Decision will be entered under Rule 50.
Petitioner opened a men's haberdashery store in the last part of September 1946 and sold it for cash and stock in the purchasing corporations on April 7, 1947. Held, proceeds received by petitioner for goodwill not long-term capital gains since record does not prove existence of goodwill for 6 months prior to sale. Held, further, (a) petitioner's valuation of the stock received sustained; (b) an ordinary loss allowed to the extent of a $ 3,000 discount granted in the sale of the merchandise inventory; (c) disallowance of rent expense sustained; and (d) amount and capital nature of specific furniture, fixtures, and leasehold improvements not proven.
*1006 The Commissioner determined a deficiency in petitioner's income tax for 1947 in the amount of $ 19,851.34. The issues for decision are:
1. Whether upon the sale of a business conducted by the petitioner as a sole proprietorship the consideration received by him in excess of the basis of the assets thereof was long-term capital gain or ordinary *98 income as either: (a) A payment made to induce him to enter into a contract; (b) advance compensation for services to be rendered; (c) rent; (d) short-term capital gain on the sale of goodwill.
2. The fair market value of certain stock received by the petitioner as part of the consideration for the sale of his business.
3. Whether petitioner suffered an ordinary loss in the amount of $ 3,000 upon the sale of his merchandise inventory.
4. Whether petitioner had deductible rent expense of $ 583.34.
FINDINGS OF FACT.
Petitioner resides in New York, New York. His income tax return for 1947 was filed with the collector of internal revenue for the third district of New York.
In 1937 at the age of 28 petitioner was employed as a stocking dyer at a salary of approximately $ 10 a week. He later worked as a shipping clerk in a department store at $ 15 a week and in May of 1938 became a salesman for the Custom Shops in New York at the same salary. At the time he left in January of 1944 he was general manager of 9 stores at a salary of $ 125 a week. He was dismissed due to disagreements with Mortimer Levitt, the owner of the 4 corporations controlling the stores. His next position was in the statistical *99 department of Wallachs in New York City at a salary of $ 125 a week. He was dismissed in November of 1945 when a new president brought in his own staff, and after unsuccessful efforts to obtain a new position, he decided to open his own business.
In August of 1946 petitioner was offered a store on the corner of Madison Avenue and 55th Street in New York City, then occupied by Eve Brand, at a price of $ 15,000. It had been used by Brand for fancy packaging and was decorated and furnished in an elegant manner. After a period of negotiations, petitioner and Brand agreed on a price of $ 10,250 on September 11, 1946. Upon being informed by the real estate agent for the building that he would be able to obtain a lease for the store, petitioner entered into an agreement with Brand on September 14, 1946. This agreement acknowledged the payment by petitioner to Brand of $ 1,000 to be applied on the purchase *1007 price of $ 10,250 for the store and for specified articles of furnishings and furniture therein. The agreement further provided that $ 4,000 additional would be paid upon the execution and delivery of a lease and a bill of sale; that petitioner would give Brand a chattel mortgage covering *100 the fixtures in the store in the amount of the balance due of $ 5,250 which was to be paid off in installments. Brand was obligated to deliver to petitioner at the closing, which was to take place on September 17, 1946, a 1-year lease from October 1, 1946, at an annual rental of $ 8,750. This agreement was carried out.
On September 16, 1946, petitioner entered into a 1-year lease with the landlord of the store purchased from Brand, the term of which ran from October 1, 1946, until September 30, 1947, at an annual rental of $ 8,750. The lease did not contain any option or other provision respecting renewal, but petitioner was assured orally by the agent that the store would be leased to him on a year-to-year basis. The first month's rent of $ 729.17 was paid at the time of the execution of the lease.
On September 18, 1946, Brand executed and delivered a bill of sale to petitioner in which she conveyed to him various furnishings and equipment located in the store, agreed to discontinue her business at the premises, and to surrender the store to petitioner on September 30, 1946, the key to which was delivered to petitioner upon the signing of the bill of sale. On the same date, petitioner *101 executed a series of promissory notes payable monthly until October 1, 1948, covering the balance due on the purchase price, and, as security therefor, a chattel mortgage in the amount of $ 5,250, covering the lease between petitioner and the landlord and the furnishings and equipment purchased by petitioner from Brand.
