*132 Decisions will be entered under Rule 50.
Petitioners, a marital community in the State of Washington, owned all of the stock of a corporation, Carter, MacDonald & Co., engaged principally in the insurance brokerage business. At a time when liabilities exceeded the value of tangible assets, the corporation was dissolved and its assets distributed to petitioners in return for their stock; and the assets were then transferred to D. K. MacDonald for the marital community and he from that date conducted an insurance business under the same name as the old corporation. The insurance business was personal in its nature and depended very largely upon the personal relation between MacDonald and the customers. Held, on the facts, that no good will was transferred to the petitioners upon the liquidation and no income was realized by them, by virtue of the transfer and sale.
*720 These cases, duly consolidated, involve income taxes for the calendar year 1941. The Commissioner determined a deficiency of $ 5,190.78 against each of the petitioners.
*133 The only question presented is whether the petitioners, D. K. MacDonald and his wife, Elise C. MacDonald, realized a taxable gain as a result of the distribution and transfer to D. K. MacDonald, acting on behalf of the marital community, of all of the assets of Carter, MacDonald & Co., a corporation engaged principally in the insurance brokerage business, where the amount of the corporation's liabilities assumed by the petitioners as transferees exceeded the value of the tangible assets of the corporation so that the asserted gain consisted of the value, if any, of the alleged good will and other alleged intangible assets of the corporation.
FINDINGS OF FACT.
Petitioners' income tax returns were filed with the collector of internal revenue for the district of Washington at Tacoma, Washington.
Petitioners are husband and wife and are residents of the State of Washington.
Carter, MacDonald & Co. (hereinafter sometimes referred to as the corporation) was a corporation existing under the laws of the State of Washington. It was originally incorporated under the name of Carter, MacDonald & Miller on September 27, 1917. Its name was changed to Carter MacDonald & Co. in 1928 and*134 remained the same *721 until July 31, 1941, when the assets of the corporation were liquidated and the corporation dissolved. The corporation was engaged principally in the insurance brokerage business; it also was engaged to a minor extent in the real estate management business. The entire authorized and outstanding capital stock of the corporation consisted of 500 shares of common stock with a par value of $ 100 per share. The declared value of the capital stock contained in the corporation's capital stock tax return for the year ended June 30, 1941, was $ 200,000. All the stock was owned on July 31, 1941, by the marital community composed of D. K. MacDonald and Elise C. MacDonald, the petitioners in the instant cases. The petitioners' basis for gain or loss from the sale or exchange of such stock was zero.
On July 30, 1941, notice was given by the secretary of the corporation that a special meeting of the shareholder and directors of the corporation would be held on July 31, 1941, for the purpose of considering and acting upon a plan for the liquidation and voluntary dissolution of the corporation. Pursuant to that notice, the special meeting was held on July 31, 1941, *135 and the shareholder and directors unanimously resolved "that this company adopt and carry out the said Plan of complete liquidation and distribution of all of its assets, to its shareholder in exchange for his stock herein to be surrendered for cancellation, * * * that the affairs of the Carter, MacDonald and Co. a Washington corporation, be wound up out of court and said corporation be voluntarily dissolved * * *; that D. K. MacDonald be and he hereby is designated as trustee to conduct the proceedings for the winding up of the affairs of this corporation; * * *"
The plan to which reference was made and which was incorporated in the corporate resolutions summarized above provided for the complete liquidation of the corporation and the distribution of its assets to D. K. MacDonald in exchange for the surrender of his stock certificates to the corporation for cancellation. The liquidation was to be followed by the dissolution of the corporation in accordance with the Revised Statutes of Washington, providing for voluntary dissolution proceedings out of court through designation of a trustee to conduct the winding up of the corporation. The plan contemplated that the corporation would*136 cease its activities on July 31, 1941, and that the trustee would distribute to D. K. MacDonald all interest in and to all of the assets of the corporation on or before December 31, 1941, after payment of Federal taxes and all other accounts and known claims of the corporation.
A bill of sale and agreement, dated July 31, 1941, was executed by the corporation transferring all its properties and assets of every kind to D. K. MacDonald, trustee, for the purpose of carrying into effect the liquidation proceedings.
