First National Bank of Kulm v. United States

delivered the opinion of the court:

The plaintiff is an association resulting from the merger of the First National Bank of Kulm and the Lamoure County Bank. The merger agreement was entered into in November, 1920, and was carried into effect on January 3, 1921. At the time of the agreement the First National Bank of' Kulm, which may be called the old bank as distinguished from the merged bank, owned certain notes which would mature before the date of consolidation, and it was agreed between the two banks that these notes would not be renewed and that the interest accumulating thereon after their maturity and up to payment should be collected by the merged bank and paid to the stockholders of the old bank; that is, this interest should not become an asset of the merged bank. It was collected after the merger in 1921 and entered to the credit of the stockholders- of the old bank.

*115The Commissioner of Internal Revenue held that, as the plaintiff kept its books on a cash basis and this interest was paid in 1921, it was income for that year and not 1920. We are in accord with this view. However, the tax levied and collected was upon the theory that this interest was income of the plaintiff for the year 1921. With this we can not agree. Under the agreement the interest when collected was not an asset or the property of the merged bank but the property of the stockholders of the old bank, for which the merged bank merely acted as a collection agency. It was received in that capacity and credited to the stockholders of the old bank. It became income to them but was not income to the plaintiff.

The plaintiff is entitled to recover the amount of the additional tax assessed against it for 1921, with interest from September 18, 1926. Let judgment be so entered.