Peoples Bank v. Commissioner

THE PEOPLES BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Peoples Bank v. Commissioner

Docket No. 97143.

United States Board of Tax Appeals

43 B.T.A. 589; 1941 BTA LEXIS 1478;

February 13, 1941, Promulgated

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Petitioner, a banking institution, closed its doors in May 1932 and in order to make possible its reopening its depositors relinquished and canceled one-half their deposits. Petitioner's stockholders agreed by separate contract with these depositors that these relinquished deposits would be paid before the stockholders claimed any dividends. The bank reopened in December 1932. In 1936 petitioner's stockholders paid $15,897.64 pro rata on the canceled deposits. Held, petitioner is not given immunity from collection of United States taxes by section 3798 of the Internal Revenue Code, since no lien on its future earnings was given the depositors in lieu of their canceled deposits; held, further, petitioner is not entitled to deduct for the year 1936 as an ordinary and necessary business expense the sum of $15,897.64 paid to the old depositors.

H. H. Hunt, C.P.A., for the petitioner.

John R. Stivers, Esq., for the respondent.

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ARUNDELL

These proceedings are brought for redetermination of the following deficiencies:

Calendar Year	Income tax	Excess profits tax
1934	$489.67
1935	1,156.07	$60.23
1936	2,285.54	196.75

Two issues are presented: (1) Whether, in the circumstances of the present case, the deficiencies asserted may be assessed and collected in face of the provisions of section 3798 of the Internal Revenue Code; (2) whether petitioner may deduct from its 1936 income, as an ordinary and necessary business expense, the sum of $15,897.64 paid out by its stockholders in liquidation of deposit accounts of the petitioner which the depositors had agreed to cancel in 1932.

The facts have been stipulated and are so adopted as our findings. The portion of them material to the decision of the issues involved is set out hereinafter.

FINDINGS OF FACT.

Petitioner is a Georgia corporation, with its principal office at Carrollton, Georgia. It was organized on November 10, 1909, and operated continuously until May 5, 1932, at which time it was closed and placed in the hands of the State Department of Banking.

Immediately after May 5, 1932, a meeting of the depositors and stockholders of the petitioner and the Superintendent of Banks of the State of Georgia was held to make plans for the reopening of the closed bank. The plan adopted provided for the relinquishment and cancellation by the depositors of 50 percent of their deposits and for the liquidation of the remaining 50 percent, two-thirds in cash and the remaining one-third in the petitioner's stock. Each depositor signed an agreement embodying these provisions and containing the following sentence:

I understand that there is a separate agreement made by the stockholders of said Peoples Bank at the suggestion of said R. E. Gormley for the benefit of the depositors of said Peoples Bank who have cancelled 50 per cent of their deposit account. This agreement, however, is the agreement of the stockholders of said Peoples Bank and is not binding on said Peoples Bank.

The agreement thus alluded to in this quoted statement was executed in June 1932 and provided that the stockholders would not claim any dividends on their stock until the depositors had been reimbursed for the 50 percent of their deposits which they relinquished and canceled. It was agreed additionally that, after the depositors had been paid the relinquished 50 percent of their deposits, the stock issued to depositors would be redeemed out of the "earnings, profits, and collections" of the petitioner. There was no liability on the part of the bank to pay the depositors any part of the 50 percent of the deposits which were released.

In October 1932 the Reconstruction Finance Corporation, in view of the agreement by which the bank was relieved of one-half its deposit obligations, loaned the petitioner $225,000, and the bank reopened for business on December 12, 1932. Petitioner has operated continuously since.

In the year 1936 there remained unpaid of the canceled deposits the sum of $158,976.40. During that year 10 percent of that amount or $15,897.64 was paid pro rata to the old depositors by the petitioner's stockholders. Additional payments were made during the period 1937-1939, leaving a balance unpaid in the latter year of $96,065.59.

The petitioner has now sufficient free assets to pay the deficiencies asserted by the respondent.

OPINION.

ARUNDELL: The petitioner contests the whole of the deficiencies asserted here on the basis of section 3798 of the Internal Revenue Code, which is set out in the margin. ^{*1482 accepting in lieu thereof a lien on its future earnings, no tax shall be assessed or collected by the United States which shall diminish the assets available and necessary to the full payment of such claims. The statute invoked, however, can have no application in the instant case. The release of the petitioner from liability for 50 percent of the deposits, given by the depositors in their agreement with the petitioner, was unconditional. Moreover, by express provision of that agreement, the contract entered into by the stockholders and the depositors, looking to reimbursement for the canceled deposits before the stockholders claimed any dividends, is not binding on the petitioner. In these circumstances, no lien on petitioner's future earnings may be said to exist in any legally recognizable form.}

The agreement of petitioner's stockholders, standing alone, does not lend support to petitioner's argument. There is an indication, it is true, in that agreement that the future earnings of the bank were the contemplated source from which the depositors should be reimbursed for their canceled deposits, and, where such an indication is present in certain situations, the courts have created equitable liens under principles stated in Walker v. Brown,165 U.S. 654">165 U.S. 654, 664:

The doctrine may be stated in its most general form that every express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, therein described or identified, a security for a debt or other obligation, or whereby the party promises to convey or assign or transfer the property as security, creates an equitable lien upon the property so indicated, which is enforceable against the property in the hands not only of the original contractor, but of his heirs, administrators, executors, voluntary assignees and purchasers or encumbrancers with notice.

