Republic Bank & Trust Co. v. Commissioner , 36 B.T.A. 680 ( 1937 )

REPUBLIC BANK & TRUST COMPANY, Z. GOSSETT, BANKING COMMISSIONER OF TEXAS, STATUTORY RECEIVER IN LIQUIDATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Republic Bank & Trust Co. v. Commissioner

Docket No. 76490.

United States Board of Tax Appeals

36 B.T.A. 680; 1937 BTA LEXIS 668;

October 20, 1937, Promulgated

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1. Held, a certificate of the Banking Commissioner of Texas to the effect that "its known financial condition is that assets sufficient to pay its depositors in full do not exist when and if this bank is required to pay any Federal taxes" is not admissible in evidence to prove the facts therein stated, when objected to by respondent.

2. During the taxable year petitioner received back from the Comptroller of the Currency bonds in the amount of $21,600, which had theretofore been deposited by petitioner with the Comptroller to secure payment of certain unproven claims of depositors. Upon receipt of the bonds, petitioner transferred $20,000 thereof to its surplus account. Since the bonds were received under a claim of right and without restriction as to their disposition, held, petitioner derived taxable income, under the facts of this case, in the amount credited to surplus. North American Oil Consolidated v. Burnet,286 U.S. 417">286 U.S. 417.

Charles F. Byers, Esq., for the petitioner.

James H. Yeatman, Esq., for the respondent.

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HILL

This is a proceeding for the redetermination of a deficiency in income tax for the fiscal year ended April 30, 1932, in the amount of $2,756.67. Petitioner, in the original petition, assigned as error the determination of respondent "that petitioner realized the sum of $20,000 or any other sum whatsoever from unproven claims in the taxable year."

The original petition herein was filed by the Republic Bank & Trust Co. on May 25, 1934. A hearing was had at Houston, Texas, on May 6 and 7, 1935, at which hearing a motion was filed by counsel for petitioner to substitute E. C. Brand, Banking Commissioner of Texas and statutory receiver of the Republic Bank & Trust Co., as petitioner, and also to file an amended petition so as to raise the issue of whether or not petitioner comes within the provisions of the Act of March 1, 1879, section 22, 20 Stat. 351; 12 U.S.C.A. 570. This motion was denied by the presiding member. Thereafter, a memorandum opinion was filed on June 26, 1936, pursuant to which an order was entered on the same date substituting E. C. Brand, Banking Commissioner of Texas, as petitioner, and also granting leave to petitioner to amend the petition so as to raise the issue of the applicability of the Act of March 1, 1879, above referred to. On March 22, 1937, pursuant to the leave granted, petitioner filed an amended petition, and on March 27, 1937, an order was entered substituting Z. Gossett, Banking Commissioner of Texas, statutory receiver of the Republic Bank & Trust Co., in liquidation, as petitioner in the place and stead of E. C. Brand.

The facts were stipulated by the parties, and in material part are set forth below.

FINDINGS OF FACT.

The original petitioner, Republic Bank & Trust Co., herein called petitioner, is a banking institution, chartered under the laws of the State of Texas on May 2, 1927.

The State National Bank was a national banking association, with its principal place of business at Austin, Texas. Prior to May 2, 1927, the State National Bank became insolvent, and was placed in receivership in a proceeding lodged in the District Court of Travis County, Texas, entitled "In the matter of James E. McKinney, Receiver."

On May 5, 1927, the Republic Bank & Trust Co., as second party, entered into a contract with James E. McKinney, receiver of the State National Bank, as first party, for the purchase of the entire assets of the last named institution. Consideration for the purchase and sale was provided in the contract as follows:

FOURTH.

