Opinion
Docket No. 20987.
1950-03-17
CHICAGO STOKER CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Jackson L. Boughner, C.P.A., for the petitioner. Charles D. Leist, Esq., for the respondent.
DEDUCTIBLE EXPENSES OR PURCHASE PRICE— SECTION 23(a)(1)(A).— Payments made during each of the taxable years were purchase price of a business in which the petitioner was acquiring an equity and not expense deductible as made. Following Judson Mills, 11 T.C. 25. Jackson L. Boughner, C.P.A., for the petitioner. Charles D. Leist, Esq., for the respondent.
The Commissioner determined deficiencies as follows:
+---------------------------------------------+ ¦ ¦ ¦ ¦ ¦ +----+----------+--------------+--------------¦ ¦ ¦ ¦ ¦ ¦ +----+----------+--------------+--------------¦ ¦ ¦ ¦Declared value¦ ¦ +----+----------+--------------+--------------¦ ¦Year¦Income tax¦excess profits¦Excess profits¦ +----+----------+--------------+--------------¦ ¦ ¦ ¦tax ¦tax ¦ +----+----------+--------------+--------------¦ ¦ ¦ ¦ ¦ ¦ +----+----------+--------------+--------------¦ ¦ ¦ ¦ ¦ ¦ +----+----------+--------------+--------------¦ ¦1941¦$888.14 ¦$519.39 ¦$2,562.87 ¦ +----+----------+--------------+--------------¦ ¦1942¦1,743.21 ¦ ¦4,238.23 ¦ +----+----------+--------------+--------------¦ ¦1943¦79.30 ¦492.84 ¦9,177.10 ¦ +----+----------+--------------+--------------¦ ¦1944¦3,162.54 ¦ ¦ ¦ +----+----------+--------------+--------------¦ ¦ ¦ ¦ ¦ ¦ +---------------------------------------------+
The only issue for decision is whether $30,000 which the petitioner paid to the Whiting Corporation during the four taxable years is deductible as ordinary and necessary expenses of those years or was a part of the purchase price of the business.
FINDINGS OF FACT.
The petitioner was incorporated on March 20, 1941, as the Whiting Stoker Co. Its name was changed in September, 1944, to Chicago Stoker Corporation. It kept its books and filed its returns on an accrual basis. Its return were filed with the collector of internal revenue for the first district of Illinois.
George W. Graham was president of the Eddy Stoker Corporation ever since its incorporation in 1931. It was a family corporation. He learned in February, 1941, that the Whiting Corporation wanted to dispose of its stoker division. He went to the Whiting plant and made a complete inspection of the stoker division. He learned that the Whiting Corporation wanted to dispose of its stoker business because it had been losing money for many years and wanted to use all of the space in its plant for other, more profitable business. Whiting wanted someone to carry on this business who would provide service and parts for stoker which Whiting had sold in the past. Graham learned that the losses from the stoker division of the Whiting business during the years 1935 through 1940 had ranged from about $18,000 to about $130,000. Graham did not want to buy the business because he though the cost would be too much for him to finance and also he did not want to pay anything for it until he could learn whether or not he could operate it profitably.
Whiting Corporation and Eddy Stoker Corporation entered into an agreement dated March 13, 1941, whereby Whiting agreed to sell everything connected with its stoker business except liabilities and accounts receivable. Eddy, although described as the ‘buyer,‘ did not expressly agree to buy, but agreed to pay royalties on the stokers manufactured and sold in amounts set forth in the agreement. The royalties were not to be less than $2,500 a year for the first two years. One of the provisions in regard to royalties were as follows:
* * * When the total of the royalties paid by the Buyer to the Seller on all types of stokers amounts to $70,000, no further royalties are to be paid by the Buyer under this agreement, and the title to the business and property described in section 1 of this agreement shall vest in the Buyer.
Eddy was not committed to make any effort to sell stokers and it could at any time return the business and property to Whiting and thereby be released from further liability under the agreement, with one exception not here material. The title to the business and property was to remain in the seller until the $70,000 of royalties was paid in full. The agreement contained a provision limiting competition by Whiting for 10 years. The agreement permitted Eddy to organize a new corporation, the petitioner, under the name of Whiting Stoker Co., to which Eddy could assign its rights under the agreement. The Whiting Corporation suggested the provisions of the contract providing for the payment of royalties. Graham required the provisions permitting the return of the business to Whiting. The $70,000 figure represented the original cost of tools and dies to Whiting and was put into the agreement at the suggestion of Whiting because Whiting wanted something to show its stockholders as having been gotten for the business.
