Peoples Nat'l Bank v. Commissioner

*815 The Commissioner determined deficiencies of $5,250 and $1,760 in the petitioner's income taxes for the calendar years 1923 and 1924, respectively. The only issue for our determination is the deductibility of $40,000 in 1923 and $12,080 in 1924, expended by the petitioner in those years to acquire the deposit accounts of another bank. Other issues raised by the amended petition were disposed of at the hearing when the parties agreed that for 1923 the petitioner was entitled to deduct depreciation of $1,883.29 upon its bank building and $621.55 upon its furniture and fixtures; and that for 1924 depreciation had been overstated by $163.94 upon the bank building and by $61.36 upon the furniture and fixtures, and that $500 was erroneously included in income as a profit upon the sale of certain bonds. The motion of the respondent for an increased*1823 deficiency as a result of the adjustments for the year 1924 was granted.

*816 FINDINGS OF FACT.

The petitioner is a national bank, organized in 1865, engaged in the general banking business at Waterville, Me.

On or about April 1, 1923, the petitioner acquired the assets and liabilities of the Kennebec Trust Company, also located at Waterville. Shortly thereafter, that bank discontinued its business and was liquidated. The transfer was effected after oral negotiation and agreement between the officers and directors of the two banks. It was agreed that the petitioner would pay to the Kennebec Trust Company 3 1/2 per centum of the total amount of the deposit accounts transferred and that the officers and directors of that bank would endeavor to have their depositors continue their accounts with the petitioner.

The Kennebec Trust Company had savings deposits of $913,510 and checking deposits of $729,034.97. The general statement of that bank on April 2, 1923, showed checking deposits of $575,136.59 and savings deposits of $913,510 that were transferred to the petitioner, and upon which the payments in controversy were based. After the transfer of these accounts*1824 the petitioner had deposits of $3,300,000, which have been increased by over $700,000 since 1923.

The petitioner reported its income on the basis of cash receipts and disbursements. On its 1923 return the petitioner deducted $40,000 "paid for new business," and on its 1924 return deducted $12,080 "purchase of deposits." These amounts were paid to the Kennebec Trust Company in the respective years in accordance with the agreement for the transfer of the deposit accounts. The Commissioner disallowed the deductions.

OPINION.

SMITH: Section 234(a)(1) of the Revenue Acts of 1921 and 1924 provides that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. The petitioner contends that the payments of $40,000 in 1923 and $12,080 in 1924 to the Kennebec Trust Company are deductible as business expenses in the nature of compensation for the services of the officers, directors, and stockholders of that bank in transferring deposit accounts to the petitioner bank. These amounts were paid out in connection with the transfer of the deposit accounts and were designated*1825 by the petitioner as "paid for new business" and "purchase of deposits" upon its income-tax returns.

In , the Circuit Court of Appeals for the *817 Eighth Circuit affirmed out decision at , disallowing the deduction of a similar expenditure, and said:

The allowance of the deduction claimed can be made, if at all, under the provisions of Section 234(a)(1) of the Revenue Act of 1921 * * *. It appears that in 1923 petitioner, in effect, purchased the business of the Nebraska National Bank of Omaha, Nebraska, and assumed certain of its liabilities. It allowed to the Nebraska National Bank, which was about to liquidate, a so-called bonus of $94,807.73, for the purpose, it asserts, of securing "favorable contact with the depositors of the liquidating bank." This payment was obviously not an ordinary and necessary expense incurred in carrying on the business of petitioner within the meaning of Section 234 of the Revenue Act of 1921. * * *

By the payments in question the petitioner acquired deposits of about $1,500,000, which were of obvious value*1826 to it and a dominant factor in bringing about the transfer of the assets and liabilities of the liquidating bank. Such payments, regardless of designations applied thereto, are capital expenditures and are not deductible as ordinary and necessary business expenses. ;. See also ; ; .

Judgment will be entered under Rule 50.