*722 A second bill of sale was executed on August 1, 1941, by D. K. MacDonald as trustee of the corporation, which reads as follows:
Know All Men By These Presents That D. K. MacDonald, as Trustee of Carter, MacDonald & Company, a Washington corporation, for the winding up of its affairs under voluntary dissolution proceedings, does hereby assign, transfer, convey and set over unto D. K. MacDonald all of the property (real, personal and mixed) and assets of every kind and description whatsoever and wheresoever situated, received by the grantor as Trustee of Carter, MacDonald & Company, a corporation, for the winding up of its affairs under voluntary dissolution proceedings, *137 including all personal property of every kind, character and description whatsoever, and including all office furniture, accounts receivable, notes receivable, choses in action and contracts of every name and nature, including agency contracts, said property and assets being all of the assets of said Carter, McDonald [sic] & Company, a corporation, as of July 31, 1941.
This bill of sale from D. K. MacDonald, trustee, to D. K. MacDonald individually, was filed for public record on October 9, 1941. A certificate dated August 1, 1941, signed by D. K. MacDonald setting forth the intention of D. K. MacDonald to conduct business under the assumed business name of Carter, MacDonald & Co. was filed in the office of the County Auditor for King County, Washington, on August 6, 1941. The corporation was dissolved on August 6, 1941.
The usual manner of buying and selling insurance agencies is under a contract by which the person primarily responsible for the seller's business agrees either to work for the purchaser or to refrain from competition for a stated period. The consideration paid, in addition to the value of the tangible assets, is ordinarily based upon a percentage of the commissions*138 received by the purchaser from the renewal of expiring policies of the seller's old customers.
On July 31, 1941, the fair market value of all the tangible assets of the corporation transferred to D. K. MacDonald was $ 267,198.87, which included $ 38,088.52 in cash.
The total amount of corporate liabilities on July 31, 1941, was $ 289,508.73. These liabilities were assumed by D. K. MacDonald and subsequently paid in full. At the time of the liquidation of the corporation, D. K. MacDonald was personally liable for approximately $ 30,000 of the corporation's indebtedness.
Item 7 ("Other assets") of schedule L ("Balance Sheets") which is part of the corporation income, declared value excess profits and defense tax return filed by the corporation covering the period from January 1, 1941, to July 31, 1941, includes "good will," which is valued at $ 74,028.55 as of July 31, 1941. In reporting no gain realized on the liquidation of the corporation for the purposes of their individual income tax liability for the calendar year 1941, petitioners described the so-called good will as being of no value and deducted the sum of $ 74,028.55 from the total value of the assets received from *139 the *723 corporation as a result of the sale of July 31, 1941. The deficiency determined by the Commissioner was based, inter alia, upon the addition to the value of the tangible assets distributed upon the liquidation of the corporation the sum of $ 99,635.25, which was alleged to represent the fair market value of the insurance agency accounts and business computed at 12 times the monthly average of gross insurance commissions received by the corporation during the 36 months ended July 31, 1941.
