Burnet v. Riggs Nat. Bank

• Decision Date: 12 April 1932
• Docket Number: No. 3246.,3246.
• Citation: 57 F.2d 980
• Parties: BURNET, Commissioner of Internal Revenue, v. RIGGS NAT. BANK.
• Court: U.S. Court of Appeals — Fourth Circuit

57 F.2d 980 (1932)

BURNET, Commissioner of Internal Revenue, v. RIGGS NAT. BANK.

No. 3246.

Circuit Court of Appeals, Fourth Circuit.

April 12, 1932.

Charles E. Lowery, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., and C. M. Charest, General Counsel, Bureau of Internal Revenue, and Eugene Meachem, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for petitioner.

Paul F. Myers, of Washington, D. C. (Wm. M. Williams, E. B. Quiggle, and Williams, Myers & Quiggle, all of Washington, D. C., on the brief), for respondent.

Before NORTHCOTT and SOPER, Circuit Judges, and HAYES, District Judge.

NORTHCOTT, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals (17 B. T. A. 615), and involves income taxes for the period June 10 to December 31, 1922, in the amount of $6,682.98. The petition is filed by the Commissioner of Internal Revenue, the Board having found in favor of the taxpayer.

The facts, as found by the Board, and as admitted by petitioner, are as follows:

"The petitioner is a corporation organized under the National Banking Act, with principal office at 1503 Pennsylvania Avenue, N. W., Washington, D. C.

"A bank known as the Central Savings Bank started to do business in Washington, D. C., about August 1, 1917. On July 1, 1920, it was succeeded by the Hamilton Savings Bank. Under neither of these names was this institution successful. During 1921 there were substantial withdrawals of deposits including the deposits of the directors and officers and their families. During the period July 22 to July 28, 1921, the accounts of this savings bank were examined by a Federal bank examiner, this examination disclosing substantial impairment of its capital. Under date of September 1, 1921, the savings bank was notified by the Comptroller of the Currency that its capital was impaired to the extent of $34,193. Under date of November 3, 1921, the Comptroller of the Currency again notified the board of directors of the savings bank that its capital was impaired to the extent of $47,589. The directors of the savings bank were instructed to take immediate steps to remedy the situation.

"On or about September, 1921, the Comptroller of the Currency urged and solicited the Riggs National Bank to take over the Hamilton Savings Bank as a matter of good public policy. He represented to the officers of the Riggs National Bank that the condition of the savings bank was bad; that a run on the bank was imminent, that the bank would have to be closed if a run occurred and that other banks of the city might become involved. Responding to the solicitation of the Comptroller of the Currency, the Riggs National Bank, in the latter part of 1921 and the first part of January, 1922, purchased, through persons identified with the bank, all of the outstanding capital stock of the Hamilton Savings Bank and paid therefor $305,560.

"After the purchase of the stock of the savings bank the Riggs Bank found the condition of the savings bank to be much worse than had been anticipated at the time of the purchase of the stock.

"Before the affairs of the savings bank were fully liquidated, the Comptroller of the Currency determined that the capital of the savings bank was impaired to the extent of $96,096.99.

"The Riggs Bank caused the savings bank to be nationalized on or about May 10, 1922. On or about June 10, 1922, the savings bank, as nationalized, was merged with the Riggs Bank under Act of Congress of November 7, 1918, and the petitioner surrendered the shares of capital stock of said savings bank and received in return therefor all of its assets. The value of the assets of the savings bank at the time of its liquidation on June 10, 1922, was $210,610.93. The difference between the cost of the stock of the savings bank ($305,560) and the value of the assets received upon its liquidation ($210,610.93) in the amount of $94,949.07, was written off the books of the Riggs Bank as a loss.

"The Hamilton Savings Bank had no good will.

"In determining the tax liability of the petitioner the Commissioner divided the year 1922 into two periods, viz: (1) the period from January 1, 1922, to June 10, 1922, during which time he determined the Riggs National Bank and the Hamilton Savings Bank to be affiliated corporations and determined their taxable income upon the basis of a consolidated return for such period; and (2) the period from June 10, 1922, to December 31, 1922, during which time there was no affiliation. During this latter period the taxable income and tax liability of the petitioner were determined by the Commissioner upon the basis of its income without respect to affiliation.

"During the period of affiliation the Hamilton Savings Bank had an operating deficit of $41,485.22. In determining the consolidated net income subject to tax during the period ended June 10, 1922, the Commissioner offset such loss against the operating income of the Riggs Bank. The Riggs Bank claimed as a deduction for the period from June 10, 1922, to December 31, 1922, the amount of $53,463.85 ($94,949.07 less $41,485.22). The Commissioner refused to allow such deduction and computed the deficiency accordingly."

The sole question presented is whether a corporation realizes a loss which may be deducted in its income and profits tax returns under the Revenue Act of 1921 when it receives the total assets of a subsidiary corporation with which it has been affiliated and surrenders the total capital stock of such subsidiary. The corporation owned all the stock of its subsidiary.

The statutes and regulations involved are sections 201, 202, 234, and 240 of the Revenue Act of 1921, c. 136, 42 Stat. 227, and articles 631, 636, and 1545 of Treasury Regulations 62, and read in part as follows:

"Sec. 201. * * * (b) For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. If any such tax-free distribution has been made the distributee shall not be allowed as a deduction from gross income any loss sustained from the sale or other disposition of his stock or shares unless, and then only to the extent that, the basis provided in section 202 exceeds the sum of (1) the amount realized from the sale or other disposition of such stock or shares, and (2) the aggregate amount of such distributions received by him thereon.

"(c) Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee. * * *

"Sec. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property. * * *

"Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * *...