DocketNumber: Docket No. 7556-77.
Citation Numbers: 42 T.C.M. 470, 1981 Tax Ct. Memo LEXIS 365, 1981 T.C. Memo. 379
Filed Date: 7/27/1981
Status: Non-Precedential
Modified Date: 11/20/2020
In 1974, petitioner W. F. Glisson sold a business which he had operated as a sole proprietorship. The sale included assets that he had used in another business which he discontinued in 1961.
MEMORANDUM FINDINGS OF FACT AND OPINION
WILES,
1. Whether any portion of the sale price of certain assets must be allocated to goodwill.
2. Whether petitioners may report any gain from the sale of those assets under
FINDINGS OF FACT
Some of 1981 Tax Ct. Memo LEXIS 365">*366 the facts have been stipulated and are found accordingly.
W. F. Glisson (hereinafter petitioner) and Frances M. Glisson, husband and wife, resided in Albany, Georgia, when they filed their joint Federal income tax return for the taxable year ended June 30, 1974, with the Internal Revenue Service Center, Chamblee, Georgia, and when they filed their petition in this case.
In 1945, petitioner began a business entailing the sale of automobile parts. In 1946, petitioner entered the industrial parts business, which included the sale of belts, chains, pulleys, shafts, couplings, and other such parts for industrial machinery and equipment. Petitioner developed his own brand of belts, under the registered name of Nytro, which were manufactured in bulk lots for him. Petitioner also purchased various other parts in bulk and his stock of industrial parts accumulated over the course of time.
In 1961, petitioner entered the agricultural parts business, selling parts to farm implement dealers. Upon entering the agricultural parts business, petitioner ceased calling on his industrial parts customers and discontinued his industrial parts business. Since petitioner had terminated his industrial 1981 Tax Ct. Memo LEXIS 365">*367 parts business, he was unable to dispose of his stock of industrial parts. Although petitioner attempted to return such stock to the manufacturers, they would not provide cash refunds for the returned parts, but were only willing to give him credits to purchase more of the same merchandise. While petitioner considered disposing of the industrial parts for salvage, he discovered that the cost of shipping and handling would exceed the proceeds from such a sale and simply decided to leave his stock of industrial parts on the "shelf." Prior to 1974, petitioner neither attempted to sell nor did he actually sell any of the industrial parts he had on hand when he began his agricultural parts business.
Petitioner operated the aforementioned business ventures as a sole proprietorship, using the name W.F. Glisson Company (hereinafter sometimes referred to as "the company"). The company's principal place of business was in Albany, Georgia. With respect to the operation of the company, petitioner maintained inventories and used the accrual method of accounting. Petitioner and his wife, however, used the cash method of accounting to compute their items of income and deductions that were not 1981 Tax Ct. Memo LEXIS 365">*368 connected with the company.
In the early 1970's, petitioner and Southern Belting & Transmission Company (hereinafter Southern Belting) initiated negotiations regarding the sale of the company to Southern Belting. On numerous occasions, petitioner discussed the possibility of such a sale with the president of Southern Belting, Lee N. Lindeman (hereinafter Lindeman). The assets that would be included in the sale of the company to Southern Belting was a matter determined pursuant to the negotiations between the parties. While Southern Belting would purchase some of the assets petitioner used in the operation of his business immediately prior to the sale, the sale also would include assets that petitioner had not used in connection with his business in recent years, namely the industrial parts. On October 30, 1973, Lindeman sent petitioner a letter that set forth Southern Belting's intention to acquire his business. The letter provided, in part, as follows:
Based on numerous discussions we have had with respect to Southern Belting & Transmission Co. purchasing W.F. Glisson Co., we feel we are in a position now to state our intention to acquire W.F. Glisson Co., subject to the mutually 1981 Tax Ct. Memo LEXIS 365">*369 agreeable determination of the following. This is not a binding contract and cannot become so until put in contract form and approved by our Board of Directors.
