Union Nat'l Bank v. Commissioner

UNION NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Union Nat'l Bank v. Commissioner Docket No. 30264. United States Board of Tax Appeals 18 B.T.A. 468; 1929 BTA LEXIS 2034; December 11, 1929, Promulgated *2034 Held, the transfer of the deposit accounts of one banking institution to another and of sufficient assets to cover the deposit liabilities thus assumed by the transferee bank and the payment by it of a consideration for such transfer was in the nature of a purchase of valuable custom or good will and did not constitute an ordinary and necessary expense of doing business within the meaning of section 234(a)(1) of the Revenue Act of 1921. H. H. Shelton, Esq., for the petitioner. John D. Kiley, Esq., for the respondent. BLACK *468 This is an appeal from the determination by the respondent of a deficiency in income taxes for the years 1922 and 1923 in the aggregate sum of $10,279.11. The amount of deficiency determined for *469 1922 is $5,701.52; for 1923, $4,577.58. In its petition the taxpayer charges error on the part of the Commissioner in disallowing as a deductible expense $15,000 paid in 1922 and $20,000 paid in 1923 in a business transaction which it had with the Mechanics Bank & Trust Co. of Knoxville, Tenn. The Commissioner disallowed the deductions claimed on the ground that they were not ordinary and necessary expenses*2035 of doing business within the meaning of section 234(a)(1) of the Revenue Act of 1921, but were capital investments for the purchase of assets in the nature of valuable custom or good will. FINDINGS OF FACT. The Union National Bank (petitioner) is and was during the years 1922 and 1923 a banking corporation with its place of business at Knoxville, Tenn. In the early part of 1922 the Mechanics Bank & Trust Co., also a banking institution of Knoxville, Tenn., found itself in some financial difficulties and took up the matter of its condition and the possibility of disposing of some of its assets with the petitioner. Petitioner's directors considered the proposition, and under date of May 24, 1922, authorized its officers to make the Mechanics Bank & Trust Co. an offer. On May 25, 1922, such an offer was made and accepted and the terms thereof are stated in the written offer, which reads as follows: We hereby submit the following proposition: We agree to take over all of your commercial accounts, savings accounts, certificates of deposit and bank deposits, and assume and guarantee the payment thereof to depositors or parties entitled thereto, you to turn over to us all the*2036 cash and liquid assets together with such papers and notes as we may select from your resources, sufficient to equal the amount of the liabilities we assume; we to give you in consideration for this business Thirty-five Thousand Dollars ($35,000), Fifteen Thousand Dollars ($15,000) of which is to be paid on June 1st, 1922, the balance of Twenty Thousand Dollars ($20,000) to be paid on or before January 10, 1923. It is understood that this transfer, if accepted, is to take place as of June 1st, 1922 and that all adjustments of interest on liabilities or assets to be adjusted as of that date, and thereafter your Bank shall cease to be a bank of deposit. This matter has been submitted to our Board and as officers of the Union National Bank we are authorized to submit the above proposition. The above offer by the Mechanics Bank & Trust Co. was accepted, as evidenced by the following notation written on the bottom of the page: We hereby accept the above proposition, this May 25, 1922. MECHANICS BANK & TRUST COMPANY, By S. B. LUTTRELL, President, J. A. WALLACE, Cashier. *470 The assets thereupon transferred by the Mechanics Bank & Trust Co. to the petitioner*2037 consisted of cash and amounts due it by other banks and commercial paper and other notes of the value of $1,471,377.11, and were equal in amount to the liabilities which petitioner assumed when it took over the deposit accounts of the Mechanics Bank & Trust Co. The number of deposit accounts which petitioner took over in this transaction was about 3,500. In addition to agreeing to pay these deposit liabilities, the petitioner paid to the said Mechanics Bank & Trust Co. in consideration of such business transaction, $15,000 in 1922 and $20,000 in 1923. These two items were deducted by petitioner as expenses from its gross income for the respective years 1922 and 1923. In petitioner's corporation income-tax return for 1922 it set up the item of $15,000 which it seeks to deduct from its gross income for that year in the following language: "Part payment on contract for accounts and business of Mechanics Bank & Trust Company, Knoxville, Tennessee, $15,000." In petitioner's corporation income-tax return for 1923 it set up the item of $20,000 claimed as a deduction for that year in the following language: "Balance on contracts for accounts and business of Mechanics Bank & Trust Company, *2038 Knoxville, Tennessee, $20,000." Respondent refused to allow these deductions, holding that the items were not ordinary and necessary expense of doing business within the meaning of section 234(a)(1) of the Revenue Act of 1921, but represented capital investments, and asserted deficiencies for 1922 and 1923, as hereinbefore stated, and from this determination the petitioner had duly appealed. OPINION. BLACK: Section 234(a)(1) of the Revenue Act of 1921 provides that in computing net income there shall be allowed as deductions all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. It is contended by the petitioner that the item of $15,000 paid by it to the Mechanics Bank & Trust Co. in 1922 and a similar payment of $20,000 made in 1923 were such expenses as contemplated by the statute above cited and should have been allowed as proper deductions by the Commissioner in the respective years mentioned. We do not agree with this contention. The amounts paid by the taxpayer corporation in this business transaction were not expenditures constituting ordinary and necessary expenses of doing business within the meaning*2039 of the statute above cited, but were capital expenditures in payment of assets in the nature of valuable custom or good will and therefore do not constitute allowable deductions. *471 We think that the contract of the parties, which has been set out in full in our findings of fact herein, clearly shows that the $35,000 agreed to be paid was a capital investment. After reciting the assets and liabilities which were to be transferred to the petitioner, the contract says: * * * We to give you in consideration for this business thirty-five Thousand Dollars ($35,000), Fifteen Thousand Dollars ($15,000) of which is to be paid on June 1st, 1922, the balance of Twenty Thousand Dollars ($20,000) to be paid on or before January 10, 1923. If petitioner had not believed that it was purchasing assets of value equal to the amount paid in getting 3,500 new deposit accounts on its books by means of the transfer, it certainly would not have paid $35,000 therefor. Petitioner's income-tax return for 1922, in setting up the item of $15,000 as a deduction for that year, enters it as follows: "Part payment on contract for accounts and business of Mechanics Bank & Trust Company, Knoxville, *2040 Tennessee, $15,000." A similar entry for the $20,000 item of deduction was made in 1923. Certainly the language used in these entries shows that petitioner recognized that in purchasing these accounts and business it was purchasing assets of value. Indeed, the language in the contract which we have already quoted shows that it was a purchase and not an expense within the meaning of the statute. In view of our interpretation of this transaction, we hold that the respondent made no error in refusing to allow these deductions of $15,000 and $20,000 in the respective years 1922 and 1923. Cf. ; . Petitioner further alleges that it suffered a deductible loss on notes of the Columbia Graphophone Co., but it appeared at the hearing that this item had been satisfactorily adjusted. No decision is required on that item. Judgment will be entered under Rule 50.