1928 BTA LEXIS 3219">*3219 Cash value of good will acquired for capital stock, determined.
13 B.T.A. 621">*621 By this proceeding the petitioner seeks a redetermination of deficiencies in income and excess-profits taxes for the years 1917, 1920, and 1921, in the respective amounts of $44.37, $359.74, and $329.93. The petitioner alleges that the respondent erred in refusing to allow any value for good will acquired for stock at the time of its organization in 1914. At the hearing the respondent amended his answer to the petition filed under Docket No. 30958 by alleging that the deficiency for 1917 is barred by the statute of limitations, and moved 13 B.T.A. 621">*622 to dismiss the petition for that year for want of jurisdiction. The motion to dismiss was denied at the hearing.
FINDINGS OF FACT.
The petitioner, a Delaware corporation, with principal place of business in Washington, D.C., was organized in January, 1914, by J. P. Herrmann to conduct a department store and acquire the furniture business of J. P. Herrmann, trading as House & Herrmann.
The firm of House & Herrmann was organized1928 BTA LEXIS 3219">*3220 in 1885 by G. E. House and J. P. Herrmann to conduct a furniture business. Upon the dissolution of the firm in 1901, House took over the branch located in Wheeling, W. Va., and Herrmann acquired the store being conducted at 921, 923, 925 and 927 Seventh Street, Washington, D.C. Subsequently, the store was moved to Seventh and Eye Streets, the present location of the petitioner's business. Prior to 1913 the business was conducted as a high-grade installment house.
On January 26, 1914, the board of directors of the petitioner accepted the following offer of J. P. Herrmann for the sale of his business as of January 1, 1914:
I propose to sell and transfer to you all my right, title and interest in and to the business now and heretofore conducted by me in the City of Washington, District of Columbia, at Seventh and Eye Streets, Northwest, under the name and style "House & Herrmann," including the good will and the following assets:
| Auto Truck | $1,500.00 |
| Notes Receivable | 3,836.60 |
| Cash | 21.37 |
| Horses and Wagons | 800.00 |
| Installments | 138,946.98 |
| Insurance Reserve | 390.00 |
| Merchandise, as per Inventory | 65,216.76 |
| Store and Office Fixtures | 5,000.00 |
| Total | 215,711.71 |
1928 BTA LEXIS 3219">*3221 you to assume and pay all the liabilities of, and in connection with said business, and to issue to me in consideration thereof the Nineteen Hundred and Ninety-seven (1997) shares of your capital stock for which I subscribed, the same to be fully paid and nonassessable.
The deal was thereafter closed according to the terms of the offer. The liabilities of House & Herrmann on January 1, 1914, were $54,960.69, consisting of accounts and bills payable.
Among the property set up on the corporate books as having been acquired from J. P. Herrmann in exchange for stock, was an item of good will amounting to $38,948.98. The good will account was closed June 30, 1918, after the following charges had been entered in it:
| January 1, 1915, Final Loss & Gain A/C | $13,959.88 |
| April 1, 1916, Cash; Sale Wagon | 25.00 |
| April 19, 1916, Cash; Sale Old Harness | 5.00 |
| May 18, 1916, Cash; A/C Wagon | 15.00 |
| August 3, 1916, Cash A/C Wagon | 10.00 |
| August 28, 1916, Cpt. | 10.00 |
| June 30, 1917, J. Phillip Herrmann | 20,474.53 |
| June 30, 1918, Profits & Loss | 4,449.57 |
13 B.T.A. 621">*623 The item of $20,474.53 originally was a liability of the petitioner to Mrs. J. Phillip Herrmann for advances1928 BTA LEXIS 3219">*3222 made to the corporation and dividends credited to her account. Some time prior to June 30, 1917, Herrmann assumed the indebtedness and released the petitioner of its liability by having the amount owing charged to him and credited to good will.
The average yearly earnings and net tangibles of House and Herrmann for the seven years prior to 1914, after excluding personal expenses and asset accouts of J. P. Herrmann entered on the firm books, were $17,059.13 and $154,078.75, respectively. The percentage of earnings to capital over the seven-year period was 11.07 per cent. The firm paid Herrmann an annual salary of $6,000 from 1907 to 1913, inclusive, and $10,000 for the next three years. Herrmann also received as owner of the property in which the firm conducted its business, an annual rental of $7,200 for the years 1907, 1908, and 1909, and $8,400 for the years 1910 to 1913, inclusive. The profits of the petitioner for 1914, 1915, and 1916 were $13,959.88, $18,657.60, and $19,111.36, respectively.
