Citizens & Southern Corp. & Subsidiaries v. Comm'r of Internal Revenue

• Decision Date: 06 September 1988
• Docket Number: Docket No. 35465-86.
• Citation: 91 T.C. No. 35,91 T.C. 463
• Parties: CITIZENS AND SOUTHERN CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

91 T.C. 463

91 T.C. No. 35

CITIZENS AND SOUTHERN CORPORATION AND SUBSIDIARIES, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 35465-86.

United States Tax Court

Filed September 6, 1988.

During 1981 and 1982, petitioner acquired nine banks. In accordance with generally accepted accounting principles, petitioner allocated the purchase price of each bank among the acquired tangible and identifiable intangible assets, with any residual amounts being allocated to goodwill and going concern value. Petitioner identified deposit base as a separately identifiable intangible asset. Petitioner uses the term ‘deposit base‘ to describe the intangible asset that arises in a purchase transaction representing the present value of the future stream of income to be derived from employing the purchased core deposits of a bank. Petitioner uses the term ‘core deposits‘ principally to refer to deposit transaction accounts, regular savings accounts, and time deposit open accounts. HELD, petitioner proved that deposit base had an ascertainable cost basis separate and distinct from the goodwill and going concern value of the acquired banks, and that it had a limited useful life, the duration of which could be ascertained with reasonable accuracy. Petitioner, therefore, is entitled to a depreciation deduction under sec. 167, I.R.C. 1954, with respect to deposit base. Sec. 1.167(a)-3, Income Tax Regs. HELD FURTHER, petitioner is entitled to allocate to deposit base an amount equal to the present value of the difference in costs between the acquired core deposits and the market alternative. HELD FURTHER, petitioner is entitled to a depreciation deduction for the taxable year 1982 in an amount equal to the present value on the acquisition dates of the difference in costs between the acquired core deposits and the market alternative for the taxable year. Sec. 167(a), I.R.C. 1954. Sidney O. Smith, Jr., Philip C. Cook, Steven M. Collins, Terence J. Greene, Martin D. Ginsburg, Kenneth W. Gideon, John F. Coverdale, and Timothy J. Peaden, for the petitioner.

Anne O. Hintermeister, Wendy Sands, and Patricia A. Donahue, for the respondent.

GOFFE, JUDGE:

The Commissioner determined deficiencies in petitioner's Federal income taxes as follows:

+------------------------+
                ¦Taxable year ¦Deficiency¦
                +-------------+----------¦
                ¦1979         ¦$433,750  ¦
                +-------------+----------¦
                ¦1980         ¦5,415,133 ¦
                +-------------+----------¦
                ¦1981         ¦44,441    ¦
                +-------------+----------¦
                ¦1982         ¦1,115,224 ¦
                +------------------------+
                

The issues for our decision are: (1) Whether petitioner is entitled to a depreciation deduction under section 167 ¹ with respect to the deposit base acquired in the purchase of nine banks; and (2) if so, whether petitioner is entitled to a depreciation deduction for the taxable year 1982 in an amount equal to the present value at the acquisition dates of the projected income stream attributable to the acquired core deposits for that taxable year. ²

FINDINGS OF FACT

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

Petitioner is a Georgia corporation and its principal place of business was Atlanta, Georgia, at the time it filed its petition in this case. Petitioner filed consolidated Federal income tax returns for the taxable years 1979, 1980, 1981, and 1982 with the Internal Revenue Service Center in Atlanta, Georgia. Petitioner's principal business is commercial banking.

In 1928, the Citizens and Southern National Bank formed a wholly owned subsidiary, Citizens and Southern Holding Company, later renamed Citizens and Southern Georgia Corporation. As of December 31, 1980, the Citizens and Southern National Bank conducted banking operations in Georgia through 109 branch banking offices located in Athens (4), metropolitan Atlanta (69), Augusta (10), Macon (11), Savannah (12) and Valdosta (3), and the Citizens and Southern Georgia Corporation had a majority interest in five State-chartered banks in Georgia having 19 banking offices located in Albany (7), Dublin (4), LaGrange (3), Newnan (3) and Thomaston (2). Citizens and Southern Georgia Corporation also had international banking offices located in Atlanta, Savannah, and Nassau, and ‘Edge Act offices‘ in Miami and New Orleans, and corporate regional service offices in New York, Chicago, and Los Angeles, and international service offices in Brazil, Peru, Costa Rica, Colombia, Singapore and Guatemala. On December 31, 1980, Citizens and Southern National Bank and three wholly owned subsidiary banks of Citizens and Southern Georgia Corporation were merged into a new entity that was named The Citizens and Southern National Bank, whereupon Citizens and Southern Georgia Corporation became the parent entity. On May 20, 1986, Citizens and Southern Georgia Corporation was renamed The Citizens and Southern Corporation. Petitioner and its predecessors shall hereinafter collectively be referred to as petitioner.

