Riggs Nat'l Bank v. Commissioner

RIGGS NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Riggs Nat'l Bank v. Commissioner Docket No. 30903. United States Board of Tax Appeals 17 B.T.A. 615; 1929 BTA LEXIS 2274; September 27, 1929, Promulgated *2274 1. Where one corporation, which owns all of the stock of a second corporation, causes the second corporation to be dissolved, and takes over its assets, which have a value less than the cost of the stock, the first corporation has a deductible loss which it may claim in computing its income for the period following affiliation. Remington Rand, Inc. v. Commissioner, 33 Fed.(2d) 77, followed; Farmers Deposit National Bank,5 B.T.A. 520; Interurban Construction Co.,5 B.T.A. 529; H. S. Crocker Co.,5 B.T.A. 537, distinguished. 2. In computing the deductible loss, adjustment must be made for operating losses of the corporation whose stock is sold, which were sustained during the period of affiliation. William M. Williams, Esq., and Paul F. Myers, Esq., for the petitioner. Eugene Meacham, Esq., for the respondent. PHILLIPS *615 The Commissioner determined a deficiency of $5,710 for the period from June 10 to December 31, 1922. The petitioner instituted this proceeding for a redetermination of such deficiency, alleging that the Commissioner erred in disallowing as*2275 a deduction from income for said period a loss of $53,463.85 suffered by the petitioner when the assets of the Hamilton Savings Bank were taken over by petitioner. FINDINGS OF FACT. The petitioner is a corporation organized under the National Banking Act, with principal office at 1503 Pennsylvania Avenue, N.W., Washington, D.C. A bank known as the Central Savings Bank started to do business in Washington, D.C., about August 1, 1917. On July 1, 1920, it was succeeded by the Hamilton Savings Bank. Under neither of these names was this institution successful. During 1921 there were substantial withdrawals of deposits including the deposits of the directors and officers and their families. During the period July 22 to July 28, 1921, the accounts of this savings bank were examined by a Federal bank examiner, this examination disclosing substantial impairment of its capital. Under date of September 1, 1921, the savings bank was notified by the Comptroller of the Currency that its capital was impaired to the extent of $34,193. Under date of November 3, 1921, the Comptroller of the Currency again notified the board of directors of the savings bank that its capital was *616 *2276 impaired to the extent of $47,589. The directors of the savings bank were instructed to take immediate steps to remedy the situation. On or about September, 1921, the Comptroller of the Currency urged and solicited the Riggs National Bank to take over the Hamilton Savings Bank as a matter of good public policy. He represented to the officers of the Riggs National Bank that the condition of the savings bank was bad; that a run on the bank was imminent, that the bank would have to be closed if a run occurred and that other banks of the city might become involved. Responding to the solicitation of the Comptroller of the Currency, the Riggs National Bank, in the latter part of 1921 and the first part of January, 1922, purchased, through persons identified with the bank, all of the outstanding capital stock of the Hamilton Savings Bank and paid therefor $305,560. After the purchase of the stock of the savings bank the Riggs Bank found the condition of the savings bank to be much worse than had been anticipated at the time of the purchase of the stock. Before the affairs of the savings bank were fully liquidated, the Comptroller of the Currency determined that the capital of the*2277 savings bank was impaired to the extent of $96,096.99. The Riggs Bank caused the savings bank to be nationalized on or about May 10, 1922. On or about June 10, 1922, the savings bank, as nationalized, was merged with the Riggs Bank under Act of Congress of November 7, 1918, and the petitioner surrendered the shares of capital stock of said savings bank and received in return therefor all of its assets. The value of the assets of the savings bank at the time of its liquidation on June 10, 1922, was $210,610.93. The difference between the cost of the stock of the savings bank ($305,560) and the value of the assets received upon its liquidation ($210,610.93) in the amount of $94,949.07, was written off the books of the Riggs Bank as a loss. The Hamilton Savings Bank had no good will. In determining the tax liability of the petitioner the Commissioner divided the year 1922 into two periods, viz: (1) the period from January 1, 1922, to June 10, 1922, during which time he determined the Riggs National Bank and the Hamilton Savings Bank to be affiliated corporations and determined their taxable income upon the basis of a consolidated return for such period; and (2) the period*2278 from June 10, 1922, to December 31, 1922, during which time there was no affiliation. During this latter period the taxable income and tax liability of the petitioner were determined *617 by the Commissioner upon the basis of its income without respect to affiliation. During the period of affiliation the Hamilton Savings Bank had an operating deficit of $41,485.22. In determining the consolidated net income subject to tax during the period ended June 10, 1922, the Commissioner offset such loss against the operating income of the Riggs Bank. The Riggs Bank claimed as a deduction for the period from June 10, 1922, to December 31, 1922, the amount of $53,463.85 ($94,949.07 less $41,485.22). The Commissioner refused to allow such deduction and computed the deficiency accordingly. OPINION. PHILLIPS: There is no dispute between the parties as to the cost to petitioner of the stock of the Hamilton Savings Bank nor is there any dispute as to the value of the assets of that bank taken over by the petitioner, other than good will. It is urged on behalf of the Commissioner that, in addition to the other assets of the Hamilton Savings Bank, the petitioner acquired the good*2279 will of that bank and that such good will had value. The record contains much testimony with respect to the losses of the Savings Bank, the character of its loans and investments, its relations to its depositors and the size and number of deposits, its reputation of doubtful solvency and opinion testimony as to the lack of value of any good will. Without reciting the details of the testimony, it appears sufficient to state that it convincingly establishes that no good will was acquired by the petitioner as a result of its acquisition of the stock and liquidation of the assets of this Savings