The following table shows the net income and gross commissions of the insurance department of the corporation, the net income of the corporation as a whole, and the income taxes paid by the corporation from 1936 to 1940, inclusive:
| Gross | ||||
| Net income | Net income | commissions | Income tax | |
| Year | (insurance) | (corporation) | (insurance) | |
| 1936 | $ 2,660.13 | (Loss) $ 14,979.45 | $ 65,976.97 | $ 592.36 |
| 1937 | 3,954.24 | 3,950.87 | 69,909.18 | 535.67 |
| 1938 | 4,584.33 | 6,204.17 | 70,318.47 | 915.22 |
| 1939 | 9,149.65 | 9,207.40 | 74,780.99 | 1,214.04 |
| 1940 | 21,603.77 | 21,204.00 | 107,993.02 | 4,964.09 |
D. K. MacDonald has been in the insurance business in Seattle, Washington, since 1908. He*140 was associated with the corporation, Carter, MacDonald & Miller, when it was organized in 1917, and he remained with the corporation continuously from 1917 until its dissolution in 1941. Miller sold out his interest in 1928 and Carter had been inactive in the management of the corporation's affairs for several years prior to 1941. D. K. MacDonald belonged to the principal clubs in the city of Seattle. In 1941 he was vice president of the Seattle Chamber of Commerce and past president of the Rotary Club. He had also been president of the Washington Athletic Club, all of whose 2,000 members were business or professional men. His acquaintanceship with businessmen and prospective customers for insurance was very broad. The development of the insurance business of the corporation was primarily due to D. K. MacDonald's aggressiveness and business ability. He kept in touch with as much of the corporation's clientele as was possible and personally solicited larger accounts and handled existing accounts that developed problems which might affect the financial status of the corporation. The business of the corporation was personal in its nature and depended largely on the relation between*141 D. K. MacDonald and the corporation's customers. His annual salary for 1936 and 1937 was $ 18,000; in 1938, $ 17,166.66; in 1939, $ 11,786.66; in 1940, $ 19,438; and for the first seven months of 1941, $ 16,212.50. The major part of D. K. MacDonald's salary was attributable to the insurance business.
*724 The corporation handled some property management business, but 98 percent of its business was insurance. It handled all kinds of insurance except life insurance, and its principal departments were its marine insurance, aviation insurance, fire insurance, casualty insurance, claims department, and Lloyd's Department. The type of account, generally, which the corporation handled was of the larger variety and involved greater and more specialized risks than the usual type of account which could be renewed automatically merely by the writing of a letter to the customer prior to the date of expiration. The policies ranged in length of time from one to five years. The servicing of these accounts was assigned to four employees of the corporation who were capable men of long experience. Their annual salaries ranged from $ 4,500 to $ 8,400, plus bonuses. They worked subject to*142 the control of, and under the direction of, D. K. MacDonald, who decided the policy of the corporation. Neither D. K. MacDonald nor any of the four assistants were under contract of employment to the corporation. In the absence of an agreement not to compete, D. K. MacDonald could, in fact, if not prevented from so doing by operation of law, obtain the renewal of substantially all customer contracts of insurance upon their expiration, as against the purchaser of the corporation's assets.
The corporation had approximately 25 agency agreements with various insurance companies. Some of these agreements were terminable by either party at any time upon written notice to the other; others, such as the agreements with Lloyd's, were terminable upon 30 days notice in writing. Some contracts, renewable yearly, had been in effect for four years. These agency agreements had no fair market value.
The corporation's customer accounts represented a high class business. The customers themselves were responsible people. The corporation had no contracts with any customers obligating them to purchase insurance from it or to transact business with it. The list of customers in and of itself had*143 no fair market value.
The location of the company in the Alaska Building, Seattle, Washington, was not held on a term lease, but on a month-to-month tenancy, and was of no fair market value.
The name of the corporation, Carter, MacDonald & Co., had no fair market value.
No good will was transferred by the sale of the corporation's assets on July 31, 1941, to D. K. MacDonald, acting on behalf of the marital community.
The sole purpose for the liquidation and dissolution of the corporation was to save Federal taxes. D. K. MacDonald intended to liquidate and dissolve the corporation and to continue the business as a sole *725 proprietorship, without any other change in the form or method of doing business; and that is what in fact occurred. He made no attempt to sell the corporation's assets to anyone else.
OPINION.
On July 31, 1941, Carter, MacDonald & Co., a corporation, transferred all of its assets to D. K. MacDonald, as trustee, for the purposes of winding up its affairs under voluntary dissolution proceedings. Thereupon, D. K. MacDonald, as trustee, transferred all of the corporation's assets to D. K. MacDonald, individually, in exchange for 500 shares of $ 100 par value*144 common stock, which constituted the entire capital stock of the corporation and was owned by the marital community composed of D. K. MacDonald and his wife. The determination of the gain or loss as a result of these transactions for income tax purposes is governed by sections 115 (c), 111 (a), (b), (c) and 112 (a) of the Internal Revenue Code. 1
*145 Petitioners contend that the only assets received by them as a result of the liquidation of the corporation were certain tangible assets which both parties agree had a fair market value of $ 267,198.87. Petitioners further contend that they assumed liabilities of the corporation, the amount of which exceeded the fair market value of the assets received. The amount of these liabilities was $ 289,508.73. Petitioners, therefore, contend that the transactions here in question did not result in any taxable gain to them.
