[548]*548OPINION.
Littleton:
While some of the items listed below have various subdivisions, the major issues are as follows:
1. Loss on Eagle River Mining Oo. bonds.
2. Affiliated status of the Fourth National Bank and the Trust Company from February 23, 1918, to April 28, 1920.
3. Manner in which cash paid by the Fourth National Bank to the Trust Company in excess of the net book value of the assets of Continental Trust Co. when these assets were acquired by the Fourth National Bank is to be treated in the returns of both banks.
4. Appreciation and disposition of Lamar, Taylor & Riley Drug Co. stock.
5. Loss on Lewis and Amos note.
6. Amount paid W. M. Davis & Co. when this firm discontinued its business and established a similar business for the Trust Company.
7. Architect’s fee.
8. Loss on Crawford-Morrow stock.
9. Year in which debt of E. F. Taylor was determined worthless.
The first issue to be considered is the loss on Eagle River Mining Co. bonds. In order to decide the extent of the loss sustained in this connection, cost of these bonds to the Trust Company must first be ascertained.
These bonds came to the Trust Company as a result of its acting as liquidating agent for the Savings Bank, a bank in Macon, Ga., which became involved in financial difficulties. In 1914, before the Trust Company agreed to liquidate this bank, it ascertained that the assets were less than the liabilities and, therefore, was unwilling to undertake the liquidating contract by taking over the assets and assuming the liabilities until directors of the Savings Bank and four national banks in Macon agreed to be responsible for the estimated deficiency of $173,000.
Among the assets taken over were notes which had Eagle River Mining Co. bonds attached thereto as collateral. None of these notes were paid by the makers. In 1915, the president of the Trust Company became convinced, after an inspection of the properties of the Eagle River Mining Co., that at least the face value of- the bonds and certain accrued interest could be realized in a sale of the properties. Accordingly, the Trust Company in 1915 agreed with the makers of the notes to surrender the notes and take the collateral at its face value of $33,211.37 in satisfaction of the notes. At the same time, or shortly thereafter, in making settlement with the guarantors under their contract, the Savings Bank was given credit for an asset equal to the face value of the bonds, namely, $33,211.37.
We are of the opinion that the foregoing amount, $33,211.37, represents cost of these bonds to the Trust Company. That they may not have been worth this amount is probably true, and it is certainly true that subsequent events show that the Trust Company [549]*549made a bad investment. The fact can not be overlooked, however, that the Trust Company considered the bonds were worth par, or more, when it relieved the makers of the notes from obligation thereon, and there is nothing to show that recovery could not have been had on the notes, apart from the value attaching to the collateral. Apparently the Trust Company was of the opinion that by acquiring the bonds, it could dispose of the Eagle River Mining Co. properties, and not only realize the face value of the bonds, but also have something left for the stockholders, of which it was one.
The fact that only the balance of the debt was charged off in 1918 does not bar the allowance of the entire amount in that year. As the Board said in the Appeal of Mason Machine Works Co., 3 B. T. A. 745, this amounts to substantial compliance with the provision of the statute with respect to charging off the debt since at this time, 1918, the debt was finally determined to be worthless and finally charged off, the amount previously charged off in 1917 being, in effect, consolidated with the amount charged off in 1918.
We have found that the properties of the Eagle River Mining Co. were finally abandoned in 1918 and the bonds determined to be worthless in that year when they were charged off. A deductible loss was, therefore, sustained by the Trust Company in 1918 of $33,211.37.
The second issue involves the question of affiliation which arises on account of an acquisition of the stock of the Trust Company by certain stockholders of the Fourth National Bank.
On February 19, 1918, certain officers and directors of the Fourth National Bank who owned considerably less than a majority of the stock of the Fourth National Bank (otherwise referred to as Lewis and associates) made an offer to persons occupying similar positions with the Trust Company and who likewise owned a minority of the stock of the Trust Company (otherwise referred to as Taylor and associates) to pay $122 per share for not less than two-thirds of the capital stock of the Trust Company, which offer was accepted. Pursuant to this contract, all of the stock of the Trust Company was acquired by Lewis and associates within a few days, though only the controlling interest had been acquired by February 23,1918. The financing of the acquisition of this stock was handled for Lewis and associates by the Fourth National Bank, though the loans made were in the name of Lewis and associates and new stock was issued in their names. On July 24, 1918, Lewis and associates executed a writing in which they stated that the stock issued to and held by them was held for the use and benefit of the stockholders of the Fourth National Bank, but that no obligation or liability, was thereby imposed either upon the Fourth National Bank or its stockholders. [550]*550Lewis and associates continued to hold the entire stock of the Trust Company until April 28, 1920, at which time each stockholder of the Fourth National Bank contributed pro rata to an amount which was used to acquire the stock, and the stock was accordingly transferred to the various stockholders, so that thereafter each stockholder of the Fourth National Bank held one share of the stock of the Trust Company for every five shares of stock of the Fourth National Bank held by him.
