*2047 1. Value of good will on date of organization, on March 1, 1913, and during the latter part of 1917, determined from the evidence.
2. Value of good will on date of organization allowed as a part of invested capital subject to the limitations prescribed by section 207 of the Revenue Act of 1917 and section 326 of the Revenue Act of 1918.
3. Deductions from gross income for obsolescence of good will due to national prohibition denied. Manhattan Brewing Co.,6 B.T.A. 952">6 B.T.A. 952, followed.
*454 In this proceeding the petitioner seeks a redetermination of its liability for income and profits taxes for the years 1917 to 1920, inclusive, for which years the respondent, as set forth in his deficiency letter dated November 16, 1926, has determined deficiencies in the amounts of $2,932.57, $14,816.21, $44,286.47, and $1,355.01, respectively.
All of the eighteen errors assigned in the petition have been abandoned*2048 except the ones alleging that the respondent erred in refusing to allow as a part of the petitioner's invested capital for the years 1917 to 1920, inclusive, any amount on account of good will acquired for stock at the time of organization in 1905, and in refusing to allow as a deduction from gross income for the years 1918 to 1920, inclusive, any amount as obsolescence of good will due to national prohibition.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of New York, with its principal place of business during the taxable years involved, at 761 Sixth Avenue, New York City.
In 1891, John Dunston and Joseph P. Kennelly began to operate a restaurant at which intoxicating liquors were sold, at 761 Sixth Avenue, New York City, known as the "Manhattan Oyster and Chop House." Shortly thereafter, the partnership of Dunston & Kennelly opened a branch restaurant at 84th Street and Columbus *455 Avenue. Dunston remained in charge of the Sixth Avenue house and Kennelly took charge of the Columbus Avenue branch. Dunston had a two-thirds interest and Kennelly a one-third interest in the partnership.
From 1891 to 1899, the average gross*2049 earnings were approximately $350 a day at the Sixth Avenue house, and approximately $300 a day at the Columbus Avenue branch. Both places were open seven days a week. The net earnings approximated about 10 per cent of the gross receipts or about $35 a day at 761 Sixth Avenue, and $30 a day at the Columbus Avenue branch. During the two years prior to 1899, the gross earnings of the Sixth Avenue house were approximately $400 and the net earnings approximately $40 a day.
During May, 1899, the partnership of Dunston & Kennelly was dissolved, and the business was sold at public auction. Dunston bought the business at both houses. He paid $25,000 for the 761 Sixth Avenue house and $15,500 for the Columbus Avenue branch. Liabilities at both places totaling about $5,000 were to be paid out of the $40,500 leaving about $35,500 as the net amount to be received by the sellers. The investment of the partnership in the Sixth Avenue business was approximately $9,000, and in the Columbus Avenue branch approximately $6,000.
After the dissolution of the partnership of Dunston & Kennelly, the business was conducted by Dunston and Timothy Hurley, as a partnership, under the partnership name*2050 of Dunston & Son, Dunston having a five-sixths and Hurley a one-sixth interest. Dunston was always known as "Jack," and the business came to be known to the trade familiarly as "Jack's" as early as 1893.
The Columbus Avenue branch was discontinued in 1900. Between 1900 and 1905, two additions were made to the business at 761 Sixth Avenue, one on each side, namely, at 759 and 763 Sixth Avenue, respectively. From 1900 to 1904, inclusive, the gross receipts of Jack's were approximately as follows:
| 1900 | $175,000 |
| 1901 | 211,500 |
| 1902 | 248,000 |
| 1903 | 284,500 |
| 1904 | 321,000 |
On January 8, 1905, Dunston & Son organized a corporation known as "Jack's," the petitioner herein, with an authorized capital stock of $300,000. The assets and liabilities and the business of the partnership, including good will, were transferred to the petitioner on February 7, 1905. The following tangible assets and liabilities of *456 the partnership, were, on that date, transferred to the petitioner in exchange for its capital stock of the par value of $49,500:
| Assets | Liabilities | |
| Cash | $23,318.33 | |
| Accounts receivable (good) | 4,270.53 | |
| Petty Cash | 1,350.59 | |
| Inventory of supplies | 5,000.00 | |
| Furniture and fixtures | 37,551.69 | |
| Accounts payable | $12,867.64 | |
| Accounts payable (T. Hurley) | 9,123.50 | |
| Total net tangible assets | 71,491.14 | 21,991.14 |
*2051 Good will valued at $250,000 was, on February 7, 1905, set up on the books of the petitioner in that amount, and stock of the petitioner of the par value of $250,000 was issued specifically therefor.
