State Bank v. Commissioner

*66 In this proceeding the petitioner seeks a redetermination of its income and excess profits taxes for the calendar year 1921, for which period the respondent has determined a deficiency in tax of $14,207.47.

In the amended petition and the amendments thereto the following errors are alleged:

The Commissioner in determining the alleged deficiency in question included in the petitioner's income for the year 1921 the sum*3871 of $64,000.00 as proceeds *67 of the sale of the petitioner's deposits, business and good will and erroneously refused to deduct therefrom -

(a) The value of such property on March 1st A.D. 1913 or

(b) The value of such property on April 20th A.D. 1918 or

(c) The cost to petitioner of such property.

The Commissioner in determining petitioner's excess profits tax for the year 1921 erroneously reduced petitioner's invested capital by deducting therefrom distributions of capital made in the process of dissolution and after the petitioner had ceased doing business.

The Commissioner in determining petitioner's excess profits tax for the year 1921 and in determining petitioner's invested capital erroneously deducted a tentative tax from the income of the year 1921 before deducting such income from the amounts paid out in distribution of petitioner's assets for the purpose of dissolution.

The total tax assessable determined by the Commissioner, as the basis of the alleged deficiency, under the provisions of sections 327 and 328 of the Revenue Act of 1921 is excessive and contrary to the law and the facts.

The Commissioner in determining the alleged deficiency in question*3872 erroneously included in petitioner's income for the year 1921 alleged profits alleged by the Commissioner to have been received by petitioner in the year 1921 from the sale of its banking house and real estate connected therewith in to-wit the amount of $33,109.62 whereas in fact petitioner received no profits from the said sale.

FINDINGS OF FACT.

The petitioner, during the taxable year 1921, was a banking corporation, duly chartered by the State of Illinois, and engaged in the general banking business at Bloomington, Ill.

The banking business which was conducted by the petitioner during the taxable year, was founded in 1878 as "The National State Bank of Bloomington, Illinois," an institution which received its charter from the Federal Government and conducted a bank at Bloomington until 1898, at which time its charter expired by operation of law. On May 4, 1898, a new charter was granted to the State National Bank by the Federal Government. This institution, with a capital of $150,000, continued the business started by the National State Bank for the next 20 years and until its charter was about to expire by operation of law.

On January 11, 1918, the following letter*3873 was mailed to all the stockholders of the State National Bank:

JANUARY 11, 1918.

As the charter of this bank expires by limitation April 20th, 1918, some steps are necessary to effect plans of re-organization. You are therefore hereby notified that, by virtue of resolution of the Board of Directors of this Bank, a special meeting of the stockholders of the Bank will be held on Monday, the 11th day of February, 1918, at 3 P.M. for the purpose of voting on the question of voluntary liquidation.

Pursuant to this notice a special meeting of the stockholders was *68 either in person or by proxy, and the following resolution was unanimously adopted:

Whereas the charter of this bank expires by limitation on the 20th day of April, 1918 and

Whereas it is the desire of more than two thirds of the stockholders to discontinue operation under a national charter and

Whereas such action has been taken on this date by proper resolution and

Whereas it is the intention of the stockholders, so voting to dissolve, to apply for a charter under the laws of this state to operate a banking business under the name of the State Bank of Bloomington.

Now therefore Be it resolved, that*3874 the Board of Directors of the Bank be and they are hereby authorized, empowered and directed to sell, assign and convey by proper instruments and endorsements to the State Bank of Bloomington, when organized, such assets, real or personal, as may be necessary to liquidate the liabilities of this bank, except its liabilities to its stockholders, and

Be it further resolved, that the Board of Directors of this Bank be and they are hereby authorized empowered and directed to sell, assign and convey by proper instruments and endorsements to the said State Bank of Bloomington, when organized, all other remaining assets of every kind and character for such consideration as may be agreed upon and

Be it further resolved, that the proceeds from the sale of said last mentioned remaining assets be distributed among the stockholders of this bank according to their respective interests at such time as may be determined upon by the Board of Directors of this Bank upon presentation of certificate of stock representing such interest for the purpose of stamping thereon the fact of such distribution.

