Banc One Corp. v. Comm'r of Internal Revenue, Docket No. 10756-80.

• Decision Date: 28 March 1985
• Docket Number: Docket No. 10756-80.
• Citation: 84 T.C. 476,84 T.C. No. 35
• Parties: BANC ONE CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

84 T.C. 476

84 T.C. No. 35

BANC ONE CORPORATION, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10756-80.

United States Tax Court

Filed March 28, 1985

P acquired two banks at prices exceeding the aggregate book values of the assets reported in the financial statements of the acquired banks. HELD, petitioner is not precluded from allocating the aggregate purchase prices among the acquired assets even though such allocations were not negotiated or calculated at the time of the acquisitions. HELD FURTHER, depreciation deductions claimed by P with respect to a ‘loan premium‘ denied because P failed to establish basis in excess of book value for the loans. HELD further, P is not entitled to depreciation deductions with respect to core deposits because hindsight statistics were the only evidence submitted by P to calculate depreciation. HELD FURTHER, value of goodwill and other nondepreciable intangibles acquired by P determined under the residual method. EUGENE P. BOGNER, for the respondent.

CHARLES J. KEGLER, PAUL D. RITTER, JR., and EDWARD C. HERTENSTEIN, for the petitioner.

COHEN, JUDGE:

Respondent determined deficiencies in petitioner's income tax liability of $455,263 for the tax year ended 1974 and $967,265 for the tax year ended 1975. The issues for decision are as follows: (1) whether petitioner should be allowed depreciation deductions under section 167 ¹ with respect to either loan or deposit premiums allegedly acquired in the purchase of two banks and (2) whether petitioner properly allocated the aggregate purchase prices of the two banks among the individual assets acquired in proportion to the relative values of the assets as determined by petitioner (the ‘second tier‘ allocations).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Prior to October 19, 1979, petitioner was known as First Banc Group of Ohio, Inc. Petitioner and its predecessor shall hereinafter collectively be referred to as ‘petitioner.‘

Petitioner is a corporation and had its principal place of business in Columbus, Ohio, at the time of filing the petition herein. Petitioner and its subsidiaries filed consolidated Federal income tax returns for the calendar years 1974 and 1975 with the Internal Revenue Service Center in Cincinnati, Ohio.

Petitioner was a registered bank holding company under the Bank Holding Act of 1956 and owned substantially all of the shares of a number of commercial banks in Ohio. Through its subsidiaries, petitioner acquired additional Ohio banks. This case concerns the acquisition of the Athens National Bank (Old Athens) and the First Citizens Bank (First Citizens).

OLD ATHENS

Prior to September 13, 1974, Old Athens operated a main office facility and four branch offices in or near Athens, Ohio. Athens was the county seat of Athens County, a rural county in southeastern Ohio and the home of Ohio University. As of December 31, 1973, Old Athens was the largest of eight banks doing business in Athens County. Old Athens had deposits of $40,3 million, and the next largest bank had deposits of $15 million on that date. The other six banks in Athens County had aggregate deposits of approximately $48 million on December 31, 1973.

Prior to September 13, 1974, all of the shares of Old Athens were owned by United Dairy Farmers Investment Company (United Dairy), a partnership whose principal office was in Cincinnati, Ohio, and whose principal partners were Carl H. Lindner (Lindner) and Robert D. Lindner. The board of directors of Old Athens consisted of its president, Brandon Tad Grover (Grover), and four Cincinnati residents, including Lindner, who were affiliated with United Dairy. Employed by Old Athens since 1952 and named president in 1965, Grover was the bank's sole executive-level manager, and he worked under the close and continuing direction of the Cincinnati board members and owners.

Old Athens derived virtually all of its deposits from within Athens County. Grover, who was a member of the Athens City Council and an active participant in a variety of community-oriented activities, had acquired the deposit accounts of the majority of the businesses in Athens County.

The Cincinnati owners required Old Athens to enter into a number of loans and leases with customers from the Cincinnati area. Because Old Athens placed priority upon servicing the lending, leasing, and other banking requirements of the Cincinnati customers, the bank frequently refused or curtailed banking services to existing and prospective local customers.