Brand, by letter dated September 18, 1946, gave possession of the fixtures to petitioner as of that date and simultaneously gave him the right to enter and leave the store premises with both parties having the right to utilize the store until midnight, September 30, 1946, without petitioner being liable for any rent until October 1, 1946. Petitioner was also authorized by Brand's letter to remove her possessions from the premises after September 30, 1947, 1 and store them at her expense, and was further authorized to remove any persons of her organization from the premises. Petitioner took possession of the store on September 18, 1946, and on September 19 filed with the clerk of New York County a certificate of doing business under the name of "de Free's."
On September 19, 1946, petitioner engaged an *102 interior decorator to remodel the premises at the cost of $ 2,500 for use as a high class men's furnishings store and gave him a deposit of $ 200 on that day. *1008 Petitioner made a further payment of $ 800 to the decorator on October 3, 1946, for work done to that time, and paid the balance owed him by January 1947. Petitioner also paid the following amounts by check:
| Date | Payee | Amount | Purpose |
| Sept. 25, 1946 | Cash | $ 25.00 | Carfare to manufacturers |
| Oct. 1, 1946 | N. Y. Telephone Co | 9.63 | Store phone |
| Oct. 4, 1946 | The Moore Business Forms, Inc | 48.95 | Cash register and cash receipt forms |
The store, which was the first men's store to open in what until then had been a women's shopping area, was designed on a new and unusual principle. It was decorated in a salon fashion and, instead of containing counters for the display of merchandise under glass, it had open display shelves of a tong type in the nature of outstretched hands which permitted the customers to closely examine and to touch the various articles. The store was given considerable publicity in men's fashion magazines due to its unusual nature.
On September 19, 1946, petitioner notified the Office of Price Administration by registered mail of his intention *103 to open a retail store dealing in men's haberdashery and on September 25, 1946, the receipt of his report was officially acknowledged and he was authorized to use specified regulations in order to determine the ceiling prices of the articles he was to sell.
Petitioner placed an order with a shirtmaker for 20 dozen dress shirts on September 24, 1946, for delivery between October 1 and 10 and a second order on October 1, 1946, for approximately $ 6,000 of merchandise for shipment on October 10, 1946. Some merchandise purchased by petitioner for his store was delivered in September 1946 and sales were made for cash during the latter part of that month in rooms behind the main store, which was then undergoing the alterations designed by the interior decorator. These rooms had been left well furnished by Brand and were not changed by petitioner. Upon the advice of his accountant, petitioner did not enter these first cash sales in his books of account but used the receipts therefrom to meet minor cash expenses incidental to setting up the store. The accountant was of the opinion that such expenses would be deductible but difficult for petitioner to keep a record of and that the Government *104 would not, in the final analysis, be defrauded of any income tax due on the sales receipts so used.
The first entries recorded in petitioner's books of account were: *1009
| Record | Date | Matter |
| Purchases | Oct. 8, 1946 | Invoice of $ 751.70 for shirts |
| Sales | Nov. 7, 1946 | Sales that day of $ 452.49 |
| Bank deposits | Oct. 17, 1946 | $ 50 deposited in bank under name of "de Free's" |
| Nov. 7, 1946 | $ 452.49 from cash sales |
In February 1947, Levitt, petitioner's former employer, visited the store at an extremely busy time and returned several times to observe the volume of business being done. Later, he inquired if petitioner was interested in selling the store and was informed that he was not. In March of 1947, Levitt offered petitioner 20 per cent of his own business, the Custom Shops, in return for the store which would have amounted to a purchase price of approximately $ 25,000 to $ 35,000. Petitioner rejected the offer but a subsequent meeting was held by petitioner, Levitt, and petitioner's counsel, Murray Rosof. Petitioner stated that if he sold the store he wanted to be sure of employment because he had only recently experienced the problem of searching for a job and didn't want to repeat it. He felt that he *105 could earn as much from the store as he would get from selling it, and wanted to be paid to work in it. Levitt increased his offer to 20 per cent of the stock of the corporations owned by him, plus 6 1/4 per cent of the profits of such corporations and the employment of petitioner at an annual salary of $ 10,000. Petitioner would also be reimbursed for the cost of his inventory and for the debts he had incurred to go into business. The proposed deal contemplated a transfer of the lease, the physical features of the store, and the name "de Free's." Levitt's primary interest was in the particular business that petitioner had shown could be done at the Madison Avenue location.