At a meeting of the directors of the National Bank held on March 13, 1918, it was voted to withdraw*3875 $50,000 United States bonds deposited with the Treasurer of the United States to secure circulation and sell the same in anticipation of the liquidation of the bank at the expiration of its charter.

At a meeting of the directors held on April 10, 1918, the following resolution was unanimously passed:

Whereas, after due and legal notice, the stockholders of this association owning two-thirds of capital stock have voted to permit the charter of this association to expire by limitation on the 19th day of April, 1918.

Whereas, this vote has been duly certified to the Comptroller of the Currency, and

Whereas, under the provisions of section 5 of the act approved December 23, 1913, and known as the Federal Reserve Act, this association is required to surrender for cancellation all of its holdings of the capital stock of the Federal Reserve Bank of Chicago, and to terminate its membership in said bank,

Now, therefore, be it resolved, that H. K. Hoblit, the duly elected liquidating agent, be, and he is hereby authorized, empowered, and directed to apply to the said Federal Reserve Bank for the cancellation of 105 shares of stock allotted to and held by this association, and to*3876 receive and receipt for any balance due this association by said Federal Reserve Bank on account of cash paid subscriptions, or otherwise, and any securities or other valuables belonging to this association, and to do such acts as may be necessary to adjust and settle the accounts between this association and the said Federal Reserve Bank.

*69 The minutes of the last meeting of the Board of Directors read as follows:

On roll call the entire Board was found to be present. Whereupon Mr. Frank W. Aldrich presented the following resolution:

WHEREAS The Board of Directors of this Bank has been duly authorized by resolution of special stockholders' meeting held on the 11th day of February, 1918, to Sell, Assign, and Convey to the State Bank of Bloomington, when organized, such assets real and personal as may be necessary to liquidate the liabilities of this Bank, and

WHEREAS the Board of Directors of this Bank has been further duly authorized to Sell, Assign and Convey to the State Bank of Bioomington, when organized all other remaining assets of every kind and character for such consideration as may be agreed upon, and

WHEREAS the difference between the value of assets, *3877 as carried on the books of this Bank, and the present market value of such assets is more than fifteen thousand dollars less than the book value, which represents the present worth of the good will of this Bank,

Now, THEREFORE, BE IT RESOLVED That the President and Cashier of this Bank, in consideration of an undertaking by the State Bank of Bloomington to assume all liabilities of this Bank, be and they are hereby authorized, empowered and directed to sell, assign and convey by proper instruments and endorsements such assets real and personal as may be necessary to liquidate the liabilities of this Bank, except its liabilities to its stockholders, to the said State Bank of Bloomington, and

BE IT FURTHER RESOLVED That the President and Cashier of this Bank be and they are hereby authorized, directed and empowered to sell, assign and convey by proper instruments and endorsements all other remaining assets of every kind and character on payment of the sum of Three Hundred and Seventy-five Thousand Dollars to be distributed pro rata among the stockholders of this Bank, according to their respective interests at such time or times as may be determined upon by the Board of Directors*3878 of this Bank upon presentation of certificate of stock representing such interest for the purpose of stamping thereon the fact of such distribution.

On motion the foregoing resolutions were unanimously adopted.

The following resolutions were adopted:

RESOLVED That H. K. Hoblit be and he is hereby appointed liquidating agent of this Bank to proceed in all matters in connection with such liquidation in accordance with the law.

