Putnam Trust Co. v. Commissioner , 26 B.T.A. 655 ( 1932 )

PUTNAM TRUST COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Putnam Trust Co. v. Commissioner

Docket No. 34743.

United States Board of Tax Appeals

26 B.T.A. 655; 1932 BTA LEXIS 1273;

July 19, 1932, Promulgated

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Purchase of bank stock made by petitioner held to be an investment, rather than an expenditure made for the purchase of assets of a going business, or for the protection of petitioner's own business, or to eliminate a competitor, on which loss was sustained upon liquidation of the bank in the amount of the difference between the cost of the stock and the amount received upon liquidation.

George E. Elliott, Esq., and Ralph E. Brush, Esq., for the petitioner.

C. C. Holmes, Esq., for the respondent.

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GOODRICH

This proceeding involves the redetermination of a deficiency in income tax asserted by respondent for the year 1923 in the amount of $2,430.78, the greater part of which is in controversy. Petitioner alleged but one error, namely, respondent's refusal to allow as a deduction from its gross income the amount of $26,386.73 claimed as a loss sustained upon its investment in the stock of the Greenwich National Bank, of Greenwich, Connecticut.

FINDINGS OF FACT.

Petitioner is a state bank, organized under the laws of Connecticut, with principal office in the town of Greenwich in that State. In 1922 there were two other banks in Greenwich, namely, the Greenwich National Bank, organized under the laws of the United States, and the Greenwich Trust Company.

During the early part of 1922 the bookkeeper of Greenwich defaulted, leaving an unpaid town indebtedness on account of pay rolls of about $300,000, having procured these funds from the Greenwich National Bank and the Greenwich Trust Company. It was claimed that the banks had permitted the bookkeeper to make these withdrawals without proper authority and therefore were liable to the town for the amounts thereof, of which approximately $197,000 was chargeable against the Greenwich National Bank.

Had suit been brought on these claims, with the attendant publicity, there was grave danger that the confidence of the community in the local banks, including petitioner, would be destroyed, and a crisis precipitated in banking and business circles of the community. To avoid that contingency and to protect the depositors of the Greenwich National Bank, it was deemed imperative to take over the business and affairs of that bank, preferably by merger or consolidation with petitioner. However, the merger or consolidation of a national bank with a state bank could not be effected under the statutes of Connecticut and the Federal banking laws, nor was it possible to change the national bank to a state institution without the surrender of its charter from the Federal Government and the obtaining of a charter from the state, which would require action by the State Legislature which was not then in session. Consequently, another plan was followed by means of which the object of averting a crisis in the local banking business was accomplished.

Petitioner's directors and officers in June, 1922, organized a syndicate which on petitioner's behalf purchased from the individual owners thereof 864 shares of stock of the Greenwich National Bank. Thereafter, petitioner took over, at cost to the syndicate, the shares so purchased and itself made further purchases of the stock, so that by January 19, 1923, it had acquired 1,323 shares, or approximately two-thirds of the stock outstanding, at a total cost of $241,003.79.

On October 27, 1922, meetings of petitioner's stockholders and directors were held, at which resolutions were adopted providing that the necessary steps be taken "to combine, consolidate and/or merge the Greenwich National Bank or its business with the Putnam Trust Company." The capital stock of petitioner was increased 1,000 shares to 2,500 shares, and a stock dividend of 250 shares was declared in favor of the stockholders of the Putnam Trust Company, leaving 1,250 shares still unissued. Pursuant to the resolutions a contract was entered into with the Greenwich National Bank on January 9, 1923, and approved by petitioner's directors and stockholders the following day, under which petitioner agreed to assume all of the deposit liabilities (but no other debts) of the Greenwich National Bank, amounting to approximately $2,200,000, in consideration for the transfer to it by that bank of assets of an equivalent amount. It provided further that after the effective date of the contract the Greenwich National Bank would discharge as rapidly as possible all of its remaining liabilities and distribute its remaining assets to its stockholders, and would not thereafter engage further in the banking business. Petitioner undertook to procure for the stockholders of the Greenwich National Bank the right to subscribe to the unissued 1,250 shares of its own stock. The agreement became effective on January 20, 1923, and the parties immediately proceeded to carry out its provisions.

