
    FIRST NATIONAL BANK OF KULM v. THE UNITED STATES
    [No. H-55.
    Decided April 2, 1928]
    
      On the Proofs
    
    
      Income tax;, interest on loans prior to bwilo merge>'; collection thereafter and payment to old stockholders. — Where in a merger of two banks it is agreed that interest on certain loans accruing prior thereto shall be paid to the old stockholders and not become an asset of the new bank, and it is collected by the new bank and so paid, it is not income to the new bank and can not be taxed as such.
    
      
      The Referteras statement of the case:
    
      Mr. Jesse I. Miller for the plaintiff.
    
      Mr. R. O. Williamson, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant. Mr. Alexander H. McCormielc was on the brief.
    The court made special findings of fact, as follows:
    I. The plaintiff is a national bank organized under the laws of the United States, with its principal place of business in Kulm, North Dakota. During the years 1920 and 1921 it was conducting a general banking business.
    II. In November, 1920, plaintiff entered into an agreement with the Lamoure County Bank for the consolidation of the two banks to become effective January 3, 1921. The First National Bank had outstanding certain loans which matured subsequent to the making of the agreement above referred to and prior to January 3, 1921. It was agreed between the two banks that in so far as possible these loans would not be renewed by the First National Bank but would be continued in their then condition until after January 3, 1921, the effective date of the merger, it being contemplated by the merging banks that such an arrangement would be advantageous to them. On January 3, 1921, the consolidation became effective and the mergecl banks continued in business under the name of First National Bank of Kulm, which is the plaintiff.
    III. Between the date of the merger agreement and January 3, 1921, certain loans of the First National Bank matured, the interest on which amounted to $4,898.58, which interest would have been paid in the year 1920 but for the agreement and arrangement above referred to.
    IY. This interest item of $4,898.58 was accrued on the books of the First National Bank during the year 1920,. but was collected by the plaintiff, that is, the merged bank, during 1921, and reported by it as income for the year 1921.
    Y. It was provided, however, in said consolidation agreement, that this interest, when actually collected by the consolidated bank, should be paid to the old stockholders of the First National Bank as constituted prior to January 3, 1921. When such interest was actually paid to the consolidated bank in 1921 it was credited to the accounts of such old stockholders.
    VI. The Commissioner of Internal Revenue refused to eliminate the item of $4,898.58 from the plaintiff’s income for the year 1921, such refusal producing a deficiency in tax for that year of $812.73, of which the plaintiff was duly notified by the Commissioner of Internal Revenue.
    VII. Thereafter, on May 8, 1925, the plaintiff appealed to the Board of Tax Appeals, and, after a hearing, the board affirmed the decision of the Commissioner of Internal Revenue on July 14, 1925.
    VIII. Thereafter the Commissioner of Internal Revenue assessed the sum of $812.73 against plaintiff, and the said amount, with interest in the sum of $219.44, was paid by plaintiff, under protest, on September 18, 1926. Plaintiff filed a claim for refund of said amounts on September 28, 1926, which claim was rejected by the Commissioner of Internal Revenue on December 15, 1926.
    IX. The interest item of $4,898.58 was not income to plaintiff for the year 1921.
    The court decided that plaintiff was entitled to recover $1,032.17, with interest.
   GRAHAM, Judcje,

delivered the opinion of the court:

The plaintiff is an association resulting from the merger of the First National Bank of Kulm and the Lamoure County Bank. The merger agreement was entered into in November, 1920, and was carried into effect on January 3, 1921. At the time of the agreement the First National Bank of' Kulm, which may be called the old bank as distinguished from the merged bank, owned certain notes which would mature before the date of consolidation, and it was agreed between the two banks that these notes would not be renewed and that the interest accumulating thereon after their maturity and up to payment should be collected by the merged bank and paid to the stockholders of the old bank; that is, this interest should not become an asset of the merged bank. It was collected after the merger in 1921 and entered to the credit of the stockholders- of the old bank.

The Commissioner of Internal Revenue held that, as the plaintiff kept its books on a cash basis and this interest was paid in 1921, it was income for that year and not 1920. We are in accord with this view. However, the tax levied and collected was upon the theory that this interest was income of the plaintiff for the year 1921. With this we can not agree. Under the agreement the interest when collected was not an asset or the property of the merged bank but the property of the stockholders of the old bank, for which the merged bank merely acted as a collection agency. It was received in that capacity and credited to the stockholders of the old bank. It became income to them but was not income to the plaintiff.

The plaintiff is entitled to recover the amount of the additional tax assessed against it for 1921, with interest from September 18, 1926. Let judgment be so entered.

Moss, Judge; Booth, Judge; and Campbell, Chief Justice, concur.  