Under these circumstances, the petitioners contend that the Fourth National Bank and the Trust Company were affiliated from February 23, 1918, to April 28, 1920, under the provisions of section 240 (bj, Revenue Act of 1918, which reads as follows :
For tho purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.
It is not set out specifically whether petitioners are contending for affiliation under subdivision (1) or (2) above, though from the argument advanced it appears that they are asking for affiliation under subdivision (1). In effect, their contention is that when the directors and officers of the Fourth National Bank acquired the stock of the Trust Company, they were acting for the Fourth National Bank and that the only reason the stock was not acquired by the bank itself was because of a prohibition against it in the national banking statutes.
It is not contended that the Fourth National Bank owned the stock of the Trust Company, but that there was control by the Fourth National Bank through closely affiliated interests. In the Appeal of Canyon Lumber Co., 1 B. T. A. 473, and subsequent decisions, the Board interpreted the control as referred to in the statute to mean control of the voting rights of stock, whether it be legal or otherwise. Tho stock in this instance was held in the name of Lewis and associates and the record is silent as to how it was voted by these individuals. Certainly, from the record, it would appear the individuals had every right to vote it as they saw fit, and could exercise such complete control over it as flows from their complete ownership thereof. No evidence was introduced of any agreement that the Fourth National Bank may have had with the purchasers other than might be gathered from collateral circumstances surrounding the use and disposition of the stock after its acquisition. We-are convinced that while there was a closeness of relationship- — particularly as to operations — between the two banks and also between the individuals who purchased the stock and the Fourth National Bank, there is not sufficient shown to cause us to [551]*551reach the conclusion that there was present the control contemplated by the statute of the Fourth National Bank over the stock of the Trust Company from February 23, 1918, to April 28, 1920.
Petitioners further argue that, since they had oral agreements with the stockholders, they were acting for them and since they executed a declaration of trust on July 28, 1918, to the effect that they were acting for them, the act of the stockholders in finally acquiring the stock on April 28, 1920, must be termed a ratification which would relate back to February 23, 1918. To say that ratification could relate back in such a manner as to change the control as contemplated by the statute which had otherwise existed over a period of more than two years is going further than we feel called upon to go in this case. What the oral agreements were, we do not know, but we consider it significant that in the declaration of trust, the signers thereof set out that the “holding of this stock shall, however, impose no obligation or liability upon either said Fourth National Bank of Macon or its stockholders.” Certainly, it would be extremely improbable for all obligations and liabilities with respect to ownership of the stock to attach to Lewis and associates and at the same time either the Fourth National Bank or its stockholders have full control of its voting rights.
Upon the whole record, therefore, the Board is of the opinion that the Fourth National Bank and the Trust Company were not affiliated from February 23,1918 to April 28,1920.
Our next consideration is the manner in which the excess of cash paid by the Fourth National Bank to the Trust Company oyer the net book value of the assets of the latter company shall be treated by both concerns as a consequence of the transaction of February 23, 1918, when the Fourth National Bank acquired the assets and assumed the liabilities of the Trust Company.
The excess in question, as shown by the books of the Trust Company, amounted to $27,459.44, and in addition there were liabilities which had accrued and which were assumed, but which had not been set up on the books of the Trust Company, in the amount of $3,117.72, which would reduce the net book value and increase the excess to $30,577.16.
First we will consider the situation with respect to the purchasing company, the Fourth National Bank. This bank contends that this amount was paid by it to acquire the business of the Trust Company, meaning by “business” primarily the old customers and depositors who thereby became customers and depositors of the Fourth National Bank, and that the amount paid represented an expense to it in the same manner that amounts, which are paid from time to time to solicitors to secure new customers are considered an expense.
[552]*552That it was expended to acquire the business, we agre* is true, but we can not concur in the proposition that it should be treated as a deductible expense for 1918 by the Fourth National Bank. An important asset to any bank is its line of customers and depositors, as they constitute the very lifeblood of the institution. For reasons of conservatism, national banks are not allowed to carry good will on their books, but this does not alter the fact, as the Board stated in Merchants National Bank v. Commissioner, 6 B. T. A. 1167, that a national bank may have good will, or intangible assets, which may be recognized for invested capital purposes under the revenue acts.
