DocketNumber： Docket No. 3426-66
Citation Numbers： 1968 U.S. Tax Ct. LEXIS 130, 50 T.C. 247
Judges： Mulroney
Filed Date： 5/7/1968
Status： Precedential
Modified Date： 10/19/2024
*130
Petitioner purchased a going, general insurance agency business including the goodwill and list of insurance expirations and all other intangible assets utilized by the seller in the operation of the business for the sum of $ 10,500.
*247 Respondent determined deficiencies in petitioner's income tax for the years 1961 and 1962 in the respective amounts of $ 698.49 and $ 4,275.70.
The issue is whether the insurance customer list, or as we will sometimes call it, the list of expirations, which was included in petitioner's purchase of a going insurance business can be the subject of a depreciation allowance under
In 1961 petitioner negotiated for the purchase of an insurance agency that was owned and operated since 1957 by Philip F. Pierce in conjunction with his real estate appraisal business under the assumed name of Pierce-Foster & Co. in St. Clair Shores, Macomb County, Mich. In the course of the negotiations, petitioner learned that Pierce wanted to sell his insurance business and concentrate all of his energies on the real estate work.
On September 22, 1961, petitioner and Pierce agreed on a sales price of $ 10,500 and executed a written agreement which provided, in part, as follows:
Whereas, the Seller owns and operates a general insurance agency business in the City of St. Clair Shores, under the assumed name of Pierce-Foster & Company, and
Whereas, the Purchaser desires to purchase from the Seller the general insurance agency business, as a going concern, exclusive of cash and accounts receivable and free of any obligations for accounts payable or other liabilities of the Seller,
Now, Therefore, it is Agreed as Follows:
1.
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5.
6.
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8.
9.
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11.
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13.
(d) Directly or indirectly disclose to any other person, firm, or corporation the names of past, present or future clients of the agency.
(e) Directly or indirectly induce, or attempt to influence, any employee of the agency to terminate his employment.
(f) Directly or indirectly engage in the insurance business in the City of St. Clair Shores, and Wayne, Oakland and Macomb Counties in the State of Michigan, either as an employee, proprietor, partner or stockholder.
*250 A "Supplemental Agreement," executed by the parties on September 30, 1961, amended the agreement of September 22, 1961, by adding the following provision: "
The $ 10,500 purchase price was arrived at by multiplying the average monthly commissions ($ 750) by 14 months. Initially, Pierce desired a formula based on an 18-month rate while petitioner bargained for a 12-month rate. The parties compromised this item, agreeing on a 14-month rate which resulted in the $ 10,500 price.
Petitioner purchased the insurance agency business as a going concern. Petitioner did not purchase or receive any of Pierce's fixtures or furniture. None of Pierce's employees worked for petitioner after the purchase and Pierce did not transfer his telephone exchange to petitioner. Pierce continued his real estate business at the same business location and under the same name (Pierce-Foster & Co.) as were used for his combined insurance-real estate business *139 prior to the sale. However, after the sale to petitioner, Pierce no longer engaged in the insurance business.
The customer list petitioner received consisted of 16 pages containing information regarding approximately 509 different policies -- in many cases, two or more policies were written for the same customer. On each page there were seven columns across the top so that a typical entry on the list appeared as follows:
| Period | ||||||
| Insured's | Type of | Gross | Commiss. | |||
| Ins. company | name | policy | Effective | Expiration | premium | percent |
| * * * | * * * | Fire | 7/20/59 | 7/20/62 | $ 65.07 | 25 |
Nine of the accounts on the list were lined out and marked "[Yates]." These accounts belonged to a solicitor employed by Pierce; petitioner returned these accounts to this solicitor after the purchase.
Some of the policies on the list had already expired by the date of purchase and others were not scheduled to expire until as late as 1966.
A form letter, dated October 9, 1961, and signed by petitioner and Pierce, was sent to each customer on the list. It was prepared by Pierce on a Pierce-Foster & Co. letterhead bearing the engraved name, telephone numbers, address, and, *140 in a diamond-shaped frame, the mark *251 "P-F & Co." associated with Pierce's business. The letter stated as follows:
Dear Customer and Friend,
We are pleased to announce that Pierce-Foster Insurance has been merged and consolidated with the Alfred H. Thomas Insurance Agency.