Respondent, on the other hand, while conceding that the value of the tangible assets transferred to the petitioners was $ 267,198.87, has determined that the sum of $ 99,635.25, which he contends represented *726 the fair market value of the "insurance agency accounts and business," 2 should be added to the sum of $ 267,198.87, and that, therefore, the transactions here in question resulted in a long term capital gain, constituting taxable income to petitioners.
*146 The correctness of the petitioners' contentions depends on what the phrase "insurance agency accounts and business" includes. The parties stipulated that "this matter is simply reduced to a question of the fair market value of these insurance agency accounts and business." These cases were tried on the theory that the phrase, "insurance agency accounts and business," included the following: (1) Agency agreements which were in existence between the corporation and various insurers on the date of transfer; (2) insurance agreements which were then in existence between the corporation and its customers; and (3) the good will of the corporation. We have found as a fact that the agency agreements in these cases, being terminable at will or upon 30 days notice, had no fair market value. We have further found that the insurance agreements with customers in these cases, as such, had no fair market value. That finding is based upon the facts that these insurance agreements involved special hazards, were not automatically renewable, and depended for renewal to a large extent upon the personal efforts of D. K. MacDonald, and that the corporation had no contracts which obligated any of its*147 customers to take insurance in the future.
Obviously, then, any excess of the fair market value of the assets received by petitioners over the liabilities assumed by them existed, if at all, in the good will of the corporation. There is no specific rule for the determination of the value of good will and each case must be considered and determined in the light of its own particular facts. Schuh Trading Co. v. Commissioner, 95 Fed. (2d) 404; Mossman, Yarnelle & Co., 9 B. T. A. 45.
"Good Will" is defined in Cyclopedic Law Dictionary (1940 Ed.) as follows:
The benefit which arises from the establishment of particular trades or occupations. The advantage or benefit which is acquired by an establishment, beyond the mere value of the capital, stocks, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluance or punctuality, or from other accidental circumstances or necessities or even from ancient partialities or prejudices. Story, *148 Partn. § 99. * * *
It includes only that estimation and repute which is peculiar to the particular establishment. It is that species of connection in trade which induces customers to deal with a particular firm.
The Supreme Court of the United States quoted Story's definition with approval in the case of Metropolitan Bank v. St. Louis Dispatch *727 ., 149 U.S. 436">149 U.S. 436, 446, and also stated in that case that good will "is tangible only as an incident, as connected with a going concern or business having locality or name * * *." See also, In re Brown, 242 N. Y. 1; 150 N. E. 581; Thursby v. Kirby, 12 N. Y. S. (2d) 279, 282; 171 Misc. 310">171 Misc. 310; C. C. Wyman & Co., 8 B. T. A. 408. But "good will does not adhere to a business or profession dependent solely on the personal ability, skill, integrity or other personal characteristics of the owner." 28 C. J., p. 732; 38 C. J. S., p. 952. It is different from, and is not to be "confused with, 'going value' or 'going concern value of a business." 38 C. J. S., *149 p. 949. It is not good will if it depends merely upon personal friendship between the seller and his customer. Cf. Strong Publishing Co. v. Commissioner, 56 Fed. (2d) 550. In Mayme C. Sommers, Administratrix, 22 B. T. A. 1241, 1244, this Court quoted with approval the following language from the case of Otto Braunwarth, 22 B. T. A. 1008:
It may be conceded that the petitioner had built up a considerable clientele and business acquaintanceship, and that this clientele followed him to a large extent, during his various business enterprises. But this personal following does not constitute good will within the generally accepted meaning of the term.
