Dime Bank of Lansford v. Commissioner

DIME BANK OF LANSFORD, PA., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Dime Bank of Lansford v. Commissioner Docket No. 39712. United States Board of Tax Appeals 20 B.T.A. 250; 1930 BTA LEXIS 2166; July 18, 1930, Promulgated *2166 Where the petitioner purchased the accounts and deposits of a private bank and the private banker rendered services in holding and transferring the accounts and solicited new ones, the consideration paid him was a capital expenditure and not an ordinary and necessary business expense. (Following Union National Bank,18 B.T.A. 468.) M. M. Marcus, Esq., and W. D. Lewis, Esq., for the petitioner. Hartford Allen, Esq., for the respondent. BLACK *250 Petitioner seeks redetermination of a deficiency in income tax of $1,401.90 for the calendar year 1925. It alleges that the respondent erred (a) in charging the sum of $10,000 paid in 1925 to John Shigo as good will; (b) in refusing to regard the expenditure of $10,000 by petitioner as an ordinary and necessary expense of conducting business; (c) in refusing to allow a 2 per cent depreciation claimed on land value; (d) in refusing to allow a depreciation of 10 per cent on furniture and fixtures. At the hearing petitioner withdrew its claims (c) and (d) relative to depreciation, leaving for consideration the sole question as to the deductibility of the $10,000 paid to John Shigo. *2167 FINDINGS OF FACT. The petitioner is a banking corporation organized under the laws of Pennsylvania, with its principal place of business at 7 West Ridge Street, Lansford, Pa. During the year 1925 and prior thereto John Shigo was a private banker in Lansford. There was a large foreignborn born population, most of whom were Slovaks, living in that vicinity. Shigo was a Slovak and did a considerable business with his fellow countrymen and many of them were depositors in his bank. On account of similarity of race and past dealing he possessed the confidence and good will of this foreign-born population and had influence among them. In 1925 he determined to cease active business and sell out to another bank, if possible. With this end in view his manager approached officers of the petitioner and it was finally agreed that Shigo and his employees should obtain the consent of Shigo's depositors to transfer their accounts and deposits to petitioner and should advise and solicit Shigo's present depositors and other Slovaks to become customers and depositors of petitioner. This was performed by Shigo and his employees, who solicited and obtained the necessary consent, which*2168 resulted in 500 accounts *251 and deposits amounting to $235,000 being transferred from Shigo's bank to that of petitioner. In addition, after the transfer of the accounts, Shigo continued to solicit for new business for petitioner until some time in 1926, but it does not appear how much he obtained, if any. For the transfer of these accounts and his services and the services of his organization in connection therewith, Shigo was paid $10,000 in 1925 and $10,000 in 1926. He was never placed on the pay roll of the petitioner nor were any of his employees, and none of them was paid anything, except the amounts above stated. In its return for 1925 petitioner returned $10,000 for deduction as an ordinary business expense, being payment made in that year of part of the purchase price of the new business taken over from John Shigo, private banker. Respondent disallowed the deduction, holding it to be a capital expenditure. OPINION. BLACK: The burden of proof in this case is upon the petitioner to show that the respondent erred in his determination. It was the contention of petitioner in its original petition that it purchased the deposit accounts of John Shigo for $20,000, *2169 and that as part of the transaction Shigo "delivered over the accounts of his depositors and personally attended to the transfer of his depositors' accounts into the bank of your petitioner." At the hearing petitioner practically abandoned its position as alleged in its petition, and contended that instead of purchasing Shigo's depositors' accounts and good will, it had employed Shigo to render services to it as a solicitor to influence his depositors to transfer their deposit accounts to petitioner's bank, and to solicit others, particularly those of foreign birth, to open accounts with petitioner, and that he was paid the sum of $10,000 for his services as soliciting agent and not as purchase price of the accounts. It was within the power of petitioner to introduce in evidence the contract between petitioner and Shigo showing the exact nature of the transaction, but this was not done, nor was any evidence introduced to show its terms beyond the mere statement that Shigo was to solicit new business and influence his old depositors. It is not probable that in a transaction of this character and importance between banking institutions, terms were not fully agreed upon. *2170 We think it clear from the pleadings and the evidence that the agreement was that Shigo cease business and turn over his deposits and accounts to the petitioner and agree to influence, advise and persuade his customers to consent thereto and continue their new relationship with petitioner for a consideration of $20,000, of which $10,000 was paid in 1925 and $10,000 in 1926. Whatever services Shigo performed in this respect were to aid in the performance of *252 the main obligation resting on him to perform his part of the contract, viz., to transfer the accounts and deposits of his customers and his good will. There is no material difference between this case and that of , where one bank purchased the accounts and assets of another and assumed its liabilities and paid the vendor $35,000 bonus, and it was held that such an expenditure was a capital expenditure in the nature of a purchase of valuable custom or good will and not an ordinary and necessary business expense deductible in the taxable year. To the same effect is *2171 ; . A similar question arose in , where one dairy company bought out another and provisions were inserted in the contract binding the vendor to use its best efforts to induce its curtomers to become and continue customers of the purchaser and it was held that expenditures thereunder were capital expenditures. In , we held that expenditures made to maintain a subscription list of a newspaper were ordinary expenses, but that those to increase it were not. In , we held that expenditures for increase in an insurance policy list were capital expenditures, and in , that expenses incident to an advertising campaign for new savings depositors was a capital expenditure. Under the authority of the cases above cited, the action of the respondent is affirmed. Judgment will be entered for the respondent.