Bank of Italy v. Commissioner , 13 B.T.A. 1226 ( 1928 )

BANK OF ITALY, SAN FRANCISCO, CALIF., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

FIRST NATIONAL BANK, FRESNO, CALIF., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Bank of Italy v. Commissioner

Docket Nos. 15810, 15811.

United States Board of Tax Appeals

13 B.T.A. 1226; 1928 BTA LEXIS 3088;

October 25, 1928, Promulgated

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Affiliation. - Under all the facts and circumstances of the case, held that the Bank of Italy and First National Bank of Fresno are affiliated corporations and should file consolidated returns pursuant to the provisions of section 240 of the Revenue Act of 1918.

H. H. Tooley, C.P.A., for the petitioners.

A. C. Baird, Esq., and R. H. Ritterbush, Esq., for the respondent.

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MILLIKEN

These two cases were consolidated for hearing and decision. Deficiencies were determined against the Bank of Italy of $210,300.81 for 1920 and $73,979.77 for 1921, and against the First National Bank of Fresno, Calif., of $35,496.65 for 1920 and $78,121.83 for 1921.

In its petition for a redetermination the Bank of Italy alleges 11 specific errors, consisting of erroneous disallowances by the respondent of deductions claimed by it. The answer of the respondent denied each error alleged in the petition, and thereupon the Bank of Italy filed an amended petition alleging that for the year 1920 the consolidated net income of petitioner and affiliated corporations, exclusive of the First National Bank of Fresno, Calif., for excess-profits-tax purposes, was $1,252,779.98, and not $1,735,521.94 as shown by the deficiency notice; that the consolidated net income of petitioner for income-tax purposes was $417,108.49, and not $728,452.06 upon which the tax determined was based; and that the consolidated invested capital of petitioner and its affiliated corporations, exclusive of the First National Bank of Fresno, Calif., was $11,721,836.45, the same as found by the respondent. For 1921, the following figures were given: Net income for profits-tax purposes was $1,225,751.98, and not $1,519,065.47; for income-tax purposes was $332,990.40, and not $520,864.70; and invested capital was $15,022,824.34, and not $15,170,167.40.

It was further alleged in the amended petition that the Stockholders Auxiliary Corporation, a subsidiary of the petitioner, was the owner of, or controlled substantially all of the capital stock of the First National Bank of Fresno, Calif., and that they were affiliated during the taxable period in question and were entitled to file a consolidated return which the respondent had denied.

The respondent, in his answer to the amended petition, expressly admits all the errors alleged in the amended petition relative to the amounts of net income for excess-profits and income-tax purposes and the amount of invested capital, but he denied that the petitioner was affiliated with the First National Bank of Fresno, Calif.

The First National Bank of Fresno, Calif., alleged in its petition that it was affiliated with the Bank of Italy and that the respondent had erred in not allowing it the right to file a consolidated return, and that the respondent had erred in determining that petitioner had made a profit of $108,471.44 upon the alleged sale of its assets to the Bank of Italy in 1921.

In his answer the respondent denied all the above allegations of the petition. Subsequently, petitioner filed an amended petition repeating the allegations relative to affiliation, omitted any mention of the alleged profit in sale of assets, and did not allege any additional errors. Respondent denied all allegations of the amended petition. At the hearing no evidence was introduced upon any issue except that of affiliation.

FINDINGS OF FACT.

The Bank of Italy is a banking corporation organized under the laws of the State of California, with its principal office and place of business located in San Francisco. During the taxable years it owned, controlled, or was affiliated with a number of other banks, or operated branches in a number of cities and towns in California.

The Stockholders Auxiliary Corporation is a subsidiary of the Bank of Italy and is a holding corporation for the purpose of holding stock in the various banks which the Bank of Italy owns, controls, or is affiliated with. Each stockholder of the Bank of Italy is the owner of a number of shares of stock in the Stockholders Auxiliary Corporation in the same ratio to his holdings in the Bank of Italy. The shares in the Auxiliary Corporation are not issued to the shareholders, but to trustees who are members of the Executive Committee of the Bank of Italy, who hold and manage them for the benefit of the owners thereof.