The new firm name is PIERCE-THOMS INSURANCE AGENCY with offices at 5768 Whittier near Harper Avenue, Detroit, Michigan. The new telephone numbers are
By a consolidation of the two agencies representing many large and well known insurance companies, we can provide even better service for you and a complete insurance center for our many customers.
Mr. Thoms has served the public in the insurance industry for the past fourteen years as owner of the ALFRED H. THOMS INSURANCE AGENCY and he will continue in his endeavor to maintain and secure an attitude of "friendly service" toward you. His experience is extensive and he welcomes the opportunity of solving your insurance problems and satisfying your many insurance needs.
Mr. Pierce will serve as an adviser and counsellor for the new organization.
We heartily appreciate having you as a loyal customer of ours, and we have appreciated*141 your many recommendations of us to others, also.
We sincerely hope that our service in the past has pleased you, too, and we certainly will continue to strive to see that our service in the future goes well beyond fulfilling your policy contracts.
Thanking you, we remain,
Sincerely yours,
In addition, petitioner and Pierce sent a form letter to each of the insurance companies associated with Pierce, notifying them of petitioner's purchase of the business. This letter, dated October 2, 1961, stated as follows:
This is to advise you that I have sold my insurance agency with renewal rights being transferred to Alfred H. Thoms. Mr. Thoms will begin renewing the November accounts and will have full rights to the renewal business and the obligation to pay for the renewals ordered. This includes the rights to receive the commission on any direct billing contracts.
It shall be my responsibility to pay for all policies ordered up to and including October 31, 1961.
Mr. Thoms will be responsible for any annual installments due on insurance policies issued at any time by our agency.
Petitioner already represented 6 of the approximately 18 insurance companies to which the letters were sent. *142 After the sale, he applied for and received agency licenses with 4 of the 12 which he did not already represent. However, his agreements with 3 of these companies were terminated on December 31, 1962, and, with the fourth, in March of 1964.
After the purchase, petitioner used the list as planned by making telephone contact with some of the policyholders and by direct billing *252 to others. Some of the customers renewed their policies and others did not. Also, some of the customers on the list were customers of petitioner on December 5, 1967 -- the date of trial.
In his Federal income tax return for 1961, petitioner reported gross receipts from his insurance agency business in the amount of $ 19,519.51. In 1962, his reported gross receipts from the insurance business were $ 25,545.40.
Petitioner treated the full cost of the purchase as attributable to the customer list. He attempted to amortize the amount paid on the straight-line method over a 14-month period, claiming depreciation deductions in 1961 and 1962 in the amounts of $ 1,500 and $ 9,000, respectively.
In his notice of deficiency, respondent disallowed any deduction for the cost of purchasing the customer list.
*143 OPINION
The only issue here is whether petitioner is entitled to an allowance for depreciation with respect to the list of expirations received by petitioner in the purchase of the insurance agency business.
Sec. 1.167(a)-3 Intangibles.
If an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. Examples are patents and copyrights. An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life. No deduction for depreciation is allowable with respect to goodwill. * * *
Petitioner had the burden*144 of proving that the intangible asset he purchased, namely the list of expirations, had a limited and determinable useful life in his business.
Petitioner argues that the entire purchase price was attributable to the list of expirations, that the list had a definite and determinable useful life and that he is therefore entitled to amortize the cost "over *253 a period not in excess of two (2) years." In the alternative, petitioner contends that the expiration of the 5-year covenant not to compete given by Pierce ends the useful life of the list of expirations so that the amount paid for the list is amortizable over a 5-year period. Respondent maintains that the list of expirations is in the nature *145 of goodwill and, like goodwill, is not subject to amortization in that it has an indeterminate useful life or, in any event, that petitioner presented no evidence as to a limited useful life so that no depreciation can be allowed.
In
The value of the files and expirations acquired is short-lived in nature * * * their only value to the taxpayer is the information contained therein which enables plaintiff and its agents to renew the policies at the expiration thereof. This information becomes obsolete, however, when the policyholders die, move out of town, sell property which is insured, or otherwise cancel or become uninsurable.
In
In
In
The case of
There are many cases expressing the close connection between an insurance expiration list and goodwill. See
the list I have in my hand would serve no purpose to me after the customer was approached, and after it was determined whether he would be willing to reinsure with me or not. A new policy may be written with a different premium shown, it may have been a different company. A new contract would go out to him with my advertising on it, so the list would serve no purpose to me after the former policy had expired.
