*2448 The evidence fails to show that the amount of $92,600.24 expended by the petitioner in the fiscal year ended April 30, 1927, is a proper deduction from gross income, and the respondent's action with respect thereto is approved.
*225 This proceeding is for the redetermination of deficiencies in income tax asserted by the respondent in the amounts of $1,389.30 for the period May 16, 1925, to April 30, 1926, and $12,791.53 for the fiscal year ended April 30, 1927. At the hearing the parties stipulated that the petitioner's tax liability for the period May 16, 1925, to April 30, 1926, is $10,226.91, and that its income for the fiscal year ended April 30, 1927, as determined by the respondent and set forth in the deficiency letter, should be reduced by the amount of $2,482.55 on account of state, county, and city taxes paid or accrued by the petitioner in that year in excess of the amount of such taxes heretofore allowed by the respondent as deductions from gross income. The only other issue*2449 is as to the petitioner's right to deduct *226 from gross income for the fiscal year ended April 30, 1927, the amount of $92,600.24 paid in that year to the Central National Bank and the Central Trust & Savings Bank of Dallas, Tex.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the United States, with its principal office and place of business at Dallas, Tex. It is and has been since its organization engaged in the banking business. Its books are and have been kept on the accrual basis.
On October 16, 1926, the petitioner entered into a written contract with the Central National Bank of Dallas, and the Central Trust & Savings Bank of Dallas, which contract is in the words and figures following, to wit:
STATE OF TEXAS
COUNTY OF DALLAS.
The Central National Bank in Dallas and the Central Trust & Savings Bank of Dallas, sellers, and the North Texas National Bank in Dallas, buyers, enter into the following agreement, effective October eighteenth, at 8 o'clock, A.M.
First: The sellers agree to sell to buyers a sufficient amount at par value of the assets listed in exhibits "A" and "B" hereto attached, and no others, and sellers*2450 guarantee the amount of such assets to be as listed, with such differences as may be shown by the books of the respective selling concerns caused by change in current daily business.
Second: In consideration buyers agree to assume the liabilities shown by exhibits "A" and "B" which sellers guarantee to be substantially correct as shown by the books of the respective sellers, subject to such change as may occur in daily transactions, and sellers represent that there are no other liabilities whatsoever.
Both statements as shown by exhibits "A" and "B" as of assets and liabilities are correct as shown by the books of the respective companies on October sixteenth, 1926.
Third: It is expressly understood that buyers have the right to refuse to take certain loans and discounts to an amount of Two Hundred Thousand ($200,000) Dollars less than the liabilities as shown by said statements but will accept in lieu thereof joint note by sellers in the sum of Two Hundred Thousand ($200,000) Dollars, with six per cent (6%) interest per annum from date and due on or before ninety days with the privilege of successive ninety day renewals for a period of twelve months. However, if*2451 buyers elect to take a larger portion of the loans and discounts than the Two Hundred Thousand ($200,000) Dollars referred to, then and in that event, said additional amount shall be credited upon said note, both as to principal and interest. All loans and discounts not taken by buyers will remain the property of sellers, but buyers shall have thirty days from this date in which to select the amount of said loans and discounts as will comply with the foregoing conditions. Sellers agree to use all collections from the notes, loans and discounts retained by them in liquidation of said Two Hundred Thousand ($200,000) Dollars note, as when said collections are made.
*227 Fourth: It is understood that the unearned interest on accepted loans will be charged back to sellers and the earned interest will be credited to sellers on all loans and likewise the earned dividends upon the Federal Reserve Bank stock.
Fifth: Buyers agree to pay, in addition to the assumption of said liabilities, to sellers one and one-half per cent. (1 1/2%) of total amount of the interest bearing deposits and three and one-half per cent. (3 1/2%) of total amount of the non-interest bearing deposits*2452 respectively to each of said institutions, the amount thereof to be determined by such deposits on the eighteenth day of October, 1926, at 8 o'clock A.M., but it is expressly agreed that such amount will be retained by the buyers until so much of the Two Hundred Thousand ($200,000) dollars note has been liquidated that the said amount to be paid for deposits will equal the unpaid balance on said note, whereupon it shall be credited on said note and the note cancelled. In the event, however, that sellers desire to pay off said note, they will have the right to have said amount credited thereon.
