*3866 Deficiencies approved for lack of evidence.
*118 This is a proceeding for the redetermination of income and profits taxes for the calendar years 1920 and 1921, for which the Commissioner has determined deficiencies of $6,954.96 and $7,690.50, respectively. It is alleged that the Commissioner erred (1) in treating as taxable income the interest collected in the taxable years which had accumulated on certain securities at the date such securities were acquired by the petitioner for capital stock and (2) in excluding from petitioner's invested capital the interest accumulated on certain securities acquired for capital stock at the date of acquisition. The issues are interdependent.
FINDINGS OF FACT.
The petitioner is a Michigan corporation, incorporated in 1898, with its principal office at Pontiac, Mich., and is engaged in the general banking business. The petitioner was incorporated in the name of Pontiac Savings Bank, which was changed to Pontiac Commercial & Savings Bank some time subsequent to October 15, 1919, and prior to December 31, 1919.
*3867 By agreement dated October 15, 1919, the petitioner and the First Commercial Bank of Pontiac, a Michigan corporation, agreed to unite the two banks and the businesses of each. Petitioner, whose corporate name at that time was Pontiac Savings Bank, had capital stock of $500,000 and a surplus of approximately $100,000 and the First Commercial Bank had capital stock of $200,000 and a surplus of approximately $90,000. It was agreed that the united banks *119 should have capital stock of $750,000 and a surplus of $150,000, to be contributed in the ratio of $2 by the petitioner to $1 by the First Commercial Bank. The agreement contemplated that all the assets of each bank should be combined and it was provided that any excess value of the assets contributed by either bank over its proper proportion, as determined by the ratio fixed, would be distributed as a dividend to the stockholders of the bank contributing such excess. It was further agreed:
That an appraisal of the real estate, furniture, fixtures, equipment and bond investments that have a fluctuating value be made in such manner as the committee of the directors, * * * shall determine; that the accrued interest item*3868 be not taken into consideration, as each institution does not credit interest on its loans until paid, and the date of paying interest on savings accounts are the same; the notes and discounts to be taken over at face value, except such items thereof as are excepted and disapproved by the said committee of directors, * * *; (Italics ours.)
and that all notes and mortgage investments of each bank shall be taken over by the petitioner at face value. It was estimated that the items of accumulated interest of the two banks would bear the same ratio to each other as that fixed for the contribution of capital by each bank and for that reason those items were omitted in the computation of the value of the assets.
Thereafter the consolidation or merger was effected as agreed upon. Petitioner amended its charter, changing its name and increasing its capital stock from $500,000 to $750,000. The increased stock of $250,000 was issued to the stockholders of the First Commercial Bank in exchange for all the stock of that bank: All of the assets of the First Commercial Bank were transferred to the petitioner by a form of deed on December 31, 1919, and thereupon the First Commercial Bank*3869 terminated its corporate existence. No business was thereafter transacted by said bank in its name and under its charter, but the business was continued as a branch bank under the charter of petitioner.
Among the assets acquired by the petitioner from the First Commercial Bank were certain securities, upon which interest, not yet due or payable, had accrued proportionately in the sum of $43,068.59 at the time of acquisition. At the same time a liability of $12,996.17 for interest accumulated against the First Commercial Bank was assumed by the petitioner.
By agreement dated April 18, 1921, petitioner and the Oakland County Savings Bank of Pontiac, a Michigan corporation, agreed to unite the two banks and the businesses of each. Petitioner had capital stock of $750,000 and a surplus of approximately $200,000, and the Oakland County Savings Bank had capital stock of $250,000 and a surplus of approximately $75,000. It was agreed *120 that the united Banks should have capital stock of $1,000,000 and a surplus of $200,000, to be contributed in the ratio of $3 by petitioner to $1 by the Oakland County Savings Bank. The agreement contemplated that all the assets of the Oakland*3870 County Savings Bank would be combined with those of petitioner, and it was provided that any excess value of assets contributed by either bank over its proper proportion, as determined by the ratio fixed, should be distributed as a dividend to the stockholders of the bank contributing such excess. It was further provided:
That an appraisal of the real estate, furniture, fixtures, equipment and bond investments have been made by the committee of the Directors of each Bank, * * *; that the accrued interest item shall not be taken into consideration as each institution does not credit interest on its loans until paid and the dates of paying interest on savings accounts are May 1st for Oakland County Savings Bank, and June 1st for Pontiac Commercial and Savings Bank, and the latter institution has made a reservation for the payment of its savings interest, so that the item of interest has been taken into consideration and will adjust itself by the payment to be credited May 1st as to Oakland County Savings Bank and the reservation for interest carried by Pontiac Commercial and Savings Bank; the notes and discounts to be taken over at face value, except such items thereof as are*3871 disapproved by the said Committee of Directors herein above mentioned. (Italics ours.)
and that all notes and mortgage investments of each institution shall be taken over by the petitioner at face value. The item of accrued or accumulated interest of each bank was omitted from the computation of the value of the assets.