Second Party agrees to pay First Party for the property all and singular, * * * the sum of $747,789.03, which amount is $25,000 in excess of the appraised value of such assets, this latter amount to be advanced by Second Party as provided for in "FIFTH" hereof in anticipation of the collection of the remaining unpaid assessment by said Receiver said amount of $747,789.03 to be paid or advanced by Second Party to First Party by its assuming and agreeing to pay and by its assuming and paying the same as hereinafter provided and agreed to; and will pay such additional sums as will be necessary to provide a payment of 86% on any unknown liabilities of said The State National Bank of Austin that may be proven and accepted or established by law against said Receivership; and such further sums as may be necessary to provide for payment in full of any preferred claims which may hereafter be established and allowed against said Receivership.

On the same date, May 5, 1927, an order ratifying and approving the contract above referred to, and authorizing and empowering the receiver to consummate and carry out such contract of sale in accordance with its terms, was entered by the District Court of Travis County, Texas, in which court the receivership was pending.

After court authorization therefor had been duly obtained, the contract of May 5, 1927, as modified by supplemental contract mentioned below, was fully carried out in accordance with its terms.

Under date of February 15, 1928, the original contract of May 5, 1927, was supplemented by an agreement in writing entered into by and between the Republic Bank & Trust Co., as first party, and the Comptroller of the Currency of the United States, as second party, which provided, inter alia, as follows:

2. Whereas, by the terms of the Ninth Paragraph of said contract [of May 5, 1927] it is stipulated as follows:

"That upon termination of the receivership all remaining funds in the hands of the Comptroller of the Currency covered by this contract and relating to claims unproven at that time shall be deposited with said Second Party (Republic Bank & Trust Company of Austin) in an account appropriately designated out of which will be paid 86% on all unproven claims and unproven liabilities listed in detail as to names and amounts, which may be filed prior to the statute of limitation for the State of Texas on claims of this nature. This deposit will be secured to the satisfaction of the Comptroller of the Currency by a duly approved bond indemnifying these creditors in the amount due them if their claims are proven and established within the time fixed by the statute of limitation. This bond will run to the Comptroller of the Currency;" and,

3. Whereas, all remaining funds in the hands of the Second Party covered by said contract and relating to such unproven claims, have been paid over to and deposited with the First Party by the Second Party; and to secure the payment of same to creditors entitled thereto upon proof and establishment of their claims within the time fixed by the statute of limitation of the State of Texas, the First Party has agreed to deposit with the Treasurer of the United States, for the account of the Second Party, and the Second Party has agreed to accept as such security, instead of the bond specified in said Paragraph Ninth above quoted, the securities hereinafter described, and to hold same until the expiration of said period of limitation; and,

4. Whereas, such period of limitation, under the laws of the State of Texas, expires four years from the date of the deposit of said funds as contemplated by the terms of said Paragraph Ninth above quoted; and,

5. Whereas, in pursuance of the terms of said contract, as modified by the terms of this agreement, the First Party has deposited with the Treasurer of the United States, for the account of the Second Party, in lieu of the bond originally contemplated, and in pursuance of a resolution of its Board of Directors, * * *, the following described securities, to-wit:

* * *

6. Now, Therefore: The Second Party does hereby acknowledge delivery of said securities to the Treasurer of the United States for the account of the Second Party, and does accept same in lieu of said bond, and agrees to hold and keep said securities, or others exchanged or substituted therefor, for a period of four (4) years from the date of said deposit (since which time the First Party has asserted an adverse claim to all of the assets of said The State National Bank of Austin, Texas, as against the holders of any and all unproven claims and liabilities against said Bank), and for the additional time hereinafter mentioned should the circumstances so warrant, - for the purpose of indemnifying the holders of any such claims or liabilities who may prove same, or any of them, during such period; and, in the event of the failure or refusal of the First Party to pay 86% of the amount of any such claim or liability which may be so proven, as provided in said original contract, the second party shall have the right to convert into cash such of the securities above described, or others which may be exchanged or substituted therefor, as may be necessary to provide sufficient funds with which to pay such dividend on any and all such claims or liabilities as may be so proven during said period; and said funds shall be so applied; and the Second Party shall, at the expiration of said period of limitation, or at such later date as all liability of the First Party hereunder shall have ceased or shall have been fully discharged to the holders of any such unproven claims, cause to be returned to the First Party any of such securities, or the proceeds thereof, as shall not have been so applied to the payment of such proven claims or liabilities of said Bank.