A copy of the balance sheet of the petitioner, as of February 7, 1905, is as follows:
| Assets | Liabilities | ||
| Cash | $23,318.33 | Accounts Payable | $12,867.64 |
| Subscription to Capital | |||
| Stock | 500.00 | Accounts Payable (T.Hurley) | 9,123.50 |
| Accounts Receivable (good) | 4,270.53 | Capital Stock | 300,000.00 |
| Petty Cash | 1,350.59 | ||
| Inventory of Supplies | 5,000.00 | ||
| Furniture & Fixtures | 37,551.69 | ||
| Good Will | 250,000.00 | ||
| 321,991.14 | 321,991.14 |
On November 14, 1904, Dunston entered into an agreement with the executors of the estate of David W. Bishop, whereby the latter agreed to lease to Dunston the premises at 761 Sixth Avenue for a period of five years, beginning May 1, 1905, and ending May 1, 1910, at an annual rental of $3,800.04. On February 7, 1905, Dunston agreed to assign to the petitioner his interest in and to the abovementioned lease, and on March 23, 1905, the assignment was made. On April 24, 1906, the petitioner surrendered the lease acquired on March 23, 1905, to*2052 the lessors and Dunston secured a new lease to the premises at 761 Sixth Avenue for a period of 21 years, beginning May 1, 1906, with provisions for two renewals of 21 years each, which lease he assigned to the petitioner on April 24, 1906. In this lease the annual rental was $5,500 for the first 7 years and an amount to be based on appraisals every 7 years thereafter, the first appraisal to be made April 30, 1913. The lessee was to pay all taxes and other charges against the property. On November 2, 1908, the owners of 759 and 763 Sixth Avenue leased those premises to Dunston, William Dunston (son of John Dunston) and Jack's for a period of 5 years, beginning May 1, 1910, and ending April 30, 1915, at a total annual rental of $8,000, the lessee to pay all taxes *457 and other charges against the property. The last mentioned leases were renewed on April 30, 1915, for an additional period of 5 years upon the same terms, and on April 30, 1920, they were again renewed upon the same terms for a period of 1 year, and on May 14, 1921, they were further renewed for a period of 5 years from May 1, 1921, to April 30, 1926, at a total annual rental of $12,000, with the other terms*2053 remaining the same.
Jack's was a very famous restaurant. It was a nationally known institution. Among its patrons were some of the most eminent people of the world. It was open seven days in the week and until four or five o'clock in the morning.
The net earnings of Jack's, for the years 1906 to 1919, before making any deduction for the obsolescence of good will, were as follows:
| Year ended | Net earnings |
| Jan. 31, 1906 | $57,662.80 |
| Jan. 31, 1907 | 45,706.98 |
| Jan. 31, 1908 | 43,959.14 |
| Jan. 31, 1909 | 32,983.89 |
| Jan. 31, 1910 | 42,346.99 |
| Jan. 31, 1911 | 31,577.98 |
| Jan. 31, 1912 | 44,905.92 |
| Jan. 31, 1913 | 39,171.62 |
| Dec. 31, 1913 (11 months) | $104,555.55 |
| Dec. 31, 1914 | 19,403.17 |
| Dec. 31, 1915 | 99,587.27 |
| Dec. 31, 1916 | 126,197.34 |
| Dec. 31, 1917 | 19,524.47 |
| Dec. 31, 1918 | 45,335.04 |
| Dec. 31, 1919 | 127,542.61 |
The net tangible assets of the petitioner, for the periods indicated, were as follows:
| Year ended | Net earnings |
| Feb. 7, 1905 | $50,000.00 |
| Jan. 31, 1906 | 61,240.46 |
| Jan. 31, 1907 | 48,980.12 |
| Jan. 31, 1908 | 37,943.22 |
| Jan. 31, 1909 | 70,844.33 |
| Jan. 31, 1910 | 43,782.94 |
| Jan. 31, 1911 | 38,756.61 |
| Jan. 31, 1912 | 93,577.25 |
| Jan. 31, 1913 | $81,838.86 |
| Mar. 1, 1913 | 40,298.16 |
| Dec. 31, 1913 | 146,407.28 |
| Dec. 31, 1914 | 128,596.93 |
| Dec. 31, 1915 | 152,869.13 |
| Dec. 31, 1916 | 151,795.13 |
| Dec. 31, 1917 | 117,965.77 |
*2054 At the time paid in for stock of the petitioner of the par value of $250,000, the fair market value of the good will of Dunston & Son, as of February 7, 1905, was $175,000. The fair market value of the good will of the petitioner, as of March 1, 1913, was $275,000, and the fair market value thereof, in 1917, and prior to the time when prohibition could be definitely foreseen, was $500,000.