The cash value of good will acquired by the petitioner in January, 1914, for stock was $15,000.
Petitioner's return for the year 1917 was filed with the Collector of Internal1928 BTA LEXIS 3219">*3223 Revenue, Baltimore, Md., on or about March 15, 1918. On January 31, 1923, it executed and filed with the respondent, a so-called waiver in words as follows:
In pursuance of the provision of subdivision (d) of Section 250 of the Revenue Act of 1921, House & Herrmann, Inc., of Washington, D.C., and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said corporation for the year 1917 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909, irrespective of any period of limitations.
The records of the special assessment section show that the consent agreement expired on April 1, 1924. The deficiency for the year 1917 was asserted by a 60-day letter bearing date of August 26, 1927. 13 B.T.A. 621">*624 No other consent agreement has been filed by the petitioner with the respondent for the year 1917.
OPINION.
1928 BTA LEXIS 3219">*3224 ARUNDELL: The principal question involved is the amount of petitioner's invested capital for the years 1917, 1920, and 1921. The only difference between the parties on this issue is the value to be attributed to the good will acquired for stock at the time petitioner purchased the business of J. P. Herrmann. Petitioner is claiming a valuation for the good will at the time paid in of $38,948.98. We have not been furnished with the basis for this valuation, but we observe from statements and bookkeeping entries of record that the amount is the difference between the book value of the assets transferred, less accounts and bills payable, and the par value of the stock issued in exchange for the property. Not having been informed to the contrary, we assume the value of the good will was arrived at by this arbitrary method.
As a consequence of the fact that the personal transactions of Herrmann were recorded on the books of his furniture business without segregation, the Commissioner experienced some difficulty in determining the profits of the firm. The petitioner has proven that many of the items which the Commissioner treated as business expenses were, in fact, expenditures1928 BTA LEXIS 3219">*3225 of the individual, with the result that we have found the average yearly earnings of the business during the seven-year period prior to 1914 to be $17,059.13, instead of an average yearly profit of $3,399.37 for the years 1909 to 1913, inclusive, determined by the Commissioner. The latter amount being less than an 8 per cent return on the firm's investment, the Commissioner declined to allow any value for good will.
No uniform rule has been laid down for determining the value of good will. The proper value is a question of fact to be decided in the light of all the facts and circumstances of the case including the reputation of the business for honest and fair dealing, its location and the length of time it has been situated there, and its earnings.
House & Herrmann was established in 1885, and maintained its business at the present address of the petitioner or in a store in the same block. The two witnesses presented by the petitioner to give their opinion on the cash value of the good will, testified that the firm had an excellent business reputation, that it was equal or superior to the average furniture store in the city, and that it spent from $8,000 to $10,000 every1928 BTA LEXIS 3219">*3226 year in advertising, of which a considerable amount was expended in building up trade under the slogan "When in doubt, buy at House and Herrmann's." Both of these witnesses either owned or were closely identified with competitive businesses. The witness who qualified to express an opinion as to the value of the 13 B.T.A. 621">*625 firm's good will at the time the petitioner acquired it for stock, testified that it was worth $50,000. The witness failed to show sufficient knowledge of the business to entitle the opinion to any great weight.
The profits of the petitioner, for the years 1914, 1915, and 1916, averaged $17,242.95 after deducting an annual salary of $10,000 paid to its owner. Whether the increase in earnings was due to better management, a larger investment, or some other reason is not shown by the evidence.
From all the evidence we are of the opinion that the good will paid in to the petitioner for stock had a cash value at that time of $15,000.
The respondent, at the hearing, moved to dismiss the petition in so far as it relates to the year 1917, on the ground that the Board had no jurisdiction as the statutory period for assessment and collection of the deficiency1928 BTA LEXIS 3219">*3227 had expired prior to the mailing of the notice of deficiency. This motion was denied. In connection with the motion respondent was granted leave to amend his answer so as to allege the facts relating to the running of the statute of limitations, and thereafter introduced evidence in support of his allegations.
We are clearly of the opinion that, even if we found that the statute of limitations had run, that fact would not deprive us of jurisdiction, it being within our power to determine whether taxes are barred, and in order to make that determination we must have jurisdiction. Under our decision on the merits of this case the deficiency determined by the respondent for 1917 will be eliminated on recomputation, and there is therefore no necessity for discussing the matter of the statute of limitation.
Judgment will be entered under Rule 50.