Court Opinion

ID: 4486175
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:14.504161+00
Date Added: 2024-06-11T07:58:28.886213
License: Public Domain

WILLIAMS, J., dissenting: I respectfully dissent. Despite the majority’s, prodigious attempt to distinguish the weight of authority, it commits an error in law by holding that an intangible asset that can be described and valued in part must necessarily be “separate and distinct” from goodwill. It is indisputable that the asset that petitioner depreciated includes the opportunity to arbitrage the funds labeled “core deposits.” The “opportunity to invest,” majority opinion at 499, low-cost funds at a higher rate of return is certainly valuable and measurable. As the majority recognizes, the value of that opportunity will fluctuate depending on (1) the level of available funds, (2) the cost of those funds, and (3) the differential between the cost of funds and the rate of return on investing those funds. To determine a value, therefore, one must be willing to accept as foundational several quixotic assumptions about the future performance of the money markets, the local and national economies, and depositors’ preferences. See, e.g., majority opinion at 472, 496, 499. This willingness is the “factual” part of this case, and though I might not be as willing as Judge Goffe to accept those assumptions, as the trier of fact, he is entitled to deference unless his judgment is clearly erroneous. . My disagreement with the majority is not, however, over its willingness to validate the future predictions that petitioner’s financial analysts made. My disagreement is with its willingness to accept the opportunity to arbitrage as the only value attributable to the core deposits. Judge Goffe found that “core deposits are * * * reasonably stable over time and relatively insensitive to interest rate changes.” Majority opinion at 465. He also found that “an integral part of [the assumptions used in the acquisition model that projected the banks’ future financial perfor-manee] was that the balance sheet growth was going to continue to be funded to a large extent by core deposits.” Majority opinion at 467, emphasis added. These two critical findings, viz, that the core deposits were stable and that they formed the heart of petitioner’s projections of future financial success, suggest to me that the acquired deposits had more value than the discounted present value of the projected net income from their investment. That additional value was petitioner’s entree into the local banking markets serviced by the Acquired Banks. In other words, that additional value was inextricably woven with “the expectancy that old customers will resort to the old place” of business — i.e., the Acquired Banks’ goodwill. Houston Chronicle Publishing Co. v. United States, 481 F.2d 1240, 1247 (5th Cir. 1973). These findings also suggest to me that despite the majority’s statement that the record here “is different from the record” in AmSouth Bancorporation & Subsidiaries v. United States, 681 F. Supp. 698 (N.D. Ala. 1988), the operative facts are not so different. The District Court in AmSouth correctly recognized that under the Houston Chronicle test, to amortize an intangible it must not only be identifiable, it must be separate and distinct. It is legal error to ignore the relationship between core deposits and customer business, and, in my view, the majority has ignored it and has failed to apply the legal standard that the value of these deposits must be “separate and distinct” from goodwill. To be sure, petitioner paid for the right to arbitrage the cash on deposit, but just as surely in the same stroke it paid for the right to conduct the banking business with those depositors and for the opportunity to exploit goodwill generated by the Acquired Banks in their communities. The majority’s reasoning is as follows: (1) An important and valuable component of petitioner’s business was the core deposits, (2) that value is the right to invest low-cost core deposits in higher returning investments, (3) the value can be measured; therefore, the value is separate and distinct from goodwill. It is a nonsequitur. Petitioner must demonstrate more than that some part of the value attributable to the core deposits can be measured; petitioner must show that that value is separate and distinct from the opportunity to do business with those depositors. Simply because “the economic value attributable to the opportunity to invest core deposits can be valued” (majority opinion at 499), it does not follow that that is the only value of the core deposits or that that value is “separate and distinct from the goodwill and going-concern value of the Acquired Banks.” Majority opinion at 500. The core deposits do not offer one business opportunity (investment) to the exclusion of the other (selling services). They represent both business opportunities, and one has no meaning without the other. Unless Judge Goffe can find as a fact in this case that core deposits presented petitioner with little opportunity to sell banking services to existing depositors or to attract new depositors, the majority has incorrectly concluded that all the value of the core deposits is represented by the arbitrage opportunity. Judge Goffe has made no such finding. While petitioner has adequately described some part of the loaf of goodwill it acquired, petitioner paid not for part but for the whole. Perhaps if petitioner had acquired only the funds represented by the core deposits, it could have made its case. See Midlantic National Bank/Merchants v. Commissioner, T.C. Memo. 1983-581. In this case, however, petitioner purchased the whole asset — including the entree into the local banking business represented by the core deposits, i.e., goodwill. It can be said in this case as forcefully as it was said in Computing & Software, Inc. v. Commissioner, 64 T.C. 223, 235 (1975), that “each of these purchases involved an ongoing business — an organization that was doing business and earning money; a