Merchants Bank Bldg. Co. v. Helvering
Decision Date | 16 June 1936 |
Docket Number | No. 10535.,10535. |
Citation | 84 F.2d 478 |
Parties | MERCHANTS BANK BLDG. CO. v. HELVERING, Com'r of Internal Revenue. |
Court | U.S. Court of Appeals — Eighth Circuit |
William H. Oppenheimer, of St. Paul, Minn. (Frederick N. Dickson, Frank C. Hodgson, Montreville J. Brown, Stan D. Donnelly, and Edwin B. Baer, all of St. Paul, Minn., on the brief), for petitioner.
Howard P. Locke, Sp. Asst. to the Atty. Gen. (Robert H. Jackson, Asst. Atty. Gen., and Sewall Key and Norman D. Keller, Sp. Assts. to the Atty. Gen., on the brief), for respondent.
Before GARDNER, SANBORN, and BOOTH, Circuit Judges.
This is a petition to review a decision of the Board of Tax Appeals which determined and adjudged a deficiency of $7,937.12 in petitioner's income taxes for 1929. At the hearing before the Board of Tax Appeals the facts were stipulated, and, so far as here material, they are substantially as follows:
Petitioner, a Delaware corporation, was organized in March, 1929. Its creation arose from the following circumstances: In that month, the Merchants National Bank and the First National Bank, two separate and distinct national banking institutions, which had been in existence for a number of years in St. Paul, Minnesota consolidated pursuant to provisions of the federal statutes, and under the charter and name of the First National Bank. The real estate owned by each bank was eliminated from the assets of the consolidated bank, and petitioner was incorporated to take over the real estate of the Merchants National Bank. In March, 1929, the Merchants National Bank transferred its real estate, which was located in Minnesota, to petitioner, receiving in exchange therefor all of the capital stock of the petitioner. The transaction was handled in strict accordance with the provisions of the income tax laws concerning reorganization, and, so far as the transfer was concerned, was a nontaxable transaction. The property was taken over by the petitioner and placed on its books as of the same value and on the same basis as it stood on the books of the Merchants National Bank. The capital stock of petitioner was sold for cash to the stockholders of the Merchants National Bank who desired to purchase it.
At the time of the transfer there were assessed and unpaid taxes against the property for the year 1928. Petitioner paid these taxes in 1929 and deducted the amount paid from its gross income for that year, but the commissioner disallowed the deduction on the ground that the Merchants National Bank should have accrued the amount and taken it as a deduction on its income tax return for the year 1928. The books and records of the Merchants National Bank were kept on an accrual basis, except as to its taxes, and interest on mortgage indebtedness, which were treated as if on a cash basis. Because of this arrangement, the bank received a deduction in 1928 for the taxes it paid in that year. The system so followed by the bank, which formed the basis for its income tax returns, had been approved by the Treasury Department for many years. Petitioner kept its books and records on a cash receipts and disbursements basis. The Board of Tax Appeals held that the taxes paid by petitioner in 1929 were a part of the cost of the property and were not deductible.
The petitioner contends that the transfer to it being made in a nontaxable reorganization transaction, the real estate took the same base value for income tax purposes in the hands of petitioner that it had in the hands of its predecessor transfer company; that the transaction was not a sale, and that it should be allowed to deduct the taxes paid from its gross income under the provisions of section 23 (c) of the Revenue Act of 1928 (26 U.S.C.A. § 23 and note).
The Revenue Act of 1928 (45 Stat. 791) applies. The pertinent parts are:
(1) Section 23 (in part) as follows:
(2) Section 112 (in part) of the act, 26 U.S.C.A. § 112 and note, as follows:
(3) Section 113 (26 U.S.C.A. § 113 note) in part as follows:
Definitions applicable are:
Section 48 (c) of the act (26 U.S.C.A. § 48 and note): "The terms `paid or incurred' and `paid or accrued' shall be construed according to the method of accounting upon the basis of which the net income is computed under this Part."
Under the laws of Minnesota, these taxes became a lien against the property on May 1, 1928, Mason's Minn.St.1927, § 2191; Martin County v. Drake, 40 Minn. 137, 41 N.W. 942; Thompson v. United States (D. C.) 8 F.(2d) 175.
Petitioner bases its right to deduct the taxes on this real estate upon the fact that it took the property in a nontaxable reorganization proceeding, and that it kept its books of account on a cash basis. It is ingeniously argued that there was neither gain nor loss recognized in the transaction, and that in petitioner's hands the property took, for income tax purposes, the same value it had in the hands of the transferor. The taxes when paid, it argues, must be deemed an expense of petitioner, as otherwise the property would not have the same capital value after the transfer as it had before, and that the bank could have paid the taxes while it owned the property and such payment would be deductible as expense. It is urged that one rule cannot be applied in determining the cost of property as a basis for gain or loss, and a different rule when dealing with the same item as an expense.
It is true that the income tax law, for certain purposes, recognizes that a transfer upon what is included in the broad term "reorganization," is not a sale or other disposition of property. Reorganization includes, by express statutory definition (section 112 (i) (1), 26 U.S.C.A. § 112 and note), merger, consolidation, and a transfer of all or a part of assets. Helvering v. Winston Bros. Co. (C.C.A.8) 76 F.(2d) 381. It is important to observe, however, that in the act such transfers have recognition as being sales or exchanges of property. Section 101 (26 U.S.C.A. § 101 note) is the section dealing with capital net gains or losses which result, as the definitions in subdivision (c) show, from the sale or exchange of capital assets. Section 111 (a) of the act (26 U.S.C.A. § 111 note) provides the basis for determining the "gain from the sale or other disposition of property," or the loss. Section 112 (a), 26 U.S.C.A. § 112 and note, provides that: "Upon the sale or exchange of property the entire amount of the gain or loss determined under section 111, shall be recognized, except as hereinafter provided in this section." Among the exceptions are (b) (3), 26 U.S.C.A. § 112 and note, the...
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