Bank of Terrebonne & Sav. Bank v. Commissioner

*1286 This is a proceeding for the redetermination of a deficiency in income tax for the year 1924 in the amount of $2,456.28. The petition asserts error in the respondent's denial of a deduction in the amount of $17,650.23, alleged to represent a loss sustained in the taxable year involved.

FINDINGS OF FACT.

The petitioner is a Louisiana corporation engaged in the conduct of a banking business at Houma, Parish of Terrebonne, La.

For some time prior to 1924 there had been three banks operating at Houma, these including the petitioner, the Bank of Houma Trust & Savings*2235 Bank (hereinafter termed the Houma Bank), and the Peoples Bank & Trust Co. (hereinafter termed the Peoples Bank). The only other bank operating in Terrebonne Parish was the Bank of Bourg, which, during 1924, or subsequently, established a branch at Houma.

*1287 Some time prior to June, 1924, the Houma Bank became involved in difficulties due to "frozen paper." The capital and surplus of the bank were exhausted and its failure appeared imminent. Officials of the institution began consideration of measures which might avert such an event. A number of the bank's officials decided that one way to avert its failure was to arrange for the petitioner to take over its assets and assume its liabilities. The petitioner at that time was the only bank in the parish whose condition would warrant it assisting the Houma Bank. Through Louis J. Derbes, an accountant of Houma, D. M. Kilpatrick and X. H. St. Martin, president and cashier, respectively, of the Houma Bank, began negotiations with officials of the petitioner for the purpose of arranging a transfer of the assets and liabilities to the petitioner.

Among the factors influencing the parties to consider such a transfer was*2236 the belief that failure of the Houma Bank would have an unsettling and depressive effect upon business in the parish and would cause a loss of public confidence which would be reflected in the affairs of other banks operating there.

When the petitioner was first asked to take over the Houma Bank a statement of the condition of that institution was prepared. This statement indicated that if the petitioner accepted the proposition it would have to take a considerable loss, i.e., the liabilities assumed would be considerably greater than the assets acquired. The petitioner was first willing to take a loss of ten or fifteen thousand dollars and later it agreed to absorb a loss not in excess of $20,000.

The following quoted statement of the condition of the Houma Bank was then prepared:

Assets purchased and liabilities by the Bank of Terrebonne & Savings Bank, the same being taken at the close of business May 17, 1924

The directors of the Houma Bank then sought some means of reducing the difference between the assets and liabilities to such an amount that they could be transferred to the petitioner with a margin between them of not more*2238 than $20,000. This required the directors to increase the assets of the Houma Bank by approximately $24,000. The directors signed notes to make up a portion of the amount mentioned. Various firms in New Orleans which did business in Terrebonne Parish were solicited for contributions to cover the remainder of the $24,000 fund being raised. It was pointed out to these contributors that if the Houma Bank were permitted to fail their business in the parish would be adversely affected, especially if that failure caused financial embarrassment to other banks operating there. Among the business firms which contributed to the fund were Stoff, Esmon Co. and the Interstate Wholesale Grocery Co., $1,000 each; the Texas Oil Co. and Woodward, Wright & Co., $500 each; Wm. Richardson; Jaubert Brothers, and A. Baldwin & Son, $250 each. Certain other firms also made contributions in cash or notes.

By an instrument dated June 9, 1924, and subscribed to before a notary public, certain of the assets and all liabilities of the Houma Bank were transferred to the petitioner. So far as material herein, the said instrument reads as follows:

PERSONALLY CAME AND APPEARED:

BANK OF HOUMA, TRUST AND*2239 SAVINGS BANK, a corporation * * * herein represented by Douglas M. Kilpatrick, its president, Jasper K. Wright, its secretary, and Charles C. Krumbhaar, one of its directors, * * * who severally declared that acting for and in behalf of the said Bank of Houma, * * * they had sold and do by these presents hereby sell, cede, transfer, *1289 convey, abandon and deliver with all legal warranties and with full substitution and subrogation to all of the said Bank of Houma's * * * rights and actions in warranty against all preceding owners and vendors, to and unto the Bank of Terrebonne and Savings Bank, a corporation, etc., * * * herein represented by Ernest Ellender, its president and Charles A. Ledet, its cashier * * * the following described property, to-wit:

A certain lot of assets including certain plain and mortgage notes, stocks, bonds, fixtures, banking house, etc., aggregating the sum of Two Hundred Thousand, One Hundred and Forty Four Dollars and Forty-one Cents ($200,144.41); together with the good will and going business of the said Bank of Houma * * * and particularly the following described property, to-wit:

A certain lot or parcel of ground situated in the City*2240 of Houma, in the Parish of Terrebonne, Louisiana, in block No. 89 of said City, and measuring fifty feet front on Main Street by such depth as may be found between the said named street and the Bayou Terrebonne; bounded north by the said Bayou Terrebonne, east by the property of Sarah Concannon, formerly, now estate of E. C. Wurzlow, south by Main Street, and west by the property of the Estate of John B. Winder, formerly, now the property of the Peoples Bank and Trust Co.; together with all the buildings and improvements thereon and thereto belonging, and all rights, ways, and servitudes thereto appertaining, also all banking house fixtures of whatever nature used by the Bank of Houma Trust and Savings Bank in the operation of its banking business as a going concern.

