United Cal. Bank v. Comm'r of Internal Revenue

• Decision Date: 03 January 1964
• Docket Number: Docket No. 93862.
• Citation: 41 T.C. 437
• Parties: UNITED CALIFORNIA BANK (SUCCESSOR TO FIRST WESTERN BANK AND TRUST COMPANY, BY MERGER), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

41 T.C. 437

UNITED CALIFORNIA BANK (SUCCESSOR TO FIRST WESTERN BANK AND TRUST COMPANY, BY MERGER), PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 93862.

Tax Court of the United States.

Filed January 3, 1964.

[41 T.C. 437]

George H. Koster, for the petitioner.

James Booher, for the respondent.

Petitioner's predecessor, a bank, had its main banking and administration offices in a bank building owned by it. Due to expansion of the bank's activities, additional office space was obtained in an adjoining office building and an adjoining hotel, both also owned by the bank. In 1957, new banking and administrative offices were opened in the office building and all employees were moved out of the hotel and the old bank building. Certain records, furniture and equipment remained in the two buildings until early in 1958. The bank building was likewise used for storing records for the comptroller and records relating to the banking operations of the main office. The records, furniture, and equipment were all removed on or before the first Monday in March of 1958. In October 1958, the old bank building and certain building accessories, equipment, and fixtures were written off and a deduction of $267,553.59 was claimed on the bank's 1958 income tax return as an abandonment loss. Early in 1959, the hotel property and the old bank property, together with an adjoining parking lot, were sold pursuant to the exercise of an option granted prior to the writeoff. Held, that the $267,553.59 is not deductible as an abandonment loss.

The respondent determined a deficiency in income tax against the petitioner's predecessor, First Western Bank & Trust Co., for the year 1958 in the amount of $137,333.85.

The only issue for decision is whether First Western Bank & Trust Co. physically abandoned a certain building and certain building accessories, equipment and fixtures during 1958 and thereby sustained a loss deductible under section 165(a) of section 167(a) of the Internal Revenue Code of 1954.

FINDINGS OF FACT

Some of the facts have been stipulated and are found as stipulated.

The petitioner is the successor corporation by merger to the First Western Bank & Trust Co. (hereinafter called the bank). The bank

[41 T.C. 438]

was merged into the petitioner under a merger agreement dated January 10, 1961, approved by the California superintendent of banks on February 24, 1961, and the petitioner thereupon succeeded, under the laws of California, to all of the rights, assets, and obligations of the bank.

The bank was incorporated under the laws of California on February 10, 1868, under the name German Savings & Loan Society. Its name was changed in 1925 to San Francisco Bank, and in 1954 to First Western Bank & Trust Co. It filed its income tax returns for the years 1958 and 1959 with the district director of internal revenue at San Francisco, Calif.

During 1958 the bank owned four parcels of real property located in the financial district of San Francisco, Calif., in a city block bounded by Montgomery Street on the east, Spring Street on the west, Sacramento Street on the north, and California Street on the south. These parcels are hereinafter described.

The parcel hereinafter called the ‘526 California Street property’ had a frontage of approximately 62 feet 7 inches on California Street and extended back approximately 139 feet 8 inches from the street. It was acquired by the bank at an undisclosed time prior to 1925, and was improved with an ornate building, four or five stories in height, designed for use as a bank and erected in 1910. The building, which contained a high-ceilinged main banking floor and a balcony, was capped by a dome extending from the balcony level to the top of the building. For many years the bank used this building as its main banking headquarters. The portion of the property to the rear of the building was used as a parking lot.

The parcel hereinafter called the States Hotel property was located on the corner of California and Spring Streets, adjoining the western boundary of the 526 California Street property. It had a frontage of approximately 63 feet 4 inches on California Street and extended back approximately 137 feet 6 inches from the street. This property was acquired by the bank in 1937. At an undisclosed time prior to its acquisition by the bank, the property had been improved with a six-story hotel building of brick veneer and wood construction. The bank continued the hotel operations until late in 1955, using part of the building for banking purposes and offices in the meantime.