7. In the event, however, any action, or actions, by any of the holders of such unproven claims be commenced upon such claims, or any of them, within such four-year period, the securities hereinbefore described and any securities exchanged or substituted therefor, shall be likewise held by the Treasurer of the United States for the account of the Second Party until any and all such liability of said The State National Bank of Austin, Texas, or the First Party, shall have been liquidated and discharged.

8. Should any recovery be had against the Receiver of said The State National Bank of Austin, Texas, on any action on any of said unproven claims, commenced after the expiration of said four-year period, then, and in such event (should said securities have at said time been surrendered to the First Party), the First Party agrees and obligates itself to fully protect and indemnity the Receiver and the Comptroller of the Currency against any and all liability or expense incurred by them, or either of them, in connection with any such action; and to place them in funds with which to fully discharge any and all such liability and expense, or either.

9. If, at the expiration of said four-year period, no claims or liabilities shall have been proven against said The State National Bank of Austin, Texas, nor sued upon by action against said Bank or said Receiver; or, if the First Party shall have paid said dividend of 86% on all such claims or liabilities which may have been so proven during said period, - then, and in either such event, the Second Party shall cause to be returned to the First Party the securities so deposited for the account of Second Party with the Treasurer of the United States in pursuance of the terms of this agreement; and all liability hereunder of the first party to the Second Party shall thereupon cease, unless and except further liability be established against said Bank or said Receiver or the Second Party in some action, or actions, begun after the expiration of said four-year period as hereinabove provided, in which event said liability shall not terminate until the full and complete satisfaction of any claim and expense which may be established under such circumstances.

Pursuant to the terms of the contracts hereinabove referred to, petitioner, on or about February 27, 1928, deposited with the Comptroller of the Currency, subject to his order, as provided in said contracts, bonds of the United States of the total face value of $21,600. Said bonds had a fair market value at date of deposit of not less than face value.

The purchased assets were entered and carried by petitioner on its books as having a cost to it of the entire amount definitely paid or agreed to be paid therefor, plus the full amount of $21,600 placed with the Comptroller of the Currency under the terms of the agreements hereinabove mentioned to guarantee the payment of possible claims that might be advanced against the purchased assets.

Prior to April 30, 1931, all assets acquired by petitioner from the State National Bank were converted through sale, exchange, or renewal, petitioner's book value thereof being used as petitioner's cost in the determination of petitioner's net taxable income for income tax purposes for years prior to April 30, 1931.

During the fiscal year ended April 30, 1932, the taxable year here involved, four years from the date of the deposit having elapsed, the Comptroller of the Currency released all his right in or to the use and possession of the bonds in the amount of $21,600, and returned them to petitioner under and pursuant to the contracts theretofore entered into between them.

Upon receipt of the bonds petitioner, with the consent and approval of the Banking Commissioner of Texas, transferred $20,000 of such amount of $21,600 to its surplus account on its books of account and records.

The individual ledger sheets of the State National Bank pertaining to sundry individual deposits, proofs of claim with respect to which were not filed with the receiver, were delivered over to this petitioner and retained in its files.

OPINION.

HILL: The sole issue presented by the original pleadings is whether petitioner realized during the taxable year income in the amount of $20,000 upon unproven claims. However, at the first hearing at Houston, Texas, in May 1935, petitioner moved for leave to file an amended petition to raise the additional issue of the applicability of the Act of March 1, 1879, section 22, 12 U.S.C.A. 570, copied in the margin. ¹ At the same hearing, petitioner offered in evidence a certificate of the Banking Commissioner of Texas, dated April 27, 1935, to which respondent objected, reading in material part as follows:

I, E. C. Brand, Banking Commissioner of Texas, do hereby certify that the Republic Bank & Trust Company, a state bank of deposit and discount, formerly doing business in Austin, Travis County, Texas, was closed by me on April 24, 1935, because it was in an insolvent and failing condition.

