Fry v. Comm'r of Internal Revenue, Docket No. 758.

• Citation: 5 T.C. 1058
• Decision Date: 14 November 1945
• Docket Number: Docket No. 758.
• Parties: W. N. FRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

5 T.C. 1058

W. N. FRY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 758.

Tax Court of the United States.

Promulgated November 14, 1945.

1. Pursuant to a plan of reorganization, a state bank in 1933 subscribed to and received all of the capital stock of a newly organized national bank, except directors' qualifying shares, and the new bank acquired part of the old bank's assets. Immediately thereafter, the old bank was in control of the new as control is defined in section 112(h) of the Internal Revenue Code. The stock of the new bank was pledged to the Reconstruction Finance Corporation by the old bank to secure the loan it had received from RFC and used for the purchase of the new bank stock. In 1939 RFC released one-half of the new bank stock to the old bank, which then distributed it pro rata to its shareholders and reduced the par value of their stock from $100 to $50. The old bank was in process of liquidation at the time. Held, the receipt of the new bank shares by the shareholders of the old bank was an exchange pursuant to a plan of reorganization and no gain is recognizable on their receipt. Sec. 112(b), (g), and (h), I.R.C., as operative during the taxable year.

2. Petitioner's claimed deductions for certain expenses allowed. W. G. Boone, Esq., for the petitioner.

Bernard D. Hathcock, Esq., for the respondent.

The respondent determined a deficiency in petitioner's income tax liability for the taxable year ended December 31, 1939, in the amount of $107.46, which deficiency is the result of respondent's determination that:

(a) The transaction whereby you received 25 shares of the common stock of the National Bank of Commerce from the Bank of Commerce & Trust Company constitutes a distribution in partial liquidation, and the gain arising therefrom is taxable as a short-term gain. Subsection (c) and (i) of Section 115 of the Internal Revenue Code.

(b) Deductions claimed as business expense disallowed in that it has not been construed that you are engaged in business.

Petitioner contests the deficiency, assigning error in respondent's determination as to both (a) and (b).

FINDINGS OF FACT.

The petitioner is an individual, residing in Memphis, Tennessee. His income tax return for the taxable year was filed with the collector of internal revenue for the district of Tennessee, at Nashville, Tennessee.

On January 15, 1934, at a cost of $315, petitioner acquired 30 shares of the common capital stock of the Bank of Commerce & Trust Co. (hereinafter sometimes referred to as the old bank).

The Bank of Commerce & Trust Co. is a state banking institution, organized and operated under the laws of the State of Tennessee. Its offices were located in Memphis, Tennessee. A run on the bank developed in January 1933. To insure payment of its deposits in full, it borrowed $13,000,000 from the Reconstruction Finance Corporation, which loan was secured by a pledge of its assets and an additional pledge of about $2,000,000 of their own assets by individuals who were directors, shareholders, or depositors of the bank. After the declaration of the ‘Bank Holiday‘ in February 1933, the question arose as to whether the bank should reopen or whether the interests of all concerned would best be served by the organization of a new national bank. The bank reopened after the ‘Bank Holiday.‘

A special called meeting of the bank's board of directors was held on April 27, 1933. The call for and notice of the meeting provided that it was called:

* * * for the purpose of considering and authorizing the organization of a new national bank, subscribing for capital stock therein by the Bank of Commerce & Trust Company, the transfer of the deposits of the Bank of Commerce & Trust Company to the proposed national bank, the transfer of certain assets of the Bank of Commerce and Trust Company to the proposed national bank, to authorize the execution of a Voting Trust Agreement with respect to the stock in the national bank to be subscribed for by the Bank of Commerce & Trust Company, * * * to authorize and approve the making of any and all necessary contracts and agreements with reference to any of said purposes * * * .