* * *

RESOLVED That the sum of one hundred per cent of the assets of this Bank be distributed by the liquidating agent in accordance with the pro rata interest of each and every stockholder. * * *

The following resolutions which were unanimously adopted, appear in the minutes of a meeting of the State Bank held on the 19th day of April, A.D., 1918:

WHEREAS the Board of Directors of the State National Bank of Bloomington, Illinois, has been duly authorized by resolution of special stockholders' meeting held on the 11th day of February, 1918, to Sell, Assign and Convey to the State Bank of Bloomington, when organized, such assets real and personal as may be necessary to liquidate the liabilities of the said State National Bank of Bloomington, Illinois, *3879 except its liabilities to its stockholders, and

*70 WHEREAS the Board of Directors of the said State National Bank has been further duly authorized to Sell, Assign and Convey to the State Bank of Bloomington, when organized, all other remaining assets of every kind and character for such consideration as may be agreed upon, and

WHEREAS it has been agreed and determined that a fair price for such remaining assets will be the sum of Three Hundred, Seventy-five Thousand Dollars ($375,000.00);

NOW, THEREFORE, BE IT RESOLVED, That the President and Cashier of this Bank be and they are hereby authorized, directed and empowered to purchase of the State National Bank of Bloomington, Illinois, such assets real and personal as may be necessary to liquidate the liabilities of the said State National Bank of Bloomington, Illinois, except its liability to its stockholders, and, in consideration of such sale, this Bank undertakes and agrees to assume all liabilities of the State National Bank of Bloomington, Illinois, except its liability to its stockholders; and

BE IT FURTHER RESOLVED That the President and Cashier of this Bank be and they are hereby authorized, directed and empowered*3880 to purchase of the State National Bank of Bloomington, Illinois, all other remaining assets of every kind and character, and to pay to the said State National Bank of Bloomington, Illinois, the sum of Three Hundred, Seventy-five Thousand Dollars ($375,000.00) for such remaining assets. * * *

The National Bank on April 19, 1918, executed a memorandum of sale with the petitioner, the material parts of which are as follows:

NOW, IN CONSIDERATION THEREOF, THIS AGREEMENT WITNESSETH, That said The State National Bank of Bloomington, Illinois, doth hereby agree to sell, assign and convey, and doth hereby sell, assign and convey to The State Bank of Bloomington, Illinois, party of the second part, all the assets and property, real and personal of The State National Bank of Bloomington, Illinois, for the sum of Three Hundred Seventy-five Thousand ($375,000.00) Dollars, payable in cash upon the execution of this contract, receipt whereof is hereby acknowledged, and in further consideration of the agreement of said party of the second part, the State Bank of Bloomington, Illinois, to assume, liquidate and pay all liabilities of said The State National Bank of Bloomington, Illinois, other*3881 than its liabilities to its Stock Holders for the repayment to said stock holders of the value of the stock held by them respectively.

And the said party of the second part, the State Bank of Bloomington, Illinois, doth hereby agree to purchase of said party of the first part, all the assets and property, real and personal of said party of the first part, upon the terms hereinabove set forth. And said party of the second part, The State Bank of Bloomington, Illinois, doth hereby agree to and with said party of the first part, its successors, representatives and assigns, to assume, liquidate and pay any and all liabilities of said The State National Bank of Bloomington, Illinois, other than its liability to its stock holders for the repayment to said Stock Holders of the value of the stock held by them respectively, and to save, indemnify, and keep harmless said party of the first part, and all persons claiming or to claim, by, thru or under said party of the first part, as against any and all liabilities, debts and claims for which said party of the first part can or should be held liable for payment thereof, under any and all laws concerning a corporation, such as said party of*3882 the first part, or that may arise in the due course of the liquidation of its affairs, but not including its liabilities for the re-payment to its Stock Holders of the value of their stock *71 or amounts that may become due them because of the ownership of stock in said party of the first part. Said party of the second part further agrees with said party of the first part, its successors, representatives and assigns, to promptly meet, pay and discharge any and all such debts and liabilities in due course of business and as the same mature, and that it will not permit any such debt or liability to become in default or protest, and will not permit any such debt or liability to be delayed in payment and discharge thereof.

