William C. Davis Home Bakeries Co. v. Commissioner

*99 This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1920 in the amount of $7,812.75. The only error alleged by the petitioner is that the respondent, in computing the profit or loss from the sale of the petitioner's business, excluded from the basis thereof, good will which the petitioner claims it acquired at a cost of $20,000.

FINDINGS OF FACT.

The petitioner was incorporated under the laws of New Jersey on June 8, 1911, to engage in the general baking business at Camden, N.J. Its authorized capital stock was $125,000.

In the year 1893 one William C. Davis started a bakery business at Camden, entirely on borrowed capital. He operated a bakery and sold the products thereof through retail stores and on delivery routes. The business proved successful so that by October 1, 1911, he was the owner of a bakery operating 16 delivery routes and 8 retail stores. He was*3310 also the owner of a number of pieces of real estate, which he had acquired and improved out of earnings of his business at a cost of $61,100.

On October 1, 1911, Davis transferred his bakery, retail stores and delivery routes, including all of the assets used in the business, but not including any of his real estate, to the petitioner, in consideration of the issue to him of $100,000 par value of the petitioner's capital stock. Of the stock so issued, $80,000 was for the tangible assets and $20,000 for good will. The value of the tangible assets was determined by an inventory thereof, and the value of the good will was determined by Davis and the petitioner as representing the value of the 16 delivery routes at $750 each, and the good will of the retail stores at $1,000 each. The assets transferred by Davis to *100 the petitioner were entered on the petitioner's books and appeared on its opening balance sheet, as follows:

*3311 The net income of the petitioner for the period October 1 to December 31, 1911, was $429.98. The petitioner's net income for the year 1912 was $10,942.54. In December, 1912, the petitioner's plant was damaged or destroyed by fire, and was not restored until late in 1913. During that time the petitioner purchased bread from a competitor and continued its retail and delivery business. Its net income for the year 1913 was $1,561.54.

In the year 1920 the petitioner sold its bakery plant and equipment, and the equipment used on its delivery routes, to the Freihofer Co., a competitor. The Freihofer Co. did not operate any retail stores. Immediately upon the consummation of the sale of its bakery, delivery routes and the plant and equipment pertaining thereto, the petitioner closed the retail stores and abandoned its delivery routes and ceased to engage in business.

In its income and profits-tax return for the year 1920 the petitioner included in the basis for computing the profit or loss from the sale of its bakery business, $20,000 as the cost of the good will acquired from William C. Davis in 1911. The respondent excluded said amount from the basis for computing the gain*3312 or loss from said sale and determined that there is a deficiency in tax in the amount of $7,812.75.

OPINION.

MARQUETTE: In its income and profits-tax return for the year 1920 the petitioner included in the basis for computing gain or loss from the sale of certain of its assets made in that year under the circumstances set forth in the findings of fact, the amount of $20,000 as the cost of good will acquired by it in 1911 from William C. Davis. The good will in question is alleged to have attached to certain delivery routes and retail stores. The petitioner now claims that it sold its bakery and delivery equipment and immediately abandoned its delivery *101 routes and retail stores, thereby sustaining a loss of the good will which had cost $20,000. The respondent alleges that the petitioner did not acquire good will of any value from Davis.

The record before us is entirely unsatisfactory. It is not clear from either the pleadings or the evidence, just what the petitioner did sell to the Freihofer Co., and whether it claims a loss on the sale of its assets, including good will, or because it abandoned the good will. However, we are not satisfied that upon either*3313 theory the petitioner is entitled to the relief it seeks. It is claimed that the good will in question attached to the delivery routes and retail stores, and that it had an actual cash value of $20,000 when the petitioner acquired it. But the only evidence we have as to the value is that over a period of 18 years the business owned and operated by Davis, including the bakery, retail stores and delivery routes, earned approximately $130,000, or an average of $7,222 per year. The amount of tangible assets used in the business and the earnings thereof for any particular year of Davis' operations are not shown. In view of the state of the record we are unable to find that the petitioner acquired from Davis good will of any value, and we therefore sustain the determination of the respondent.

Judgment will be entered for the respondent.