*183 Decision will be entered for the respondent.
Petitioner, organized in 1941, claimed relief under section 722 (c) (1) of the Internal Revenue Code. It asserted that the competency and unquestioned integrity of its management and the contacts made by them with depositors and potential depositors, together with the willingness on the part of such depositors to place their funds in its custody, were intangible assets making important contributions to income, but were not includible in invested capital under section 718, and that consequently the invested capital method of determining its excess profits credit, to which it is confined, having begun business after 1939, was an inadequate standard for determining its excess profits. It further claimed the use and occupancy of a building complete with banking facilities which it obtained at a favorable rental was an additional intangible asset for the purposes of section 722 (c) (1). Held, that the proof with respect to both claims fails to establish any factual basis for the relief sought.
*539 The respondent*184 denied petitioner's applications for relief under section 722 (c) (1) and ( 3) of the Internal Revenue Code for the years 1943, 1944, and 1945, and for the refund of $ 4,118.36, $ 12,359.70, and $ 705.39 of the excess profits tax paid by it for those years. At the trial petitioner waived its claim under section 722 (c) (3), leaving for determination the question whether it was qualified for relief under section 722 (c) (1) of the Code, and, if so, the extent thereof.
FINDINGS OF FACT.
The petitioner was chartered as a State bank under the laws of Texas on July 29, 1941. It started business at 2315 North Main Street, Fort Worth, Texas, on or about September 3, 1941, with a paid-in capital of $ 120,000, of which $ 100,000 represented capital stock and $ 20,000 was paid-in surplus.
Petitioner keeps its books and files its Federal tax returns on a cash basis of accounting and by calendar years. For all years material hereto, the tax returns of the petitioner and its claims for refund *540 were filed with the collector of internal revenue for the second district of Texas.
In 1937, Lawrence N. Wilemon was vice president and managing officer of the First National Bank in Midlothian, *185 Texas. Midlothian was a town of 1,000 to 1,200 inhabitants. His brother, C. H. Wilemon, was in a small bank at Maypearl, Texas. They were both interested in becoming connected with a bank where there was greater opportunity for advancement and for participating in a larger banking business. Learning that the only bank in Arlington, Texas, had been closed by reason of the defalcations and suicide of the man who had been managing the bank, they went to Arlington and set about the promoting and organizing of a new bank. At or about the same time, Cleaves Rhea, who was engaged in the insurance and loan business in Fort Worth, but who in his earlier years had had considerable banking experience, decided to reenter the banking field if a suitable and satisfactory opportunity could be found. In talking over the matter with the president of the Fort Worth National Bank, he learned about the Wilemons and their efforts to organize a bank in Arlington. He contacted the Wilemons and together they effected the organization of the Arlington State Bank and opened it for business on or about August 2, 1937. The money for the organization, or most of it, was provided by Rhea and members of*186 his family. He and the Wilemon brothers became directors of the bank. Rhea became its president, and C. H. Wilemon left the bank at Maypearl and became its manager. Lawrence N. Wilemon continued in his position with the bank at Midlothian, but served the Arlington State Bank in an advisory capacity whenever needed. Both Lawrence Wilemon and C. H. Wilemon were regarded as being experienced and capable bankers. Cleaves Rhea was well established and regarded as a successful business man in the Fort Worth area.
Arlington is located about 16 miles east of Fort Worth and approximately the same distance west of Dallas. In 1937 it was an incorporated village of 3,000 to 4,000 inhabitants. The population of Arlington and vicinity was made up largely of farmers, dairymen, cattlemen, teachers, and the like.
The Arlington State Bank has been a sound and prosperous banking venture since it opened for business in 1937. For the years 1938 through 1943, from two-thirds to three-fourths of its income, as shown by its reports of earnings to the Texas State Banking Department, were described as being from interest and discount on loans. The ratio of such income to total earnings began dropping*187 in 1942, and in 1944 was approximately three-fifths and in 1945 slightly more than 50 per cent. In each of the years, a fairly substantial portion of its loans were listed in its reports as agricultural in character, and *541 beginning in 1942, when a category for loans secured by agricultural commodities, covered by purchase agreements of the Commodity Credit Corporation, appeared on the form, the aggregate of loans relating to agriculture was ratably greater. For the earlier years of its existence, however, and except at December 31, 1937, when its report indicated that $ 100,363.72 out of total loans of $ 173,403.56 were agricultural loans, the bulk of its loans were reported under the heading "All other loans," and were described as secured and unsecured. Some loans were to dairymen and cattlemen, some were secured by automobiles, and others were personal loans to salaried people.