Stockholders of this institution are this day being assessed their full one hundred per cent liability for the benefit of its creditors.

During former years the officers of this bank charged its dormant deposits off of its depositors' liability ledger and credited surplus to cover a material amount. These deposits are now, and always have been, a true liability of this bank.

Its known financial condition is that assets sufficient to pay its depositors in full do not exist when and if this bank is required to pay any Federal taxes.

In a memorandum opinion filed herein June 26, 1936, we held that the above quoted certificate of the Banking Commissioner of Texas was not admissible in evidence to prove the facts therein stated, when objected to by respondent, saying:

In the first place, evidence is not admissible to prove an issue which has not been raised by the pleadings. In the next place, a mere certificate by the Banking Commissioner of Texas that "its known financial condition is that assets sufficient to pay its depositors in full do not exist when and if this bank is required to pay any Federal taxes" is not admissible proof of the facts stated therein. Rule 29 of the Board's Rules of Practice provides in part: "Statements in the petition, ex parte affidavits, and briefs, do not constitute evidence."

The Banking Commissioner's certificate, printed above, in so far as it affects the issue here involved, is an ex parte statement. If the only question we had to determine was whether petitioner had been declared insolvent and its affairs placed in the hands of the Banking Commissioner of Texas, this certificate of the Banking Commissioner would be sufficient for that purpose. But when it comes to establishing the facts which are necessary to bring petitioner's case within the provisions of the Act of March 1, 1879, and thus absolve it from the deficiency which the Commissioner has determined, we think that more than the ex parte certificate of the Banking Commissioner is necessary, especially when its admission in evidence is objected to by respondent's counsel.

To admit such a certificate as evidence of the facts therein stated would prevent respondent's exercise of the right of cross-examination to test out the correctness of the conclusions therein stated. * * * We sustain respondent's objection to the admission of the certificate for that purpose. Cf. Guaranty State Bank of Greenville, Texas,12 B.T.A. 543">12 B.T.A. 543.

We adhere to the views expressed above.

Pursuant to leave granted in an order entered June 26, 1936, petitioner filed an amended petition on March 22, 1937, all the material allegations of which were denied by respondent, raising the issue of the applicability of the Act of March 1, 1879, supra, but at the subsequent hearing held at Houston, Texas, on April 19, 1937, petitioner did not again offer in evidence the certificate of the banking commissioner, hereinabove referred to, in connection with the issue so raised, and failed to offer any evidence on such issue. While we have jurisdiction to consider the issue, West Town State Bank, 32 %.b.t.a./ 531, its decision depends entirely upon the existence or nonexistence of certain facts, in respect of which petitioner has the burden of proof. Petitioner having offered no proof on the issue raised by the amended pleadings, we find for the respondent thereon.

This brings us to the consideration of the issue presented by the original pleadings, namely, whether petitioner during the taxable year derived income in the amount of $20,000, from unproven claims.

In 1927 petitioner purchased from the receiver of the State National Bank all of that bank's assets, and as part consideration therefor, agreed to assume and pay 86 percent of any of its unknown liabilities which might thereafter be proved and accepted or established against the receivership. Upon termination of the receivership, the funds in the hands of the Comptroller of the Currency, relating to the unproven claims, were deposited with petitioner, to be used by it to pay 86 percent of any unproven claims which might be filed prior to the expiration of the statutory period of limitation of the State of Texas, which was said to be four years from the date of such deposit. To secure payment by petitioner to creditors upon proof of their claims within the time fixed by the Texas statute of limitations, petitioner agreed to and did deposit with the Treasurer of the United States, instead of the bond originally provided, bonds of the United States having a fair market value of $21,600. During the taxable year ended April 30, 1932, four years from the date of the deposit having elapsed, the Comptroller of the Currency released all of his rights in the bonds mentioned, and returned them to petitioner. Upon receipt of the bonds, petitioner, with the consent and approval of the Banking Commissioner of Texas, transferred $20,000 of such amount of $21,600, to its surplus account.

