Marshall Field & Co. v. Commissioner , 14 B.T.A. 755 ( 1928 )

MARSHALL FIELD & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Marshall Field & Co. v. Commissioner

Docket No. 15279.

United States Board of Tax Appeals

14 B.T.A. 755; 1928 BTA LEXIS 2916;

December 17, 1928, Promulgated

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">*2916 Reduction of opening inventory of a business purchased by reason of assigning a part of the purported purchase price of the stock of merchandise to cost of good will of the business held error, where the evidence established that no good will asset in fact existed, or was considered in appraising the stock in trade.

Lyle T. Alverson, Esq., for the petitioner.

John F. Greaney, Esq., for the respondent.

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SIEFKIN

">*755 This proceeding results from respondent's determination of a deficiency in income taxes for the calendar year 1923 in the amount of $151,345.31, of which $117,374.74 is contested. The sole error alleged is respondent's action in treating a part of the purported purchase price of a stock of goods as payment for good will of the seller, thereby reducing opening inventory of an affiliated corporation organized to carry on the acquired business.

FINDINGS OF FACT.

Petitioner is, and was during 1923, an Illinois corporation with principal offices at Chicago. During the year in question negotiations were begun between petitioner and another corporation, Rothschild & Co., which was then conducting a retail drygoods department">*2917 store, looking to the purchase of Rothschild & Co. by petitioner. When the negotiations were begun, petitioner informed the sellers that the negotiations might as well stop if they had in mind petitioner's paying anything for good will, as petitioner thought there was no good will.

Respecting the merchandise petitioner agreed to buy on the basis of cost or market, whichever was lower. The effective date of the sale was October 1, 1923, though the actual selling price was not determined until December 18, 1923. The last physical inventory taken by the seller, prior to the agreed effective date of the sale, was July 1 of that year. The stock sheets of the seller were represented as showing cost or market, whichever was lower, to date, and were used as a basis or starting point for determining the agreed purchase price without actual physical inventory. The stock sheets showed an estimated inventory of $3,324.633, which was reduced to $2,918,034 by adjustments made by representatives of both parties to bring the estimate down to the purchase basis. No item-for-item examination of the merchandise was made, but petitioner's merchandise ">*756 men made a general survey of the">*2918 store to ascertain the condition of the goods.

The assets taken over by petitioner and their respective values, as determined by the parties to the sale, were as follows:

Cash on hand		$ 50,434
Building		3,500,000
Fixtures		470,779
Motor trucks		40,742
Warehouse elevator		478
Jackson Blvd. Bldg. improvements		107,475
Bonds:
Market value 10/1/23	$107,556
At R. & Co	13,000
		120,556
U.S. Treasury cert. of ind.		250,000
Inventory of merchandise		2,918,034
Inventory of supplies		90,639
Advances on leases		28,224
Unexpired insurance		31,048
Unexpired licenses		1,283
Regular and furniture install. accts. rec		1,451,604
C.O.D. in transit		17,121
Will call in transit		11,523
		9,089,940
Mortgage assumed		1,000,000
		8,089,940
	$ 5,000
	100,000
		105,000
		7,984,940

In appraising the assets, each asset was separately valued and the sum of such values was determined to be the total sale price.

The petitioner conducted the business taken over during the remainder of 1923 through a subsidiary, the Davis Dry Goods Co. Business was not interrupted at the time of the transfer. Most of the employees">*2919 (including departmental heads) of the seller were retained for a time. The process of weeding out such employees, which was begun immediately, lasted over a period of a year or two.

The merchandise purchased from Rothschild & Co. was included in the Davis Company's opening inventory at the agreed sale price of $2,918,034. In the report submitted by a revenue agent which was adopted as a basis for the deficiency, this amount was reduced by $938,997.97, which was treated as the cost of good will, a capital item.

Rothschild & Co. had not been successful in conducting the business. The business had been able to continue only because its stockholders ">*757 made additional advances to the business from time to time and converted the loans into stock or securities. Rothschild & Co. had been advertising for a number of years. There was no good will or going concern asset of value acquired by petitioner.

OPINION.

SIEFKIN: The single issue in controversy in this proceeding is whether the $2,918,034 fixed as the purchase price of the stock of goods, appraised on the basis of cost or market value, whichever was lower, included any sum paid for good will of Rothschild & Co.

">*2920 We think the evidence is clear that such value was fixed as the value of the merchandise only. It was reached by the representatives of the parties to the sale after a careful check of the various elements marking up the total current inventory value as shown by the seller's stock sheets.

The evidence likewise is clear that no good will or going-concern asset of value was purchased. We have found as a fact that Rothschild & Co. had not been successful. Petitioner refused to negotiate on any basis assigning a value to good will. Petitioner did not think Rothschild & Co. had any good will. Such opinion is evidenced by testimony and by the fact that the business was conducted after purchase under a new name. The total purchase price was determined by adding together the value fixed in the separate preliminary appraisal of the several assets. Neither good will nor going-concern value was considered as an asset.

The deficiency is $33,970.57. Decision will be entered accordingly.