AmSouth Bancorporation and Subsidiaries v. US

• Decision Date: 25 February 1988
• Docket Number: Civ. A. No. CV86-PT-1690-S.
• Citation: 681 F. Supp. 698
• Parties: AmSOUTH BANCORPORATION AND SUBSIDIARIES, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Alabama

681 F. Supp. 698

AmSOUTH BANCORPORATION AND SUBSIDIARIES, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. CV86-PT-1690-S.

United States District Court, N.D. Alabama, S.D.

February 25, 1988.

Alfred F. Smith, Jr., N. Lee Cooper, Maynard Cooper Frierson & Gale, Birmingham, Ala., for plaintiff.

John J. Gill, III, Henry C. Ruempler and Joanne Ames, Washington, D.C., for American Bankers Ass'n., amicus curiae.

Frank W. Donaldson, U.S. Atty., Richard E. O'Neal, Asst. U.S. Atty., Birmingham, Ala., Curtis Bowman, Richard F. Mitchell, William A. Roberts, Trial Attys., Tax Div., Dept. of Justice, Washington, D.C., for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

PROPST, District Judge.

This cause came on to be heard at a bench trial which concluded on October 22, 1987.

THE ISSUE

Can a bank which acquires the assets and assumes the liabilities of another going concern bank assign some or all of the price paid in excess of tangible values purchased, to an intangible asset known as "customer deposit base" and capitalize, amortize and deduct the same pursuant to Section 167(a) of the Internal Revenue Code and Treasury Regulation § 1.167(a)?

FINDINGS OF FACT¹

The Players

AmSouth Bancorporation and Subsidiaries (hereinafter collectively referred to as AmSouth) is a national banking organization, organized and existing under the laws of the State of Delaware, with its principal place of business in Birmingham, Alabama. In February 1979, AmSouth, then named Alabama Bancorporation, acquired the assets and assumed the liabilities of the Bank of East Alabama (BEA), a state-chartered bank located in Opelika, Lee County, Alabama. AmSouth's total cash payment was $4.8 million. A newly formed corporation continued to operate under the BEA name until 1983 when its name was changed to AmSouth.²

At the time AmSouth purchased BEA, BEA was one of eight banking institutions in Lee County, Alabama. BEA had more assets than any of the other banks. Lee County was considered to be an attractive, second-tier banking market. Prior to the acquisition of BEA, AmSouth had no operations in Lee County.

The Tax Returns

AmSouth timely filed federal corporate tax returns for 1978, 1979, and 1980 with the Internal Revenue Service (IRS). The returns reflected depreciation deductions taken by AmSouth, purportedly pursuant to Section 167(a) of the Internal Revenue Code toward the value of the "customer deposit base" AmSouth acquired from BEA. The core deposits of a bank are generally considered in the banking industry to include the demand (checking) and savings accounts of customers and certificates of deposit of less than $100,000.00. The "customer deposit base" is a value assigned to such deposits.³

The IRS rejected AmSouth's depreciation deductions and assessed deficiencies against AmSouth. AmSouth timely paid in full the alleged deficiencies. On December 23, 1985, AmSouth filed with the IRS Regional Service Center in Atlanta, Georgia, claims for refunds for the years 1978, 1979, and 1980 on Forms 1120-X. AmSouth requested refunds of $81,320.00 and $92,938.00 for 1978 and 1979, respectively, with no refund due for 1980 due to the carry-back of excess credits reflected in the 1978 return. The IRS never acted on AmSouth's refund request, and this lawsuit followed.

BEA's History Prior To The Sale

BEA was the oldest and a well-established bank in Opelika, Lee County, Alabama which began experiencing difficulties because of bad loans and questionable investments made during the early 1970s.⁴ These difficulties resulted from the well-publicized, illegal activities of its president since 1969 and Opelika Mayor, Robert McCullough. McCullough resigned as president of BEA effective January 1, 1977 and was imprisoned for a time as a result of these activities. From about 1976 until the time of the AmSouth acquisition, BEA suffered substantial loan losses, many of the loans having been made on the authority of McCullough.

On June 16, 1976, after Opelika National Bank had applied to convert to a state chartered bank, the State Superintendent of Banks required, as a condition of approval, inter alia, that the bank increase its capital by one million dollars of which at least $500,000.00 was to be in new common stock. Although the capital increase was stated to be a condition of approval, the bank was given until 90 days after date of conversion to comply. The Superintendent further required, as a condition of approval, that no dividends be paid without the consent of the Superintendent. The Superintendent required that the directors of the bank adopt a resolution "assuring compliance with these conditions," and stated that "we will then issue a Certificate of Approval and a Permit to Transact Business as a state chartered bank." The bank resolved to comply. Thereafter the charter, etc. was issued in September 1976.

