Rev. Rul. 58-42

In view of the decision in National Bank of Commerce of Seattle v. Commissioner , 27, T.C. No. 92, acquiescence, page 5, reconsideration has been given to Revenue Ruling 56-163, C.B. 1956-1, 658.

Revenue Ruling 56-163, supra , holds that the `deposit liabilities' of a selling bank, assumed by a purchasing bank in a transaction of the type described in section 474(a)(1)(A) of the Internal Revenue Code of 1939, 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. 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.

An identical issue was considered in National Bank of Commerce of Seattle, supra . The court there held that no duplication of experience resulted and that the acquiring bank was entitled to compute its average base period net income by taking into account the excess profits net income (or deficit therein) of the selling bank to the extent attributable to the properties acquired, for which the consideration was the assumption of the deposit liabilities. The court expressly disagreed with the holding in Revenue Ruling 56-163 and stated:

If the petitioner had borrowed money by the issuance of bonds of debentures and had used the funds to purchase the assets of the selling corporations, apparently there would be no question as to its right to use the income experience of the selling corporations in computing its excess profits credit, except to the extent that some duplication might occur in some other manner, as, for example, by reason of an increase in the excess profits credit on account of a capital addition under section 435. This is contemplated by section 40.474-4 of the regulations where it is provided that no adjustment is necessary where properties are acquired through a bona fide long-term increase in the capital structure of the purchasing corporation, except to the extent duplication may occur. We see no reason why the same result should not follow where the increase in indebtedness results from an assumption of liability to depositors. In either case the purchasing corporation has incurred an indebtedness in connection with the acquisition of assets, and without parting with any of its own assets which have contributed to its own base period income experience.

In view of the above, it is now the position of the Internal Revenue Service that the assumption of the `deposit liabilities' of the selling bank is not tantamount to the use of the purchaser's assets, in acquiring the properties of the selling corporation. Accordingly, since the purchasing bank did not part with any of its own assets which contributed to its own base period income experience, it is entitled, under section 474 of the Code, to compute its average base period net income, upon which its excess profits credit is based, by taking into account the base period experience of the selling bank to the extent attributable to the properties acquired, for which the consideration was the assumption of the `deposit liabilities.'

Revenue Ruling 56-163, supra , is hereby revoked.