The bank whose assets were purchased had been in existence since about 1890, and assets purchased consisted not only of tangible assets, but assets of every nature and description, exclusive of its trust and fiduciary business. Customers and depositors of the Trust Company became customers and depositors of the Fourth National Bank, representing several classes of deposits amounting to several hundred thousand dollars. Various officers in the Trust Company came over to occupy similar positions with the Fourth National Bank.
In view of the foregoing facts, we are of the opinion that the excess paid, $30,577.16, represented a sale by the Trust Company and a purchase by the Fourth National Bank of an intangible asset of at least this value and that it should be included in the invested capital of the Fourth National Bank from date of acquisition in this amount.
Since this asset was sold by the Trust Company, the question arises as to whether a profit was realized in the sale. From the evidence introduced by the Trust Company, both in the form of expert testimony and earnings,'and invested capital of the Trust Company for five years preceding March 1, 1913, and for the years preceding February 23, 1918, we are convinced that the intangible value was not worth more on February 23, 1918, than on March 1, 1913, and that therefore no profit was realized in the sale to the Fourth National Bank.
We are of the further opinion that interest on the loan of Lewis and associates amounting to $350, which was paid by the Fourth National Bank, does not represent a deductible expense to this bank under the provisions of section 234(a), (1) and (2) of the Revenue Act of 1918, since it does not represent an ordinary and necessary expense, or interest paid or accrued within the taxable year on its indebtedness.
At the time of the aforementioned sals of assets, the Trust Company had certain stock of the Lamar, Taylor & Riley Drug Co., which cost the Trust Company $13,500, but which had been appreciated on its books to $32,000 and was sold to the Fourth National Bank at $32,000. During 1918, a national bank examiner instructed [553]*553the Fourth National Bank that it was in violation of the national banking statutes to hold this stock and it should dispose of it. Accordingly, the Fourth National Bank sold it hack to the Trust Company for the price paid therefor, $32,000, which bank, in 1920, sold it for a like amount.
We have heretofore held that the two banks were not affiliated and consequently each must be dealt with on a separate entity basis. We must hold, therefore, that there were three separate sales involved in the foregoing transactions. In the first instance, stock which cost the Trust Company $13,500 was sold for $32,000 on February 23, 1918, to the Fourth National Bank and, therefore, a profit of $18,500 realized, no question being raised as to a March 1, 1913, value, or that the stock was acquired prior to March 1, 1913.
In a similar case, Appeal of Farmers & Traders Bank, 4 B. T. A. 753, the Board said:
It was a l)cma fide sale between two corporations, the consideration being cash and an enforceable obligation. The parties to the transaction made their own terms and the taxpayer must be bound by the same in so far as taxation may result on the profit of $9,840.
In the two subsequent sales, cost and selling price were the same, and, consequently, no profit resulted to be accounted for.
The next item is the contention of the Trust Company that it should be allowed a deduction of $15,000 in 1919 on account of such an amount being paid by it to secure the services of W. M. Davis and brother to carry on a stock and bond business. The resolution authorizing this transaction is to the effect that $5,000 was to be paid for the furniture, fixtures, and office supplies of the business formerly conducted by these individuals and $10,000 for the good will of their business. The testimony is to the effect that the Trust Company in seeking to establish a brokerage business negotiated with Davis and his brother because they had what was considered the best stock and bond house in Macon, Ga. These men discontinued their business and brought with them their office furniture and fixtures, which apparently had little value, and also their mailing lists. They came to the Trust Company and conducted for this bank the kind of a business which they had previously carried on in their own capacities. When the business as conducted by them proved unsatisfactory to the Trust Company, they were released from their contract, the business was discontinued and their office paraphernalia returned.to them.
The Board is of the opinion that the foregoing expenditure was of a capital nature and represented an amount paid by the bank to secure what was, in effect, a going business. When, however, the business was discontinued in 1920, a loss was sustained on account of which the Trust Company is entitled to a deduction from gross [554]*554income. Appeal of Metro Pictures Film Exchange of Pennsylvania, 1 B. T. A. 721.
