Rev. Rul. 56-163

Advice has been requested whether an adjustment is required in determining the average base period net income of a purchasing bank where the purchasing bank, in a taxable acquisition which occurred prior to December 1, 1950, assumed the "deposit liabilities" of the selling bank.

The taxpayer corporation, a bank, purchased, in 1949, substantially all of the assets of another bank, in consideration of the assumption by the purchasing corporation of an equivalent amount of the deposit liabilities of the selling corporation. After completion of the necessary formalities involved in the transfer of the assets and liabilities to the purchasing corporation, the selling corporation immediately ceased all business activities and dissolved. The purchasing bank used the entire base period experience of the selling corporation in the computation of its excess profits credit based on income. The specific question is whether the purchasing corporation was correct in including the entire base period experience of the selling corporation in determining its average base period net income upon which its excess profits credit is based.

Part IV of Subchapter D of Chapter 1 of the Internal Revenue Code of 1939 provides for the computation of the excess profits credit of a purchasing corporation in connection with certain taxable acquisitions occurring prior to December 1, 1950.

Section 40.474-4(a)(1) of Regulations 130 provides the rules to be followed in order to prevent certain duplications in base period income in cases where assets of the purchasing corporation are used to purchase properties of the selling corporation in a taxable acquisition occurring prior to December 1, 1950.

Section 40.474-4(a)(2) of Regulations 130 provides, in part, that, except to the extent that a duplication of base period experience occurs, no adjustment is necessary where stock of the purchasing corporation is issued directly to the selling corporation or the properties are acquired through a bona fide increase in long-term capital structure of the purchasing corporation made in conjunction with and for the purpose of such acquisition.

In the instant case, the facts disclose that the acquisition qualifies as a Part IV transaction within the meaning of section 474(a)(1)(A) of the Internal Revenue Code of 1939. However, the assumption by the purchasing corporation of the "deposit liabilities" of the selling corporation is tantamount to the payment thereof, by use of the purchaser's assets, in order to acquire the properties of the selling corporation.

Accordingly, the "deposit liabilities" of the selling bank, assumed by the purchasing bank, do not constitute a bona fide long-term increase in capital structure within the meaning of section 40.474-4(a)(2)(ii) of Regulations 130 and, to the extent that duplication of base period experience occurs, an adjustment is required under the provisions of section 40.474-4(a)(1) of Regulations 130 in determining the average base period net income of the purchasing bank upon which its excess profits credit is based.