We intend to proceed with determining the selling price in the following manner. Southern Belting & Transmission Co. will purchase the assets of the W.F. Glisson Co. as determined by extension at the lower of cost or market of the physical inventory count of items which we have agreed to purchase (the final determination of that to be made as soon as possible following the physical count); the Accounts Receivable which we determined to be collectible by audit test; and other miscellaneous assets which will have to be specified in a final Sales Contract. The value of these assets will be reduced by outstanding liabilities such as Trade Payables and other obligations which must be deducted in order to arrive at a Net Worth of the W.F. Glisson Co.
A minimum formula that can be used to determine the value of the going concern, the W.F. Glisson Co., is to multiply the anticipated Net Profit after taxes that should be realized by Southern Belting & Transmission Co., after providing for a reasonable management fee and miscellaneous 1981 Tax Ct. Memo LEXIS 365">*370 extra operating expenses not currently incurred by W.F. Glisson Co., by a multiple of four. However, it is anticipated that the Net Worth of W.F. Glisson Co. will exceed the product of this formula. Therefore, it will be necessary to wait for an independent audit of W.F. Glisson Co. to be made by Peat, Marwick, Mitchell & Co. in order to determine the final selling price.
Southern Belting & Transmission Co. intends to pay to Mr. W. F. Glisson the final selling price as determined above, in ten equal installments to be paid annually at a mutually agreed upon date, interest to be paid on the unpaid balance at the rate of six (6) percent per annum.
On March 1, 1974, a physical inventory and accounting of all of the assets and liabilities encompassed by the sale was taken under the supervision of Southern Belting's accountants, Peak, Marwick, Mitchell & Co. (hereinafter Peat-Marwick). Subsequently, Peat-Marwick conducted certain auditing procedures with respect to this accounting and valued such assets as of April 1, 1974. For purposes of this accounting and audit, petitioner's parts merchandise was divided into the following three groups: the "group I inventory" which consisted almost 1981 Tax Ct. Memo LEXIS 365">*371 entirely of power transmission items and included petitioner's stock of industrial parts; the "group II inventory" which was characterized by articles generally referred to as mill supply items; and the "group III inventory" which was composed primarily of auto parts. Southern Belting was only interested in acquiring the group I inventory, and in particular petitioner's stock of industrial parts, because it was a distributor of such items. Nevertheless, it was willing to purchase the group II inventory at later date at a negotiated price if petitioner could not sell such property. By means of the accounting and audit, the sale price of the assets that Southern Belting would purchase was determined in the manner set forth in the letter of intent Lindeman sent to petitioner. Accordingly, a price of $ 105,330.51 was assigned to the industrial parts included in the group I inventory.
On April 1, 1974, petitioner, as "seller, " and Southern Belting as "buyer," entered into a contract for the sale of petitioner's business (hereinafter sales contract) which provided, in part, as follows:
1.
2.
3.
Attached to the sales contract were the schedules referred to as "Exhibits A and D" which provided that the following assets would be sold and liabilities assumed:
Cash in Company Bank account in the | |
C & S Bank of Albany | $ 7,261.11 |
Cash on hand at Company office, | |
334 Broad | 253.79 |
Trade accounts receivable | 27,051.48 |
O.E.M. Rebates receivable | 178.64 |
Merchandise returned for which | |
credit has not been received | 21981 Tax Ct. Memo LEXIS 365">*374 1,886.64 |
The following physical property located | |
at 334 W. Broad in the Glisson Building: | |
Inventory 3 | 129,961.51 |
Shelving | 5,452.12 |
Office equipment | 3,000.00 |
Office and paper supplies | 2,000.00 |
Atlas Chain | $ 13.35 |
Eaton, Yale and Towne | 171.69 |
Martin Sprocket | 68.58 |
Payroll and withholding tax | 527.48 |
The total purchase price under the sales contract was $ 176,264.48, payable pursuant to a negotiable promissory note which petitioner received from Southern Belting. The promissory note was unsecured and provided that Southern Belting would pay petitioner the principal sum of $ 176,264.48 in ten equal installments with interest on the unpaid balance from April 1, 1974, at a rate of six percent per annum. The first installment was due on July 1, 1974, with the remaining nine installments payable on the first day of July of each year thereafter.
