DocketNumber： Docket No. 42043.
Citation Numbers： 22 B.T.A. 1328, 1931 BTA LEXIS 1963
Judges： Arundell
Filed Date： 4/28/1931
Status： Precedential
Modified Date： 1/12/2023
*1963 The evidence fails to establish that petitioner bought good will in connection with a business acquired in 1920, and a loss claimed to have been sustained upon the sale of the business and good will in 1925 at less than cost is disallowed.
*1329 The respondent determined a deficiency in income tax in the amount of $691.73 for the calendar year 1925. Petitioner alleges that it is entitled to a loss deduction on account of the sale of good will in that year at less than cost.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office in Chicago. It was organized in 1907 and is engaged in the business of furnishing metallurgists' and chemists' services to steel plants and iron foundries. It also does some miscellaneous work for other concerns. Its services to steel plants and iron foundries were performed under written contracts which ran for one year only. Some of its clients have renewed their contracts with petitioner year after year ever since its organization.
At December 31, 1919, petitioner's authorized*1964 capital stock amounted to $50,000, par value, of which $49,175 was outstanding. In 1920 its authorized capital stock was increased to $115,000, par value, and out of the increase a 50 per cent stock divided was declared. The remaining $40,000 par value was issued share for share to the stockholders of Charles C. Kawin Company, Limited, of Toronto, Canada, hereinafter called the Canadian company. The Canadian company had engaged in the same kind of business in Canada as was conducted by the petitioner in this country. After the exchange of stock, and within the year 1920, the Canadian company's assets were transferred to petitioner and its liquidation was effected. Its business, however, was continued, it being conducted as a branch office of petitioner.
The assets acquired by petitioner from the Canadian company included a laboratory equipped to handle advisory work for some 30 or 40 foundries, office furniture and fixtures, some accounts receivable, a small amount of Canadian bonds, and some cash in bank, all of which had a value not in excess of $5,000. Petitioner also acquired the Canadian company's contracts with foundries, which like its own, ran for annual periods, but*1965 some of which had been renewed from year to year over a considerable period of time.
Between 1920 and 1925 the manager of the Canadian branch stole a considerable part of the equipment that was under his charge. In 1925 petitioner sold the Canadian branch, including its equipment and contracts, for the sum of $5,000, which was represented by a series of notes, the last of which was paid in 1929. In its income tax return for 1925 petitioner reported neither gain nor loss from the sale. In the balance sheet attached to its return for 1925 it listed good will of $84,607.41 at the beginning of the year and $79,607.41 at the close of the year.
*1330 In respondent's deficiency notice $5,000 was added to income under the designation "good will," with the explanation that "Since you could not substantiate the value of good will sold it has been held to have cost nothing. See Article 41, Regulations 60."
Petitioner's net income for the years 1917 to 1920 was as follows:
| 1917 | $11,692.58 |
| 1918 | 10,795.12 |
| 1919 | 10,474.16 |
| 1920 | 10,208.21 |
OPINION.
ARUNDELL: Petitioner claims that in 1920 it bought the good will of the Canadian company and that it sold the*1966 good will in 1925 at less than cost, thereby sustaining a deductible loss in the latter year.
The evidence is contrary to petitioner's claim that it brought good will in 1920. What actually occurred was that petitioner purchased the stock of the Canadian company by the issuance of its own stock. This did not give it ownership of the Canadian company's assets. When upon subsequent liquidation of the Canadian company petitioner took over its assets, a loss may have been sustained or a gain realized, depending upon whether the cost of the stock was more or less than the value of the assets received in liquidation. ; .
Upon receipt of assets in liquidation a new basis for gain or loss arises, namely, the value of the assets at the time received. In this case the proof is unsatisfactory both as to the assets taken over and their value. The tangible equipment of the Canadian company business and its accounts receivable and cash were worth at the outside not over $5,000 according to the testimony. But, in addition to these, petitioner took over the service contracts from which the company's*1967 income was derived and which apparently were its most valuable assets. There is no evidence at all as to the number or value of these contracts. Nor is there any evidence at all upon which we could find that the Canadian company had any good will. It may be that petitioner paid more for the Canadian company stock than the contracts and other tangibles were worth, but, if so, the excess might be attributed to a number of factors other than the purchase of good will.
With the absorption of the Canadian company by the petitioner it is difficult to see how the good will that had belonged to the Canadian company could be held separate so as to be susceptible of a later sale. In fact, under the evidence it is extremely doubtful whether more than a small portion of the property acquired in 1920 was the same property that was sold in 1925. It appears that about *1331 half of the laboratory equipment and supplies had been lost through theft. The contracts originally taken over were annual agreements and must have expired before 1925. While the evidence is that it was the practice of a number of petitioner's clients to renew their contracts from year to year, there is not even*1968 an approximation of the number of contracts sold in 1925 that were renewals of those acquired in 1920.
Thus, on the record as made we are unable to determine whether petitioner either acquired or sold good will, and, even if we presume that there was some element of good will involved, neither the cost nor sale price is established. We are accordingly unable to find any merit in the petitioner's claim and the respondent must be affirmed.