Eddy assigned its rights under the contract to the petitioner on March 31, 1941, and the petitioner assumed and agreed to make the payments therein provided.
The petitioner made total payments of $30,000 to Whiting prior to September 2, 1944, based on sales of stokers. The following table shows those payments by years:
+---------------+ ¦1941¦$6,850.87 ¦ +----+----------¦ ¦1942¦10,188.47 ¦ +----+----------¦ ¦1943¦10,098.41 ¦ +----+----------¦ ¦1944¦2,862.25 ¦ +---------------+
The petitioner in the spring of 1942 and again in the spring of 1944 gave serious consideration to the possibility of returning the stoker business to the Whiting Corporation.
The petitioner made a final payment of $40,000 to Whiting in September, 1944, and on September 2, 1944, sold the business to another corporation.
The petitioner on its returns for each of the taxable years deducted that part of the $30,000 which it paid to Whiting in that year. The Commissioner, in determining the deficiencies, disallowed all of those claimed deductions, with the explanation that they were not deductible under section 23(a)(1)(A), and determined a gain from the sale of the business in 1944, using $70,000 as the cost of the business.
The stipulation of facts is incorporated herein by this reference.
OPINION.
MURDOCK, Judge:
The Commissioner contends that the amounts in question are not deductible because they were rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade or business, of property to which the taxpayer was taking title or in which it had an equity, and, therefore, they are not proper deductions under section 23(a)(1)(A). He relies on such cases as Goldfields of America, Ltd., 44 B.T.A. 200; Judson Mills, 11 T.C. 25; and Truman Bowen, 12 T.C. 446. He does not make any different point as to the part of the $30,000 paid in 1944.
The petitioner contends that the contract was not one of sale. He quotes the following from Williston on Sales, vol. 2, Rev. Ed., sec. 336, p. 299:
It is, however, essential in order to make a conditional sale, in the sense in which that term is used ordinarily in the Statutes or elsewhere, that the buyer should be bound to take title to the goods, or at least to pay the price for them. Therefore, a lease which provides for a certain rent in instalments is not a conditional sale if the lessee can terminate the transaction at any time by returning the property, even though the lease also provides that if rent is paid for a certain period, the lessee shall thereupon become the owner of the property.
The petitioner relies upon Gilken Corporation, 10 T.C. 445; affd., 176 Fed.(2d) 141; Estate of Clarence B. Eaton, 10 T.C. 869; Rotorite Corporation, 40 B.T.A. 1304 (reversed, 117 Fed.(2d) 245); and Lincoln D. Godshall, 13 T.C. 681.
The petitioner by reason of the payments here in question was able to use the property during the taxable years. The payments were made unconditionally in the sense that they were never going to be returned to the petitioner. The petitioner was not required to buy the property. The arrangement was that when the payments amounted to $70,000, the petitioner would receive title to the property. The petitioner was to have no legal title to the property until the payments equaled $70,000 and was never to have any title to the property unless the payments equaled $70,000. The evidence indicates that, if royalty payments had been made in accordance with the agreement, it would have been about 15 years before they would have amounted to $70,000. The petitioner on two occasions had seriously considered giving up the contract altogether and returning possession of the property to Whiting.
Cases like this, where payments at the time they are made have dual potentialities, i.e., they may turn out to be payments of purchase price or rent for the use of property, have always been difficult to catalogue for income tax purposes. A fixed rule for guidance of taxpayers and the Commissioner is highly desirable, and it is also desirable that the rule, whatever it is, be as fair as possible, both to the taxpayer and the tax collector. If payments are large enough to exceed the depreciation and value of the property and thus give the payor an equity in the property, it is less of a distortion of income to regard the payments as purchase price and allow depreciation on the property than to offset the entire payment against the income of one year. That is the rule laid down in the Judson case and it finds support in section 23(a)(1)(A). The payee, meanwhile, is not reporting the payments, since they are purchase price rather than rent, and his gain or loss can be determined at the time of the final outcome of the transaction. The Judson Mills and Truman Bowen cases, being the most recent ones and seeming to establish the more equitable rule, will be followed herein and the Commissioner's disallowance of the deductions will be allowed to stand.
Decision will be entered under Rule 50.