Petitioner and Levitt discussed the comparative benefits to be derived by the former from the sale and by retention of the store, and Levitt finally offered to guarantee that petitioner's income from his stock, his 6 1/4 per cent interest in the profits, and his $ 10,000 salary would yield at least $ 25,000 in each of the first 2 years and at least $ 20,000 in each of the next 2 years.
Petitioner, Levitt, and Levitt's corporations entered into an agreement for the sale of the store on April 7, 1947, the pertinent *106 provisions of which were as follows:
This Agreement, made in the City of New York, this 7th day of April, 1947, by and between THE MORLEY SHIRT CO., INC., THE CUSTOM SHOP, INC., THE CUSTOM SHOP SHIRT MAKER, INC., all corporations of the State of New York, and THE CUSTOM SHOP CORP., a corporation of the State of New Jersey, hereinafter referred to as "the corporations"; MORTIMER LEVITT, residing at One Fifth Avenue, in the Borough of Manhattan, City and State of New York, hereinafter referred to as "Levitt", and ERWIN D. FRIEDLANDER *1010 [sic], residing at 18 Lexington Avenue, in the Borough of Manhattan, City and State of New York, hereinafter referred to as "Friedlander",
* * * *
1. Friedlander agrees to sell and turn over to corporations the assets of the business known as de Free's, located at 547 Madison Avenue, New York City, N. Y., for which the corporations agree to pay Friedlander Seven Thousand ($ 7,000.00) Dollars if there be Ten Thousand ($ 10,000.00) Dollars worth of inventory at cost, plus cash or its equivalent. If there be more than Ten Thousand ($ 10,000.00) Dollars worth of assets as above defined, Friedlander is to receive an additional sum which shall be equal to the *107 dollar value of said excess value over Ten Thousand ($ 10,000.00) Dollars. In the event the said assets as above defined be less than Ten Thousand ($ 10,000.00) Dollars, then the sum of Seven Thousand ($ 7,000.00) Dollars shall be decreased by the dollar value of said deficit.
2. The corporations agree to pay the liabilities of de Free's, which liabilities shall not exceed the sum of Twelve thousand five hundred ($ 12,500.00) Dollars. The corporations further agree to assume the lease of de Free's and agree to hold Friedlander harmless therefrom.
3. For the goodwill of de Free's, the corporations agree to give, and Friedlander is to receive, the following:
(a) At the time of the signing of this agreement, the corporations will turn over to Friedlander twenty (20%) percent of all stock outstanding in each of the respective corporations; it being the intention at all times that Friedlander is to have twenty (20%) percent of the stock or interest in the corporations, their successors, assigns and/or any other businesses formed by the parties hereto, and that Levitt shall have eighty (80%) percent of the stock or interest in the corporations, their successors, assigns and/or any other businesses *108 formed by the parties hereto; provided, however, these percentages are subject to modification by a provision in this agreement hereinafter set forth.
(b) As an additional consideration for inducing Friedlander to enter into this agreement, and conditioned further that Friedlander continue in the employ of the corporations and/or their successors and assigns and/or any new businesses that may be formed in connection with the manufacture and/or sale of men's haberdashery by the parties hereto for the term of this agreement, Levitt hereby agrees, and by these presents hereby authorizes and directs his executors, administrators and/or representatives to turn over and deliver to Friedlander a sufficient number of shares and/or a sufficient percentage of Levitt's ownership in any of the corporations now existing, their successors and/or assigns and/or any new businesses formed or to be formed in connection with the manufacture and/or sale of men's haberdashery by the parties hereto, so that in addition to the stockholdings and/or interest or interests that Friedlander has at the time of the death of Levitt, he become possessed of sufficient stock and/or interest so that he will then have *109 fifty (50%) percent of the total issued and outstanding capital stock of the corporations, their successors and assigns; such stock and/or interest is to be turned over to Friedlander without requiring him to pay anything therefor.