On February 1, 1977, the FDIC approved a request of the bank that it be allowed to acquire 1,404 shares of its stock at $850.00 per share as treasury stock,⁵ subject to the condition that the bank's total capital be increased by one million dollars.⁶

The capital-to-asset ratio for BEA was 5.5 percent in 1972, 5.7 percent in 1973, 5.9 percent in 1974, 6.1 percent in 1975, 6.6 percent in 1976, 7.5 percent when plaintiff evaluated BEA in mid-autumn of 1977, and 8.0 percent by the end of 1977.⁷ The national average capital-to-asset ratio for commercial banks in 1960 was 8.1 percent, 6.6 percent in 1970 and 5.8 percent in 1980.⁸ BEA's ratio of loans to deposits had reached an unacceptably high level of 89 percent in 1976 but had been reduced to 80 percent at the time BEA approached plaintiff in 1977. BEA paid a dividend to its shareholders in each year applicable to this case. Earnings per share rose from $.16 in 1976 to $3.84 in 1977.⁹ The Bank's market share and deposit growth rate declined during the three or four years before the acquisition. This could have been partially explained by an increased number of banks in the county and developing bank holding company influence.

There is some room for dispute as to why BEA's Board of Directors ultimately determined "to sell" the bank. The decision ultimately was influenced by concern about the bank's loan portfolio, the need to raise capital, a possible deterioration of stock values, etc.¹⁰ There is no reason for the court to speculate on whether the bank could have raised the necessary additional capital if the attempt had been made. Although there was some desire on the part of the bank's Board to remain independent and some indication of support among directors for raising additional capital, that was not the route taken. A capital deficiency was the bank's main problem.¹¹

The Negotiations

In August of 1977, the Chairman of the Board of First Alabama Bankshares (First Alabama) approached BEA about its purchasing BEA. Thomas Botsford, acting President of BEA, later contacted the plaintiff. Over the summer and fall of 1977, negotiations ensued with both bank holding companies. These potential purchasers were aware of BEA's financial condition when making their offers.¹² In November of 1977, First Alabama made its final offer of $45 (plus an additional reserve amount conditioned on future loan losses). A $45 price represented 1.5 times book value. The BEA Board rejected First Alabama's final offer.¹³

BEA's Board of Directors decided to solicit a purchase offer from AmSouth. The plaintiff's internal analysis of BEA projected a stock price in the $50 to $60 range. The plaintiff, in valuing BEA, paid particular attention to return on assets. The analysis that Dorothy Thomas prepared for plaintiff's Chairman John Woods projected a return on assets of 0.76 percent in order to cover a purchase price of $60 per share.¹⁴ The first nine months of the 1977 return on assets for BEA was 0.79 percent. The Thomas analysis projected the return on assets to rise to 0.87 percent in 1978 and 0.97 percent in 1979. Plaintiff's own return on assets for 1977 was 0.95 percent. In view of this analysis, the plaintiff's Board of Directors authorized negotiations in the mid-$50 range, or about 1.63 times book value.¹⁵

Plaintiff's first offer, after reviewing BEA's books, was $55 per share. BEA's board rejected this offer. On November 25, 1977, John Woods met with Mr. Botsford, and raised plaintiff's offer to $57 per share. Mr. Botsford informed Mr. Woods that the price was probably insufficient. In a telephone conversation shortly thereafter, Mr. Botsford informed Mr. Woods of BEA Board's decision to reject the $57 per share offer. Mr. Woods then increased plaintiff's offer to $60 per share.

BEA's Board of Directors agreed to the $60 per share price and recommended this offer to its shareholders. The Board of BEA accepted.¹⁶ This price, $60 per share, was 1.875 times book value. On December 30, 1977, as a result of negotiations between the parties, the plaintiff and BEA announced that plaintiff would acquire BEA, for a price of $60 per BEA share, subject to shareholder and regulatory approval and certain examinations of BEA. At that time, there were 80,000 shares of BEA stock outstanding.¹⁷

The Agreement and Closing

BEA remained in charge of its operations and continued to function as an independent bank until the acquisition was completed on February 28, 1979. On June 12, 1978, BEA signed a Merger Agreement with the plaintiff. The Merger Agreement reflected the $60 per share price, but included no allocation of the price to specific assets or liabilities, i.e., no separately assigned value to any "customer deposit base." There were no early discussions or negotiations concerning the value of the customer deposit base (or "core deposits intangibles"). There is no evidence that plaintiff specifically considered the value of the customer deposit base as a separate item until July 12, 1978, when the plaintiff's senior accountant (Harvey Campbell) sent a memorandum on the matter to Mr....