network of customers and the expectation that their patronage would continue; a staff of employees trained in * * * dealing with the organization’s customers; * * * . Petitioners were able to continue to provide services to the customers of the acquired businesses without interruption because of the takeover. The portion of the price attributable to these factors is nondepreciable.” The majority attempts to diminish the importance of core deposits to the generation of future business by its conclusory statement that “The fact that new accounts may be opened as old accounts are closed does not make the deposit base self-regenerative.” Majority opinion at 499. It is undoubtedly true that new accounts do not spring to life from old ones. The issue, however, is whether new business is attracted by the relationship represented by those core deposits. The majority’s failure to come to grips with this issue results from the majority’s erroneous premise- that because some part of the value of the core deposits can be measured, core deposits are an asset isolated from overall banking business opportunities and specifically from the business plan for petitioner’s acquisitions. In short, the core deposits were critical to petitioner’s ability to do business (sell services to existing customers) and to improve business (sell new services to existing and new customers) and were far more valuable to petitioner (“of paramount concern”) in this case than the mere opportunity to arbitrage the funds. See majority opinion at 495. The Northern District of Alabama in AmSouth Bancorporation & Subsidiaries v. United States, 681 F. Supp. 698 (N.D. Ala. 1988), expressed these same points as follows: For accounting purposes, a bank may be able to “identify” a customer deposit base even though it may not be separate and distinct from goodwill. To the extent that deposits remain after some contractually stipulated period, they result from “continued patronage.” The mere fact that the deposits themselves are identifiable, does not make their “value” separate and distinct from goodwill. Other facets of bank activities such as safe deposit “expectations,” loan “expectations,” etc. could perhaps be similarly “identified” so as to phase out the concept of goodwill. There is no indication that tax law permits or contemplates this result. Moreover, were the majority correct that the only value to core deposits is the value ascribed to them, on an essential point the majority opinion does not require adequate proof of the useful life of the core deposits. The elaborate and sophisticated lifing and impairment studies conducted by petitioner focus on the number of accounts more than on the level of funds. The opportunity to arbitrage the funds, of course, depends less on the number of accounts existing than on the level of available funds. Perhaps the majority opinion recognizes this weakness in the lifing studies by accepting the petitioner’s proffered “M-2 adjustment.” See majority opinion 502-504. The majority accepts this M-2 adjustment in rejecting the Government’s observation that “the impairment studies show that the aggregate balances in the open accounts remained high and declined at a slower rate than projected.” What the majority avoids, however, is giving any rationale for applying a macroeconomic measurement of currency to reduce available funds in the acquired core deposits. Petitioner itself did not use such an adjustment, I believe, as a result of correct financial and economic understanding and not as a result of “the conservative nature of petitioner’s approach.” Majority opinion at 503. Whether this adjustment is appropriate is a question which is not addressed by the majority. In the absence of any rationale, it appears to be unwarranted. In the absence of the adjustment, it does appear that the Government’s observation is correct. The measured balances in the core deposits remained high, and this tends to undermine the reliability of petitioner’s estimated useful life for core deposits. Finally, the amount of the depreciation claimed by petitioner is unreasonable. Judge Goffe finds that “under the amortization method adopted by petitioner for financial accounting and regulatory accounting purposes, the amortization deduction in each year is equal to the difference between the present value of all projected future income streams at the beginning of the year and the present value of all projected future income streams at the end of the year.” Majority opinion at 473. For 1982, the amount so determined was $5,486,830. Nevertheless, petitioner deducted $9,250,982 — i.e., “the present value at the acquisition dates of the projected income stream for the taxable year.” Majority opinion at 474. The majority accepts petitioner’s contention “that its tax method of depreciation coincides with the evidence and the facts of life in the banking industry.” Majority opinion at 514. The majority ignores, however, that neither financial accounting principles nor the Comptroller of the Currency permit such a liberal chargeoff against income despite the prevailing facts of life in the banking industry. Of course, neither financial accounting nor regulatory accounting are determinative for Federal income tax purposes because they serve different and often divergent policy goals. Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 541-544 (1979). Nevertheless, it is unclear why petitioner is entitled to claim the projected income stream as a deduction. If actual income were less than projected, the majority’s rule could permit a greater tax benefit than if the income were treated simply as a return of capital and excluded from gross income. The majority has not given the reason. I am also puzzled by the majority’s last-page transmutation of the projected income stream from arbitraging the core deposits into “projected cost savings.” In particular, I do not believe there is any authority for permitting a deduction based on “cost savings.” Whitaker, Gerber, and Parr, JJ., agree with this dissent.