Under the sales contract, Southern Belting purchased the group I inventory and promised to purchase the group II inventory that petitioner was unable to sell by April 1, 1975. Southern Belting agreed to pay petitioner the lower of cost or market value for such group 1981 Tax Ct. Memo LEXIS 365">*375 II inventory, but would not be required to purchase merchandise with a total value in excess of $ 20,000. In both 1975 and 1976, petitioner and Southern Belting agreed to a one-year extension of time for petitioner to sell the group II inventory. At the time of the trial of the instant case, Southern Belting had not purchased any of the group II inventory.
Pursuant to the sales contract, petitioner also agreed to enter into a consulting agreement with Southern Belting whereby he would convenant not to engage, directly or indirectly, in a competitive business within a 100-mile radius of Albany, Georgia, for a period of three years. In exchange for his agreement to serve as a consultant and not to compete, petitioner would be paid $ 5,000 per year for the three-year duration of such agreement. In pertinent part, the agreement provided:
1.
Glisson covenants and agrees as follows:
(a) Glisson shall not establish, engage in, or in any manner become interested in, directly or indirectly, as an employee, owner, partner, agent, shareholder or otherwise, any business, trade or occupation the same as or similar to the business now being conducted by Glisson as the W.F. GLISSON COMPANY (hereinafter 1981 Tax Ct. Memo LEXIS 365">*376 called the "Business") within a radius of 100 miles of the City of Albany, Georgia, for a period of three (3) years from the date hereof;
(b) Glisson shall not, directly or indirectly, request or advise any present or future customer of the Business to withdraw, curtail or cancel his business with the Business;
(c) Glisson shall not, directly or indirectly, disclose to any other person, firm or corporation the names of past, present or future customers of the Business;
(d) Glisson shall not, directly or indirectly, induce, or attempt to influence any employee of the business to terminate his employment.
2.
Glisson agrees to consult with Southern Belting with respect to the operation of said Business at such times as Glisson shall deem necessary in Glisson's sole discretion.
Finally, the sales contract provided that petitioner would lease to Southern Belting the premises from which he had conducted his business. The lease was executed on April 1, 1974, and provided for a lease term of five years at a monthly rental of $ 450, but allowed Southern Belting to terminate the lease upon six months notice to petitioner. Southern Belting operated the business out of the leased premises 1981 Tax Ct. Memo LEXIS 365">*377 until late 1976, when it terminated the lease and moved into a new building it had constructed in Albany, Georgia.
Prior to its acquisition of petitioner's business, Southern Belting had supplied parts to industrial customers, but had not dealt with farm implement dealers or other agricultural customers. In addition to purchasing various assets, Southern Belting also hoped to acquire petitioner's agricultural customers when it purchased his business. Consequently, during the year following the acquisition, pursuant to the consulting agreement, petitioner spent a significant amount of time introducing Southern Belting's employees to his customers. In addition, Southern Belting has used petitioner's name in conducting its Albany, Georgia, operation.
Southern Belting purchased petitioner's stock of industrial parts because it considered such merchandise to be readily saleable to its regular customers. Since the purchase, Southern Belting has written-off only an insignificant portion of the industrial parts it acquired from petitioner.
On the joint return filed for their taxable year ended June 30, 1974, petitioner and his wife elected to report the income from the sale to Southern 1981 Tax Ct. Memo LEXIS 365">*378 Belting under the installment method pursuant to
OPINION
We must first decide whether any portion of the sale price allocable to petitioner's stock of industrial parts must be allocated to goodwill. It is well settled that the sale of a business is treated for tax purposes as a separate sale of each of the assets comprising the business.
Petitioner argues that some portion of the sale price allocable to his stock of industrial parts under the sales contract should have been allocated to goodwill. 5 On the other hand, respondent maintains that petitioner has not established that the allocation made under the sales contract to the group I inventory and the industrial parts included therein was improper. Accordingly, he concludes that petitioner is bound by that allocation. For the reasons discussed below, we agree with and hold for respondent on 1981 Tax Ct. Memo LEXIS 365">*380 this issue.
