White House Milk Co. v. Commissioner , 2 B.T.A. 860 ( 1925 )

OPINION.

Graupner:

In this appeal there is presented the question of fact whether or not the milk routes under consideration had a goodwill value of approximately $50,000 for invested capital purposes and for the purpose of computing profits' resulting from the sale of the assets of the taxpayer to the A. & P. Products Corporation. There is also the question of law, involving the right to deduct net losses of a predecessor corporation for a fractional taxable year from the net profit of the taxpayer for the succeeding taxable years.

The Board has recognized that good will can have value for invested capital purposes only when established by adequate proof of actual cash value. Appeal of John H. Wood Co., 1 B. T. A. 1098; Appeal of Richmond Dairy Lunch, 1 B. T. A. 876. The mere setting up of value of good will upon the books is not sufficient. The fact that a business has operated at a loss for a number of years is strong evidence against an alleged value of good will. Appeal of York Hotel Corporation, 1 T. B. A. 672; Appeal of Walcutt Brothers Co., 1 B. T. A. 910. In this appeal, the predecessor corporation operated at a loss for nearly four years and sold its assets to H. M. Langer for $200, who assumed the liabilities. The new corporation issued to him 500 shares ($100 par value each) for all assets, and subsequently, without consideration, he distributed this stock to the stockholders of the new companv. While the $50,573.75 item was set tip on the books in a “ milk route and goodwill ” account, there is no convincing evidence that it had the actual cash value ascribed to it. On the contrary, it appears that in the sale of the assets of the White House'Milk Products Co. to Langer and the sale by Langer to the taxpayer the parties did not attribute any cash value to this item. There is in this case an entire lack of convincing evidence that this milk route account, at the time it was transferred to the taxpayer, had any actual cash value. As this good will had no actual cash value, the action of the Commissioner was also correct in refusing to allow' this item as a part of the cost of the assets in computing the profits resulting from the sale of the assets of the taxpayer to the A. & P. Products Corporation.

The taxpayer contends it should be allowed to deduct the net loss of the White House Milk Products Co., incurred during the period January 1, 1921, to April 30, 1921, from the net income of the taxpayer for the succeeding taxable years ended April 30, 1922, and April 30, 1923, under the provisions of section 204 (b) of the Revenue Act of 1921, as interpreted in Appeal of Carroll Chain Co., 1 B. T. A. 38. See Appeal of Tacoma Grocery Co., 1 B. T. A. 1062. The White House Milk Products Co. kept its books on the calendar-year basis and operated in 1921, from January 1 to April 23, at a net loss of $29,076.10. It sold its assets to H. M. Langer, who sold the same to the taxpayer shortly after. The taxpayer kept its books on a fiscal-year basis, ending April 30, and for the year ended April 30, 1922, had a taxable income of $26,603, and for the year ended April 30, 1923, had a taxable income of $16,456.50. Eleven stockholders out 45, representing 1,045 out of 2,099 shares, entered the new company (taxpayer), taking 460 out of 985 shares. In our opinion there are too many legal obstacles to overcome to sustain the contention of the taxpayer. There is a difference in taxable years — one calendar and one fiscal — and there is the difference in legal entities. It is undisputed that the taxpayer was a new corporation composed of a minority of stock and stockholders of the old corporation and that there was an intervening ownership of assets by an individual prior to the formation of the new corporation.

The taxpayer further contends that, in case its foregoing claims are not sustained, it is entitled to special relief under sections 327 and 328 of the Revenue Act of 1921. Very little testimony was presented to sustain this position. The taxpayer points out that the invested capital allowed by the Commissioner was $72,517.70 and that the taxable income for the year ended April 30, 1922, was $26,603, indicating an abnormality in invested capital allowed. This fact in itself is an entirely insufficient basis upon which to grant special relief under sections 327 and 328 of the Revenue Act of 1921. In view of the foregoing opinion, we must sustain the position of the Commissioner in all particulars in this appeal.

AruNdell not participating.