Northwest Bancorporation v. Commissioner , 32 B.T.A. 1218 ( 1935 )

NORTHWEST BANCORPORATION, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Northwest Bancorporation v. Commissioner

Docket No. 71302.

United States Board of Tax Appeals

32 B.T.A. 1218; 1935 BTA LEXIS 834;

August 14, 1935, Promulgated

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1. Where a corporation enters into a contract whereby it sells part of its assets, and the purchaser assumes certain liabilities, for which the seller agrees to reimburse the purchaser within one year, and the purchaser agrees to take over the remainder of the assets for liquidation and application of the proceeds to the repayment of the liabilities assumed and agrees to surrender any balance of assets to the seller after it has been fully reimbursed, and the seller agrees to discontinue business at once and to liquidate with all possible dispatch, a stockholder of the seller can not balance his prospective share of the net assets of the seller against the cost of his stock and take a deduction of the difference as a loss sustained in the year in which the seller entered into the contract.

2. The evidence indicates that the liquidation took place subsequent to rather than during the year in which the contract was entered into and it fails to show that a loss of any amount was ever sustained.

Peter S. Rask, Esq., and P. J. Coffey, Esq., for the petitioner.

Shelby S. Faulkner, Esq., for the respondent.

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MURDOCK

The Commissioner determined a deficiency of $13,577.85 in the petitioner's income tax for 1930. The parties are agreed upon one issue which they propose to adjust in a recomputation under Rule 50. The petitioner claims that it sustained a loss of $654,467.75 in 1930 on its investment in stock of the Metropolitan National Bank of Minneapolis. The parties have stipulated "that if the Metropolitan National Bank were liquidated in the year 1930 the Northwest Bancorporation would have sustained a loss of $654,467.75." The Commissioner contends, however, that the loss was not sustained in 1930.

FINDINGS OF FACT.

The petitioner is a corporation, organized under the laws of Delaware. Its principal place of business is in Minneapolis, Minnesota. The Metropolitan National Bank (hereinafter called Metropolitan) was organized as a national bank in 1909. Its place of business was in Minneapolis. It was an independent bank prior to September 1929, and competed with the Northwest National Bank (hereinafter called Northwestern). The latter had its own separate place of business in Minneapolis.

Five thousand shares of the stock of Metropolitan were outstanding at all times material hereto. The petitioner began to acquire stock of Metropolitan on September 12, 1929, and subsequently acquired almost all of the stock of Metropolitan.

Metropolitan continued its banking operations until November 8, 1930. It filed separate income tax returns for the years 1929 and 1930.

Metropolitan entered into an agreement with Northwestern dated November 7, 1930. Metropolitan thereby sold its good will, furniture and fixtures and assigned certain leases to Northwestern for $76,187.91. Northwestern assumed and agreed to pay all of the liability of Metropolitan to its depositors and on account of its circulation of $225,000, Metropolitan agreed to repay Northwestern in full with interest for the liability assumed on or before November 8, 1931, by "the application of assets and/or of proceeds from collection or other liquidation of assets, or otherwise." It assigned to Northwestern, as collateral for the repayment, all of its remaining property and assets, including cash. Northwestern was to apply the $76,187.91, the cash, collections, and proceeds of sales of assets of Metropolitan to the reimbursement of Northwestern for the liabilities assumed. Any balance of assets after Northwestern had been fully reimbursed, was to be surrendered to Metropolitan. Northwestern could buy any assets of Metropolitan at face, or less provided the representatives of Metropolitan agreed to the lower price. If the assets of Metropolitan should prove insufficient to reimburse Northwestern, then Metropolitan was to pay the balance and receive the remaining assets, if any. Interest was to be computed on the daily balance owing to Northwestern until it was paid in full. Metropolitan named two representatives to determine all matters pertaining to the assets, such as renewals, sales prices, extensions, and liquidation. Metropolitan was to liquidate its affairs and wind up its business "with all possible despatch."

The stockholders of Metropolitan consented to and approved the agreement of November 7, 1930. The terms of the contract were completed and carried out at some time not shown by the record.

Metropolitan discontinued its banking business and vacated its banking rooms on November 8, 1930. It never paid any employees thereafter. Its only business thereafter was incidental to the liquidation of its assets. Northwestern took over all of its assets.

The balance sheet of Metropolitan at the close of business on November 8, 1930, shows total assets of $11,454,166.84, capital stock $500,000, surplus $250,000, undivided profits $252,024.64, total liabilities to stockholders $1,017,611.71, Northwestern National Bank obligation $10,354,397.49, and total liabilities $11,454,166.84.

The directors of Metropolitan on November 7, 1930, met, authorized an agreement with the Minnesota Loan and Trust Co. "relating to the future handling of the safe deposit department and of trusts now being administered by this bank", declared a dividend of $2.50 per share "to be paid on December 31st, 1930, to stockholders of record at the close of business on that date", and disposed of other business matters incidental to the discontinuance of its business. They met again on January 12, 1931, authorized the withdrawal of bonds securing public moneys, and appointed tellers for a stockholders' meeting to be held the same day. The stockholders met on March 20, 1931, voted to place the Metropolitan "in voluntary liquidation under the provisions of Sections 5220 and 5221 of the United States Revised Statutes, to take effect March 20, 1931", and appointed three liquidating agents who were to render semiannual reports to the Comptroller, showing the progress of the liquidation and annual reports to the stockholders.

The petitioner did not sustain a loss in 1930 upon its investment in Metropolitan stock.

OPINION.

MURDOCK: The petitioner claims a loss on its investment in the stock of Metropolitan. A loss from an investment in stock is the difference between the cost of the stock and the amount realized. Sec. 111, Revenue Act of 1928. It is sustained when the transaction is closed for tax purposes either by a sale, exchange, or disposition of the stock, by the stock becoming worthless, or by a liquidation of the corporation in which the stockholder receives less than the cost of his stock. Here the loss is claimed by reason of a liquidation. See section 115(c). The parties have stipulated that had Metropolitan liquidated in 1930 the amount of the loss would have amounted to $654,467.75. The Commissioner did not intend to stipulate that the petitioner actually sustained any loss in 1930. He contends that there was no liquidation in 1930 and no loss in that year for tax purposes. He apparently intended to agree that the cost of the petitioner's stock exceeded, by the stipulated amount, the sum which the petitioner might have expected to receive had the corporation been liquidated in 1930 by the sale of its assets at their then value and the distribution of the proceeds to the stockholders. But Metropolitan was not liquidated in 1930. It had a great wealth of assets which were not to be disposed of in a hurry. The record does not show how or when the assets were actually disposed of or how much the petitioner eventually received. There is good reason to believe that the liquidation took place after 1930. Not only does the record fail to show that the petitioner sustained a loss in 1930, but it fails to show that a loss of any particular amount was ever sustained. The petitioner's theory seems to be that it can balance its prospective share of the net assets of Metropolitan against the cost of its stock and take a deduction of the difference. It cites no authority for that contention. No sufficient reason for such an anticipation of a loss has been shown. The petitioner in brief states that it also owned the stock of Northwestern. That fact was not proven and would not have aided the petitioner had it been proven. Cases were cited to show that a loss on stock need not always await dissolution of the corporation. That is, of course, true but here there was not only no dissolution but no liquidation and consequently no fixing of the amount of the loss. We can not say that the Commissioner erred in denying the deduction.

Decision will be entered under Rule 50.