In 1941, Rhea and the Wilemon brothers decided to investigate the feasibility of establishing a State bank in North Fort Worth. North Fort Worth is that part of the city of Fort Worth which is north of the Trinity River. It was, in the main, an industrial area, in which the Fort Worth Stockyards, *188 two large packing plants, one owned by Swift and the other by Armour, one or more oil refineries, and other industries were located. It was the center of the used car business for Fort Worth. At one time, quite a few years before, three banks had been located in the area. It had not had a bank, however, since 1934, when The Stockyards National Bank, the stock of which was owned by Armour & Company, was closed and its assets were transferred to the Fort Worth National Bank. A reason for the closing of the Stockyards Bank was a legal prohibition of the ownership of banking interests by packing companies. During the interval between 1934 and 1941, various people or interests had looked into the possibilities, or undertaken the promotion, of a bank for the area, but no bank had materialized.
In making their survey, Rhea and the Wilemons undertook to learn the number of people working in the stockyards, packing houses, refineries, and other businesses in North Fort Worth and to determine the extent of the territory that could be served by a bank located there. They made or obtained an estimate that the population of North Fort Worth in 1941 was 50,000 to 60,000 people.
When the petitioner*189 was incorporated on July 29, 1941, its stock was subscribed for largely by Rhea and the members of his family and by the Wilemon brothers. Lawrence N. Wilemon became its vice president and managing officer.
A favorable lease was procured from the Fort WorthStockyards Company covering the building and fixtures which had been used by the defunct Stockyards Bank. Under the lease the rental was fixed at $ 100 a month until deposits reached $ 1,500,000; $ 150 a month until deposits reached $ 2,000,000; and $ 200 a month when the deposits *542 were $ 2,000,000 or more. The lease covered bank fixtures, vaults, safe deposit boxes, safes, and other banking equipment. Petitioner continued in that location until October 1941 when it acquired and moved into new and larger quarters about two blocks therefrom.
The petitioner has specialized in the making of small loans to working people, sometimes referred to as industrial loans, and in loans on automobiles. Its income for the years 1941 through 1945 was made up, to a very large degree, of interest on such loans. In making these loans the face amount of the note given by the borrower would be the amount borrowed, plus an amount equal*190 to the designated interest thereon. If a borrower's credit rating was good, the interest added would be at 8 per cent. If his credit rating was not good, the interest added would be at a higher rate and as high as 10 per cent, and in addition he would be required to put up collateral or procure a cosigner. In the case of a $ 400 loan at 8 per cent, payable monthly in 12 months, the borrower would give a note for $ 432, which would be paid in 12 monthly installments. The interest paid would accordingly be 8 per cent on $ 400 for the full 12 months, even though the borrower had the use of one-twelfth of the $ 400 for only 1 month and had use only of the final one-twelfth for as much as 1 year. On that basis, the interest received by the petitioner on such loans actually ranged up to as high as 15 per cent per annum on the money loaned.
In addition to the above, petitioner would acquire notes which had been taken by automobile dealers in the sale of automobiles. These notes were normally acquired at a discount rate of 6 per cent. To illustrate, a dealer would receive $ 470 from petitioner for a $ 500 note. The notes were payable monthly and the dealer was liable as an endorser.
*191 The loans made by petitioner were from money which had been received as deposits from depositors. Petitioner's deposits at December 31 of the years 1941 through 1945 were as follows:
| 1941 | $ 664,193.20 |
| 1942 | 1,444,308.63 |
| 1943 | 2,553,152.98 |
| 1944 | 3,615,970.53 |
| 1945 | 5,135,112.92 |
Petitioner was never able to procure Swift & Company as a depositor. Armour & Company opened an account and maintained a balance therein as an inducement to petitioner to cash paychecks for its employees without charge. The balance "was to be about as much as" petitioner "would accumulate in checks at any one time."