The par value of the petitioner's outstanding stock at all times during the four years here involved, was $300,000.
On December 18, 1917, the Congress of the United States adopted a resolution proposing to the several States an amendment to the Constitution of the United States prohibiting the manufacture, sale or transportation of intoxicating liquors within, the importation thereof into, and the exportation thereof from the United States*458 and all territory subject to the jurisdiction thereof, for beverage purposes. On December 19, 1917, the resolution was deposited in the State Department, and shortly thereafter was submitted to the legislatures of the several States. At that time, the following 33 States had already, by constitutional amendment or by legislative enactment, *2055 adopted state-wide prohibition:
Maine.
Kansas.
North Dakota.
Oklahoma.
North Carolina.
West Virginia.
Arizona.
Colorado.
Kentucky.
Georgia.
Tennessee.
Oregon.
Virginia.
Washington.
Idaho.
South Carolina.
Michigan.
Montana.
Nebraska.
Arkansas.
Indiana.
Mississippi.
South Dakota.
New Mexico.
Utah.
Florida.
Nevada.
Texas.
Wyoming.
Ohio.
New Hampshire.
Iowa.
Alabama.
By April 4, 1918, the three States of Massachusetts, Maryland, and Delaware, which had not theretofore adopted state-wide prohibition, had ratified the proposed amendment. The proposed amendment was adopted by the requisite number of States in January, 1919, and according to its terms, became effective January 16, 1920. On November 21, 1918, Congress prohibited the sale of intoxicating liquor for beverage purposes for the period of the war, to become effective July 1, 1919.
On December 18, 1917, it could be foreseen that the United States was to have national prohibition. At that time, it could be definitely foreseen that as the result of prohibition, the petitioner's business would be reduced to such a small volume that*2056 it would no longer be profitable to operate it and as the result thereof, the good will of the petitioner would be practically worthless after the proposed amendment became effective. The petitioner continued to conduct a restaurant business subsequent to the adoption of the prohibition amendment, but, with the exception of the year 1920, sustained losses as indicated below:
| Year | Profit | Loss |
| 1920 | $15,550.13 | |
| 1921 | $38,706.05 | |
| 1922 | 74,581.34 | |
| 1923 | 37,523.15 | |
| 1924 | 70,705.17 | |
| Jan. 1 to May 31, 1925 | 28,882.92 |
The good will of the petitioner was destroyed as a result of the adoption of the prohibition amendment. On February 28, 1920, the petitioner charged off as a loss its entire good will in the amount of $250,000.
*459 The respondent determined that the good will, set up on the petitioner's books at the date of organization in the amount of $250,000, had no value at any time, and, accordingly, did not allow any amount therefor in the petitioner's invested capital on account of good will, nor did the respondent allow any amount as a deduction from gross income for any of the years in question, on account of the obsolescence of good will.
*2057 OPINION.