4. The corporations hereby agree to employ Friedlander as manager, in complete charge of the operations of the corporations, their successors and assigns, for the duration of this contract, on the terms and conditions hereinafter set forth.
* * * *
6. The corporations, their successors and/or assigns hereby agree:
(a) to pay unto Friedlander a salary which in the aggregate shall equal the *1011 sum of Ten Thousand ($ 10,000.00) Dollars per year for each and every year of this agreement;
* * * *
(c) The corporations agree that they will give unto Friedlander a bonus which shall be deducted as an expense of the business, before provision for taxes. Said bonus shall be equal to 6 1/4% of the net profits of the business after the payment of all expenses and said taxes.
(d) The corporations hereby agree between them that if the salary of Friedlander, plus the bonus hereinabove provided, plus dividends received on his stockholdings from all the companies, plus Friedlander's *110 share of the distributed earned surplus over and above any part thereof reinvested in a further venture, do not equal Twenty-five Thousand ($ 25,000.00) Dollars for the first year of the contract, then in that event Friedlander is to receive an additional bonus which is to be considered an expense of the business, so that the minimum that he can receive for the first year shall be not less than Twenty-five Thousand ($ 25,000.00) Dollars.
Subparagraphs (e), (f), and (g) of paragraph 6 were the same as subparagraph (d) except that they provided for minimum receipts by petitioner of $ 25,000, $ 20,000, and $ 20,000 for the second, third, and fourth years of the contract. Sums in excess of $ 17,000 due under subparagraphs (d) through (g) were not payable until January 1, 1951, unless petitioner should die or sever his connection with the corporations.
The agreement also contained mutual representations by Levitt and petitioner as to the financial condition of their respective businesses and further provided that neither would sell, transfer, or encumber his stock in the corporations without first offering such stock to the other for purchase within 20 days in accordance with a prescribed *111 formula; that in the event of petitioner's death or the termination of his employment, his stock would be purchased by Levitt at a value to be determined by the above-mentioned formula; that in the event of the liquidation of any of the corporations, Levitt and/or the remaining corporations remained liable under the guarantee provision of paragraph 6; that in the event any new corporation was formed for the same purposes as the old ones, petitioner had the right to acquire 20 per cent of the stock and was to be entitled to a bonus of 6 1/4 per cent as provided in paragraph 6 (c); that petitioner was to devote full time to the affairs of the various corporations and was not to engage in any manner in any competing business except that upon the termination of his employment his covenant not to compete was limited to refraining from manufacturing and/or selling "custom shirts" for 2 years; that Levitt was not to engage in a competing business for the term of the agreement; that the existing corporations were to loan petitioner sufficient funds to enable him to acquire a 20 per cent interest in any new businesses formed; that the corporations had the right to insure petitioner's life for *112 their own benefit to the extent of $ 20,000 plus 25 per cent of the book value of the stock of all existing corporations; *1012 and that the term of the agreement was from April 7, 1947, to April 7, 1962.
The agreement provided for the sale of the merchandise inventory at $ 3,000 less than its cost because Levitt insisted that the Custom Shops which did not deal in the same type of merchandise could not dispose of it without reducing the retail price.
On April 7, 1947, petitioner executed a bill of sale in favor of the four corporate parties to the agreement, conveying to them "the haberdashery business known as de Free's, located at 547 Madison Avenue, New York City, together with the furniture and fixtures therein located, the lease thereto, and the assets thereof, together with the goodwill of said business."
The combined balance sheet of the four Levitt corporations on April 5, 1947, showed the net worth of the corporations to be $ 163,758.71, including the capital stock and surplus accounts. The balance sheet of the corporations did not reflect any asset on account of goodwill.
On April 7, 1947, the following shares of stock were issued to the petitioner. All of the certificates were *113 marked "Subject to Agreement of April 7th, 1947."
| No. of shares | Corporation | Date endorsed by petitioner |
| 40 | The Custom Shop, Inc | Aug. 5, 1952 |
| 40 | Custom Shop Shirtmaker, Inc | |
| 20 | The Custom Shop Corporation | |
| 40 | Morley Shirt Company, Inc |
In addition to the shares of stock, petitioner also received $ 22,517.08 in cash and, despite the terms of paragraph 2 of the agreement, settled his own liabilities from the operation of the store. Of this amount, $ 583.34 represented a reimbursement to petitioner of rent paid by him for the period April 7-April 30, 1947.