Bank. It is next urged by respondent in substance that petitioner and the Savings Bank were affiliated, that the loss in question arose out of the affiliated status and that no loss is deductible. The petitioner contends, on the other hand, that it sustained a loss which it may deduct and that such loss was not one sustained by the affiliation but by it at the time the affiliation was dissolved. Ordinarily there could be no question that a corporation which purchases stock and later exchanges such stock for other assets, realizes a taxable gain or sustains a deductible loss. The difficulty*2280 arises from the application of section 240(a) of the Revenue Act of 1921, which provides as follows: That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed *618 and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner. Prior to January 18 1922, a consolidated return by affiliated corporations was required, not optional. The question arose as to the method by which the consolidated income was to be determined. Were the incomes and deductions of each of the affiliated corporations to be computed separately and added together or were the affiliated companies to be treated as members or branches of a whole and the consolidated income computed on that basis? In many cases it made no difference which method*2281 was used; in others the difference in result was substantial. The Board reached the conclusion that it was the intention of Congress that the consolidated income of affiliated corporations should be computed by treating the affiliated group as a whole and the separate corporations as parts. Only in that manner could taxable income and invested capital be computed so as to avoid duplications and prevent evasions. The Board had also decided that a corporation derived no taxable gain and sustained no deductible loss by reason of dealings in its own stock. Later the Board decided that there was no taxable gain to the affiliated group when one of the affiliated corporations sold stock of another of the affiliated group. ; ; . These were all cases where the attempt was made to increase the consolidated income by reason of a sale of capital stock to one member of the group. The situation here is different. For the period from January 1 to June 10, 1922, the Hamilton Savings Bank and the Riggs National Bank were affiliated*2282 and their income was computed upon a consolidated basis. For the remainder of 1922 there was no affiliation. The income and tax liability for each of these periods is separately computed. It is not claimed that the loss now in question affects the consolidated income. The consolidated income of the Hamilton Savings Bank and the Riggs National Bank during the period of affiliation from January 1 to June 10, 1922, has been computed without reference to such loss. The loss is claimed by the Riggs National Bank for a period during which it was not affiliated with the Hamilton Savings Bank, and during which it is required to make a return of its own income. It does not follow, because the affiliated group sustained no loss during the period of affiliation, that the owner of the stock did not sustain a loss at the time the affiliation was dissolved by sale of the stock, which loss is available as a deduction to such owner in computing income arising outside of the affiliation. *619 It is urged that the Board had this question before it for decision in *2283 , and . In those cases one corporation was affiliated with another until February 28, 1920, when the parent sold all of the stock of the subsidiary. The Commissioner refused to allow a loss on such sale but computed a gain. It is not clear whether this gain was included in the income during the period of affiliation or in the income of the parent for that portion of 1920 which was outside of the period of affiliation. The deficiency was asserted by the Commissioner as for the year 1920 and was computed as upon a consolidated return. Upon appeal to the Circuit Court of Appeals that court held that the sale took place outside the period of affiliation and that the parent company realized a gain which was part of its net income. . It must be concluded from the opinion in that case that the gain was to be included as income of the Baker-Vawter Co. for that portion of the year 1920 which followed the dissolution of the affiliation. Following the authority of that decision, we are of the opinion that petitioner*2284 is entitled to deduct the loss from its income for that portion of its taxable year which falls outside the period of affiliation. The difference between the cost to petitioner of the stock of the Savings Bank and the value of the assets received in liquidation was $94,949.07. A substantial part of this difference was due to the loss sustained in the operation of the Savings Bank from January 1 to June 10, 1922, amounting to $41,485.22. During this period petitioner and the Savings Bank filed a consolidated return of their income. On such consolidated return the operating loss of the Savings Bank served as a deduction in computing taxable income. This loss served to reduce the taxable income of the petitioner for that period by the amount of the loss, and tax was paid on the income of petitioner after it had been adjusted to reflect this operating loss of its subsidiary. Petitioner originally claimed that its deductible loss for the period following affiliation was $53,463.85; the actual loss sustained in 1922 less the amount allowed in computing the affiliated taxable income for the first part of 1922. It suggests that it may be limited to such amount by the reasoning in*2285 , to which we would add . It suggests, however, that under , it may be entitled to deduct the whole loss without reference to the amount claimed and allowed on the affiliated return; in other words, that the consolidated income from January 1 to June 10, 1922, is its income less the loss of its *620 subsidiary, and that its income for the remainder of 1922 is to be reduced by $94,949.07, which includes the loss of the subsidiary. We are of opinion that petitioner's first view is the sounder. It is not lightly to be assumed that Congress intended that the same taxpayer should have the same reduction twice. With the greatest respect for the court which decided the Remington-Rand case, we can not agree with the basis they use for computing gain or loss in such a case, and, having in mind that appeals lie from our decisions to the several Circuit Courts, we should be lax in our duty did we not express our views when only one of the Circuit Courts has*2286 spoken. Reviewed by the Board. Decision will be entered under Rule 50.