A Texas State bank was required to retain 15 per cent of its deposits in cash or on deposit with a correspondent bank, and it could not loan an amount in excess of 25 per cent of its capital and certified *543 surplus to a single borrower. It was also a requirement of State law that a State bank in a city or town with a population of over 30,000 must have a minimum capital of $ 100,000.
For the years 1941 through 1945 petitioner's gross income and net income as reported by it in its returns and its net income and excess profits net income as determined by respondent were as follows: *192
| 1941 | 1942 | 1943 | |
| Interest on loans, notes, etc | $ 8,370.01 | $ 39,649.75 | $ 77,341.73 |
| Interest on Treasury notes and on United | |||
| States obligations issued after Mar. 31, | |||
| 1941 | 1,455.84 | ||
| Rents | 58.00 | 436.00 | |
| Exchange | 111.77 | 1,159.72 | |
| Service charges | 268.87 | 1,856.45 | 14,792.31 |
| Other income | 393.31 | ||
| Total gross income | $ 8,808.65 | $ 44,951.07 | $ 92,134.04 |
| Net income reported by petitioner | 67.57 | 12,788.52 | 20,775.28 |
| Net income determined by respondent | 67.57 | 12,788.52 | 25,698.06 |
| Exempt income | 41.12 | ||
| Excess profits net income | 67.57 | 12,788.52 | 25,698.06 |
| 1944 | 1945 | |
| Interest on loans, notes, etc | $ 92,797.87 | $ 110,090.26 |
| Interest on Treasury notes and on United | ||
| States obligations issued after Mar. 31, | ||
| 1941 | ||
| Rents | 1,088.75 | 1,054.70 |
| Exchange | 5,911.44 | |
| Service charges | 1 15,021.66 | 6,430.33 |
| Other income | ||
| Total gross income | $ 108,908.28 | $ 123,486.73 |
| Net income reported by petitioner | 26,046.38 | 40,262.17 |
| Net income determined by respondent | 38,690.39 | 40,262.17 |
| Exempt income | 310.00 | 722.83 |
| Excess profits net income | 38,690.39 | 2 27,310.77 |
*193 Petitioner paid a dividend of 5 per cent on its outstanding stock in 1943, which was its first dividend. It paid a dividend at the same rate in 1944. Since 1945 annual dividends of 10 per cent have been paid.
The capital, both stock and paid-in surplus, and the undivided profits of petitioner at January 1 of the years 1942 to 1945, inclusive, were as follows:
| 1942 | $ 120,067.57 |
| 1943 | 132,752.30 |
| 1944 | 148,816.84 |
| 1945 | 176,070.91 |
The deposits and net worth of the Arlington State Bank, as of December 31, for the years 1937 through 1945, and its net profits, before income taxes and dividends, for the years 1938 through 1945, as shown by its reports to the Texas State Banking Department, were as follows:
| Net profits | |||
| Deposits at | Net worth at | before income | |
| Year | December 31 | December 31 | taxes and |
| dividends | |||
| 1937 | $ 456,776.35 | $ 46,747.65 | |
| 1938 | 513,786.81 | 54,540.38 | $ 10,749.36 |
| 1939 | 586,662.07 | 63,734.76 | 14,107.72 |
| 1940 | 635,345.30 | 74,480.98 | 16,081.18 |
| 1941 | 1,016,222.32 | 84,016.66 | 15,115.03 |
| 1942 | 1,401,127.93 | 82,020.00 | 4,275.43 |
| 1943 | 2,585,126.46 | 90,057.53 | 12,232.50 |
| 1944 | 3,357,796.16 | 109,899.94 | 26,149.69 |
| 1945 | 4,009,665.90 | 127,378.91 | 29,354.55 |
*194 *544 The ratio of compiled net profit to net worth as of the close of the year for all corporate banks and trust companies in the United States, for the years 1938 through 1941, was as follows:
| Compiled | Ratio of | ||
| Year | net profit | Net worth | net profit to |
| (In thousands) | (In thousands) | net worth | |
| 1938 | $ 346,303 | $ 7,078,864 | 4.9 |
| 1939 | 401,085 | 7,270,662 | 5.5 |
