserve method of accounting under section

593 and then, when challenged, to argue that the nature of its

operations was controlling, the administration of section

7701(a)(19), section 593, and related regulatory provisions would

be a practical nightmare.   Petitioner’s position would add
                               - 28 -

confusion and uncertainty to the law, while the statutory history

shows an intention by Congress to provide certain tax benefits to

savings and loan institutions while denying them to banks.    By

incorporating a definition or “meaning” into the statute,

Congress attempted to draw the line, while recognizing that

different terminology was used in different State laws and under

different State regulatory or supervisory structures.

     Petitioner’s strategic decision to expand its market share

in Florida was undertaken with the knowledge that the acquisition

of thrift institutions would require their conversion to banking

corporations under Florida law.   As the U.S. Supreme Court has

often stated:   “while a taxpayer is free to organize his affairs

as he chooses, nevertheless, once having done so, he must accept

the tax consequences of his choice, whether contemplated or

not, * * * and may not enjoy the benefit of some other route he

might have chosen to follow but did not.”    Commissioner v. Natl.

Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974).

     Based on the statutory framework and relevant legislative

history, we conclude that a financial institution chartered as a

bank cannot meet the threshold requirements of section

7701(a)(19).    Therefore, because Pinellas and Southwest were

chartered as banks under Florida law, petitioner is not entitled

to use the reserve method of accounting for bad debts under
                              - 29 -

section 593.   Respondent’s Motion for Partial Summary Judgment

with Respect to Bad Debts will be granted, and petitioner’s

Motion for Summary Judgment will be denied.

     To reflect the foregoing,

                                              An appropriate order

                                         will be issued.