The First National Bank of Fresno, Calif., during the years and period in question was a national banking corporation, with its principal office and place of business in Fresno. It had a capital stock of $500,000 divided into 5,000 shares, all of which were issued and outstanding January 1, 1920, and thereafter. The Fresno bank was a competitor of the Bank of Italy and its affiliated connections in Fresno and contiguous territory and in order to eliminate the competition and add the business of the Fresno bank to its own, the Bank of Italy determined to purchase its stock, which it ultimately accomplished by purchase of same through the instrumentality of the Stockholders Auxiliary Corporation. The stockholdings of the Stockholders Auxiliary Corporation in the First National Bank of Fresno during the taxable years and period in question were as follows:

Date	Shares acquired	Per cent	Total shares	Per cent of
		of stock	to date	ownership
		acquired
Jan. 1, 1920			4,122 1/2	82.45
Jan. 3, 1920	100	2.0	4,222 1/2	84.45
Dec. 17, 1920	25	.5	4,247 1/2	84.95
July 5, 1921	70	1.4	4,317 1/2	86.35
July 18, 1921	12 1/2	.25	4,330	86.60
July 19, 1921	40	.8	4,370	87.40
July 28, 1921	33	.66	4,403	88.06
Aug. 1, 1921	345	6.9	4,748	94.96
Aug. 8, 1921	8	.16	4,756	95.12
Aug. 10, 1921	8	.16	4,764	95.28
Aug. 19, 1921	35	.7	4,799	95.98
Aug. 23, 1921	150	3.0	4,949	98.98
Oct. 6, 1921	1	.02	4,950	99.00

In June, 1921, the Bank of Fresno was liquidated by the Stockholders Auxiliary Corporation and a branch of the Bank of Italy installed in its former premises.

During the year 1920 and until the Fresno Bank was liquidated in 1921 by the Stockholders Auxiliary Corporation, the business policies of the former were dictated by either the latter or the Bank of Italy. The interest rate charged on loans by the Fresno Bank was reduced to conform to the interest rate charged in California by the Bank of Italy and its branches. The personnel of the Fresno Bank was supplemented by the Bank of Italy. Real estate was purchased by the Bank of Italy for the Fresno Bank and the general banking policy, such as the making and extensions of loans, was under the supervision of the Bank of Italy. During the period in question there was harmony between the minority stockholders and the majority stockholders of the Fresno Bank, and the former did not oppose nor contest its management and operation in any way.

Some time prior to June 25, 1920, certain real estate in Fresno was purchased and title thereto taken in the name of O. J. Woodward, president of the Fresno bank, and on the above date the president of the Bank of Italy directed its conveyance to the FirstNational Bank of Fresno. During the taxable years the Fresno bank conducted its foreign exchange business through the Bank of Italy.

The respondent ruled that affiliation between the two banks did not exist until August 23, 1921, at which time the Stockholders Auxiliary Corporation was the owner of 4,949 shares of the Fresno bank, being 98.98 per cent thereof.

OPINION.

MILLIKEN: The only question for decision is that of the affiliation of the petitioners, the Bank of Italy and the First National Bank of Fresno, Calif., during the year 1920 and from January 1, 1921, to August 23, 1921.

In cases arising under section 240 of the Revenue Act of 1918, we have many times stated that the decision can not rest in and of itself on mere percentage computation as to the ownership or control of stock. Counsel for the respective parties have cited to us many of our decisions where the percentage of ownership or control of stock has varied, and where the percentage is less or greater than in the instant proceeding they are relied upon as authority for their positions and as decisive of the case at bar. The problem of affiliation is not one where general rules of application can be laid down. Each case is a separate problem. The facts and circumstances of the organization, conditions surrounding the acquisition of stock, operation of the companies and the result to be or accomplished must be given their proper significance.

The Bank of Italy prior to the year 1920 had decided to acquire the stock of the Bank of Fresno and cause the latter to be made one of its branches. By the first few days of the year 1920 it had acquired, through one of its affiliated holding companies, approximately 85 per cent of the outstanding stock. The vice president of the Bank of Italy testified that the Fresno bank was not immediately liquidated solely as a matter of policy. It was deemed best to make liquidation a gradual process and thus retain the good will of the depositors of the Fresno bank, adjust personnel problems and allow sufficient time for a complete advantageous business adjustment. The Bank of Italy felt that nothing would be lost by such strategy. The 85 per cent of the stock was acquired with only one purpose in view and that was to make the Fresno bank one of its branches. During the year 1920, and until liquidation, the Bank of Italy directed the policies of the Fresno bank, the executives of the former were at all times in touch with and dictating the business policies to be pursued. If the interest rate was to be reduced to make the same in line with that charged by the Bank of Italy, that was done. If the latter believed real estate should be purchased or loans extended, that was done. A large amount of correspondence passing between the two banks during the period in question was introduced, and from it we can not doubt the very active and positive control exercised by the Bank of Italy.

When in June, 1921, at which time the stock ownership was substantially the same as at January, 1920, the Stockholders Auxiliary Corporation believed the time was opportune to effect a complete liquidation of the Bank of Fresno, that act was in strict conformity with the purpose in mind when the stock was acquired and the climax of liquidation is illustrative of their control of the Bank of Fresno during the period now in controversy.

We believe the petitioners were affiliated and should file consolidated returns. Any other conclusion would result in placing an undue emphasis on mere percentages of stockholdings, to the exclusion of the facts and circumstances obtaining, which in this case outweigh the former.

Judgment will be entered under Rule 50.