| 1940 | 443,004 | 7,492,499 | 5.9 |
| 1941 | 489,248 | 7,889,893 | 6.2 |
The following schedule reflects the growth in total deposits of banks in the Eleventh Federal Reserve District for the years 1935 to 1941, inclusive:
| Index (Jan. | ||
| 12, 1938, as | ||
| Total deposits | 100 per | |
| (In thousands) | cent) | |
| % | ||
| Jan. 9, 1935 | 1 $ 421,782 | 57.3 |
| Jan. 15, 1936 | 663,231 | 90.2 |
| Jan. 15, 1937 | 754,076 | 102.5 |
| Jan. 12, 1938 | 735,542 | 100.0 |
| Jan. 11, 1939 | $ 804,801 | 109.4 |
| Jan. 10, 1940 | 899,964 | 122.4 |
| Jan. 15, 1941 | 979,698 | 133.2 |
| Jan. 14, 1942 | 1,125,527 | 153.0 |
The excess profits credit determined and allowed by respondent for each of the*195 years ending December 31, 1941, to December 31, 1945, inclusive, was as follows:
| Dec. 31, 1941 | Dec. 31, 1942 | Dec. 31, 1943 | |
| Equity Invested Capital | |||
| Paid in for stock | $ 100,000.00 | $ 100,000.00 | $ 100,000.00 |
| Paid in for surplus | 20,000.00 | 20,000.00 | 20,000.00 |
| Total paid in | $ 120,000.00 | $ 120,000.00 | $ 120,000.00 |
| "New Capital" credit (Sec. 718 | |||
| (a) (6)) | 30,000.00 | 30,000.00 | 30,000.00 |
| Accumulated earnings and | |||
| profits | 67.57 | 12,752.30 | |
| Total invested capital | $ 150,000.00 | $ 150,067.57 | $ 162,752.30 |
| Less: Reduction due to | |||
| inadmissable assets | |||
| Net equity invested capital | $ 150,000.00 | $ 150,067.57 | $ 162,752.30 |
| Excess profits credit at 8 per cent | 1 3,845.04 | 12,045.40 | 13,020.18 |
| Dec. 31, 1944 | Dec. 31, 1945 | |
| Equity Invested Capital | ||
| Paid in for stock | $ 100,000.00 | $ 100,000.00 |
| Paid in for surplus | 20,000.00 | 20,000.00 |
| Total paid in | $ 120,000.00 | $ 120,000.00 |
| "New Capital" credit (Sec. 718 | ||
| (a) (6)) | 30,000.00 | 30,000.00 |
| Accumulated earnings and | ||
| profits | 28,816.84 | 56,070.91 |
| Total invested capital | $ 178,816.84 | $ 206,070.91 |
| Less: Reduction due to | ||
| inadmissable assets | 884.34 | |
| Net equity invested capital | $ 177,932.50 | $ 206,070.91 |
| Excess profits credit at 8 per cent | 14,234.60 | 16,485.67 |
*545 OPINION.
The petitioner, being a corporation which was not entitled to use an excess profits credit based on income, pursuant to section 713 of the Internal Revenue Code, because it came into existence after December 31, 1939, claims that it qualifies for relief under section 722 (c) (1), 1 on the ground that its excess profits credit, based on invested capital, was an inadequate standard for determining its excess profits, because its business was of a class in which intangible assets not includible in invested capital under section 718 make important contributions to income. At the hearing, petitioner waived its claim that its invested capital was abnormally low and by reason thereof it was qualified for relief under section 722 (c) (3).
*197 If petitioner is to prevail, two conditions must be met. It must appear that its business was of a class in which intangible assets not includible under section 718 of the Code make important contributions to income, and, if such is the case, it must also appear that the excess profits credit allowable to petitioner on the basis of its invested capital was an inadequate standard for determining its excess profits, because it was less than the excess profits credit based upon what would be the fair and just amount "to be used as a constructive average base period net income" for petitioner. Danco Co., 14 T.C. 276">14 T.C. 276.
