Schuman Piano Co. v. Commissioner
Opinion
*4188 The petitioner in the year 1920 in order to obtain an agency for a certain line of merchandise and to eliminate a competitor, purchased from the competitor for $7,000 its stock of goods worth $665.43, the competittor agreeing to cease dealing therein. Six thousand dollars of the purchase price was paid in 1920 and the remainder was paid in 1921. During the year 1920 the demand for the kind of merchandise acquired by the petitioner greatly lessened and in its income-tax return for that year it deducted as a loss the difference between the value of the goods purchased and the amount actually paid therefor.
*119 This proceeding is for the redetermination of a deficiency in income and excess-profits taxes asserted by the respondent for the year 1920 in the amount of $1,101.48. The deficiency arises from the disallowance by the respondent of a deduction of $5,334.57 claimed by the petitioner on account of an alleged loss.
FINDINGS OF FACT.
This proceeding was submitted on the pleadings. The respondent by his answer admits all the allegations*4189 of fact contained in the petition but avers that the facts do not constitute a good cause of action. The material allegations of the petition are as follows:
The taxpayer is an Illinois corporation with principal offices at Fulton & Logan Streets, in the City of Rockford, County of Winnebago, State of Illinois, U.S.A.
The deficiency letter (copy of which is attached) was mailed to the taxpayer on the 26th day of January, 1926, was received on the 29th day of January, 1926, and states a deficiency of One Thousand One Hundred One Dollars and Forty-Eight Cents ($1,101.48).
The taxes in controversy are income and excess profits taxes for the calendar year 1920 and are less than Two Thousand Dollars $2,000, to-wit - One Thousand One Hundred and One Dollars and Forty Eight Cents ($1,101.48).
The determination of tax contained in said deficiency letter is based upon the disallowance of a loss of Five Thousand Three Hundred Thirty Four Dollars and Fifty-Seven Cents ($5,334.57) claimed by the taxpayer.
When the Edison Phonograph Company opened another account in the City of Rockford we were compelled to drop this line and as our patronage was accustomed to buy phonographs and*4190 records from our retail store we were sorely in need of another line of phonographs. We were very anxious to obtain the Victor Talking Machine Company's line but found that this was possible only by eliminating one of the present dealers in the City of Rockford. We, therefore, approached Messrs. E. L. and A. M. Burr, a sporting goods store located in the City of Rockford, County of Winnebago, State of Illinois, U.S.A., who were accredited dealers of Victor merchandise but handled said merchandise as a sideline only. After conversation pro and con, we finally purchased from Messrs. E. L. and A. M. Burr of this city, for the amount of Seven Thousand Dollars ($7,000) merchandise of the Victor Talking Machine Company of Camden, N.J., valuing at wholesale Six Hundred Sixty Five Dollars and Forty Three Cents ($665.43), and their assurance that they would discontinue buying and selling Victor merchandise in their establishment.
In the fall of 1920 we experienced a great slump in the sale of talking machines and records and our business in such merchandise since that time has been practically nil. Therefore, in order that the financial statement of our corporation be correct and not*4191 show untrue values we were compelled to write off as a loss that excess amount which we paid for the Victor merchandise purchased from E. L. and A. M. Burr, amounting to Six Thousand Three Hundred Thirty-Four Dollars and Fifty-Seven Cents ($6,334.57), and decided to write off during 1920 Five Thousand Three Hundred Thirty Four Dollars and *120 Fifty Seven Cents ($5,334.57) of said excess, the amount actually paid by us during the year. The balance of One Thousand Dollars ($1,000) was paid during 1921 and written off at that time.
OPINION.
MARQUETTE: The petitioner during 1920 paid $6,000 to E. L. and A. M. Burr for their stock of Victor Talking Machine Co. merchandise and their oral promise that they would discontinue buying and selling Victor merchandise from their place of business. The wholesale value of the merchandise bought by the petitioner was only $665.43. Practically no sales of talking machines or records were made by the petitioner during the balance of the year 1920; therefore petitioner claims the right to deduct as a loss the difference between the purchase price and the wholesale value of the goods bought from the Burrs, viz, $5,334.57.
The petitioner*4192 relies upon section 234(a)(4) of the Revenue Act of 1918, which reads as follows:
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise.
The petitioner's purchase from the Burrs covered not only the stock in trade and agency rights, but also the elimination of the Burrs as a competitor. The fact that the petitioner's sales thereafter during 1920 were negligible in amount is not sufficient to establish a loss as of that year. The petitioner still had the principal consideration for which the purchase was made, namely, the agency for Victor machines and records and the elimination of the Burrs as a competitor. These were not confined to the year 1920. They were continuous and may have proved profitable in later years. It was not, therefore, a closed transaction which would establish loss to the petitioner. .
Case-law data current through December 31, 2025. Source: CourtListener bulk data.