Merchants Nat. Bank v. Commissioner of Internal Rev., 14097.

• Decision Date: 10 November 1952
• Docket Number: No. 14097.,14097.
• Citation: 199 F.2d 657
• Parties: MERCHANTS NAT. BANK OF MOBILE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

199 F.2d 657 (1952)

MERCHANTS NAT. BANK OF MOBILE v. COMMISSIONER OF INTERNAL REVENUE.

No. 14097.

United States Court of Appeals Fifth Circuit.

November 10, 1952.

Geo. E. H. Goodner, Washington, D. C., for petitioner.

Walter Akerman, Jr., Robert N. Anderson, Sp. Assts. to Atty. Gen., Ellis N. Slack, Acting Asst. Atty. Gen., Mason B. Leming, Acting Chief Counsel, John M. Morawski, Sp. Atty., Bur. Int. Rev., Washington, D. C., for respondent.

Before BORAH, STRUM, and RIVES, Circuit Judges.

STRUM, Circuit Judge.

This is a petition to review a decision of the Tax Court which sustained deficiency assessments in petitioner's income taxes for the years 1943 and 1944.

The 1943 deficiency arose as follows: Petitioner is a national bank. In 1934, it owned all the stock of Merchants Securities Corporation, which dealt in securities. As the Banking Act of 1933, 12 U.S.C.A. § 377, prohibited such affiliation after June 16, 1934, liquidation of the Securities Corporation was begun May 19, 1934, the bank acting as liquidating trustee.

The Securities Corporation owned all the capital stock of Dorgan-McPhillips Packing Corporation, which it held for sale in the ordinary course of its business. When liquidation of the Securities Company was completed on March 31, 1937, the market value of the Packing Company stock was quite low. In an effort to avoid taking a loss on the stock, and it being unnecessary to sell it at that time to pay the Securities Company's debts, the bank as owner of the Securities Company's surplus assets took over the stock and held it for eventual sale but awaiting a more favorable market. The bank entered the stock on its books as an asset on March 31, 1937, at the then appraised value of $43,770.17. It held the stock until 1943, when it sold it for $2,380.65, thus incurring a loss of $41,389.52, which the bank deducted on its 1943 return as an "ordinary" loss.

The Commissioner recognized the loss, but held that the stock was held by the bank as a capital asset within the meaning of section 117(a)(1) of the Internal Revenue Code, 26 U.S.C.A. § 117(a) (1), and the loss therefore a long term capital loss, not an ordinary loss, which substantially reduces the deduction to which petitioner is entitled. The Commissioner entered a deficiency assessment for the difference, which the Tax Court sustained, and its decision is here for review.

Although under 12 U.S.C.A. § 24, it may have been permissible for the bank to acquire the Packing Company stock as an "investment," national banks are forbidden by law to "engage in the business" of selling stocks. 12 U.S.C.A. § 378. The bank therefore could not have lawfully acquired the Packing Company stock "primarily" for sale in the ordinary course of its business, but could only acquire it as an "investment" pursuant to 12 U.S.C.A. § 24. Moreover, there is no evidence that the bank made any effort to sell the stock between 1937 and 1943, nor that it held the stock "primarily" for sale. On the contrary, it appears that the bank continued to hold the stock for six years, awaiting an improvement in its market value, which persuasively indicates that petitioner regarded the stock as a capital investment, not as property held primarily for sale in the ordinary course of the bank's business. The Tax Court correctly sustained the Commissioner in holding that the loss in question was a capital loss, rather than an "ordinary" loss.

The bank rests its contention that this was an ordinary loss upon an earlier ruling by a Deputy Commissioner, dated September 7, 1943, contained in a letter to a national bank in Boston, which had acquired corporate stock from a commercial affiliate in process of liquidation in circumstances similar to, but not identical with, those here presented....