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PULLMAN TRUST AND SAVINGS BANK v. UNITED STATES

September 19, 1963

PULLMAN TRUST AND SAVINGS BANK, AN ILLINOIS CORPORATION, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Will, District Judge.

This is an action brought by plaintiff, Pullman Trust and Savings Bank (hereinafter sometimes referred to as the "New Bank"), for the return of federal income tax deficiencies for calendar years 1955 and 1956 assessed by the Commissioner of Internal Revenue on May 7, 1959, and paid by plaintiff on May 14, 1959. The Court's jurisdiction is provided by 28 U.S.C. § 1346(a) (1).

Plaintiff was incorporated in 1932 and has engaged in banking operations at 400 East 111th Street, Chicago, continuously since it opened. In 1955 and 1956, it filed federal income tax returns with the District Director of Internal Revenue at Chicago, and in those returns it claimed bad debt deductions of $160,600.00 and $229,020.62 respectively. The Commissioner denied these deductions (and one other in each year not here in issue). As a result, he assessed deficiencies in the amounts of $84,552.00 and $120,130.82 respectively. Plaintiff paid these sums, plus interest, and in October, 1959, it filed timely claims for refund in the amounts of $83,512.00 and $119,090.82, respectively, plus interest. These claims were predicated upon plaintiff's assertion that its original determinations of its allowable bad debt deductions were correct and in accordance with the procedure set forth in Mimeograph 6209, 1947-2 Cum.Bull. 26, as supplemented. On October 12, 1960, plaintiff, having received no notice of allowance or disallowance of these claims, commenced this litigation.

1. History of the Plaintiff

Plaintiff's predecessor, The Pullman Trust and Savings Bank (hereinafter referred to as the "Old Bank"), was incorporated under the banking laws of the State of Illinois in 1907. It was dissolved in 1940. From April 30, 1932 until its dissolution the Old Bank was in liquidation.

During the late 1920's and early 1930's, the Old Bank's solvency and liquidity became increasingly impaired. The bank's net worth declined drastically and, according to the report of the State Auditor of Public Accounts as of February 23, 1932, slow, doubtful and worthless loans and receivables totalled substantially more than the bank's capital and surplus.

The Old Bank's majority shareholder, the Pullman Car and Manufacturing Corporation (hereinafter referred to as the "Pullman Company"), risked considerable sums to prevent the bank's insolvency. In 1931, for example, the Pullman Company added more than $1,000,000 to its deposits in the Old Bank. In February, 1932, depositors of that bank were informed that the Pullman Company had substantial amounts on deposit and was, "if necessary, prepared to add to such deposits in order that the Bank may be at all times in position to meet, with its other realizable assets, any requirements for immediately available cash."

In April, 1932, the State Auditor ordered the Old Bank to write off its books more than $111,000 of bad debt losses relevant to this case. (The bank did not comply with this order during 1932). At this point it became clear that the bank needed an immediate infusion of additional funds in order to replenish its capital. Three alternatives presented themselves: a 100% involuntary assessment upon shareholders pursuant to the provisions of section 11 of the Illinois Banking Act, Ill.Rev.Stat. 1931, ch. 16 1/2, § 11 (which, it was believed, would result in the bank's demise); a voluntary assessment upon shareholders (it was expected, however, that only the Pullman Company would pay); or a reorganization of the bank in accordance with the terms of section 12 of the State Banking Act. The last alternative was selected in part because the State Auditor was of the opinion that no other was likely to permit the bank to continue in operation.

On April 29, 1932, plaintiff, bearing the same name as the Old Bank, except for the initial word "The", was incorporated. The Pullman Company and individuals associated with it subscribed for all 3000 authorized shares at $167.00 per share and paid $501,000 in cash therefor. All other stockholders of the Old Bank were given the opportunity to subscribe at the same price, but no others accepted the offer.

The New Bank elected as its directors the same persons then also serving as directors of the Old Bank, and it chose as its officers the officers of the Old Bank. From the first day it opened its doors, on Monday, May 2, 1932, it used as its banking facilities the identical premises used through the previous Friday, April 29, by the Old Bank. To all intents and purposes, the Old Bank and the New Bank constituted one and the same continuous banking operation.

Section 12 of the Illinois Banking Act, Ill.Rev.Stat. 1931, ch. 16 1/2, § 12, provided in relevant part the following:

  "With the approval in writing of the Auditor of
  Public Accounts, which approval shall state that the
  proposed sale is, in his opinion, necessary for the
  protection of the depositors and other creditors, any
  corporation with banking powers may, by a vote of
  two-thirds of its directors and without a vote of its
  stockholders, sell all or any part of its assets to
  another corporation organized under the banking laws
  of this State or of the United States, provided such
  other corporation assumes in writing, all of the
  liabilities of said corporation as shown by its
  records, other than its liabilities to its
  stockholders as such."

On April 30, 1932, with the consent of the State Auditor, the boards of directors of both banks adopted an agreement whereby the New Bank assumed substantially all of the Old Bank's deposit and other liabilities. In consideration therefor, the Old Bank turned over to the New Bank all of the former's cash and government obligations, and, in addition, the Old Bank tendered an unsecured obligation in the form of an account payable for the balance. All of the Old Bank's other assets were retained by it until selected by the New Bank for conveyance to it as provided for by section 7(a)(3) of the agreement which read in part as follows:

  "The New Bank may from time to time go through all
  loans [in the Old Bank's portfolio] * * * and may
  select such items as are, in the sole judgment of the
  New Bank, of the class that the New Bank would make
  or purchase in the usual course of its business, and
  the face value of all such loans * * *, plus accrued
  interest or less discount for prepaid interest
  unearned thereon, so selected shall be applied as a
  credit upon the liabilities assumed."

This agreement was to be of five years duration. In that period, all cash realized by the Old Bank was to be transferred to the New Bank with the former's indebtedness being reduced accordingly. The Old Bank guaranteed that on April 30, 1937, the New Bank would have received at least as much from the sale or liquidation of the Old Bank's assets as the liabilities assumed by the New Bank, or else the Old Bank and its stockholders would be responsible for paying the balance in full. By consent of the parties and with the approval of the State Auditor, this agreement subsequently was extended for an additional three years to April 30, 1940.

The result of this agreement was twofold. First, the New Bank remained solvent and it continues to operate today. During the 1930's, the New Bank's loan and investment portfolio contained only those of the Old Bank's assets which the New Bank's directors considered to be of value. Consequently substantially all losses resulting from the depreciation in value of loans and securities held by the Old Bank on April 29, 1932, were absorbed by that bank. Second, the separation of the two entities became more formal than substantial. During the Old Bank's liquidation period, the two banks functioned as a single banking operation. For example, all employees, officers and directors were paid by the New Bank although they performed in dual capacities as needed. The same premises housed both banks.

During the 1930's, the Pullman Company continued to inject funds into the combined operation. As a condition of the New Bank's opening after the National Bank Holiday in March, 1933, the State Auditor required the Pullman Company to deposit an additional $1,000,000 in the New Bank. In return therefor, the company took deferred and subrogated deposit certificates. The following year, with the permission of the State Auditor, the company Withdrew about $458,000 of this deposit and placed it in the Old Bank in return for which the State Auditor rescinded his order that the Old Bank liquidate certain reduced-value assets on what the Pullman ...


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