Merchants National Bank v. Commissioner

OPINION.

Littleton :

The contention advanced by the petitioner to the effect that it should be allowed to report a part of its income on the accrual basis when it is otherwise on the cash receipts and disbursements basis has previously been decided by the Board adverse to its contentions, Appeal of Chatham & Phenix National Bank, 1 B. T. A. 460; Appeal of Bank of Hartsville, 1 B. T. A. 920. In the Appeal of Madison & Kedzie State Bank, 1 B. T. A. 922, the Board said:

When a bank keeps its books of account on a cash basis, discount is income only when it is received; upon an accrual basis discount becomes income as it is earned. •

We fail to find anything in the petitioner’s argument as to consistency which would cause us to change our views previously expressed. See Appeal of Henry Reubel, 1 B. T. A. 676.

The second contention advanced by the petitioner is that the Commissioner erroneously refused to permit it to include good will in invested capital, which it acquired in the acquisition of the assets of the First National Bank through the merger of this bank and the petitioner in 1916.

The substance of the transaction in question is that after a basis of merger had been agreed upon, the entire capital stock of the First National Bank, $1,000,000, was acquired by the petitioner through an exchange of $500,000 additional stock issued by it. The exchange was handled through sjmdicate managers, with whom the additional stock was deposited and who made the exchange with the stockholders of the First National to the extent they elected to take stock, which all did except in the case of a small minority who elected to take cash and to whom it was necessary to pay cash in the amount of $49,280, which cash was obtained by the sale of a sufficient amount of the additional stock at $28 per share. After the stock was turned over to the petitioner, it effected a liquidation of the First National Bank and thereby became the owner of the assets of the First National Bank.

The Board is of the opinion that through the above transaction the petitioner acquired assets by the payment of tangible property therefor, viz., stock of the First National Bank. Prior to the time when liquidation was effected the petitioner was merely a stockholder, but after liquidation it was vested with full and complete ownership of the assets. Appeal of Regal Shoe Co., 1 B. T. A. 896. In the aforementioned decision we said:

It is undoubtedly true, as appears from the resolution of January 31, 1907, that the taxpayer at all times intended to acquire the business and assets of the three predecessor corporations, but the fact is that before it acquired these assets it had acquired the stock which the statute characterizes as tangible property, and the assets were acquired not for the stock of the taxpayer company but in liquidation of the stock of the other three corporations which it held. '

In order to dispose of this issue, two remaining questions must be answered:

(1) What was the cash value of the assets paid in?

(2) Was good will of a value of $294,254.64 paid in?

It does not seem that there can be much question that the entire assets paid in had a value at least equal to $1,400,000, the amount claimed therefor by the petitioner. While we do not have a specific cash valuation of the assets themselves, we do have an undisputed market value of the stock of both the buyer and the seller at the time of the merger. The market value of the stock of the former was $145 and was considered in the merger at $140, while the market value of the stock of the petitioner was from $28 to $30 and was considered in the merger at $28. Whether we take the 10,000 shares of the former at $140 or 50,000 shares of the petitioner at $28, we arrive at a total value in each instance of $1,400,000 which is the valuation claimed by the petitioner. Whether the market value of the petitioner’s stock was the same after the additional issue of stock is not definitely stated, though convincing evidence of its value then is shown by the fact that in its issuance the stockholders of the First National Bank, except a very small minority, willingly exchanged their stock for the new stock, when under the term of the merger they could have taken cash instead of stock. We consider the evidence sufficient to establish the cash value of the assets of the First National Bank at the time paid in to the petitioner of at least $1,400,000.

The remaining question is whether good will of a value equal to the difference between the net book value of the First National Bank when acquired or $1,105,745.36, and the $1,400,000 found above, represents good will.

The following paragraph from the sales agreement under which the merger took place and which refers to the assets to be taken over shows that whatever good will the First National Bank had and was capable of transfer, was acquired by the petitioner:

All of the property of every nature and kind, including good will of tlie First National Bank of Baltimore, (save as hereinafter expressly excepted.)

A national bank is capable of having good will as an asset and this has been recognized by the Commissioner, I. T. 1995, C. B. 111-1, p. 145.

The failure of either bank to carry good will on its books is explained by the rulings of the Comptroller of the Currency, which prohibit the showing of any good will upon a financial statement of a national bank. That the petitioner immediately charged off the good will which it considered was acquired in the merger is ascribable to the same reason as a failure to carry good will on its books.

That a bank which has been in business since 1863, had been paying dividends at the rate of 7 per cent on its capital stock, and had grown to the position of one of the leading banks in Baltimore, Md., did not thereby build up an intangible asset of substantial value— whether we call it going concern value or good will value is not material — does not impress the Board as tenable. The substantial line of deposits which came over to the petitioner was certainly of value. The further fact can not be overlooked that many of the officers and employees of the First National Bank came along to occupy similar positions with the petitioner, so that old customers would be assured of the same treatment accorded heretofore.

The further fact must not be overlooked that we are dealing with a national bank which is under strict Government supervision. When at any time tangible assets are being carried in excess of conservative valuation, the United States will require that the proper valuation be placed on the assets. This would indicate that the tangible assets as taken over by the petitioner were considered on a conservative present value at the time taken over.

Value of good will is a question of fact and a taxpayer claiming a value for good will must prove facts sufficient to show value thereof at date of acquistion. Appeal of Schulz Baking Co., 3 B. T. A. 470.

It is very difficult to establish the exact cash value of the intangible asset good will, but the Board is convinced from a consideration of all the evidence, that a valuation of intangibles based upon the difference between the net book value of the tangibles at date of acquisition, $1,105,745.36, and the amount paid therefor, $1,400,000, is fair and reasonable, and to this extent the appeal -of the petitioner is sustained. This amount is, of course, not subject to the usual limitations of acquisition of intangibles for stock since tangible assets of an equivalent cash value were given therefor.

Judgment will be entered on 15 days’ notice, under Bule 50.

Phillips concurs in the result only.