Tisdale Lumber Co. v. Commissioner

*753OPINION.

Lack of proper accounting records during the period of the sole proprietorship and thereafter, during the time of petitioner’s ownership of the business, to December 31, 1916, has made it extremely difficult for the petitioner to prove its contention that it acquired good will of a value of $50,000 from the predecessor business, which it is entitled to include in its invested capital. As evidence of the earnings of the business and the investment in tan*754gible assets for a period prior to its acquisition of the business, the petitioner has found it necessary to rely upon periodic statements of the financial condition of the business furnished to the bank by Tisdale for the purpose of securing loans. But Tisdale’s testimony discredits these statements to such an extent that we can not accept them as fairly reflecting the actual facts pertaining to the financial condition of his business.

Tisdale testified that he offered to sell the assets and business to the petitioner for a lump sum which included $50,000 for the good will. The value which he placed upon the good will, for the purpose of the sale, was not determined upon any definite basis, but was simply his opinion as to the value of the good will of a concern doing a yearly business of from $300,000 to $400,000.

The auditor who conducted the audit of the petitioner’s books in 1916 testified as to the methods employed in making the audit, and as to the processes by which he determined the net worth of the business in 1910, when it was acquired by the petitioner, to be $209,953.67, as compared with $279,496.80, shown by Tisdale in a statement furnished to the bank, to have been the net worth at approximately the same date. It was apparently the purpose of the petitioner in placing this witness on the stand to establish by his testimony the approximate degree of accuracy in the financial statements furnished by Tisdale to the bank. The method employed by the auditor in determining the net worth, at the date petitioner acquired the assets and business, briefly stated, is as follows: The net worth at December 31, 1916, was determined by a balance sheet audit of all accounts other than plant and equipment. In the case of plant and equipment, the values thereof were determined by Tisdale as of the date of the audit, and these were accepted by the auditor. From the net worth at December 31, 1916, the auditor sought to eliminate all changes made in plant and equipment from date of acquisition and whatever profits may have been reflected in other accounts. That the results obtained by the auditor can not be accepted as a fair reflection of the facts is evident from his testimony. He had no very definite data to assist him in his work. In numerous instances he found it necessary to accept the date of patent, appearing on items of machinery and equipment, as indicative of the date such items were acquired by the petitioner. He admits that there wore income items which he was unable to trace through the books, and for this reason he disregarded “a lot of sales that were not shown.” He apparently made no effort to check the values placed by Tisdale on the plant and equipment as of December 31, 1916, but accepted them for the purposes of the audit. There were liability accounts appearing on the statement which Tisdale furnished to the *755bank, and, notwithstanding his own audit indicated that these statements of Tisdale were inaccurate, the auditor accepted the liabilities shown thereon as correct because “ a person will not overstate his liabilities in favor of someone else.” An audit made under such circumstances has little weight as evidence of values. We can not from the evidence before us find that the petitioner acquired good will of value which it may include as invested capital.

Judgment will be entered for the 0ommissioner.