Thereafter the consolidation or merger was effected as agreed upon. The petitioner, by amendment to its charter, increased its capital stock from $750,000 to $1,000,000 and issued the $250,000 of additional stock to the stockholders of the Oakland County Savings Bank in exchange for all the stock of that bank. All of the assets of the Oakland County Savings Bank were transferred to the petitioner by a form of deed on May 28, 1921, and thereupon the Oakland County Savings Bank terminated its corporate existence. No business was thereafter transacted by said bank in its name and under its charter, but the business was continued as a branch bank under the charter of the petitioner.
Among the assets acquired by the petitioner from the Oakland County Savings Bank were certain securities, upon which interest, not yet due or payable, had accrued proportionately*3872 in the amount of $40,641.54 at the time of acquisition. At the same time a liability of $12,480.27 for interest accumulated against the Oakland County Savings Bank was assumed by the petitioner.
In each case the so-called accrued interest represented the amount earned by the securities for that portion of the total interest period elapsed at the date of the transfer of the securities. Interest on loans and securities was not credited by any of the three banks until paid.
*121 The petitioner kept its accounts and made its tax returns upon the cash receipts and disbursements basis. The interest accrued on the First Commercial Bank securities was collected by petitioner in 1920. It does not appear when the interest accrued on the Oakland County Savings Bank securities was collected by petitioner.
The respondent excluded the accrued interest in each of the transactions from invested capital of petitioner. The interest accrued on the First Commercial Bank securities and collected by the petitioner in 1920, less the interest obligations of such bank assumed by the petitioner, was included by the respondent in taxable income for 1920. The interest accrued on the Oakland*3873 County Savings Bank securities, less the interest obligations of such bank assumed by the petitioner, was included by the respondent in taxable income for 1921.
OPINION.
VAN FOSSAN: Petitioner contends that the interest earned to the date of transfer on certain securities transferred to it by the First Commercial Bank and the Oakland County Savings Bank, though such interest was not at the time due and payable, was an independent capital asset acquired for stock and should be so included in its invested capital. The most obvious answer to this contention is that there is no evidence that any stock was issued for this interest item independent of its relation to the securities on which it was earned. If fact, under the circumstances of the merger by which, technically, stock in petitioner's corporation was exchanged for stock in the absorbed bank it may well be doubted if there was an issuance of petitioner's stock for the assets of the merged banks. However, looking at the transactions by which the assets of the two banks were transferred to petitioner, broadly, and considering the effect rather than the form of the several procedural steps, for the purposes of this opinion*3874 we will consider the case as though the bank assets were acquired for stock.
Speaking generally, the right to collect and receive interest is an incident of ownership of the securities on which the interest is accruing. It passes as a concomitant upon the transfer of the securities and except under unusual circumstances is not transferred independently. Thus, in the instant case, the interpretation of the provision of the resolution providing for the appraisal of the asset involved in the transfer, that the accrued interest should not be taken into consideration, is not free from difficulty. The reason assigned for this treatment in the resolution does not seem adequate or complete. We do not construe it to mean that the accrued interest was reserved to the absorbed banks as those banks, after the merger, were liquidated and ceased to function and the interest was actually collected by petitioner. Rather, we are inclined to believe that it was merely an attempted simplification of the appraisal, based on the fact *122 that the amounts of accrued interest due each bank were approximately in the same proportion as the estimated value of the securities contributed by each. *3875 Assuming this interpretation and passing to the deeper question of the inclusion of the interest items in invested capital, we find other difficulties. Upon the transfer of securities the accrued interest is usually taken into account as an element in determining the value or price at which they are to be transferred. In this case we have no identification of the securities involved, no evidence of their number or value. The appraisal resolution provided that they be taken over at face value unless disapproved by the committee of directors and provision was made for a fund to take care of any losses incurred prior to final consummation of the merger. There is no evidence whatever of their actual cash value, or of an allocation of stock to particular assets. Such being the state of the evidence, we are unable to determine that there is error in respondent's determination.
Similar observations apply to the second issue. The interest in question was subsequently collected by petitioner. We know only that petitioner was on a cash receipts and disbursements basis.
The interest accrued on the securities acquired from the First Commercial Bank on December 31, 1919, and was collected*3876 by the petitioner in the year 1920.
It is alleged by the petitioner that the interest accrued on the securities acquired from the Oakland County Savings Bank on May 28, 1921, was collected by it in 1921. The respondent in his answer denied that such interest was collected in 1921 and no evidence was offered to show when the collection thereof was actually made. The respondent, however, in determining the deficiency included such interest, less the interest obligations of the Oakland Bank assumed by the petitioner, in taxable income for 1921. The burden is upon the petitioner to establish that there was error in the respondent's determination, and this it has failed to do.
Judgment will be entered for the respondent.