At the meeting the board was told by Phil M. Canale, a director and member of a committee appointed to work out a plan for the reorganization of the bank, that the Comptroller of the Currency had approved plans for the organization of a new national bank, to be known as the National Bank of Commerce in Memphis (sometimes hereinafter referred to as the new bank), with a capital of $2,000,000 consisting of 10,000 shares of common stock of the par value of $100 per share, paid-in surplus of $750,000, and paid-in undivided profits or reserves of $250,000, giving its stock a book value of $200 per share; that the stock of the new bank with the exception of qualifying shares was to be subscribed by the old bank; that the subscription to the stock of the new bank by the old was to be financed by a new loan of $2,000,000 to be made to the old bank, which loan was to be made by the Reconstruction Finance Corporation (hereinafter referred to as RFC) and be secured by pledge of the stock so subscribed for and a third lien on assets of the old bank theretofore pledged to RFC; that the new bank was to use the $2,000,000 received from the old bank in payment of its stock subscription to buy paper and other assets of the old bank held by RFC as security for its loan to the old bank, which amount was to be then credited against the indebtedness of the old bank to RFC. Canale further stated that in carrying the proposed plan into execution there were many details to be passed upon by the board, among others being that the stock which the old bank would acquire in the new bank was to be placed in a voting trust at the request of RFC and for the purpose of insuring stability and continuity of management for the new bank; and that three of the five voting trustees selected were directors of the old bank, one was secretary of RFC, and one was manager of the Memphis branch of the Federal Reserve Bank of St. Louis.

The directors were also told by Canale:

* * * that it would also be necessary to consider a resolution authorizing the new bank to take over the deposit liabilities of the old bank, and the transfer to the new bank by the old bank of assets of equal value. * * * that the ultimate ownership of the old bank and of the new bank was practically the same, except as to the qualifying shares of the directors of the new bank, which were negligible, amounting to only one hundred and forty shares. * * * that the Committee had discussed with the Reconstruction Finance Corporation the matter of liquidating the old bank; that as he understood it, the Reconstruction Finance Corporation would permit the old bank to be liquidated in somewhat the same manner in which it was now being liquidated; that it was to be done under the supervision of a committee * * * by selling notes, * * * real estate, etc.

Various resolutions were then adopted by the directors, among which were the following:

RESOLVED, that the Board of Directors hereby approve the plan outlined by Mr. Canale with respect to the organization of the new national bank, the liquidation of the assets of the old bank, etc.; that the officers and representatives are hereby authorized and directed to do and perform any and all things necessary or proper to the due and proper consummation thereof.

* * * RESOLVED that the Bank of Commerce & Trust Company subscribe and pay for the entire capital stock of the National Bank of Commerce in Memphis (except the qualifying shares of the directors thereof) amounting to 9860 shares, at and for the price of $200.00 per share.

RESOLVED That the Bank of Commerce & Trust Company deposit the stock to be subscribed for by it in the National Bank & Commerce in Memphis, in a Voting Trust Agreement, with Messrs. W. R. King, W. W. Mallory, Phil M. Canale, the Manager of the Memphis Branch of the Federal Reserve Bank of St. Louis and Secretary of the Reconstruction Finance Corporation, as Voting Trustees, the Voting Trust Agreement to be approved by Messrs. King, Mallory and Canale; and that the officers of this bank be and they are hereby authorized in its name and on its behalf to execute the Voting Trust Agreement as so approved.

RESOLVED That the Bank of Commerce & Trust Company enter into a contract with the National Bank of Commerce in Memphis providing generally that the National Bank of Commerce in Memphis shall assume the deposit liabilities of the Bank of Commerce & Trust Company, after adjustment of off-set deposits, in consideration of the transfer to it of assets of equal amount, consisting of cash and other assets, to be approved by the National Bank Examiner and the directors of the new national bank, the form of agreement so to be entered into to be submitted to the Board for its approval.

RESOLVED that the liquidation of the assets of the Bank of Commerce & Trust Company, according to the plan outlined by Mr. Canale by a committee composed of Messrs. David Sternberg, W. W. Mallory and A. L. Pritchard, be and the same is hereby approved.

A special, duly called meeting of the stockholders of the old bank was held the following day, April 28, 1938. The call was for the purposes as set out in the call for the special called meeting of the board of directors as set out above. Phil M. Canale stated to the meeting that subsequent to December 1932 the bank had borrowed thirteen million dollars from RFC to fulfill the obligations of the bank to its depositors and that such obligation was fulfilled, and that ‘Immediately thereupon we had a thorough examination made of the bank and set about to see what we could do then to fulfill the next obligation, which was to the stockholders and to the pledgers who had put up their money to insure the payment of the deposits in full.‘ Canale further stated that three directors,...