To the same effect is Wickes Boiler Co., 15 B. T. A. 1118, 1122, wherein this Court stated that "the ability, will, experience, or other qualifications of individuals do not constitute good will as an item of property.' See also, Noyes-Buick Co. v. Nichols (U. S. Dist. Ct., Mass.), 14 Fed. (2d) 548.
The facts in the instant cases established that any value which this business*150 may have had on July 31, 1941, in addition to its tangible assets, was due to the personal ability, business acquaintanceship, and other individualistic qualities of D. K. MacDonald. As one witness put it, "Mr. MacDonald was the Company." The policy of the corporation was decided by D. K. MacDonald and all employees worked under his direction and supervision. There existed no contract between the corporation and any of its employees, including D. K. MacDonald, with respect to future services. Neither the name of the corporation, its location, its agency agreements, nor its existing policies with customers had any value. If the law prevents the recognition of the personal ability and personality of D. K. MacDonald as an element of this corporation's good will for income tax purposes, then petitioners did not receive any good will as a result of their acquisition of this corporation's assets.
We find no authority which holds that an individual's personal ability is part of the assets of a corporation by which he is employed where, as in the instant cases, the corporation does not have a right by contract or otherwise to the future services of that individual. The contrary seems*151 to be indicated by such cases as Cox v. Helvering, 71 Fed. (2d) 987; *728 Salvage v. Commissioner, 76 Fed. (2d) 112; affd., 297 U.S. 106">297 U.S. 106; and Beals' Estate v. Commissioner, 82 Fed. (2d) 268, affirming 31 B. T. A. 966.
Nothing in this opinion is inconsistent with the authorities cited by respondent to show that good will is an intangible asset having value under certain circumstances or that a list of customers may, under particular conditions, also possess value. Neither those circumstances nor those conditions are present in the instant cases. The valuation placed upon its capital stock by the corporation ($ 200,000) in connection with its 1941 capital stock tax return and the value placed upon its good will by the corporation ($ 74,028.55) in the balance sheet which is a part of its 1941 corporation income, declared value excess profits, and defense tax return are not binding. "The admissions made by such * * * entries can be overcome by proof of the true market value * * *." Bessemer Inv. Co. v. Commissioner, 31 Fed. (2d) 248, 249;*152 Osborn v. United States, 54 Fed. (2d) 824; George Blodgett Co. v. Ham (U. S. Dist. Ct., Dist. Maine, 1934). We think the balance sheet valuation is overcome by the other evidence herein.
Respondent requests that this Court find as a fact that "It is contrary to the custom in the insurance business for the seller of an insurance agency after making a sale to attempt to take the business away from the buyer, irrespective of whether the seller agreed to stay out of the insurance business for a limited period." The evidence does not support such a finding; it establishes that it is customary for the seller to agree to refrain from competition for a stated period. However, in the absence of such an agreement the Supreme Court of the State of Washington has held, in the case of Cooper & Co. v. Anchor Securities Co. (Wash., 1941), 113 Pac. (2d) 845, 850, that:
* * * the vendor is at liberty to set up a similar business in the same locality and carry it on in his own name. * * * However, the sale of good will of a business carries with it, even in the absence of a restrictive covenant, the implied obligation *153 that the seller will not solicit his old customers or do any act that would interfere with the vendee's use and enjoyment of that which he has purchased.
Under these circumstances, the value of the good will of the corporation to a purchaser would not be the same as if the sale had included such an agreement. It is difficult to see why a willing buyer would pay more for this corporation than the value of its tangible assets, where D. K. MacDonald was "at liberty to set up a similar business in the same locality and carry it on in his own name." See Estate of Leopold Kaffie, 44 B. T. A. 843. The presence or absence of an agreement not to compete does not create good will; its only effect would be possibly to enhance its value if it was already in existence.
