Manufacturers Trust Co. v. Commissioner

MANUFACTURERS TRUST COMPANY (FORMERLY CHATHAM PHENIX NATIONAL BANK & TRUST COMPANY), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Manufacturers Trust Co. v. Commissioner Docket No. 46073. United States Board of Tax Appeals 28 B.T.A. 1260; 1933 BTA LEXIS 1022; August 29, 1933, Promulgated *1022 The petitioner, a national banking association, was consolidated with the Metropolitan National Bank on March 15, 1925, and the consolidated association continued under the charter of the petitioner. Thereafter, the petitioner reported in a single return for the calendar year 1925 its own income and deductions for the period January 1 to March 15, 1925, also the income and deductions of the Metropolitan Bank for the same period, and the income and deductions of the consolidated association for the remainder of the year. Held, that the single return filed by the petitioner improperly included the income and deductions of the Metropolitan, which should have filed a separate return for that part of the year 1925 preceding consolidation. Held, further, that the consolidated association is not entitled, in computing net income for the period following consolidation, to deduct a net loss sustained by the Metropolitan Bank prior to consolidation. James L. Dohr, Esq., for the petitioner. R. W. Wilson, Esq., for the respondent. TRAMMELL *1261 This is a proceeding for the redetermination of a deficiency in income tax for the year 1925 in the*1023 amount of $9,139.60. The issue is whether respondent erred in disallowing a deduction for a net loss sustained during the period from January 1 to March 15, 1925, by another national banking corporation which was merged with the petitioner on the latter date. FINDINGS OF FACT. The petitioner is a national banking association, with its principal office at 149 Broadway, New York City. The Chatham Phenix National Bank was organized in 1812 under the laws of the United States as a national banking institution. It filed a consolidated return for the calendar year 1925, including therein the income and deductions of two wholly owned subsidiaries, the C.P.N. Realty Corporation and the Resource Holding Corporation. The Metropolitan National Bank & Trust Co. was also a corporation organized as a national bank under the laws of the United States. On March 15, 1925, the Chatham Phenix National Bank and the Metropolitan National Bank & Trust Co. were consolidated under the provisions of the Act of Congress approved November 7, 1918 (40 Stat. 1043, 12 USCA, secs. 33, 34), and, thereafter operated as one corporation. The union was effected under the charter*1024 of the Chatham Phenix National Bank, which was amended to include the words "and Trust Company." This corporation will hereinafter be referred to as the "Chatham Phenix Bank" or "the petitioner." The stockholders of both banks exchanged their stock for new stock of the Chatham Phenix Bank. Subsequent to the filing of this appeal, the petitioner, Chatham Phenix National Bank & Trust Co., was merged with the Manufacturers Trust Co., and, upon motion duly made and granted, the name of the petitioner was changed to Manufacturers Trust Co. The Metropolitan National Bank & Trust Co., hereinafter referred to as the "Metropolitan Bank", filed no return for any part of the year 1925. Its income and deductions for the entire year were included in the return filed by the petitioner. During the period January 1 to March 15, 1925, the Metropolitan Bank sustained a loss of $70,304.70, exclusive of nontaxable income in the amount of $33,313.53, resulting in a statutory net loss for that period in the amount of $36,991.17. Subsequent to March 15, 1925, the records of the operations of the properties transferred to the petitioner from the Metropolitan Bank*1262 at the time of*1025 consolidation were mingled with the records of the operations of the other properties of the petitioner. The consolidation above referred to was effected pursuant to an agreement entered into by the two banking associations under date of February 5, 1925, which provided that the consolidated association would continue under the charter of the Chatham Phenix National Bank of the city of New York and under the name of Chatham Phenix National Bank & Trust Co.; that the stockholders of the two associations would exchange their stock certificates for new certificates under certain ratios; that all of the assets, trusts and all the rights, franchises, and interests of both associations in and to every species of property, real, personal or mixed, and choses in action should be deemed transferred and vested in the consolidated association; that the consolidated association should hold and enjoy the same and all rights of property, franchises, and interests in the same manner and to the same extent as they were held and enjoyed by the two associations. The agreement provided further that it would become effective upon ratification by vote of two thirds of the stockholders and approval*1026 by the Comptroller of the Currency of the United States. The agreement was carried into effect and approved by the Comptroller of the Currency on the 16th day of March 1925. The net income of the Chatham Phenix National Bank during the period January 1 to March 15, 1925, and the net income of the consolidated association during the remainder of the year were reported by the petitioner in its return as amounting to $932,140.36, which amount was adjusted by the respondent to $943,546.61. The books of the Chatham Phenix Bank were closed, along with the books of the Metropolitan Bank, as of March 14, 1925, and were continued thereafter with the corporation as combined. The books were not so kept as to disclose the amount of income earned during 1925 prior to March 14, nor how much income was earned during the balance