PUTNAM TRUST COMPANY v. COMMISSIONER OF INTERNAL REVENUE

Decision Date19 July 1932
Docket NumberDocket No. 34743.
Citation26 BTA 655
PartiesPUTNAM TRUST COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Board of Tax Appeals

George E. Elliott, Esq., and Ralph E. Brush, Esq., for the petitioner.

C. C. Holmes, Esq., for the respondent.

This proceeding involves the redetermination of a deficiency in income tax asserted by respondent for the year 1923 in the amount of $2,430.78, the greater part of which is in controversy. Petitioner alleged but one error, namely, respondent's refusal to allow as a deduction from its gross income the amount of $26,386.73 claimed as a loss sustained upon its investment in the stock of the Greenwich National Bank, of Greenwich, Connecticut.

FINDINGS OF FACT.

Petitioner is a state bank, organized under the laws of Connecticut, with principal office in the town of Greenwich in that State. In 1922 there were two other banks in Greenwich, namely, the Greenwich National Bank, organized under the laws of the United States, and the Greenwich Trust Company.

During the early part of 1922 the bookkeeper of Greenwich defaulted, leaving an unpaid town indebtedness on account of pay rolls of about $300,000, having procured these funds from the Greenwich National Bank and the Greenwich Trust Company. It was claimed that the banks had permitted the bookkeeper to make these withdrawals without proper authority and therefore were liable to the town for the amounts thereof, of which approximately $197,000 was chargeable against the Greenwich National Bank.

Had suit been brought on these claims, with the attendant publicity, there was grave danger that the confidence of the community in the local banks, including petitioner, would be destroyed, and a crisis precipitated in banking and business circles of the community. To avoid that contingency and to protect the depositors of the Greenwich National Bank, it was deemed imperative to take over the business and affairs of that bank, preferably by merger or consolidation with petitioner. However, the merger or consolidation of a national bank with a state bank could not be effected under the statutes of Connecticut and the Federal banking laws, nor was it possible to change the national bank to a state institution without the surrender of its charter from the Federal Government and the obtaining of a charter from the state, which would require action by the State Legislature which was not then in session. Consequently, another plan was followed by means of which the object of averting a crisis in the local banking business was accomplished.

Petitioner's directors and officers in June, 1922, organized a syndicate which on petitioner's behalf purchased from the individual owners thereof 864 shares of stock of the Greenwich National Bank. Thereafter, petitioner took over, at cost to the syndicate, the shares so purchased and itself made further purchases of the stock, so that by January 19, 1923, it had acquired 1,323 shares, or approximately two-thirds of the stock outstanding, at a total cost of $241,003.79.

On October 27, 1922, meetings of petitioner's stockholders and directors were held, at which resolutions were adopted providing that the necessary steps be taken "to combine, consolidate and/or merge the Greenwich National Bank or its business with the Putnam Trust Company." The capital stock of petitioner was increased 1,000 shares to 2,500 shares, and a stock dividend of 250 shares was declared in favor of the stockholders of the Putnam Trust Company, leaving 1,250 shares still unissued. Pursuant to the resolutions a contract was entered into with the Greenwich National Bank on January 9, 1923, and approved by petitioner's directors and stockholders the following day, under which petitioner agreed to assume all of the deposit liabilities (but no other debts) of the Greenwich National Bank, amounting to approximately $2,200,000, in consideration for the transfer to it by that bank of assets of an equivalent amount. It provided further that after the effective date of the contract the Greenwich National Bank would discharge as rapidly as possible all of its remaining liabilities and distribute its remaining assets to its stockholders, and would not thereafter engage further in the banking business. Petitioner undertook to procure for the stockholders of the Greenwich National Bank the right to subscribe to the unissued 1,250 shares of its own stock. The agreement became effective on January 20, 1923, and the parties immediately proceeded to carry out its provisions.

The depositors' accounts, more than 2,000 in number, were assumed by petitioner, and assets offsetting that liability were turned over to it. The Greenwich National Bank ceased to engage in its ordinary business, but remained in existence for some time for the purpose of satisfying, acting through a liquidating committee, its various liabilities, including the claim of the town and various Federal Reserve notes. From its remaining assets it realized, after the discharge of all its liabilities, the net amount of $324,440, which it distributed in cash to its stockholders in two liquidating dividends, one on April 2, 1923, of $187,500, the other on August 23, 1923, of $136,940. Of these distributions, petitioner as a stockholder received $124,031.25 from the first, and $90,585.81 from the second, a...

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