*729 We have pointed out above that the record in the instant cases establishes that the usual manner of buying and selling an insurance agency calls for a contract by which the person primarily responsible for the seller's business agrees either to work for the purchaser or to refrain from competition for a stated period. Consideration is ordinarily based upon a percentage of the customers*154 received by the purchaser from the renewal of expiring policies of the seller's old customers over a stated period of time. Thus, even if we assume that the sale of the corporation's assets included an agreement by D. K. MacDonald not to compete with the purchaser for a stated period of time, the full market value of a corporation's assets including its good will, if any, would under the evidence have to be measured by the value of the purchaser's promise to pay the seller a certain percentage of the commissions received from renewal business done with the seller's old customers over a period of years. The Court in the case of Cassatt v. Commissioner (C. C. A., 3d Cir., 1943), 137 Fed. (2d) 745, in affirming the opinion of this Court reported in 47 B. T. A. 400, held that such a promise did not have an ascertainable market value. At page 748 of its opinion the Circuit Court made the following significant statement:
* * * It is true that good will may be the subject of exchange. Here, however, Cassatt and Company [the seller] did not undertake to transfer its good will to Pierce [the purchaser] in exchange for property*155 of an ascertainable market value. On the contrary the transfer was made in consideration of Pierce's promise to share with Cassatt and Company for six years in the future any commissions which it might earn during that period from business with Cassatt customers. The receipt of such commissions was wholly contingent upon Pierce's remaining in business and obtaining business from the former Cassatt customers, neither of which it was under any obligation to do. It is settled that such a promise to make payments in the future "wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty" has no ascertainable fair market value. Burnet v. Logan, 283 U.S. 404">283 U.S. 404, 413, 51 S. Ct. 550">51 S. Ct. 550, 552, 75 L. Ed. 1143">75 L. Ed. 1143. We agree with Judge Learned Hand's statement in Bedell v. Commissioner of Internal Revenue, 30 F. (2d) 622, 624 (C C A 2, 1929) that "It is absurd to speak of a promise to pay a sum in the future as having a 'Market value,' fair or unfair. Such rights are sold, if at all, only by seeking out a purchaser and higgling with him on the basis of the*156 particular transaction. Even if we could treat the case as an exchange of property, the profit would be realized only when the promise was performed."
Any attempt to establish the fair market value of good will under such circumstances by discounting anticipated commissions would be open to the same objection. The Commissioner seeks to surmount this objection by implying a logical relationship, if not an identity, between past commissions earned and future commissions to be earned. The relationship does not exist. It does not follow that, because the seller earned $ 100,000 in gross commissions for each of the past three years, the purchaser, either with or without an agreement on the part *730 of the seller and the seller's employees not to compete, will earn $ 100,000 in gross commissions for each of the next three years.
Respondent cites National Weeklies, Inc. v. Commissioner (C. C. A. 8th Cir.), 137 Fed. (2d) 39, suggesting that the opinion evidence offered by the petitioners was of "so inherently weak and improbable a nature that it is not legally required to be credited." We can not agree. Insurance agencies are not bought and sold*157 like stocks on an exchange. Petitioner offered as opinion evidence the testimony of men with considerable experience in the insurance brokerage business. Respondent's opinion evidence was of the same general nature.
Applying the above authority, the evidence in the instant cases establishes that by the corporate liquidation there was not transferred to petitioners any good will within the meaning of that term as it has been defined by this Court and that the agency accounts and business had no fair market value. We conclude, therefore, that the Commissioner's determination is erroneous to the extent that it added the sum of $ 99,635.25 to the value of the assets transferred to D. K. MacDonald.
Decisions will be entered under Rule 50.
Footnotes
1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
* * * *
(c) Distributions in Liquidation. -- Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock * * *. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112.
SEC. 111. DETERMINATION OF AMOUNT OF, AND RECOGNITION OF, GAIN OR LOSS.
(a) Computation of Gain or Loss. -- The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113 (b) for determining gain * * *. [Section 113 (b) is not applicable to the instant case.]
(b) Amount Realized. -- The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.
(c) Recognition of Gain or Loss. -- In the case of a sale or exchange, the extent to which the gain or loss determined under this section shall be recognized for the purposes of this chapter, shall be determined under the provisions of section 112.
SEC. 112. RECOGNITION OF GAIN OR LOSS.
(a) General Rule. -- Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section. [Section 112↩ is not otherwise applicable to the instant case.]
2. This phrase is used by the Commissioner in the deficiency notices.↩