GREEN: All of the errors assigned in the petition were abandoned at the hearing, except those relating to the value of good will acquired in exchange for stock at the time of incorporation in 1905, for invested capital purposes and the value thereof, on March 1, 1913, for deduction purposes. With respect to these issues the petitioner contends that the evidence shows that the value of the good will in 1905, at the time it was acquired in exchange for $250,000 par value of the petitioner's capital stock, was $175,000; that the value on March 1, 1913, was $275,000; that in accordance with section 207(a) of the Revenue Act of 1917, it is entitled to include in its invested capital for the year 1917 good will to the extent of $60,000 (20 per cent of the total outstanding shares of the petitioner's capital stock of the par value of $300,000); that in accordance with section 326(a)(4) of the Revenue Act of 1918 it is entitled to include in its invested capital for each of the years 1918 to 1920, inclusive, good will to the extent of $75,000 (25 per cent of $300,000); and that in accordance with section 234(a)(7) of the Revenue Act of 1918 it is entitled to deduct from gross*2058 income for the years 1918 to 1920, inclusive, obsolescence of good will due to national prohibition in the amounts of $132,420.84, $132,420.84 and $5,870.71, respectively. The respondent determined that the alleged good will had no value either at the time of incorporation or on March 1, 1913, and that, therefore, no amount representing good will could be allowed either in invested capital or as deductions from gross income.
The business here in question was originally started by Dunston and Kennelly as partners in 1891. In May, 1899, the partnership of Dunston & Kennelly was dissolved and the business sold at public auction. At that time the investment of the partnership in the business amounted to approximately $9,000. Dunston bought it at auction for $25,000, which would indicate that at that time a substantial good will value existed. The business was then conducted under the partnership name of Dunston & Son, until February 7, 1905, at which time it was transferred to the petitioner, which had been incorporated on January 9, 1905. At the time of transfer the petitioner assumed liabilities in the amount of $21,991.14 and issued *460 its entire authorized capital*2059 stock of the par value of $300,000 for the following:
| Stock subscriptions | $500.00 |
| Tangible assets | 71,491.14 |
| Good will | 250,000.00 |
| 321,991.14 |
The good will account in the amount of $250,000 remained on the petitioner's books as an asset from 1905 to February 28, 1920, at which time it was charged off as a loss.
The evidence offered by the petitioner in support of the good will value contended for by it consisted of its net earnings for the years 1906 to 1919, inclusive, the approximate net earnings of the partnership of Dunston & Son from 1900 to 1904, inclusive, together with the value of the net tangible assets for the same periods, and the testimony of two expert witnesses, namely, August Janssen and Kennelly. Both witnesses, and particularly the former, were well qualified to express opinions as to the value of the petitioner's good will. Janssen testified that in his opinion the petitioner's good will was worth at least $175,000 on February 7, 1905, $275,000 on March 1, 1913, and $500,000 the latter part of 1917. The purpose of introducing evidence as to the value of good will in 1917 was to show that the good will which existed in 1905 and 1913 had*2060 not disappeared prior to the date on which it could be foreseen that national prohibition was a practical certainty. Kennelly's opinion was that in 1905, the petitioner's good will was worth $200,000, and that on March 1, 1913, it was worth $300,000. The respondent offered no evidence on the issue, but relied upon cros-examination of the petitioner's witnesses.
After a careful consideration of the entire record, we are of the opinion, and so find, that the actual cash value of the good will acquired by the petitioner on February 7, 1905, in exchange for $250,000 par value of its capital stock, was at least $175,000; and that the fair market value of its good will on March 1, 1913, and the latter part of 1917, was at least $275,000 and $500,000, respectively.
At all times during the years here in question, the total outstanding capital stock of the petitioner was $300,000, $250,000 of which was issued, in 1905, for good will having at that time an actual cash value of $175,000. It follows that the petitioner is entitled to have included in its invested capital for each of the years 1917 to 1920, inclusive, the value of good will subject to the limitations prescribed in section*2061 207(a) of the Revenue Act of 1917, and section 326(a)(4) of the Revenue Act of 1918.
Relative to the petitioner's contention that in accordance with section 234(a)(7) of the Revenue Act of 1918, it is entitled to deduct *461 from gross income during the years 1918 to 1920, inclusive, the March 1, 1913 value of the good will which was destroyed by national prohibition, we have consistently held in other cases that the statute did not authorize such deductions. See , citing ; certiorari denied, ; , and cases therein cited; and ; affd., ; certiorari granted . See contra, Haberle Crystal Springs Brewing Co. v. Clarke (C.C.A., 2d Cir.), 30 Fed.(2d) 219; certiorari granted *2062 .
The deficiencies should be redetermined so as to correct the errors relative to invested capital as indicated above.
Judgment will be entered under Rule 50.