The proof as to the details of organization of the State Bank is rather meagre, but it appears that certain individuals, whose names do not appear, subscribed for all the stock and that these subscription rights in some way were availed of by the stockholders of the old bank so that each would hold the same number of shares as he had held in the old bank, with the exception of A. B. Hoblit, who held 650 shares in the old and was to have 150 shares in the new. *3883 The capital was to be $100,000 and the surplus $150,000, instead of $150,000 capital and $225,000 surplus as it was in the old, the reduction being effected by the reduction in A. B. Hoblit's stockholdings. The stockholders of the National Bank executed the following memorandum directing the cashier of the National Bank to receipt for their distributive shares of the proceeds of the sale of the assets of the National Bank and use the proceeds in payment of their stock subscription with the petitioner.

WHEREAS it has been determined by the stockholders of the State National Bank of Bloomington to permit the charter of said Bank to expire by limitation on the 20th day of April, 1918, and

WHEREAS it has been determined to organize a Bank under the laws of the State of Illinois, to be known as the State Bank of Bloomington, to continue the business with a capital of $100,000.00 and surplus of $150,000.00.

We, the undersigned, hereby authorize the Cashier of the State National Bank of Bloomington to properly receipt for and to apply the proceeds of the undersigned's share of the assets of said State National Bank of Bloomington in payment for the number of shares below set opposite*3884 our respective names in said State Bank of Bloomington, when organized.

On April 19, 1918, the Auditor of Public Accounts for the State of Illinois granted a charter to the State Bank of Bloomington, Ill. This certificate reads in part as follows:

AND WHEREAS, It appears from the evidence furnished the Auditor as required by law, that the capital stock of said Association, amounting to ONE HUNDRED THOUSAND dollars, has been fully paid in and is now in the custody of the proper officers of said Association.

The petitioner paid the purchase price of $375,000 by executing and delivering to the liquidating agent three checks, one for $100,000, one for $150,000, and one for $125,000. These checks were by him deposited and the amounts thereof applied as follows: The amounts, $100,000 and $150,000, were paid by check on the State Bank to the petitioner in satisfaction of the stock subscription agreements and *72 these amounts became, respectively, the capital and surplus of the petitioner. The amount of $125,000 was paid by check to A. B. Hoblit in liquidation of 500 shares of his stock in the National Bank. The remainder of his share of the funds in the hands of the liquidating*3885 agent was applied in satisfaction of his obligation to pay for 150 shares of the stock of the State Bank.

A comparative statement of the National Bank at the close of business on April 19, 1918, and of the petitioner on the opening of business on April 20, 1918, follows:

*3886 The item of $125,000 due H. K. Hoblit, liquidating agent, does not appear in the statement of the petitioner at the close of business on April 20, 1918.

The deposits of the State National Bank on March 1, 1913, were $1,307,105.25, and on April 19, 1918, $1,519,418.55.

*73 Both the National Bank and the petitioner did a general banking business, received commercial, savings and time deposits, as well as deposits from banks and bankers. Bloomington is in the heart of the Illinois corn belt.

At the time of the purchase of the assets of the National Bank by the petitioner, the bank building was transferred by a deed reciting a consideration of $67,600, which was the value at which it was carried on the books of the National Bank.

The Industrial Appraisal Corporation made an appraisal of the petitioner's bank building, fixtures and equipment and on July 18, 1919, reported:

Expert testimony was offered to the effect that the bank building was worth from $110,000 to $150,000 on April 20, 1918.

On June 30, 1921, the petitioner sold its bank building and real*3887 estate connected therewith to the First National Bank of Bloomington, Ill., for $100,000. At the same time it also sold its deposit business and good will to the same bank for $64,000. The petitioner then proceeded to liquidate. The bank building had been carried on its books since the date of its acquisition from the National Bank for a recited consideration of $67,600. In making the entries incident to the sale of the building, $67,600 was credited to the bank building account and $32,400 credited to profit and loss. The entire $64,000 received from the sale of the deposits and good will was also credited to profit and loss.