See also United States v. Butterworth-Judson Corporation,267 U.S. 387">267 U.S. 387; Ingersoll v. Coram,211 U.S. 335">211 U.S. 335, 368.

The present facts do not present a situation appropriate for the application of this doctrine. The contracting parties, the stockholders, are without power to bind the bank's future earnings, which become petitioner's property as they arise and remain so until the declaration of dividends. Southern Pacific Co. v. Lowe,247 U.S. 330">247 U.S. 330; In re Sutherland, 23 Fed.(2d) 595, 599; Central of Georgia Railway Co. v. Central Trust Co. of New York,135 Ga. 472">135 Ga. 472; 69 S.E. 708">69 S.E. 708.

In the absence of an indication on the part of Congress to use the term "lien" here in some special sense, see Revenue Act of 1938, Conference Committee Report, 75th Cong., 3d sess., H.R. 2330, it must be taken as used in the customary legal sense in which we have considered it. It thus can have no application to the facts present here and the petitioner's claim under section 3798 of the Internal Revenue Code for immunity from the deficiencies for all the years here involved must be denied.

There remains for disposal the question of whether petitioner is entitled for the year 1936 to deduct, as ordinary and necessary business expense, the sum of $15,897.64 paid to the petitioner's depositors in partial liquidation of their released deposits. The respondent contends that the petitioner did not pay the sum sought to be deducted, but that such amount was paid by its stockholders.

The stipulation of the parties entered herein states plainly that the petitioner's stockholders paid the $15,897.64 for which the deduction is sought, and a sample of the check used in making the payments is offered in substantiation. If we stop here, in the absence of further proof as to the source from which the stockholders derived these funds, the petitioner may not have the deduction, since the payments were made by another. New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435; Morris Plan Co. of Binghamton,26 B.T.A. 772">26 B.T.A. 772; see section 23(a) of the Revenue Acts of 1934 and 1936.

It may be assumed that the petitioner furnished the funds for the payments to the depositors; however, the way to the allowance of the deduction is still not clear, since the payment of these funds by petitioner to its stockholders did not in itself constitute payment of the old deposit liabilities but was rather a distribution to petitioner's stockholders of its earnings and was therefore in the nature of a dividend for which no deduction may be allowed. The present situation does not, so far as we are shown, differ greatly from that presented in Morris Plan Co. of Binghamton, supra, where the taxpayer had been saved from insolvency through advances made to it under a contract by which its stockholders deposited their stock with trustees who were to hold such stock and collect dividends thereon and out of these dividends were to pay off the advances. The taxpayer claimed as a deduction certain amounts paid by it to the trustees and used by them to discharge interest due on the advances. It was held that petitioner's action did not constitute the payment of interest but merely the distribution of a dividend, for which no deduction may be allowed. So far as the facts in the instant case have been disclosed, they bear close similarity to those in the case cited; in both instances the agreements relative to the payment of the obligations were made not in the name of the taxpayer, but in the names of their stockholders; in neither case did the taxpayer appear as a party to the agreement or assume any obligation thereunder; in both cases the role of the taxpayer was merely to distribute its earnings to its stockholders, without participation in the use to which they were thereafter put. Although in the instant case it does not appear how the amounts in question were distributed to the stockholders, in the absence of evidence on this point it must be assumed that distribution was made through the declaration of a dividend. The similarity between the two cases is thus further confirmed.

In these circumstances it must be held that petitioner is not entitled to the deduction which it claims.

Decision will be entered for respondent.

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Footnotes

• 1. SEC. 3798. EXEMPTION OF INSOLVENT BANKS FROM TAX.

  (a) Whenever and after any bank or trust company, a substantial portion of the business of which consists of receiving deposits and making loans and discounts, has ceased to do business by reason of insolvency or bankruptcy, no tax shall be assessed or collected, or paid into the Treasury of the United States on account of such bank, or trust company, which shall diminish the assets thereof necessary for the full payment of all its depositors; and such tax shall be abated from such national banks as are found by the Comptroller of Currency to be insolvent; and the Commissioner of Internal Revenue, when the facts shall appear to him, is authorized to remit so much of the said tax against any such insolvent banks or trust companies organized under State law as shall be found to affect the claims of their depositors.

  (b) Whenever any bank or trust company, a substantial portion of the business of which consists of receiving deposits and making loans and discounts, has been released or discharged from its liability to its depositors for any part of their claims against it, and such depositors have accepted, in lieu thereof, a lien upon subsequent earnings of such bank or trust company, or claims against assets segregated by such bank or trust company or against assets transferred from it to an individual or corporate trustee or agent, no tax shall be assessed or collected, or paid into the Treasury of the United States on account of such bank, or trust company, such individual or corporate trustee or such agent, which shall diminish the assets thereof which are available for the payment of such depositor claims and which are necessary for the full payment thereof.

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