Aside from any question as to the class 2 in which the business of petitioner falls, for the purposes of section 722 (c) (1), the identity of the intangible asset or assets claimed as making important contributions to income is not as clear and definite as it should be. After some reference in its opening brief to deposits as the good will of a bank's customers, it was stated that petitioner started business with that "indispensable asset, viz., competent management of unquestioned integrity." In its reply brief, the intangible asset which, *198 it was claimed, petitioner enjoyed was described as "the contacts that petitioner's *546 management had made with depositors and potential depositors, and the willingness on the part of such depositors to place their funds in petitioner's custody and to permit it to use such funds in its business and to realize for itself a return thereon, without demanding any compensation from petitioner for the use of such funds, other than the willingness and ability of petitioner to have available at all times adequate funds with which to pay checks drawn by its depositors on their respective accounts."
*199 If we follow the petitioner's argument to its ultimate conclusion, it is that the ability, integrity, and standing of its officers were of such superior quality as to put it in a class apart from banks generally and to instill such confidence in depositors and potential depositors that it was able thereby to procure deposits in such amounts as to provide it with funds for the making of loans and earning of interest over and above that which might otherwise have reasonably been expected in a banking business. The evidence does indicate, and we have found as a fact, that the Wilemon brothers and Rhea were generally regarded as experienced and capable bankers and successful businessmen. There is no evidence, however, as to the extent of the deposits, if any there were, which were attracted to petitioner by reason of these things. Beyond the fact that Armour & Company did open and maintain a checking account so that its employees might cash their salary checks without charge and that the balance in the account was usually equal to the amount of employees' checks which petitioner might be called on to cash at any one time, and the further fact that petitioner, regardless of the capabilities*200 and standing of its management, was unable to procure an account from Swift & Company at all, we know nothing about petitioner's depositors or deposits, other than the aggregate amount of the deposits at certain dates. Insofar as the record shows, the petitioner at no time procured deposits in any greater amount than would have been possible or likely for a bank located in a similar or comparable area under any other management. Such a bank as petitioner was would have been required to meet the same requirements of the State banking laws and to operate under the regulation and supervision of the State Banking Department, to maintain the necessary reserves, and to preserve its capital, as was petitioner. In short, there is no evidence which would indicate that petitioner through assets, whether tangible or intangible, and whether includible or excludible from invested capital, succeeded in attracting deposits to any greater extent than would have been the case had a bank meeting the requirements of the banking laws, but other than petitioner, been established in North Fort Worth.
Assuming, therefore, but not deciding, that the power, ability, or whatever it may be termed of the *201 petitioner to draw and attract *547 deposits is, for the purposes here, an intangible asset which makes an important contribution to petitioner's income, but is not includible in its invested capital, we would be no more than saying that petitioner is, in that respect, comparable or similar to banks generally. 3 And yet, petitioner strenuously resists the respondent's comparison of its operations and the result thereof with either the corporate banks and trust companies of the United States or the banks of the Eleventh Federal Reserve District, the district in which the petitioner is located, for the purpose of testing petitioner's claim as to a proper constructive base period net income and that its excess profits credit, based on invested capital, was an inadequate standard for determining the extent to which its profits for the years herein were excess profits, if any, under the provisions of the Internal Revenue Code. The reason for such resistance is apparent, and it is that a constructive average base period net income which would be derived by such comparison would not result in an excess profits credit greater than that which has been determined and allowed to petitioner*202 on the basis of its invested capital.
At this point, it may be noted that at January 14, 1942, total deposits of the banks of the Eleventh Federal Reserve District had increased greatly over what they had been during *203 the base period, and were more than 50 per cent greater than they had been at January 12, 1938. It may also be noted that during the interval from 1934 to 1941, the promotion of a bank for NorthFort Worth had been considered and attempted, but no bank had materialized.