of the year. The books of the consolidated bank were kept on an accrual basis, and the income did not fluctuate widely but accrued approximately the same each month. The Metropolitan Bank contributed approximately 21 percent of the combined assets of the merged banks, and after the merger approximately 21 percent of the gross profits was derived from the assets*1027 so contributed by the Metropolitan Bank. OPINION. TRAMMELL: The issue in this case is whether or not the respondent erred in refusing to allow the petitioner to deduct from its gross income for the year 1925 the sum of $36,991.17, representing the *1263 statutory net loss sustained by the Metropolitan National Bank & Trust Co. for the period January 1 to March 15, 1925. The Metropolitan Bank was merged or consolidated with the petitioner on the latter date, under the Act of Congress approved November 7, 1918 (40 Stat. 1043, 12 U.S.C.A., secs. 33, 34), and the consolidated bank continued under the petitioner's charter. The petitioner contends that the return filed by it for 1925, in which it reported the income and deductions of itself and its subsidiaries for the entire year, as well as the income and deductions of the Metropolitan Bank for the period January 1 to March 15, 1925, was a proper and sufficient return, upon the basis of which its tax liability should be computed. The respondent held that the Metropolitan Bank should have filed a separate return for that period, and determined the deficiency by eliminating from the petitioner's return*1028 the income and deductions of the absorbed bank for the portion of the year preceding consolidation. The petitioner, on brief, further contends in the alternative that the net loss of the Metropolitan Bank should be carried forward and offset against the income derived by it during the period from March 16 to December 31, 1925, from the properties transferred to the petitioner by the Metropolitan as a result of the consolidation. No separate account was made of the income subsequently produced by the assets of the merged banks, but it is shown that the Metropolitan contributed 21 percent of such assets and the petitioner proposes to allocate to the Metropolitan assets 21 percent of petitioner's income. From the amount so computed as Metropolitan income, petitioner argues that the net loss in question should be deducted in determining its tax liability for 1925. We are unable to agree with the petitioner's contentions. In A. J. Siegel,4 B.T.A. 186, where three banking associations united under the statute of 1918 cited above, and continued the consolidated business under the charter of one of the associations, we held that no new corporate entity was created, *1029 the effect of the statute being to merge the identity of two of the associations in the third, whose corporate existence continued. However, in such case the merged or consolidated corporation becomes liable for all obligations of its constituents (Nat. Bank of Commerce,19 B.T.A. 1080, and authorities cited; affd., 55 Fed.(2d) 1073), and the merging corporation ceases to be a taxpayer. For income tax purposes, at least, there is but one corporation after the merger. Industrial Cotton Mills Co.,22 B.T.A. 648, 652. It follows that since the petitioner here is not the "taxpayer" which sustained the net loss in controversy, it is not entitled to deduct the same in computing net income for the taxable year. Woolford Realty Co. v. Rose,286 U.S. 319; Overbrook Nat. Bank of Philadelphia,23 B.T.A. 1390; Industrial Cotton Mills Co., supra;*1264 Athol Mfg. Co.,22 B.T.A. 105; Standard Silica Co.,22 B.T.A. 97; *1030 Alabama By-Products Corp.,18 B.T.A. 919; Swift & Co. v. United States, 38 Fed.(2d) 365. In support of its argument that but one return was required for the taxable year, petitioner cites our decision to that effect in Grand Rapids Nat. Bank,9 B.T.A. 1119. The cited case was overruled by us in Industrial Cotton Mills Co., supra, and while the latter decision was reversed by the Circuit Court of Appeals for the Fourth Circuit, 61 Fed.(2d) 291, such reversal was predicated upon facts which do not exist in the instant case. This is made clear by the following extract from the court's opinion: It is true that ordinarily the loss sustained by one of a number of affiliated corporations cannot be carried forward and deducted from the consolidated return, but must be deducted only from the income of the corporation which has sustained the loss (citing authorities). And on the same principle, loss sustained by one corporation prior to its merger with another cannot be availed of, we think, by the corporation resulting from the merger. This rule, however, is based upon the fact that the statute authorizes*1031 the carrying forward of the deduction only by the taxpayer who has sustained the loss; and a group of affiliated corporations, although a taxpaying unit, is not a taxpayer within the meaning of the section authorizing the deduction. To permit the deduction in the consolidated return of affiliates or in the return of a corporation succeeding to their rights by merger would open the door to tax evasion by permitting a corporation with taxable income to escape taxation by the simple expedient of acquiring a business which had sustained losses in past years. But the rule has no application, we think, where there is in reality but one taxpayer, and the merger, as here, is with a mere holding company which owns no property except the stock and obligations of the company which produces the entire income * * *. It is obvious that the principle upon which the court reversed our decision in the Industrial Cotton Mills case has no application under the facts of the present case, which comes well within our prior decisions and those of the courts hereinabove cited. Judgment will be entered for the respondent.