*3824 For want of proof of the value of an intangible asset in the nature of "a going business" on March 1, 1913, as well as of its value at date of sale, the action of the Commissioner is approved.
*361 This proceeding is for the redetermination of a deficiency in income and profits tax for the year 1919, in the amount of $2,608.68.
The petitioner assigns as errors:
(1) Failure of the Commissioner to find that the taxpayer had good will of a certain value as of March 1, 1913.
(2) Failure of the Commossioner to find that the good will passed at the time of the sale of all the other assets of the taxpayer.
(3) Failure of the Commissioner, when calculating the results of the sale, to include the good will value as a part of the assets of the taxpayer at the time it sold its business in 1919 to the English & Mersick Co.
*362 FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of Connecticut, with its principal office in New Haven. The corporation*3825 was organized in 1908 for the purpose of taking over the assets and business of a partnership business of long standing. Its authorized capital stock was $100,000 par value.
The Pfleghar manufacturing plant was in existence and operated as a partnership from about 1880 to 1908, at which date the corporation was formed and took over the business. At the time the corporation took over the business new buildings were erected. At all times it maintained an efficient organization of skilled workmen and manufactured hinges, locks, automobile handles, and equipment that belongs thereto. It had one customer, the English & Mersick Co., that regularly purchased its products, and for many years prior to 1913 and down to 1919 purchased as much as 90 per cent of its products. In 1913 petitioner owned no patent rights of value. It took orders from English & Mersick Co. with plans and specifications, and manufactured the desired articles and billed them to the English & Mersick Co. at agreed prices. Such articles as it so manufactured and sold to the English & Mersick Co. did not carry the name of petitioner, but went to the public as English & Mersick Co. products.
Frank P. Pfleghar*3826 was theprincipal stockholder of the petitioner corporation. In 1916, Pfleghar died, testate, and in accordance with the terms of his will his estate was taken over by the Union & New Haven Trust Co. as trustee. Prior to 1919 the trustee decided to sell the plant. Negotiations were entered into with the English & Mersick Co. and in 1919 an agreement was reached by which the English & Mersick Co. agreed to pay for said plant, as a whole, as a going concern, $300,000 plus $35,000 for the inventory of merchandise on hand. Since 1908 the English & Mersick Co. had maintained their offices in the Pfleghar Company building but no stock of the Pfleghar Company was held by the English & Mersick Co. or any of its stockholders. However, the officers of the English & Mersick Co. were well acquainted with the history of the Pfleghar Company and were cognizant of its prosperity.
The average value of the tangible assets of petitioner from July 1, 1908, to December 31, 1912, was $222,854.12. The average income of petitioner per annum from July 30, 1909, to December 31, 1912, was $68,044.14. The depreciated cost of petitioner's tangible assets at date of sale was $186,111.75.
Petitioner*3827 claims the right to capitalize a good will asset as of March 1, 1913, and in doing so and in computing its value, it allowed 10 per cent income on its average tangible assets of $222,854.12, that is, $22,285.41, and deducting that amount from its average income *363 during the prior four and one-half years, $68,044.14, obtained $45,758.73 which it contends is "subject to good will" and capitalized same on a 15 per cent rate of income, and thus arrived at a valuation of good will of $305,058.20. Petitioner contends that it suffered a loss on the sale of the plant instead of a profit as contended by respondent.
The respondent denied that petitioner owned an asset of good will on March 1, 1913, which had any value, and also denied that petitioner's business was of such character as to make good will an clement of continuing earning power. The respondent also denied that earnings prior or subsequent to March 1, 1913, are attributable to an asset of good will and denied that petitioner suffered a loss on the sale of its plant.
OPINION.
LOVE: In this proceeding none of the essential facts are contested. It was stated at the hearing that the values placed on the tangible*3828 assets, as given in our findings of fact, were not controverted and that the only issues involved were whether or not the petitioner on March 1, 1913, owned good will, and if so, was it of any value and how much. Was that asset, if such it be, sold and conveyed to the purchaser?
Petitioner argues that the possession of good will is shown by the large profits made by it during the four and one-half years immediately prior to 1913.
Abnormal profits, standing alone, are not evidence of a good will asset. In , we said:
The only evidence offered in the attempt to prove good will was the average annual earnings and the average tangible assets as shown by the books of the years 1908 to 1912, inclusive. These figures, standing alone, are not sufficient evidence of the existence of good will to warrant our disturbing the Commissioner's finding.
When the possession of good will is shown, profits are sometimes used to assist in measuring its value. There may be large profits in the absence of any of the elements of good will, or there may be small profits, or even a loss, when good will exists.
It may be suggested here that*3829 not every circumstance and condition that tends to the advantage of a certain business may be classified and capitalized as good will. It may be true that the term "good will" has been used to include circumstances and conditions other than such as legitimately belong in the ambit of that term, but we believe that good will is fairly well and in a fairly comprehensive manner, defined as follows:
Good will may be defined to be the advantage or benefit which is acquired by an establishment beyond the mere value of the capital stock, funds or property *364 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, affluence, punctuality, or from other ancient partialities or prejudices.
The term "good will" in its legitimate sense, implies or connotes a condition where the public, or at least a substantial number of people, will continue to deal with the establishment by force of habit or otherwise, regardless of a change of ownership. It does not follow, however, that in the absence of such conditions as may legitimately*3830 be called "good will," an establishment may not possess advantages that may be capitalized. There may be such conditions. That petitioner possessed some advantages in the conduct and operation of its manufacturing business seems apparent. One of the significant facts tending to indicate the possession of such advantages and their value, is the fact that the purchase price in 1919 was greater than the depreciated cost of the tangible assets. John B. Kennedy, witness for petitioner, who has been president of the English & Mersick Co. for 29 years, testified that had there been no going concern, the tangible assets would not have been worth what he paid for the business.
Kennedy knew the history of petitioner, he knew the personnel of its labor organization and the skill and efficiency of its workmen, and knew the class of work they turned out. He nowhere stated, however, his opinion of the value, either of the tangible or intangible assets. All the evidence indicates that conditions were practically the same in 1913 as in 1919, and whatever value, if any, that intangible asset had in 1919, it had the same in 1913. What was that value? The depreciated cost of tangible assets*3831 in 1919 was $186,111.75. The sale price of the plant (aside from the inventory of merchandise) was $300,000. Petitioner asks us to hold that its intangible asset possessed a value at least equal to the difference, that is, $113,888.25, which is nearly 38 per cent of the total sales price.
We are of the opinion that the evidence in this case fails to show such a value for the intangible asset. Would any other person in 1919 have paid $300,000 for that plant? Would any other person in 1913 have paid $113,000 more than the value of the tangible assets for the plant? And, further, a very pertinent question is whether or not the English & Mersick Co. in 1913 would have paid $113,000 more than the value of the tangible assets. There is no evidence in the record that tends to justify an affirmative answer to either of the foregoing questions.
There is no evidence other than the large profits, by which we may measure that value. As heretofore stated, capitalizing profits by formulae is sometimes resorted to as an aid, or as it were, to check against other evidence, but its use alone is very unsatisfactory. If *365 petitioner possessed an intangible asset on March 1, 1913, we*3832 are not able from the record, to determine its value, if any.
With reference to the second assignment of error, we hold that in the sale of the plant, whatever intangible asset petitioner owned in 1919 was conveyed to the purchaser of the plant as an incident of the plant.
Reviewed by the Board.
Judgment will be entered for the respondent.
MARQUETTE, STERNHAGEN, and PHILLIPS concur in the result.
SMITH, TRAMMELL, and TRUSSELL dissent.