Generally, this Court has held that when a taxpayer who is a party to an agreement seeks to alter an allocation set forth therein, he must establish by "strong proof" -- beyond a mere preponderance of the evidence -- that the proffered allocation reflects the actual intention of the parties and that such an allocation comports with economic reality.
a party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc.
In the instant case, however, we need not concern ourselves with which one of the aforementioned rules is applicable because under either rule petitioner has failed to satisfy his burden of proof. No evidence was produced to show that 1981 Tax Ct. Memo LEXIS 365">*383 the allocation made under the sales contract to the group I inventory and the stock of industrial parts included therein was not bargained for or was economically unrealistic. To the contrary, the letter of intent sent by Lindeman to petitioner when considered together with their prior discussions indicates that as a result of the bargaining process they agreed to determine the sale price of these assets on the basis of the lower of the cost or market value thereof. Furthermore, there is no indication that there was anything amiss with respect to the actual determination of the sale price under this formula.
Although petitioner maintains that some portion of the sale price assigned to his stock of industrial parts must be allocable to goodwill because those assets had little value to him, this argument is seriously flawed. While the industrial parts may have had little value to petitioner, that was due to the fact that he had abandoned his industrial customers long ago. On the other hand, Southern Belting was a distributor of such merchandise and undoubtedly had a ready market therefor. Consequently, the industrial parts certainly were valuable to Southern Belting.
While petitioner 1981 Tax Ct. Memo LEXIS 365">*384 has asserted that some portion of the sale price should have been allocated to goodwill, he has not proposed any specific amount that should have been allocated thereto, nor has he advanced any recommendations as to how that amount should be determined. Furthermore, there is no evidence in the record which even suggests that the parties discussed an allocation of some portion of the sale price to goodwill. Neither the sales contract nor the consulting agreement mentioned goodwill, and we are convinced that the parties never intended to make an allocation to goodwill. Cf.
Although Southern Belting contemplated the acquisition of petitioner's agricultural customers when it purchased his business, it planned to attain this goal through the consulting agreement and the covenant not to compete included therein. In fact, pursuant to the consulting agreement, petitioner spent a substantial amount of time introducing Southern Belting's employees to his customers during the year following the sale. By means of these services and the covenant not to compete, Southern Belting sought to acquire petitioner's customers. Petitioner, however, has not even 1981 Tax Ct. Memo LEXIS 365">*385 suggested that some portion of the payments made pursuant to the consulting agreement are allocable to goodwill.
Finally, petitioner has adduced no proof indicating that the sales contract or the allocations made thereunder were forced upon him by mistake, undue influence, fraud, or duress. On the basis of the record herein, we hold that petitioner has failed to prove by even a preponderance of the evidence that some portion of the sale price of his stock of industrial parts is allocable to goodwill. Accordingly, petitioner is bound by the allocation made under the sales contract.
We next consider whether petitioner may report the gain from the sale of his stock of industrial parts under
Petitioner, on the other hand, argues that at the time of the sale to Southern Belting his stock of industrial parts was not property of a kind which would properly be included in his inventory if on hand at the close of the taxable year. According to petitioner, he discontinued his industrial parts business in 1961 when he began selling agricultural parts. Thereafter, he no longer held his stock of industrial parts for sale to customers in the ordinary course of his business and such parts did not constitute inventory. Accordingly, petitioner maintains that he is entitled to report any income from the 1981 Tax Ct. Memo LEXIS 365">*388 sale of his industrial parts under the installment method. We agree.
Essentially, a taxpayer's inventory encompasses goods held for sale in the ordinary course of his business.
The provision that specifically excludes a sale of inventory from the meaning of "a casual sale or other casual disposition of personal property" for purposes of
In circumstances similar to those in the instant case, this Court has recognized that the characterization of any particular asset for tax purposes is a question of fact which turns upon the taxpayer's purpose for holding such property.