The bank deposits at the time the sale was negotiated were approximately $1,600,000, and they were sold on the basis of 4 per cent premium. The deposits increased before the sale was completed. The premium paid remained the same, $64,000, which represents a premium of 3.8384 per cent.

Testimony of several Chicago bank officials was introduced to the effect that from 1912 to 1921 bank deposits, both in country and city banks, were worth on an average of 3 to 5 per cent.

For the purpose of comparison under section 328, the income and excess-profits-tax*3888 returns and final computation of taxes of eight banking institutions were introduced in evidence by the petitioner.

OPINION.

GREEN: The allegations of error are set forth in the preliminary statement. Each of these allegations has been specifically denied by the respondent in his answers. The answers likewise deny practically *74 every fact alleged in the petition and the amendments thereto. As the result of these denials it is of course incumbent upon the petitioner to establish by proof the facts upon which it relies for the relief sought.

The first and last of the alleged errors relate to the computation of gain resulting from the sale by the petitioner of its bank building and its deposits. The petitioner's position is, first, that the transaction of April 19, 1918, was a reorganization and that therefore the basis for the computation is the April 19, 1918, value of the assets, and second, that if there was in fact no reorganization, then the basis should be the value of the assets on March 1, 1913. It is clear to us that there was no reorganization of the State National Bank of Bloomington. That institution sold its assets to the petitioner and liquidated. *3889 The stock of the petitioner was subscribed for by a limited number of subscribers. There was no exchange of stock or assets for stock. The entire transaction was negotiated and put into effect, in terms of and by means of money or checks. A substantial portion of the stock of the old corporation was retired. The new institution was a state bank; the old a national bank. Many of the essentials to a reorganization are wholly lacking. We have found that the petitioner on April 19, 1918, acquired by purchase all the assets of the National Bank. As additional consideration they assumed all the National Bank's liabilities except those to its stockholders. In this purchase were acquired the bank building at a stated consideration of $67,600 and the deposit accounts at their book value. The bank building was carried on the books of the petitioner at the figure at which it was acquired until finally disposed of in 1921 for $100,000. The deposits were at all times reflected on the books of the petitioner at their book value. In 1921 the deposit accounts were sold at a premium of $64,000.

Section 202(a) of the Revenue Act of 1921 provides:

That the basis for ascertaining the*3890 gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; * * *

Accordingly, the gain derived from the sale of the banking house is the difference between the selling price and the cost at acquisition, less depreciation, and as to the deposits since they were acquired at their book value and sold for a premium of $64,000, the entire premium represents gain on the transaction. This disposes of the first and last allegations of error.

As to the issues raised by the second and third allegations of error, the findings of the respondent should not be disturbed since he has computed the deficiencies in accordance with sections 327 and 328 of the Revenue Act of 1921. Where special assessment is applied the tax is computed by the use of comparatives rather than making *75 the adjustments as provided in the sections applicable to invested capital.

The fourth allegation of error relates to the respondent's computation of the excess-profits tax under the provisions of sections 327 and 328 of the Revenue Act of 1921, and it is there alleged that the tax as computed*3891 under these sections is excessive and contrary to the law. The petitioner introduced considerable evidence in support of its contentions in this respect. The case was tried before the decision of the Supreme Court in the case of , and in accordance with his practice at that time, the respondent offered no proof as to the proper comparatives. We are not wholly satisfied that the excess-profits tax should be computed by using the comparatives offered by the petitioner. Under such circumstances we believe the ends of justice will best be served by granting to both parties with respect to this issue the right to proceed under Rule 62 of this Board, promulgated on the 28th day of December, 1927, in so far as such rule is applicable. The proof, if any is required, will be limited to the proper comparatives to be used in the computation of the excess-profits tax.

Reviewed by the Board.