On April 8, 1947, the respective boards of directors of each of the four above-named corporations adopted resolutions which:
1. Authorized and ratified the action of the president in executing the contract with petitioner on April 7, 1947.
2. Authorized the acceptance as a donation of the assignment and transfer by Levitt of the number of shares of the stock of the particular corporation subsequently issued to petitioner, the same to be held as treasury stock.
3. Authorized the delivery of said shares to petitioner as the consideration for the contract of April 7, 1947.
4. Authorized the corporation to contribute a stated percentage toward the basic salary *114 and bonus of petitioner and toward any sum required by the minimum income guarantees.
5. Authorized the subscription to 25 per cent of the capital stock of de Free's, Inc.
*1013 6. Elected petitioner a vice president and director of each of the four corporations.
The business of the Custom Shops was the sale of ties and jewelry and made-to-order shirts. Petitioner's merchandise consisted of ties, jewelry, sportswear, and ready-made shirts. After the purchase of petitioner's store by the Custom Shops, his stock of ready-made shirts was sold off at retail and, after being reduced to odd lots, in bulk, and no more were ordered.
Petitioner worked at the executive offices of Custom Shops after selling his business, and did not work at the Madison Avenue store. He left the employ of the corporations in 1952.
Petitioner's original 1-year lease from October 1, 1946, until September 30, 1947, provided that it could not be assigned and that the premises could not be subleased or used by others without the prior written consent of the landlord. After the sale, the lease was left in petitioner's name until 1951 because the attorneys for both parties feared that if the landlord learned of the transaction, *115 it would demand an increase in the rent or a part of the purchase price as a condition to the granting of its consent. In view of this possibility, the attorneys for petitioner and for Levitt and his corporations agreed that instead of a formal assignment of the lease from petitioner to the corporations, it would be sufficient if the latter assumed the lease on the store and agreed to hold petitioner harmless therefrom, and the agreement of April 7, 1947, so provided.
The monthly rent of $ 729.17 on the Madison Avenue store was paid by checks of de Free's, Inc., between May 1947 and December 1949. Petitioner was one of the signers of all but one of the checks, but the funds came from the corporation and not from him. Petitioner never owned any stock in de Free's, Inc., which was wholly owned by the four Levitt corporations.
On July 31, 1947, the Morley Shirt Co., Inc., made the following entries in its general journal:
| Investments | $ 5,629.27 | ||
| Erwin Friedlaender for 25% of the capital stock of de Free's Inc. | $ 5,629.27 | ||
| The Custom Shop, Inc | 5,629.27 | ||
| Custom Shop Shirtmaker, Inc. | 5,629.27 | ||
| The Custom Shop Corp | 5,629.27 | ||
| Erwin Friedlaender for each corporation's share of 25% of the capital stock of de Free's, Inc. | $ 16,887.81 |
On *116 July 31, 1947, 2 of the other 3 corporations made the following entry in their general journals:
| Investment | $ 5,629.27 | |
| Morley Shirt Co., Inc for 25% of the capital stock of de Free's, Inc. | $ 5,629.27 |
*1014 Custom Shop Shirtmaker, Inc., the third corporation, made the same entry but the explanation therefor read: "for 25% of $ 22,517.08 paid for the stock of de Free's, Inc."