Sixth: It is further agreed that the Boards of Directors of the contracting parties will pass proper resolutions approving this contract and appoint such officers or agents, respectively, as may be necessary to carry out its terms in accordance with the law governing transactions of this nature.
Seventh: One of the objects in making this contract on the part of the buyers is to secure the good will and business of the sellers, and it is understood that all officers and directors of the sellers will lend their individual influence to aid in the retention of buyers of all business*2453 transferred to it in this transaction and such employees and directors of the sellers as may be hereafter determined, agree to go on buyers board and to use their good offices in securing the services of such of the sellers employees as the buyers may select.
Witness the names of the parties hereto acting for their respective institutions of Dallas, Texas, this sixteenth day of October, A.D. 1926.
Pursuant to said contract the petitioner, in the fiscal year ended April 30, 1927, paid or accrued on its books as payable to the said Central National Bank and the said Central Trust & Savings Bank, the amount of $92,600.24, which was computed as follows:
| Noninterest-bearing deposits, $1,971,967.18, at 3 1/2% | $69,018.85 |
| Interest-bearing deposits, $1,572,093.42, at 1 1/2% | 23,581.39 |
| Total | 92,600.24 |
The petitioner filed an income-tax return for the fiscal year ended April 30, 1927, and in computing its net income deducted said amount of $92,600.24 as an ordinary and necessary business expense. The respondent disallowed the deduction on the ground that said amount was expended for good will and should be capitalized.
OPINION.
MARQUETTE: The parties hereto*2454 have stipulated the amount of the petitioner's tax liability for the period May 16, 1925, to April 30, 1926, and that the petitioner's net income for the fiscal year ended *228 April 30, 1927, as heretofore determined by the respondent and set forth in the deficiency letter, should be reduced by the amount of $2,482.55 on account of state, county and city taxes paid or accrued by the petitioner in that year in excess of the amount of such taxes heretofore allowed by the respondent as deductions from gross income. This leaves for decision the single question of whether the petitioner is entitled to deduct from gross income for the fiscal year ended April 30, 1927, the amount of $92,600.24 paid by the petitioner to the Central National Bank and the Central Trust & Savings Bank of Dallas, Tex., pursuant to the contract of October 16, 1926, which is set forth in full in the findings of fact.
The amount in question was deducted by the petitioner on its return as an ordinary and necessary business expense. The respondent disallowed the deduction on the ground that the expenditure was made to acquire good will and that it should be capitalized. The petitioner argues that the*2455 expenditure was not made for good will, except in an incidental way, but was made to get the difference between the interest paid to depositors and the interest received from the use of the deposits purchased from the Central National Bank and the Central Trust & Savings Bank. It admits that there was an incidental advantage connected with the purchase, in that the petitioner might thereby be placed in a position to build up good will.
No citation of authority is necessary on the proposition that if the expenditure under consideration was for the purchase of good will, it is not a proper deduction in computing net income. The respondent, having determined that it was a capital expenditure and not an ordinary and necessary business expense, and having disallowed the deduction taken by the petitioner, the burden is upon the petitioner to establish by evidence that it is entitled to the deduction.
The only evidence on this issue is the contract between the petitioner and the Central National Bank and the Central Trust & Savings Bank, and a stipulation to the effect that the petitioner, pursuant to the contract, paid or accrued the amount it asks as a deduction. The contract expressly*2456 states that one of the objects of the petitioner in making the contract was to secure the good will and business of the seller, and we have nothing before us to negative that statement, or to show that there was any other object. On the record we must affirm the determination of the respondent.
Judgment will be entered under Rule 50.