*1494 1. Good will as of March 1, 1913, excluded from basis for computing gain for sale of petitioner's business in 1924.
2. Amounts paid monthly by sublessee, held to be allowable deduction from petitioner's taxable income for the years involved in this proceeding.
*651 The respondent asserts deficiencies for the years 1924, 1925 and 1926 in the respective amounts of $5,144.04, $2,565.28 and $3,922.13. Petitioner alleges that respondent erred (1) in excluding all good will value as of March 1, 1913, in computing profit on the sale of certain property which it sold in 1924, and (2) in determining that certain payments made in each of the taxable years represented purchase money paid for good will.
FINDINGS OF FACT.
During the taxable years the petitioner was a corporation, with its principal place of business in Los Angeles, California, where it was engaged in the cafeteria business.
*652 Some time in December, 1911, the petitioner opened a cafeteria at 1059 Market Street, San Francisco. On June 6, 1924, it*1495 sold such cafeteria for $100,000 and in its income-tax return for such year reported profit in the amount of $55,839.93. Such profit was computed by deducting $19,844.02 and $24,324.05 representing, respectively, depreciated cost of physical assets at date of sale and fair market value of good will at March 1, 1913. Upon audit the respondent excluded all good will value from the basis for determining gain from the sale.
Results from the operation of the cafeteria before and after the basic date were as follows: 1911, loss $4,400.88; 1912, gain $4,875.73; 1913, gain $17,811.12; 1914, gain $28,758.86; 1915, gain $73,158.39. The earnings for January and February, 1913, were $2,678.30.
On May 5, 1924, petitioner acquired a sublease on business premises at 522-534 Hill Street, Los Angeles, which was to run for approximately 16 years and until May 31, 1940. The considerations for such sublease are set out in an agreement as follows:
In consideration of the execution of said assignment by First Parties, Second Party hereby agrees to pay to First Parties the sum of Four Hundred Sixty-seven thousand One Hundred Sixty and no one-hundredths dollars ($467,160.00), lawful money of the*1496 United States to be paid as follows, to-wit:
On the execution of this agreement the sum of Fifty-Six Thousand Seven Hundred Sixty and no one-hundredths dollars ($56,760.00) through escrow; on the 1st day of June, 1924, the sum of Two Thousand Two Hundred Dollars ($2,200.00); and the sum of Two Thousand Two Hundred Dollars ($2,200.00) on the first day of each calendar month thereafter to and including the 1st day of May, 1935; and the sum of Two Thousand Dollars ($2,000.00) on the first day of each calendar month thereafter to and including the 1st day of May, 1940. Said payments shall be made at such place in the City of Los Angeles, County of Los Angeles, State of California, as may, from time to time, be designated in writing by First Parties.
The agreement also provided that before May 31, 1925, the sublessees would erect a building suitable for cafeteria purposes, to cost and to be at time of completion of a fair value of $150,000, including furniture and fixtures. Upon obtaining possession petitioner demolished the structure then located on the premises and constructed and equipped a new building in conformity with the agreement.
In its income-tax returns for 1924, 1925*1497 and 1926 the petitioner deducted the respective amounts of $15,400, $26,400 and $26,400 from its gross income for each of such years as rentals under the terms of its sublease agreement. Upon audit the respondent held that the monthly payments provided for in the lease represent the cost of good will acquired by the petitioner when it secured possession of the property.
*653 The lessees under the original lease had operated a cafeteria on the premises for many years prior to the transaction here involved and had earned substantial profits. In 1924 the building was no longer suitable for a modern restaurant conducted on the cafeteria plan, but the lessees were unable to obtain the capital necessary for the construction and equipment and accordingly disposed of all their interests.
OPINION.
LANSDON: The petitioner's claim of good will value for its cafeteria at 1059 Market Street, San Francisco, is not established by the evidence. At that date no substantial profits had been realized and the income had been no more than a reasonable return on the capital invested in tangible assets. It is true that there was an expectation of profitable business during the exposition*1498 period, which was realized later. Neither the hope of good business nor the realization of that hope in subsequent years is good will. On this issue the determination of the respondent is approved. ; ; ; .
The respondent has disallowed the deductions claimed on account of the annual payments under the terms of the agreement through which petitioner obtained a lease on premises located at 552-534 Hill Street, Los Angeles, on the theory that such amounts represented the purchase price of good will and, therefore, were capital investments. Upon the record we are convinced that no good will was acquired in that transaction. Petitioner's sole object was to secure a suitable location for a branch of its own business. It razed the buildings and erected a more suitable structure. It never made any use of the trade name of the B. and M. Company. The payments in question must be regarded either as capital cost of the lease or as rentals for the premises.
*1499 The agreement through which the petitioner became a sublessee provides for three kinds of payments, viz., (1) a lump sum of $56,760 for the tangible property; assumption of the obligation to pay the rental of $2,100 per month reserved to the fee owner in the original lease; and (2) the payment of $2,200 per month to the lessees. We think it perfectly clear that the latter payments must be regarded either as rentals deductible as ordinary and necessary expenses under section 234(a)(1) of the Revenue Acts of 1924 and 1926 as and when paid, or as a bonus ratably distributed over the term of the sublease and recoverable tax free. J. Alland & Bro.,*654 ; . On this issue the determination of the respondent is reversed.
Decision will be entered under Rule 50.