Petitioner's unsupported and generalized conclusion falls far short of the proof which is required in this instance. The regulation quoted above provides that "No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life."
*255 There is evidence offered by respondent that the list did not have a *150 definite limited life. Pierce was called as a witness by respondent and he was asked how long the customer list would be of aid to a purchaser. He answered:
They would have an indefinite value from the standpoint that it would permit the user to renew the next contract; and if for one reason or another he was not able to, it would also at least give him an edge or inside, as to when subsequent contracts would expire, even though he might have not renewed the most recent renewal contract.
Petitioner contends that the remaining policy periods reflected on the list should measure the useful life of the list because, after the initial contact with a customer near the policy expiration date, only petitioner's "efforts, goodwill, and skill provided any further contact or business." *151 Petitioner makes a separate argument with respect to the covenant not to compete. He does not claim that the covenant not to compete was treated in a separate and severable manner in respect to value and cost so that some portion of the $ 10,500 purchase price could be attributed to the covenant and amortized pro rata by annual deductions over the life of the covenant. His argument on brief is: "The expiration of the term of the covenant not to compete with Petitioner must mark the ultimate useful life of the customer list purchase as the value and usefulness of the list was then most clearly exhausted."
Such a covenant not to compete is a normal incident to the purchase of an insurance business including the list of expirations. It is obvious such a covenant has the function primarily of assuring the purchaser the beneficial enjoyment of the goodwill and the seller's list of expirations. But that does not mean the list became worthless when the seller could if he wished reenter the insurance business in the same territory. It would be unreasonable to assume that after a 5-year period *256 of doing business with the listed policyholders without competition from the seller*152 he would be totally cut off from future benefits the day the seller is free to start up again in the insurance business. *153 We are of the opinion that under the facts of this case the list of expirations is so inextricably linked with goodwill that it could not possibly have a separate depreciable existence. We have here the transfer of a going insurance agency business and its goodwill. Any definition of goodwill includes the concept of the advantage that the proprietor of an existing business enjoys resulting from the probabilities that old customers will continue their patronage. *154 of a list of expirations of a going insurance agency business is merely implementing the transfer of goodwill.
Under the Commissioner's regulation (sec. 1.167(a)-3) no deduction for depreciation is allowable with respect to goodwill. Goodwill has no determinable useful life. It will continue to serve the purchaser as long as he continues the business.
We hold for respondent on the issue presented.
1. Unless otherwise stated, all Code references hereinafter shall be to the Internal Revenue Code of 1954.↩
2. This provision of the contract was changed by a handwritten notation initialed by petitioner and Pierce. The words "Five 5 years" were substituted for "three (3)" which appear in the typed document.↩
3. Petitioner relies heavily upon a Memorandum Opinion of this Court (
4. In a recent Memorandum Opinion of this Court (
"The fallacy of petitioners' argument is patent. They are under the misconception that after the expiration information has been used for the first time it becomes valueless, whether there is a renewal or the business is lost. Apparently they believe that once a policy was renewed the expiration information was no longer part of the list purchased from White but somehow became merged in their own business. Such is not the case. The benefits inuring to petitioners from White's customer list, whether in the nature of renewals or referrals, remain attributable to that list. The expiration information is useful at each renewal, not just the first. Thus, it is plain to us that an insurance expiration list, purchased together with goodwill and a covenant not to compete, does not have a determinable useful life."↩
5. There is much authority for the proposition that where a going business, including goodwill, has been transferred, the grantor is under a duty not to solicit the patronage of his old customers. See "An Inquiry into The Nature of Goodwill,"
6. See Notes,
J. L. Cooper & Co. v. Anchor Securities Co. , 9 Wash. 2d 45 ( 1941 )
Thrifiticheck Service Corporation v. Commissioner of ... , 287 F.2d 1 ( 1961 )
Commissioner of Internal Revenue v. Maurice L. Killian , 314 F.2d 852 ( 1963 )
V. L. Phillips & Co., Inc. v. Pennsylvania Threshermen & ... , 199 F.2d 244 ( 1952 )
National Weeklies, Inc. v. Reynolds , 43 F. Supp. 554 ( 1942 )