The parcel hereinafter called the 405 Montgomery Street property was located on the corner of Montgomery Street and California Street, adjoining the eastern boundary of the 526 California Street property. It had a frontage of approximately 137 feet 6 inches on Montgomery Street and approximately 138 feet on California Street. This property

[41 T.C. 439]

was acquired by the bank in 1945 for use in connection with expansion of the bank's premises. It was improved by a 15-story office building, which, at the time it was acquired, was known as the Financial Center Building. The name of this building was changed in 1949 to the San Francisco Bank Building, and later to the First Western Bank Building. The bank used some space in this building for its offices, but the amount of space it used was minimal until 1955. The remainder of the building was rented to various tenants.

The parcel hereinafter called the parking lot property was located on the corner of Sacramento Street and Spring Street, adjoining the northern boundaries of the States Hotel and 526 California Street properties. It had a frontage of approximately 126 feet 6 inches on Sacramento Street and extended back approximately 137 feet 6 inches from the street. This property was acquired by the bank in 1930. At some undisclosed time prior to 1956, a one-story l-shaped structure was constructed thereon. The bank used this property primarily as a parking lot.

Prior to July 1954, the bank was primarily a local savings bank. In July 1954, it purchased the business of the Central Bank of Oakland, Calif., thereby acquiring 15 branch banking offices in various California cities. T. P. Coats, who had been president of the Central Bank, became chairman of the board of directors of the bank. At that time, the board of directors planned to expand the bank's commercial banking business and to further extend its activities throughout the State of California by means of additional acquisitions and the opening of new branch offices.

At the time of acquisition of Central, the bank's main banking and administrative offices were located in the 526 California Street building, with additional quarters in portions of the States Hotel and the mezzanine of the 405 Montgomery Street building. There was an entrance to the main floor of the 526 California Street building from the lobby of the 405 Montgomery Street building. In or prior to 1949, an escalator had been installed to connect these two floors, which, due to the downward easterly slope of California Street, were not on the same level.

Upon taking office at the bank, Coats inspected the main offices and concluded that they were already overcrowded and inefficient and would be inadequate to accommodate the planned expansion of the bank's activities.

In November 1954, the name of the bank was changed from San Francisco Bank to First Western Bank & Trust Co., to reflect the enlarged scope of its operations. In the same month, the bank acquired

[41 T.C. 440]

the businesses of 23 additional banks, providing 31 new banking offices located in various California cities.

At Coats' request, the bank's properties committee studied the 526 California Street and States Hotel buildings early in 1955 to determine the feasibility of remodeling them to provide additional operating space. The committee concluded that use of the two buildings on a permanent basis was impractical, citing the different construction and elevations of the two buildings, certain difficulties in complying with the San Francisco building code with respect to the States Hotel, and the costs which would be incurred in remodeling the 526 California Street building to provide usable space out of the dome area. They recommended that the bank either raze the two buildings and erect a new banking building on the site, or else use the 405 Montgomery Street building for banking and administrative offices.

In the meantime, additional offices were set up in some of the hotel rooms in the States Hotel to accommodate the bank's increasing staff. As of July 1955, the bank occupied approximately 14,000 square feet of space in the hotel building. The comptroller's department and the commercial banking department were located on part of the first floor of the building. An entrance and two or three steps connected the commercial banking department with the main floor of the 526 California Street building, which was on a slightly different level. The remainder of the first floor of the States Hotel was used as a hotel office until November or December 1955, when the hotel operations in the building were terminated. The States Hotel had faulty plumbing, which at times caused pieces of plaster to become loosened and to fall from the ceilings.

The bank also maintained certain administrative offices in the 405 Montgomery Street building during 1955. In August 1955, it occupied approximately 3,500 square feet of space on the 15th floor of that building, approximately 1,000 to 1,500 square feet on the second floor, and additional space on the mezzanine.

Some time in 1955 or early 1956 the bank decided to move the banking facilities to the main floor of the 405 Montgomery Street building and to utilize additional space on one or more of the upper floors of that building for offices. In order to obtain the necessary additional space, the bank purchased the leasehold interests of certain...