There is, if we understand the facts aright, one noticeable difference or distinction between petitioner and banks generally as we know them. That difference, however, is not in the method or pattern for attracting deposits, but in the use of the money received on deposit which, in turn, is utilized in the earning of the bank's income. The evidence shows that petitioner in making its loans did not follow the pattern of banks generally, but carried on a loan business closely resembling that of the so-called "small loan" operators. On such loans the rate of return is very much greater than that on more conservative loans made by banks generally. The money so loaned, however, was definitely tangible, and the parties so agree. It did not, therefore, constitute intangible assets, for the purposes of section 722 (c). By reason, however, of the fact that the petitioner did *548 specialize in industrial or small*204 loans, the petitioner offers that fact as a basis for using, for the purposes of arriving at a proper constructive average base period net income for petitioner, a comparison other than banks generally. It does not, however, offer a group or multiple number of comparisons, but limits itself to the Arlington State Bank. The facts as found show that the Arlington State Bank was organized and operated under its own particular circumstances and its own individual surroundings. Those surroundings were wholly unlike those in which petitioner was organized and set up. It was not located in an industrial area. It is not shown or claimed that it earned its income by the making of industrial or small loans, even though there was some testimony that most of its loans were installment loans. We have undertaken in our Findings of Fact to set out such information as is of record with respect to the loans of that bank. There is, in our opinion, very little, if any more, basis for limiting the comparison here sought to the Arlington State Bank and its base period experience than the mere assertion of the petitioner in making its argument. We accordingly conclude that the petitioner has not*205 shown that on the basis of the contribution of the assumed intangible asset to petitioner's income, a proper constructive base period net income would produce an excess profits credit greater or equal to the excess profits credit already determined and allowed by the respondent on the basis of its invested capital.
The petitioner has made the further claim that the use and occupancy of the building and equipment of the Stockyards Bank at the favorable rental at which the building and facilities were obtained was an additional intangible asset, for the purposes of section 722 (c) (1). Regardless of the merits of the claim as to the nature of the advantageous rental as an intangible asset, for the purposes herein, the proof with respect thereto, as in the case above, fails to establish any factual basis for the relief sought. Aside from the testimony that the rental payments required were very favorable to petitioner, the only other evidence was that in the opinion of Lawrence Wilemon it would have cost petitioner approximately $ 25,000 to have acquired the fixtures and equipment which were obtained at the favorable rental. There was no evidence, however, as to the margin by which*206 the rent required of petitioner would have been increased if it had paid a full rental for the facilities used. We are accordingly unable to find or conclude that even if allowance should be made for some amount of rental saved by reason of the favorable lease, the amount thereof would have indicated any relief, and petitioner has not undertaken to show wherein it would.
Reviewed by the Special Division.
Decision will be entered for the respondent.
Footnotes
1. This item described on return as "Service charges, exchange, etc."↩
2. Net income, less $ 13,674.23 of capital gains.↩
1. Includes time and demand deposits only and is not comparable with deposits for later years which include in addition United States Government deposits and interbank deposits.↩
1. As allowed in revenue agent's report for carry-over purposes:
↩
1941 (120 days only) $ 3,845.04 1942 12,045.40 Total 15,890.44 Less: 1942 excess profits income 12,788.52 Unused excess profits credit carried over to 1943 $ 3,101.92 1. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.
(c) Invested Capital Corporations, Etc. -- The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer, not entitled to use the excess profits credit based on income pursuant to section 713, if the excess profits credit based on invested capital is an inadequate standard for determining excess profits, because --
(1) the business of the taxpayer is of a class in which intangible assets not includible in invested capital under section 718 make important contributions to income.↩
2. E. P. C. 35, 1949-1 C. B. 134, 135, provides in part as follows:
The provision that taxpayer's business must be "of a class" does not imply that there be a division of businesses into trades or industries, or that any other separation into specified groups is required. Here, the word "class" is used in the sense of type, character, or nature, rather than with any requirement that businesses must be segregated into classes. If the nature of the taxpayer's business function, the character of its organization, or the methods it employs in operation are such that intangible assets of the character in question make important contributions to income, it is considered that it falls within the purview of the statute.↩
3. A requisite for a bank charter under Texas law is that "the proposed officers and directors have sufficient banking experience, ability and standing to render success of the proposed bank probable." See Vernon's Ann. Civ. St., arts. 342, 305. And in E. P. C. 35, supra, footnote 2, it is said: "The personal characteristics of individuals * * * generally do not constitute intangible assets. So-called 'know how,' specialized knowledge, skill, experience, reputation, credit standing, and the like are ordinary and expected characteristics of persons undertaking the conduct of a business." In contrast, is Danco Co., 14 T.C. 276">14 T.C. 276↩, where it was shown that the contacts and reputation of one of the taxpayer's officers in the trade were responsible for the flow of business.