The real estate hereinabove described being the same property acquired by the Bank of Houma from Emile Daigle on August 29th, 1898 by act before E. C. Wurzlow, then Chief Deputy Clerk of Court in and for Terrebonne Parish which act is duly recorded in C.B. SS folio 190 et seq.

The instrument continues:

For the purpose of this sale and transfer the real estate and improvements herein transferred by the Bank of Houma*2241 Trust and Savings Bank to the said Bank of Terrebonne and Savings Bank, is valued at the sum of $22,591.54.

In addition to the assets hereinabove described, the said Bank of Terrebonne * * * hereby acquires a certain note, signed and executed by the said Bank of Houma * * * for the sum of $24,126.51, made sue (due) and payable one year after date at the office of the Bank of Terrebonne * * * and conditioned to bear interest at the rate of six per cent per annum from its date, until full and final payment; said note to be renewed from year to year by the said Bank of Terrebonne * * * for a period not exceeding five years, from its date, provided, that interest is paid annually thereon; said note to be secured by the pledge and pawn, of a certain mortgage note for the sum of $12,000, executed by the Bank of Houma * * * and secured by a special mortgage on certain real estate owned by the said Bank of Houma, * * * a certain lot of notes, rights and credits owned by the said Bank of Houma, * * * and 1,000 shares of the capital stock of Ardoyne Planting Co., Inc., of the par value of $100 each, by the Marine Bank and Trust Co., New Orleans; the pledge and pawn of the said 1,000 shares*2242 of the Ardoyne stock by the Marine Bank and Trust Co. to secure not more than $21,000 of said note;

* * *

This sale and transfer is made and accepted for and in consideration of the price and sum of Twenty Thousand Dollars ($20,000.00) in lawful United States Currency, paid cash by the purchaser herein to the vendor, the receipt *1290 of which is hereby acknowledged, and the payment and assumption, by the said Bank of Terrebonne * * * of all monies and deposits due by the said Bank of Houma, * * * to its depositors, and such other liabilities as are fully shown on "the statement of May 17th, 1924 detailed above," with the exception, however, of the sum of $20,000.00 of said deposits and liabilities, it being understood that the cash consideration herein paid by the vendee to the vendor, will be applied, at once, towards the liquidation of said liabilities as are fully shown on said statement. It being distinctly understood that the vendee herein assumes all liabilities fully outlined in said statement of May 17th, 1924, including liability to depositors as hereinabove outlined, but not including any liability to the stockholders of the said Bank of Houma, * * *. All taxes*2243 for the past three years have been duly paid and those for the current year 1924 are assumed by the vendor and vendee as their respective interest may appear. * * *

* * *

Attached to the instrument and by reference incorporated therein, are copies of resolutions adopted by the boards of directors of the Houma Bank and the petitioner, authorizing and ratifying the transfer of assets and liabilities thereby effected. Also attached and similarly incorporated, are copies of written "consents" of stockholders holding more than two-thirds of the issued capital stock of each of the contracting banks consenting to the transfers detailed in the instrument.

The Houma Bank filed an income-tax return for the period January 1, 1924, to June 30, 1924. Included in this return was a balance dated at June 30, 1924, and indicating the following:

*2244 Upon the figures given, total assets should be stated as $317,864.37, and the statement is out of balance to the extent of $5.70.

The assets transferred in accordance with the contract above mentioned were selected from the total assets of the Houma Bank, as detailed in the above balance sheet, and were appraised by a joint committee representing that bank and the petitioner. The assets retained by the Houma Bank consisted of certain notes and at least two pieces of real property. In the opinion of the joint committee the assets retained by the Houma Bank were worthless. The notes have proven uncollectible in any amount. One of the parcels of *1291 realty was disposed of by a trade for other property and the second, which consisted of a small parcel of land located near the Bayou Terrebonne about 23 miles from Houma, was transferred to D.M. Kilpatrick, president of the Houma Bank, to be liquidated for the benefit of the officers and stockholders who had contributed, by notes or otherwise, to the fund of $24,126.51 raised by such persons and used to reduce the deficit of that bank when the transfer to the petitioner was made. This property had a value of about $2,400*2245 in 1924 and it was subject to a mortgage in an amount approximately one-half its value. Adjoining land was being drilled for oil during 1924.

