Carthage Spoke Co. v. Commissioner , 21 B.T.A. 1135 ( 1931 )

CARTHAGE SPOKE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Carthage Spoke Co. v. Commissioner

Docket No. 34358.

United States Board of Tax Appeals

21 B.T.A. 1135; 1931 BTA LEXIS 2245;

January 13, 1931, Promulgated

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Upon the evidence, held, that a so-called "bonus" of $15,000 paid by petitioner in the acquisition of a mixed aggregate of assets was in fact a part of the cost of the class of assets acquired under the heading of "Merchandise," and, as such, was a part of the cost of goods sold during the taxable year.

F. E. Harris, Esq., and J. H. Campbell, Esq., for the petitioner.

Brooks Fullerton, Esq., for the respondent.

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LOVE

This proceeding is for the redetermination of deficiencies in income tax for the calendar years 1923 and 1924, in the amounts of $2,224.63 and $109.09, respectively.

The sole issue is the proper allocation of a so-called "bonus" of $15,000 paid by the petitioner during the taxable year 1923 in the acquisition of a mixed aggregate of assets.

FINDINGS OF FACT.

Petitioner is a corporation organized under the laws of the State of Tennessee.

On February 26, 1923, petitioner, as party of the second part, entered into a written contract and agreement with the J. C. Bilbrey Spoke Co., party of the first part, wherein the party of the first part agreed to sell to the party of the second part, all its assets (with certain exceptions not material here) "as per inventory of January first, 1923," as follows:

Real estate	$15,500.00
Machinery	19,300.00
Merchandise	59,713.48
Plus a bonus of	15,000.00
Total	109,513.48
Less farm products, etc	2,500.00
Aggregate total	107,013.48

The contract further provided that all sales made by the J. C. Bilbrey Spoke Co. since January 1 were to be recorded as the sales of petitioner; that petitioner was to assume the expenses of operation for the period since January 1; that petitioner was also to assume the taxes on the property transferred as assessed on January 10, 1923, and all unexpired contracts made by the J. C. Bilbrey Spoke Co. "for sale of logs delivered to mill yard and for spokes from what is known as the Alpine set." The contract further provided that $896.23 was to be added to the aggregate total as covering office fixtures and machine tools; that the petitioner was to take possession of the property at once; that payment was to be made in notes and cash, and that "these matters are to be worked out by March 15th, 1923 and complete settlement to be made as per this agreement."

As the matters were finally worked out, the total purchase price to be paid by petitioner in cash and notes amounted to $115,076.84.

On or about March 15, 1923, the J. C. Bilbrey Spoke Co. rendered petitioner a detailed invoice of the property purchased by petitioner in the amount of $115,076.84, as follows:

Real Estate		$15,500.00
Machinery		19,300.00
Machine tools		500.00
Office fixtures		443.93
Merchandise, Jan. 1st, 1923:
19,750 auto billets $10	$197.50
265,188 spoke billets 50	13,259.40
293,132 turned billets 60	17,587.92
817 sets finished "A" spokes
254 sets finished "B" spokes
1,830 sets finished "C" spokes
100 sets finished "D" spokes	10,415.35
208 sets finished trucks spokes
130 bundles, Tim Run
40 ricks timber	253.43
50 M feet lumber	5,500.00
Harward set #2, 41,200 turned spokes	2,060.00
Harward set #3, 19,350 spoke billets	774.00
Garrett Lumber, 79,806 feet	2,394.18
McDonald Lumber, 50,000 feet	1,500.00
Merchandise bought since Jan. 1st,
Hauling Garrett lumber	$287.98
Cutting & logging Alpine set	143.76
Logs at Garrett set	4,152.44
Logs at Harward set #3	307.76
Timber at Livingston	2,488.85
S. B. Harward, spokes	1,479.60
Bonus, or premium	15,000.00
	77,802.07
Less sales since Jan. 1st	6,542.12
	71,259.95
Ledbetter tract timber	2,471.70
		$73,731.65
Labor		1,896.22
Supplies		641.08
Interest		398.13
Discounts		58.88
Expense		2,606.95
		115,076.84