The depositors' accounts, more than 2,000 in number, were assumed by petitioner, and assets offsetting that liability were turned over to it. The Greenwich National Bank ceased to engage in its ordinary business, but remained in existence for some time for the purpose of satisfying, acting through a liquidating committee, its various liabilities, including the claim of the town and various Federal Reserve notes. From its remaining assets it realized, after the discharge of all its liabilities, the net amount of $324,440, which it distributed in cash to its stockholders in two liquidating dividends, one on April 2, 1923, of $187,500, the other on August 23, 1923, of $136,940. Of these distributions, petitioner as a stockholder received $124,031.25 from the first, and $90,585.81 from the second, a total of $214,617.06, which was $26,386.73 less than the cost of the stock of the Greenwich National Bank purchased by petitioner. This difference petitioner deducted as a loss from its gross income for the year 1923 and respondent refused to allow it.

Petitioner was at no time affiliated with the Greenwich National Bank and never filed a consolidated return under the internal revenue laws with that bank.

OPINION.

GOODRICH: Petitioner claims the right to deduct from its income for the year 1923, under the provisions of section 234(a)(4) of the Revenue Act of 1924, the sum of $26,386.73 as a loss sustained upon its investment in stock of the Greenwich National Bank, having paid for the stock $241,003.79, and having received in liquidation thereof only $214,617.06 in cash. It seeks to confine the transaction to a purchase of stock at a price certain and the subsequent liquidation thereof for an amount certain, and the issue to a determination of the deductibility of the resulting loss in cash. Respondent, however, views the transaction as, in substance, a merger of the two banks and regards the so-called loss as an expenditure made in acquiring capital assets - the depositors accounts and good will - or in eliminating a competitor, or in protecting petitioner's own business. He seeks thus to enlarge the issue, and calls to our attention numerous decisions of this Board and of the courts holding that a deductible loss is not recognized in such transactions and that amounts expended for such purposes are not deductible from income.

It is conceded that a merger, as the term is defined in law, of petitioner and the Greenwich National Bank could not have been effected, since one was a state bank and the other a national bank, and that the two institutions were never affiliated. It is conceded also that the impelling motive for petitioner's participation in this transaction was the desire to stabilize the banking business and the dependent financial situation in the community by liquidating, while it could be done without loss to its depositors, a bank which, while yet solvent, was not strong and was under serious threat of a liability which, if enforced, might so cripple the institution as to cause grave apprehension in business circles, resulting in dangerous embarrassment to the other banks in the city, including petitioner. It appears also that when the Greenwich National Bank was dissolved one of petitioner's competitors had been eliminated, and petitioner had gained a large number of depositor's accounts, the liability on which was covered by transferred assets, good, if not quick, in an amount equal to the accounts.

But, as we view it, this is not the usual case where capital assets are purchased from the owner for a consideration in excess of their value and the difference should be denied as a loss, ; ; ; ; ; ; nor where an expenditure made in eliminating a competitor should be denied as an operating expense, ; affd., ; ; ; nor where expenditures made in protecting one's business or property should be added to capital account, ; affd., ; ; .

Here, petitioner, first through a syndicate acting for it, went out on the open market and purchased capital stock of the Greenwich National Bank, not from the bank itself, but from various individual owners of that stock, thus making an investment. True, after it had gained a controlling stock interest it entered into a contract with the Greenwich National Bank whereunder it assumed the liability for all the deposit accounts of that bank and took over assets, satisfactory to itself, of an equal amount. The transfer of such assets was expressed in the contract as the consideration for the assumption of the liability of the accounts, and petitioner paid nothing in the purchase of them. It purchased from the bank neither tangible nor intangible assets, nor a going business. Respondent does not allege that petitioner made a profit by the acquisition of the accounts, and the evidence before us is that at that time the accounts were of little value, if any, and that because of its condition the Greenwich National Bank had no good will of value. Therefore, in view of the express terms of the contract relative to the consideration for the transfer of the accounts and of the evidence before us respecting their value, we can not agree that petitioner paid anything by way of bonus for their acquisition, or derived taxable profit thereof.

With respect to the remaining grounds urged as a basis for disallowance of the claimed loss, it suffices to point out that petitioner passed no consideration to the Greenwich National Bank for its agreement to refrain from engaging in the banking business, and it made no expenditure for the purposes of eliminating a competitor, since that purpose was not the motive and object of its purchase of the stock. Nor can it be said that petitioner's object was so directly to protect its own business or property as to make its investment an expenditure for that purpose. It was threatened with no direct liability or injury. It sought to avoid a possible crisis which might bring difficulty to itself as well as to the other bank, and the business concerns of the community, but such a purpose can not be enlarged to constitute an expenditure for the direct protection of one's business or property such as should be added to capital investment.

We conclude that petitioner's purchase of stock of the Greenwich National Bank should be treated as an investment and, since upon liquidation of the stock it received $26,386.73 less than the cost thereof, that amount should be deducted as a loss from its income for the year 1923. Cf. , affd., .

Reviewed by the Board.

Judgment will be entered under Rule 50.