Court Opinion

ID: 4626194
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:43.073504+00
Date Added: 2024-06-11T07:56:50.141389
License: Public Domain

WASHINGTON STATE BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Washington State Bank v. CommissionerDocket No. 19911.United States Board of Tax Appeals20 B.T.A. 33; 1930 BTA LEXIS 2213; June 12, 1930, Promulgated *2213  Amount paid in purchase of assets of going bank in excess of value of the assets held not deductible.  S. F. Racine, Esq., and T. F. Trumbull, Esq., for the petitioner.  A. H. Fast, Esq., for the respondent.  MATTHEWS *34  In this proceeding the petitioner seeks a redetermination of its income-tax liability for the calendar years 1923 and 1924, for which years the respondent has determined deficiencies in the amounts of $1,305.36 and $848.28, respectively.  The only question in issue is whether $40,000 paid as a bonus in connection with the purchase of the deposits of a bank should be treated as a capital item or charged to expense.  FINDINGS OF FACT.  The petitioner is a banking corporation organized under the laws of the State of Washington, with is principal office at Port Angeles in that State.  During the latter part of 1923 there were three banks located in Port Angeles, two chartered by the State of Washington and one national bank.  The Bank of Clallam County was in financial difficulty and the state banking department insisted that it either be closed or is business sold to one of the other banks.  Negotiations between*2214  the petitioner and the Bank of Clallam County were instituted and on December 9, 1923, the two banks agreed on the following valuation of the assets and liabilities of the Bank of Clallam County: AssetsCash on hand$ 29,065.68Due from banks144,701.09Cash, H. E. Lutz26,926.48U.S. bonds and stamps144,969.15Warrants51,954.91Other bonds17,260.00Banking house25,000.00Furniture and fixtures8,747.88Notes303,332.36Overdrafts178.86Timber paper29,236.00Total781,372.41LiabilitiesDemand deposits subject to check$ 420,225.70Demand certificates of deposits7,802.12Cashier's checks9,957.54Certified checksTime certificates of deposit74,632.35Savings deposits308,754.70Total821,372.41In order to increase the assets to the amount of the liabilities, the petitioner agreed to pay the Bank of Clallam County $40,000 for its deposit accounts.  This amount was entered under assets as "Bonus, $40,000," thus bringing the total assets to $821,372.41.  The petitioner then took over the assets at $821,372.41 and assumed the liabilities in the same amount.  On December 13, 1923, immediately*2215  after this transaction was carried out, the certificate of authority issued to the Bank of Clallam County was terminated and revoked by the state supervisor of banking.  The petitioner is seeking to take as an expense deduction in each of the years under consideration the sum of $20,000, representing one-half of the cost of acquiring the deposits.  The respondent contends *35  that the $40,000 represents a capital expenditure and is not deductible.  OPINION.  MATTHEWS: The petitioner contends that in order to prevent ill effects to itself which might result from the failure of another state bank in the same town, it paid, in purchasing the assets of that bank and assuming its liabilities, $40,000 more than the assets received were worth; and upon this theory seeks to deduct this amount as an expense incident to the transaction, apportioning it over a two-year period.  Our interpretation of the transaction is that the petitioner purchased the going business of the Bank of Clallam County for $821,372.41 and assumed liabilities of the bank in that amount.  The fact that the petitioner paid more for the assets than they were worth is not the basis for a deduction.  Judgment*2216  will be entered for the respondent.