The item referred to in our findings of fact as a claim against E. N. Lewis and Mrs. Amos, represents another asset which was taken over by the Fourth National Bank from the Trust Company in the transaction of February 23,1918, at its face value of $20,970.36. The testimony was to the effect that Mrs. Amos, the guarantor on the note securing this claim, was solvent at the time the claim was taken over, and, while the claim was then in litigation, counsel for the Fourth National Bank, after an investigation of the defense which Mrs. Amos was setting up, advised the bank that the defense was not good and the Fourth National Bank took it over at its face value. Subsequent to acquisition, additional information was secured which indicated that there might be some basis for the defense of Mrs. Amos. Then on advice of counsel, the claim was compromised out of court for $5,000 less than its face value.
We are of the opinion that such a reduction in the settlement of a claim represents a deductible loss under section 234 (a) (4) of the Revenue Act of 1918. Appeal of George C. Peterson Co., 1 B. T. A. 690; Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168; and Pacific Novelty Co. v. Commissioner, 5 B. T. A. 1017.
In our opinion, the amount paid to the architect for preliminary plans of a building which it proposed to erect, but which plan was abandoned in the same year after the costs were determined, and has not since been carried into execution, is a proper deduction from gross income in the year when paid, namely, 1919. Appeal of C. U. Connellee, 4 B. T. A. 359.
No evidence was introduced at the hearing with respect to the loss on the Crawford-Morrow stock by the Fourth National Bank, this issxxe being submitted on the pleadings. The Commissioner admits that this stock cost $6,379.60 and that prior to its being charged off, $5,000 had been received and applied as a credit on account thereof, but denies that the stock was worthless when charged off by the Fourth National Bank. In the absence of proof that the stock was worthless as contended by the Fourth National Bank, the prima facie correctness of the Commissioner’s determination must be sustained.
The final issue in the case involves a deduction claimed on account of a debt of E. F. Taylor which arose in 1919 and which the Fourth National Bank contends became worthless in 1920. The debt was charged off on February 28, 1920, on instructions from a national bank examiner, at which time the bank was of the opinion that recovery could be had on a part of the indebtedness.
Had the evidence presented as to the worthlessness of the debt been confined to the directions of the bank examiner who instructed the [555]*555bank to charge it off, it would have been necessary to deny the deduction. Appeal of Murchison National Bank, 1 B. T. A. 617, and Appeal of Farmers & Traders Bank, 4 B. T. A. 753. We have in addition, however, the fact that prior to December 31, 1920, this petitioner determined that there was no value attaching to the debt other than that which might possibly exist in the claims held by Taylor, which had only a nuisance value. The carriers were contesting the claims held by Taylor and the investigation made by the petitioner convinced it that the carriers had a defense which could not be overcome by Taylor, and that, therefore, the only hope of recovery lay in the possibility that the carriers would pay something in order to rid themselves of the various suits which had been filed against them.
We are convinced that the foregoing circumstances are sufficient to satisfy the terms of section 234(a) (5) as to a debt “ascertained to be worthless and charged off within the taxable year.” The debt having been charged off in February, 1920, when it was considered worthless, it is obviously unnecessary to take any further action in this respect, when prior to December 31, 1920, it was determined that the debt was actually worthless. Appeal of Mason Machine Works Co., 3 B. T. A. 745.
As to the determination of worthlessness, we are of the opinion that this was likewise in accordance with sound business judgment and amounted to a substantial compliance with the statute. In Appeal of Egan & Hausman Co., 1 B. T. A. 556, the Board said:
In adjusting their accounts and debts business men are called upon to use sound business judgment and prudence .and are justified in 'eliminating from their assets such accounts and debts as are past due and which they are satisfied that they can not realize upon within some reasonably determinable period. They do not have to await uncertain and future events, nor are they called upon to wait until some turn of the wheel of fortune may bring their debtors into affluence, or to enable the receivers of a bankrupt institution to eke out a liquidating dividend.
Likewise, in Appeal of Pacific Pipe & Supply Co., 2 B. T. A. 870:
The possibility that a small part of the debt may ultimately be recovered will not prohibit the writing off of the debt as worthless for income-tax purposes when every consideration of good business directs that it be charged off.
Also see J. W. Teasdale & Co. v. Commissioner, 5 B. T. A. 1244, and Fort Worth Warehouse & Storage Co. v. Commissioner, 6 B. T. A. 536.
The deduction to be allowed in this instance in 1920 should be reduced by collections which were made during 1920, i. e., the allowable deduction is $54,707.66 less $2,120.50.
Redetermination should be made in accordance with the foregoing.
Judgment will Toe entered on 30 days’ notice, under Rule 60.