Petitioner entered the purchased assets on its books at a cost to it of the entire amount paid, plus the full amount of $21,600 placed with the Comptroller of the Currency. Prior to the taxable year all of such assets were converted through sale or otherwise, and petitioner's net income was determined for tax purposes on the basis of the book cost or value.

Respondent contends that upon expiration of the four-year period of limitation petitioner's contractual liability in respect of the unproven claims was extinguished. Therefore, on return of the bonds by the Comptroller of the Currency, respondent says, they became petitioner's property unconditionally, and it therefore derived taxable income in the amount of the $20,000 transferred to its surplus account.

Petitioner argues that under Texas law limitation does not apply to the unproven claims of the depositors; that it has a continuing liability in that respect, and points to the provisions of the contract of February 15, 1928, whereby petitioner remained conditionally liable after expiration of the four-year period of limitation. Petitioner contends, therefore, that it derived no taxable income upon return of the bonds by the Comptroller of the Currency.

The point argued by the parties respecting the Texas statute of limitation, we need not decide. If the bonds, upon return to petitioner, became its property absolutely, without further liability on the part of petitioner as to unproven claims of the depositors, as contended by respondent, then petitioner does not deny that it received taxable income in the amount determined by respondent. If the bonds were not unconditionally returned to petitioner without further liability on its part, as it contends, we think, on the facts disclosed, petitioner nevertheless derived taxable income in an amount equal at least to the amount in controversy.

There is an abundance of evidence to establish that petitioner received the bonds back from the Comptroller of the Currency during the taxable year under a claim of right and without restriction as to their disposition, notwithstanding it might thereafter have been required to pay out, on claims of depositors subsequently established, an amount equal to the value of the bonds in whole or in part. The agreement between petitioner and the Comptroller of the Currency indicated that after expiration of the four-year period of limitation, petitioner "asserted an adverse claim to all of the assets" of the State National Bank "as against the holders of any and all unproven claims and liabilities against said Bank." That petitioner claimed the bonds upon their return as its own property unconditionally is further indicated by the transfer of $20,000 thereof to the credit of its surplus account.

In these circumstances, petitioner derived taxable income in the amount stated, and if in a later year it was or should yet be required to pay the equivalent of any part of such amount in satisfaction of claims subsequently proven, it would be entitled to deduct such amount from the income of the year in which paid. This principle was clearly established by the decision of the Supreme Court in North American Oil Consolidated v. Burnet,286 U.S. 417">286 U.S. 417, where it was held that income earned in 1916, but impounded by a receiver pending outcome of litigation and actually paid over to taxpayer in 1917, was taxable as income of 1917. In its opinion the Court said:

The net profits earned by the property in 1916 were not income of the year 1922 - the year in which the litigation with the government was finally terminated. They became income of the company in 1917, when it first became entitled to them and when it actually received them. If a taxpayer receives earnings under a claim of right and without restriction as to its disposition he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. * * * If in 1922 the government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year.

Respondent's determination is approved.

Judgment will be entered for the respondent.

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Footnotes

• 1. Whenever and after any bank has ceased to do business by reason of insolvency or bankruptcy, no tax shall be assessed or collected, or paid into the Treasury of the United States, on account of such bank, which shall diminish the assets thereof necessary for the full payment of all its depositors; and such tax shall be abated from such national banks as are found by the Comptroller of the Currency to be insolvent; and the Commissioner of Internal Revenue, when the facts shall so appear to him, is authorized to remit so much of said tax against insolvent State and savings banks as shall be found to affect the claims of their depositors. ↩