Petitioner uses the term ‘deposit base‘ to describe the intangible asset that arises in a purchase transaction representing the present value of the future stream of income to be derived from employing the purchased core deposits of a bank. Petitioner uses the term ‘core deposits‘ principally to refer to deposit transaction accounts (DTA accounts), regular savings accounts, and time deposit open accounts (TDOA accounts). In 1981 and 1982, DTA accounts included regular checking accounts and NOW accounts but did not include any market investment accounts. Regular savings accounts are interest-bearing accounts with no checking privileges and no restrictions on the timing of withdrawals. Petitioner's TDOA accounts are interest-bearing consumer savings accounts similar to petitioner's regular savings accounts, except for some restrictions on the timing of withdrawals. The stated nominal rate and effective rate of interest paid on TDOA accounts was approximately the same as that paid on regular savings accounts. TDOA accounts, which did not pay market rates of interest, were perceived by depositors as savings accumulation accounts rather than investment accounts.

Core deposits are a relatively low-cost source of funds, reasonably stable over time and relatively insensitive to interest rate changes. A bank typically invests the funds from deposits in loans and other income-producing assets, and receives fees for services rendered to its depositors. A bank also incurs expenses in establishing, processing, and maintaining deposit accounts. The excess of the income generated over the associated costs represents the profit attributable to core deposits. Core deposits are an important factor contributing to the profitability of a commercial bank. If a bank does not have sufficient core deposits, it must fund its investments through higher-cost deposits and other sources of funding, thereby reducing net income.

Deposit accounts do not remain with a bank indefinitely but eventually close because depositors' circumstances change over time. An account may close because of marriage, divorce, relocation, death or dissatisfaction with the services offered by the bank. Newly established banks may offer greater convenience or low introductory service charges. A business account may close because of business failure, reorganization, or merger.

Beginning in the late 1950's, petitioner developed a close relationship with a number of banks located throughout Georgia referred to as ‘correspondent associates.‘ The correspondent associates used the data processing and banking services of petitioner and in most cases used a name that included the ‘Citizens and Southern‘ name. The correspondent associates normally used petitioner's logogram, with the consent of petitioner.

During 1981 and 1982, petitioner acquired nine of these correspondent associates, collectively referred to as the ‘Acquired Banks.‘ The Acquired Banks were: (1) The Citizens and Southern Bank of Cobb County (the Cobb Bank); (2) The Citizens and Southern Bank of Clayton County (the Clayton Bank); The Citizens and Southern Bank of Henry County (the Henry Bank); (4) The Citizens and Southern Bank of Houston County (the Houston Bank); (5) The Citizens and Southern Bank of Colquitt County (the Colquitt Bank); (6) The Citizens and Southern Bank of Dalton (the Dalton Bank); (7) The Citizens and Southern Bank of Hart County (the Hart Bank); (8) The Citizens and Southern Bank of Jackson (the Jackson Bank); and (9) The Citizens and Southern Bank of Thomas County (the Thomas Bank). The Acquired Banks expended and deducted amounts for advertising, marketing, business development, promotion, salaries, and other expenses connected with attracting and retaining customers in the taxable years prior to their acquisition. The business of the Acquired Banks was conducted substantially in the same manner as before the acquisitions. To the best of petitioner's knowledge, no employees of the Acquired Banks were discharged or resigned as a result of the acquisitions.

To establish offering prices for the Acquired Banks, petitioner relied upon a computerized acquisition model. Petitioner's corporate finance department reviewed material prepared by petitioner's economics department concerning the county in which the bank was located and reviewed 5 years of historical financial information on the bank, identifying specific strengths and weaknesses. All of this background data was used to derive the assumptions used in the acquisition model that projected the bank's future financial performance. The purpose of projecting future financial performance of a bank was to determine a future dividend stream which, when discounted to present value, would determine the value of the bank. The projections were based upon balance sheet growth, and an integral part of these assumptions was that the balance sheet growth was going to...