Petitioner reported the receipt of the proceeds from the sale of his business, exclusive of approximately $ 1,100 used to pay off outstanding debts, on his tax return for 1947, as follows:
| Proceeds allocated to furniture, fixtures, and | ||||
| leasehold | 1 $ 13,083.34 | |||
| Less: Expenses of sale | 1,250.00 | |||
| $ 11,833.34 | ||||
| Less: | Adjusted basis: | |||
| Furniture and fixtures, | ||||
| original basis | $ 4,675.67 | |||
| Less: Depreciation | 2,167.25 | |||
| $ 2,508.42 | ||||
| Leasehold, original basis | $ 9,475.50 | |||
| Less: Amortization | 4,822.03 | |||
| 4,653.47 | ||||
| 7,161.89 | ||||
| Gain on above Proceeds allocated to goodwill | $ 4,671.45 | |||
| $ 32,751.74 | ||||
| Less: Basis | None | |||
| Gain | 32,751.74 | |||
| Total gain | $ 37,423.19 | |||
| Long-term capital gain | 18,711.60 | |||
| Proceeds allocated to merchandise inventory | $ 8,356.89 | |||
| Less: Basis | 11,356.89 | |||
| Loss | $ 3,000.00 |
*117 Petitioner's accountant computed the value of the proceeds received for the sale of goodwill by taking 20 per cent of the net worth of the four Levitt corporations as shown by the combined balance sheet of April 5, 1947. He did not give any effect to any goodwill that these corporations might have possessed and no such item was reflected on the balance sheeet.
The Commissioner determined that in the foregoing transaction the petitioner realized ordinary income of $ 45,915.71 under section 22 (a) of the Internal Revenue Code of 1939 as either: (a) A payment made to induce him to enter a contract; (b) advance compensation for services *1015 to be rendered; (c) rent; or (d) short-term capital gain on the sale of goodwill.
The determination was based upon the following computation:
| Consideration received: | ||
| Cash and liabilities paid or assumed by The Morley Shirt Co., | ||
| Inc., The Custom Shop, Inc., The Custom Shop Shirtmaker, Inc., | ||
| The Custom Shop Corp | $ 22,517.08 | |
| Fair market value of capital stock of the above-named corporations | ||
| received | 44,827.60 | |
| Total | $ 67,344.68 | |
| Less: Reimbursement for rent expense for the period April 7 | ||
| through April 30, 1947 | 583.34 | |
| Total | $ 66,761.34 | |
| Adjusted basis of assets transferred: | ||
| Merchandise inventory | $ 11,356.89 | |
| Deposits | 854.17 | |
| Prepaid insurance | 222.68 | |
| Furniture and fixtures | 2,508.42 | |
| Leasehold cost | 4,653.47 | |
| 19,595.63 | ||
| Balance | $ 47,165.71 | |
| Less: Deductible expenses | 1,250.00 | |
| Income realized | $ 45,915.71 |
*118 The long-term capital gain of $ 18,711.60 reported on the sale of furniture and fixtures and goodwill was eliminated and the $ 3,000 ordinary loss claimed on the sale of the merchandise inventory was disallowed. Rent expense claimed in the amount of $ 583.34 was also disallowed on the ground that it covered the period April 7, 1947, through April 30, 1947, for which petitioner had been reimbursed.
OPINION.
The first and major issue presented for decision herein is whether the petitioner realized long-term capital gain or ordinary income upon the sale of his men's haberdashery business. The respondent based the determination of the deficiency with respect to this issue upon four alternative theories, namely, that the amount of the payment to petitioner in excess of the value of the tangible assets of the store was either: (a) To induce petitioner to enter into a contract; (b) advance compensation for services to be rendered; (c) rent; (d) short-term capital gain on the sale of goodwill.
In his brief, respondent also argues that since the lease covering the store location was not assigned by petitioner, there was no transfer of goodwill and hence no "sale or exchange" within the meaning *119 of section 117 of the Internal Revenue Code of 1939.
*1016 Upon this issue petitioner contends that he sold his business as a going concern, including its "locational goodwill," over 6 months after the business was started and, therefore, any proceeds received by him in excess of his basis constituted capital gains. Specifically he contends that the value of the stock received by him constituted capital gains since it was received "in payment for the locational goodwill of his business * * *."