Although Grover had no concern for the credit worthiness of the Cincinnati customers, he resented being forced by the owners to engage in the transactions. Grover believed that Old Athens could make additional and very profitable loans to customers in Athens County, if funds were not used in the Cincinnati loans and leases, Grover thus desired the acquisition of Old Athens by a holding company that would allow him to run a community-oriented bank on an aggressive and profitable basis.

In early 1973, Lindner contacted petitioner's chief executive officer and proposed the sale of Old Athens to petitioner. An associate of Lindner visited petitioner's office in Columbus, Ohio, in late summer of 1973 to discuss further the possible acquisition. Lindner's representative proposed a sales price of $13 million for Old Athens.

Sometime before October 11, 1973, petitioner reached an oral agreement in principle with Lindner for the purchase of Old Athens. On that date several officers of petitioner met with Grover at Old Athens' offices. Petitioner's officers thereafter acquired additional information concerning Old Athens that became the basis of several written internal evaluations of the proposed transaction. These evaluations included a memorandum of October 12, 1973, prepared by petitioner's officer in charge of acquisitions, which described Old Athens' market, organizational and operational structure, and assets and liabilities, including loans and deposits.

During October and November of 1973, petitioner's assistant treasurer prepared several reports analyzing the financial effect upon petitioner of the acquisition of Old Athens and determining petitioner's return on investment at various assumed acquisition prices. A primary objective of these reports was to ensure that the acquisition of Old Athens would not dilute petitioner's per share earnings. The accuracy of the financial projections thus depended upon the assistant treasurer's ability to determine Old Athens' ‘normalized‘ net income, i.e., the expected continuing earnings of Old Athens based upon petitioner's accounting standards. In computing Old Athens' normalized earnings, petitioner's assistant treasurer considered Old Athens' loans and deposits and treated the excess of the assumed purchase prices over Old Athens' book value as ‘goodwill,‘ to be amortized over 40 years.

On March 20, 1974, the F.B.G. National Bank of Athens (F.B.G.) was organized as a national banking association in which petitioner owned substantially all the shares. Old Athens, United Dairy, F.B.G., and petitioner entered into a merger agreement dated May 17, 1974, providing for the merger of Old Athens into F.B.G. The merged entity was to be renamed ‘The Athens National Bank‘ (New Athens). New Athens was to pay $10 million to the shareholders of Old Athens and to assume all of Old Athens' liabilities on the effective date of the merger. The merger agreement did not allocate the purchase price among the various assets to be acquired as a result of the merger. United Dairy agreed not to employ Grover in any capacity within 5 years after the effective date.

The obligations of petitioner (and thus of New Athens) under the agreement were subject to a number of express conditions. Among these was that there be no material adverse change in the financial position, business, or aggregate net assets of Old Athens from June 30, 1973, until the effective date of the merger. The purpose of this condition was to allow petitioner to avoid closing the transaction, if the financial condition of Old Athens at closing were materially worse than petitioner's expectations. Additionally, petitioner's obligations were contingent upon the payment in full, prior to the effective date, of the loans made by Old Athens to the Cincinnati borrowers.

On May 24, 1974, petitioner filed with the Comptroller of the Currency an application for approval to merge Old Athens into F.B.G. Petitioner noted in the application that a condition precedent to consummation of the merger was that Old Athens' loans to Cincinnati customers, which aggregated approximately $5.13 million, be paid in full. Petitioner also stated that Old Athens held approximately $3 million in leveraged leases and equipment leases derived from transactions originated by the Cincinnati owners. Although these leases were to remain with New Athens after the merger, petitioner represented that New Athens would not participate in additional leveraged leasing and would engage in equipment leasing only to accommodate customers from the Athens area. According to petitioner, freeing New Athens from the credit and leasing requirements of the Cincinnati customers would allow the bank to satisfy better those needs of its local customers.

Between May 17, 1974, and September 13, 1974, petitioner sent auditors to Old Athens to perform a cursory review of the deposits, loans, and operations of the bank. Sometime after May 24, 1974, petitioner performed a preclosing examination of Old Athens. No change in the merger agreement resulted from petitioner's examinations.

The merger was consummated on September 13, 1974, at which time New Athens paid $10 million in cash and assumed all of Old Athens' liabilities (including investment tax credit recapture) totaling $39,266,812, for a total...