Fidelity Nat'l Bank & Trust Co. v. Commissioner

FIDELITY NATIONAL BANK & TRUST CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Fidelity Nat'l Bank & Trust Co. v. Commissioner Docket No. 17708. United States Board of Tax Appeals 14 B.T.A. 904; 1928 BTA LEXIS 2892; December 21, 1928, Promulgated *2892 Petitioner sold certain securities to one of its affiliated companies; subsequently and during the same calendar year, the affiliation was dissolved. Held, that the sale was an intercompany transaction with neither loss nor gain resulting. Gould Coupler Co.,5 B.T.A. 499. Justin D. Bowersock, Esq., for the petitioner. Phillip M. Clark, Esq., for the respondent. MORRIS *904 This proceeding is for the redetermination of a deficiency in income and profits taxes for 1919 in the amount of $8,681.62. The petition sets forth the following allegations of error: 1. The respondent erred in holding that petitioner and the Concordia Loan & Trust Co. were required under the revenue act then in force to file consolidated returns. *905 2. The respondent erred in holding that the sale by petitioner to the Concordia Loan & Trust Co. of certain securities issued by the Salina Northern Railway Co. was an intercompany transaction and, therefore, not deductible in computing petitioner's net income. 3. The respondent erred in holding, under the special circumstances of this case, that said sale did not represent an ascertained*2893 loss actually sustained by petitioner during the year 1919. FINDINGS OF FACT. The petitioner is a national bank which was organized and incorporated under the laws of the United States in 1919, and its principal place of business is in Kansas City, Mo. In 1919, and for 19 years prior to the consolidation hereinafter referred to, the petitioner owned substantially all of the capital stock of the Concordia Loan & Trust Co., operating as a separate institution with separate assets and a separate board of directors and officers. Negotiations for consolidating the petitioner and the National City Bank of Kansas City began late in 1918, and on February 26, 1919, a contract was entered into between the stockholders of the Fidelity Trust and the National City Bank agreeing upon the general terms of the consolidation, provided the necessary action by stockholders' meetings could be obtained. Thereafter, on March 16, 1919, a contract was entered into between those two corporations, which was approved by the stockholders of each company. Pursuant to that agreement the Fidelity Trust Co., which had theretofore conducted its business under the laws of the State, was converted into*2894 a national bank, under the name Fidelity National Bank & Trust Co., and on May 31, 1919, this bank was duly consolidated with the said National City Bank. Each of the consolidated banks had assets in excess of the amount necessary to make up the capital of the consolidated bank. The agreement of consolidation provided that such excess assets, or any undesirable assets, should be transferred by each company prior to the effective date of the consolidation to a trustee or trustee for the ultimate benefit of its share holders. The Fidelity Trust Co. had among its assets certain securities of the Salina Northern Railway, a short-line railroad operated from Salina, Kans., to Downes and Osborne, Kans., connecting the Union Pacific road and the Missouri Pacific, which it acquired at a cost of $243,204.33. These securities were issued for the purpose of building the road and were acquired prior to its completion. It was finally completed and operated but was never able to pay operating expenses and it, therefore, went into the hands of the receivers and the properties *906 were at some time thereafter sold. Because of the condition of said railroad these securities were of*2895 doubtful value and were recognized as undesirable investments for either trust companies or national banks. It having been agreed in the consolidation agreement, hereinabove referred to, to take out all assets of an undesirable character, these securities were, on February 15, 1919, sold to the Concordia Loan & Trust Co. in consideration of the payment of $95,000 in cash. The Concordia Company stock, which the petitioner owned, was also recognized as an improper and undesirable asset under the consolidation agreement and it too, together with other excess assets, was transferred to H. C. Flower, L. W. Hall, and G. T. Tremble, as trustees, to hold in trust for the stockholders of record of the Fidelity Trust Co., on May 29, 1919, and after the consolidation of the two banks the consolidated company had no interest in said Concordia Loan & Trust Co. During the first five months of 1919 the Concordia Company was affiliated with the Fidelity Trust Co. and its successor, the Fidelity National Bank & Trust Co., but after the consolidation, and for the remaining seven months of 1919, the Concordia Company was not a member of the affiliated group. Respondent consolidated the returns*2896 of the petitioner and the Fidelity Trust Co. and several subsidiaries, including the Concordia Company, for the first five months of the year, but excluded the latter company for the remainder of the year. For 1919 the petitioner filed a consolidated return not including the Concordia Company and deducted from gross income the difference between the cost of the Salina Northern Railway securities and their sale price as a loss sustained during that year. He disallowed the loss for the reason that at the time of the sale the Fidelity Trust Co. and the Concordia Company were affiliated and, therefore, the sale was an intercompany transaction. OPINION. MORRIS: This proceeding in its last analysis presents but one issue, namely, whether petitioner sustained a loss within the meaning of the taxing statutes by the sale of certain securities to one of its subsidiaries. The cost and sale price of these securities are not in question, but only the legal significance flowing from the transaction under the applicable provisions of the Revenue Act of 1918. It is admittedly true that the Fidelity Trust, and later the petitioner, were affiliated with the Concordia Loan & Trust Co. during*2897 the first five months of 1919, and it is also true that for the remaining seven months of 1919 the Concordia Loan & Trust Co. was not affiliated with either of the aforementioned companies. *907 The sale which gives rise to the question of loss occurred in February, 1919, while the affiliated status existed and respondent holds that under these circumstances the transaction must be considered one between affiliated companies with neither loss nor gain resulting. It is our opinion that in this determination the respondent is correct, and that this is true regardless of the fact that subsequently and during the same calendar year the affiliated status was dissolved. This principle has been before the Board and has been decided adversely to the contention of the petitioner in a number of cases. In , we distinctly stated that during the continuance of the affiliated status, intercompany obligations and transactions would be disregarded for the purpose of computing the consolidated income and tax liability. See also *2898 ; ; and . The question presented in the above cited cases was whether a gain or loss resulted from dealing in the stock of its subsidiary by the parent company, and we held in each case that neither gain nor loss resulted. The doctrine laid down in these cases, in our opinion, applies with equal force to the present set of facts. Judgment will be entered for the respondent.