On March 15, 1923, petitioner recorded in its journal the purchase of all the above assets. The "Merchandise" account was set up at a cost of $80,273.77, which is in accord with the invoice received from the seller ($77,802.07, plus $2,471.70, equals $80,273.77). Included in the $80,273.77 appearing on petitioner's journal in the entry of March 15, 1923, was the item of "Livingston Inventory 1/1 Bonus $15,000.00."

On the same date, namely, March 15, 1923, petitioner opened an account in its ledger which was captioned "Merchandise, Livingston." It debited this account with the amount of $80,273.77 as representing "Livingston Inventory 1/1/23 $56,413.48 plus amt bought to 3/3 $8,860.29 and Bonus $15,000.00."

In filing its corporation income-tax return for the year 1923, petitioner reported its "Cost of Goods Sold" to be $147,830, computed as follows:

Inventory at beginning of year	$64,763.90
Merchandise bought for sale	184,568.53
Cost of manufacturing or otherwise producing goods	69,122.60
Total	318,455.03
Less inventory at end of year	170,625.03
Cost of goods sold	147,830.00

The so-called "Bonus" of $15,000 paid to the J. C. Bilbrey Spoke Co. was included by petitioner in the above amount of $184,568.53 as "Merchandise bought for sale."

The respondent determined that the said amount of $15,000 was not a part of the cost of merchandise bought for sale, and, accordingly, reduced petitioner's "Cost of Goods Sold" by the amount of $15,000, which had the effect of increasing petitioner's net income by the amount of $15,000.

In a statement attached to the deficiency letter, the respondent said:

The payment of $15,000 as a bonus in connection with the purchase of the J. C. Bilbrey Spoke Company at Livingston, Tennessee, is held to constitute a capital item and may not be added to the cost of the merchandise bought for sale. Article 24, Regulations 62.

The J. C. Bilbrey Spoke Co. continued to engage in the same line of business after the sale to pertitioner as it had been engaged in prior thereto.

OPINION.

LOVE: The question in this case is one of fact, namely, for what asset or assets did petitioner pay the so-called $15,000 bonus? The contract is silent on the subject, We must, therefore, look to evidence outside of the contract, such as the acts of the parties at or about the time the contract was negotiated. In this connection the evidence shows that the seller, in submitting its invoice to petitioner, itemized the so-called bonus under the heading of "Merchandise" and that petitioner, in recording the transaction in its books, recorded it as a part of the cost of the merchandise purchased. In fact there is no evidence in the record to show that the amount of $15,000 in question was paid for anything except merchandise. There is no evidence to indicate that it was paid for the good will of the J. C. Bilbrey Spoke Co. On the contrary the evidence negatives such a conclusion for the reason that the latter company remained in existence and conducted the same line of business after the sale to petitioner, as it had been engaged in prior thereto. It is true that the evidence relating to this item is somewhat meagre and we think petitioner might have elaborated more in regard to what was said between the parties at the time the purchase price of all the assets, including the so-called bonus of $15,000, was agreed upon. But in view of the fact that the only evidence we have tends to prove that the parties intended the $15,000 to be part of the cost of the merchandise, we fail to see how we could find it to be for anything else. We, therefore, find as a fact that the $15,000 in question was a part of the cost of the merchandise purchased by petitioner from the J. C. Bilbrey Spoke Co. Petitioner's inventory of merchandise at the close of the year is not in dispute. It follows that the respondent was in error in reducing petitioner's merchandise bought for sale, as reported by it, by the amount of $15,000.

No evidence was offered with respect to the deficiency determined by the respondent for the year 1924. His determination for that year is approved.

Judgment will be entered under Rule 50.