It will be noted that the agreement of sale dated April 7, 1947, while calling for the sale of "the assets of the business known as de Free's" in the first paragraph, calls for payment in the same paragraph in terms indicating that the payment was only for inventory, that the second paragraph of the agreement called for the payment by the purchasers of the liabilities of de Free's in an amount not to exceed $ 12,500 and for the assumption of the lease, and that the stock of the acquiring corporations was to be given to petitioner "for the goodwill of de Free's." No payment was spelled out for the furniture, fixtures, improvements, and prepaid items. It will also be noted that the provisions of the *120 contract with regard to payments were not complied with. Instead of petitioner receiving the payment called for by paragraph 1 of the agreement and the acquiring corporations paying the liabilities of de Free's, petitioner received over $ 22,500, part of which ($ 12,500) he allocated to "furniture, fixtures and leasehold improvements." Part of petitioner's furniture and fixtures was acquired by petitioner when he acquired the store in September 1946, but part was acquired later at times not disclosed by the record. Similarly, a part of the "leasehold improvements" was made prior to October 7, 1946, and a part was made later. Therefore, even if petitioner acted correctly in treating the $ 12,500 as payment for "furniture, fixtures and leasehold improvements" (a treatment not supported by the agreement of April 7, 1947), we would still be unable to determine what part of the $ 12,500 constituted long-term capital gains.
For the purposes of the discussion of this issue, we will assume that all payments of moneys or stock received by petitioner, except those received for the merchandise inventory, were received for what petitioner describes as "locational goodwill." We will also assume, *121 contrary to respondent's contention, that there was a "sale" by petitioner of this "locational goodwill" on April 7, 1947. Even on these assumptions, petitioner cannot prevail.
The burden of proving that the respondent's determination was erroneous was upon the petitioner. In our opinion, he has failed to sustain this burden since he has failed to establish that the proceeds of the sale in excess of the amount paid for the merchandise inventory represented long-term capital gain upon the sale of goodwill held for more than 6 months. In view of this conclusion, it is unnecessary to *1017 consider the other alternative theories presented by the respondent on this issue.
In D. K. MacDonald, 3 T. C. 720, 726, we quoted the following definition of the term "goodwill" from the Cyclopedic Law Dictionary (3 ed.), and noted that it had also been quoted with approval by the Supreme Court of the United States:
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 *122 which it receives from constant or habitual customers, on account of its local position, or common celebrity, or reputation for skill or affluence or punctuality, or from other accidental circumstances or necessities or even from ancient partialities or prejudices. Story, 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.
In an early case we pointed out that "one of the chief factors in the development and growth of goodwill is long continued business under the same or similar names and in the same community." Theo. Planz, Inc., 10 B. T. A. 1158, 1159. Other factors to be considered include the record of earnings, stability of customers, the nature of the premises occupied by the business, the operating costs, the economy of the region served, the competition, the competence and efficiency of the management, and the existence of unusual economic conditions. Estate of Henry A. Maddock, 16 T. C. 324, 329; Estate of A. Bluestein, 15 T.C. 770">15 T. C. 770.
We do not question that goodwill may be attached to a particular location, see Morris Gumpel, Executor, 2 B. T. A. 1127, *123 but, in our opinion, all of the factors which must be considered in determining whether or not goodwill exists involve an element of time. Essentially, the goodwill of a business is the potential of that business to realize earnings in excess of the amount which might be considered a normal return from the investment in the tangible assets. Only the passage of time can establish the criteria whereby the existence and value of such potential can be determined, and we have been reluctant to attempt to value goodwill where the determining factors may have been in existence for only a short period. See Independent Aetna Sprinkler Co., 15 B. T. A. 21; R. H. Perry & Co., 12 B. T. A. 328.
Under unusual circumstances, a value has been determined for goodwill after a relatively short period of operation. In Sidney V. LeVine, 24 T.C. 147">24 T. C. 147, we found that a partnership owned goodwill of substantial value despite a mere 28 months of operation, but therein we also found that the partnership had assembled and trained a group of highly skilled employees accustomed to working together, had developed specially designed equipment for the particular work done by *1018 the partnership, had established a *124 distinct pattern of growth, and, from its very inception, had shown substantial and constantly increasing profits far beyond what might be expected as a normal return on the investment in tangible assets.
In the instant case we have the problem of determining whether goodwill existed as an asset of the petitioner's business prior to October 7, 1946, so that such a capital asset would have been held for more than 6 months at the time of its sale on April 7, 1947. Sec. 117 (a). As we have previously noted, the foregoing authorities make it clear that goodwill is not an asset which normally is acquired in a relatively short period of time. Despite excellent location, unique design, lack of competition, and other favorable factors, a newly established retail store may well require a period of several months before the public is accustomed to patronizing it in numbers sufficient to enable the store to do a business of such substantial volume as to indicate that it is capable of future earnings in excess of the normal return that might be expected on the investment therein. Until such time, it cannot be said that the business possesses goodwill as an asset.