Although petitioner originally purchased the industrial parts for sale to customers in the ordinary course of his business and such property would have properly been considered inventory, his intent with respect to 1981 Tax Ct. Memo LEXIS 365">*390 those assets changed. We have found as facts that in 1961 petitioner abandoned his industrial parts customers and discontinued his industrial parts business. From that time until 1974, petitioner neither attempted to sell nor did he actually sell any of his stock of industrial parts. After 1961, petitioner was no longer engaged in any business activities in connection with his stock of industrial parts, and we do not consider those parts includable in the inventory of petitioner's agricultural parts business.When Southern Belting purchased petitioner's business, the industrial parts were included in the sale because Southern Belting so desired. Since the sale of the industrial parts to Southern Belting was the only sale of such merchandise made by petitioner in over a decade, it was truly a casual sale.
On the basis of the facts and circumstances herein, we are convinced that petitioner's industrial parts were not held for sale to customers in the ordinary course of his business and did not constitute inventory but rather capital assets at the time of the sale to Southern Belting. See
In our view the mere fact that property was at one time includable in 1981 Tax Ct. Memo LEXIS 365">*392 the inventory of a taxpayer does not forever after taint such property with respect to that taxpayer for purposes of
To reflect the foregoing,
1. All statutory references are to the Internal Revenue Code of 1954, as amended and in effect for the year in issue.↩
2. This figure should be $ 1,886.93. The error was due to a typographical error by the parties.
3. The assets labelled inventory represented only the group I inventory, and $ 105,330.51 of the sale price of that merchandise was allocable to petitioner's stock of industrial parts.↩
4. Apparently, respondent determined that petitioner had written-off his stock of industrial parts in prior years, thereby obtaining a reduction in his gross income from sales of inventory during those years. Consequently, he determined that the entire proceeds from the sale of those parts constituted taxable income.↩
5. No brief has been filed on petitioner's behalf. Consequently, his arguments have been gleaned from his petition and his counsel's opening statement at trial.↩
6. In
7.
(a) Dealers in Personal Property.--
(1) In general.--Under regulations prescribed by the Secretary or his delegate, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price.
(2) Total contract price.--For purposes of paragraph (1), the total contract price of all sales of personal property on the installment plan includes the amount of carrying charges or interest which is determined with respect to such sales and is added on the books of account of the seller to the established cash selling price of such property. This paragraph shall not apply with respect to sales of personal property under a revolving credit type plan or with respect to sales or other dispositions of property the income from which is, under subsection (b), returned on the basis and in the manner prescribed in paragraph (1).
(b) Sales of Realty and Casual Sales of Personalty.--
(1) General rule.--Income from--
(A) a sale or other disposition of real property, or
(B) a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding $ 1,000,
may (under regulations prescribed by the Secretary or his delegate) be returned on the basis and in the manner prescribed in subsection (a).↩
chick-m-farha-and-leenda-farha-v-commissioner-of-internal-revenue , 483 F.2d 18 ( 1973 )
Williams v. McGowan , 152 F.2d 570 ( 1945 )
Horace S. Baker, Lucille J. Baker, Huey F. Baker and Bonnie ... , 248 F.2d 893 ( 1957 )
Emmette L. Barran and Martha Barran v. Commissioner of ... , 334 F.2d 58 ( 1964 )
Charles W. Balthrope and Mary v. Balthrope v. Commissioner ... , 356 F.2d 28 ( 1966 )
commissioner-of-internal-revenue-v-carl-l-danielson-and-pauline-s , 378 F.2d 771 ( 1967 )
Louis Greenspon v. Commissioner of Internal Revenue, (Three ... , 229 F.2d 947 ( 1956 )
Bernard D. Spector v. Commissioner of Internal Revenue , 641 F.2d 376 ( 1981 )
Grace Bros. v. Commissioner of Internal Revenue , 173 F.2d 170 ( 1949 )
Alois M. Sonnleitner and Mildred A. Sonnleitner v. ... , 598 F.2d 464 ( 1979 )
dixie-finance-company-inc-v-united-states-of-america-empire-mortgage , 474 F.2d 501 ( 1973 )
Watson v. Commissioner , 73 S. Ct. 848 ( 1953 )