The Houma Bank, which had been in business since 1892, ceased business immediately upon the transfer to the petitioner. None of the officers of the Houma Bank became affiliated with the petitioner.

Neither the petitioner nor the Houma Bank paid interest on individual deposits subject to check except on funds of the Parish of Terrebonne. The interest rate on time certificates of deposit was 3 1/2 or 4 per cent and on savings accounts, 3 per cent. The petitioner loaned moneys deposited with it at rates varying from 4 to 8 per cent and averaging about 6 per cent. The accounts and deposits of all classes acquired by the petitioner through the transfer above detailed constituted valuable income-producing assets. The petitioner was able to retain a majority of the accounts acquired.

In its income-tax return for 1924 the petitioner claimed a deduction in the amount of $17,650.23, alleged to represent a loss sustained through its purchase of the assets of the Houma Bank, or, more specifically, a loss alleged to represent the purchase price*2246 of the "good will" of the Houma Bank, which, it is asserted, was in fact worthless. The difference between the claimed deduction of $17,650.23 and the $20,000 paid in excess of the appraised value of the assets acquired, results from adjustments in liabilities of the Houma Bank assumed by the petitioner. The respondent has denied the claimed deduction upon the theory that the purchase was a capital transaction from which no loss or gain resulted in the taxable year.

OPINION.

LOVE: The petitioner asserts that it sustained a loss during 1924 in the transaction by which it purchased certain of the assets and assumed the liabilities of the Houma Bank. When the petitioner decided to make that purchase, liabilities of the Houma Bank amounted to $244,270.92 and the value of such of its assets as the petitioner acquired was determined by a joint committee of officials of the two institutions to be $200,144.44. Liabilities therefore exceeded such assets by the amount of $44,126.31, which amount is referred to as a "deficit."

*1292 The Houma Bank covered this deficit to the amount of $24,126.51 by a note, secured by special mortgage on its real estate, and the pledge of certain*2247 stock and such notes and credits as it retained. It appears that contributions of certain New Orleans business firms, and personal notes of officials of the Houma Bank were applied on the note given the petitioner.

The remainder of the deficit, amounting to $20,000, was covered by the petitioner's payment of that amount to the Houma Bank and its immediate application to the reduction of the liabilities of that company. In effect, therefore, the petitioner acquired assets in the amount of $224,270.92, assumed an equal amount of liabilities, and in addition paid $20,000 in cash.

The petitioner asserts that the $20,000 paid by it represented the purchase price of "good will" of the Houma Bank. It is further asserted that the Houma Bank had no "good will" in fact, and, therefore, that the petitioner received nothing for the said payment. The petitioner accordingly claims that the payment constituted a loss in the year in which it was made. Due to adjustments in the liabilities assumed, the amount of the alleged loss has been reduced to $17,650.33, and it is this amount that the petitioner now claims as a deduction.

The respondent's denial of the deduction involved is predicated*2248 upon the theory that the purchase of the "good will" as specified in the contract of June 9, 1924, was a capital transaction upon which no deductible loss can occur until the asset mentioned is disposed of by the petitioner.

We have found from testimony of the petitioner's witnesses, and admissions of its counsel, that the accounts and deposits constituted valuable income-producing assets. The number of these accounts does not appear, but it has been shown that checking accounts, time certificates of deposit, and savings deposits amounted to $172,501.08, $12,383.25, and $57,661.98, respectively, a total of $242,546.31. It also appears that the petitioner was able to hold most of the accounts acquired. The Board has heretofore held that acquisition of a line of deposits is of value to a bank. . Payments made to acquire accounts and deposits are capital expenditures. . See also .

Considering this, it will seem that the petitioner can not properly allocate the net amount paid or assumed in excess of the value*2249 of the assets received wholly to good will and then be allowed to deduct that amount as a loss because the good will was valueless. The accounts and deposits admittedly were of value, but there has been no attempt to establish the amount of their value. Without expressing an opinion as to the merit of the petitioner's theory of a loss sustained *1293 upon its purchase of the good will of the Houma Bank, we hold that the purchase of June 9, 1924, was a capital transaction in which the petitioner acquired a valuable line of accounts and deposits and that upon the record it does not appear that the petitioner sustained any loss during the year 1924 by reason of that purchase.

Judgment will be entered for the respondent.