On the record before us, it *125 appears that the petitioner commenced doing business in the Madison Avenue store toward the end of September 1946. The store at this time was undergoing alterations and such business as petitioner carried on was not even recorded in his books, the receipts therefrom being used to meet the incidental expenses of setting up the store. Levitt first visited the store and was impressed by the volume of business being conducted in February of 1947, but this was only about 2 months prior to the sale. By that time petitioner's business may well have developed goodwill of appreciable value, but we are unable to find on the evidence before us that such goodwill existed as an asset of the business for more than 6 months prior to April 7, 1947.
Fair Market Value of Stock Received.
The second issue for decision is the fair market value of the stock of the four Levitt corporations received by petitioner as part of the consideration for the sale of his business. This stock constituted 20 per cent of that issued and outstanding, and petitioner reported the value as $ 32,751.74, which his accountant testified was computed by taking 20 per cent of the net worth ($ 163,758.71) of the corporations as *126 shown on the combined balance sheet of April 5, 1947. Respondent determined a value for the stock of $ 44,827.60 in his notice of deficiency and argues that it must be confirmed because petitioner failed to introduce any affirmative evidence demonstrating its incorrectness. However, the assets of a corporation may be considered in valuing its stock, and, "in the absence of any different showing, the book value of those *1019 assets is some evidence of their actual value sufficient to shift the burden of going forward to the respondent." B. F. Edwards, 39 B. T. A. 735, 737-738; see also Ralph Perkins, 41 B. T. A. 1225, affd. (C. A. 6, 1942) 125 F. 2d 150; Earl V. Perry, 22 T. C. 968. In the absence of any evidence by respondent, we sustain the petitioner's valuation.
Loss on Merchandise Inventory.
The respondent argues that the price fixed in the agreement of April 7, 1947, for petitioner's merchandise inventory was not bona fide and should be disregarded. He points to the discount of $ 3,000 provided by the agreement regardless of the size of the inventory as evidence of an arbitrary arrangement without relation to actual inventory values. As we view the facts, Levitt, toward the end *127 of the negotiations for the purchase of petitioner's business, suddenly demanded a discount in the flat amount of $ 3,000 to cover an anticipated loss in liquidating a stock of shirts not carried by the Custom Shops. We need not decide whether his demand was legitimate or was a bit of last-minute haggling for a lower purchase price to which petitioner succumbed. We are satisfied that petitioner sold his merchandise inventory for $ 3,000 less than its cost basis and is entitled to an ordinary loss thereon. Cf. Williams v. McGowan, (C. A. 2, 1945) 152 F. 2d 570.
Rent Reimbursement.
The respondent decreased the petitioner's receipts from the sale of his business by the amount of $ 583.34, which he determined was reimbursement to petitioner for rent for the period April 7, 1947, to April 30, 1947, rather than a part of the sales price, and consequently disallowed an equal amount of rent expense claimed as a deduction by petitioner in his return. Petitioner has not shown that respondent erred in this adjustment and we sustain the respondent on this issue.
Gain on Sale of Furniture and Fixtures and Leasehold Improvements.
The petitioner reported the excess of the proceeds allocated to *128 his furniture and fixtures and leasehold improvements above the basis therefor as long-term capital gain without allocating the proceeds as between these several assets. The respondent treated the entire amount received in excess of the basis of these and other assets as ordinary income. Although petitioner pleaded as an error the respondent's elimination of the long-term capital gains and the treatment of the transaction as giving rise to ordinary income, he has not adduced sufficient evidence to enable us to make a finding as to the amount of the proceeds properly allocable to the furniture and fixtures and to the leasehold improvements or to determine what part of such furniture, *1020 fixtures, and leasehold improvements was owned by him prior to October 7, 1946. On the record before us, we can only sustain the respondent's determination on this point.
Decision will be entered under Rule 50.