1929 BTA LEXIS 2170">*2170 Intangible assets consisting largely of good will, which were acquired at a cost of $45,000, held not to be such wasting assets as may be exhausted over a definite number of years.
17 B.T.A. 1213">*1213 The respondent has asserted deficiencies in income taxes for the years 1922 and 1923, in the respective amounts of $1,268.29 and $1,023.27. The single question presented for determination is whether the petitioner is entitled to deductions for depreciation on his pro rata share of certain intangible assets purchased in 1922 by the partnership of which he is a member.
17 B.T.A. 1213">*1214 FINDINGS OF FACT.
The petitioner is an individual, residing at Kansas City, Mo., where he is a member of the insurance partnership of R. B. Jones & Sons.
On September 1, 1922, the following agreement was entered into by the insurance partnerships of Bales, Hogsett & Gray and R. B. Jones & Sons:
THIS AGREEMENT, Made this 1st day of September, 1922, by and between WALTER J. BALES and LESLIE C. GRAY, doing business under the firm name of BALES, HOGSETT & GRAY, parties of the1929 BTA LEXIS 2170">*2171 first part, and R. BRYSON JONES, CARY W. JONES, CLIFF C. JONES, MORTON T. JONES, JAMES A. RAILEY, ROBERT L. STEWART, GEORGE W. KERDOLFF and JAMES R. SYDNOR, doing business under the firm name of R. B. Jones & Sons, parties of the second part,
WITNESSETH: That for and in consideration of the sum of Forty-five Thousand Dollars ($45,000) the parties of the first part have sold, assigned, transferred and conveyed, and by these presents do sell, assign, transfer and convey unto the parties of the second part all of the local agency insurance business heretofore maintained and operated by the parties of the first part, and all the right, title and interest of the parties of the first part therein, and to each and every part thereof, including all the data, records and files of said business and movable cabinets, cases and files containing such records, but not including, however, all other office furniture, fixtures and equipment not herein specified, and not including any outstanding accounts due first parties, and not including the membership in the Local Agents Association; said sale and transfer to become effective as of October 1, 1922, and to include all business effective on and1929 BTA LEXIS 2170">*2172 after that date - the transfer of the records to be made at any time prior to October 1, 1922, at the election of the parties of the second part.
Said first parties shall have the right to cancel any business of any kind or nature written before October 1, 1922, for nonpayment of premium, which they may deem necessary or advisable in closing up their outstanding accounts.
Of the total consideration Twenty Thousand Dollars ($20,000) has been paid in cash, and the receipt of same is hereby acknowledged by the parties of the first part. The remainder of said consideration, to-wit - Twenty-five Thousand Dollars ($25,000) is to be paid in the following manner:
Said second parties agree to pay to said first parties quarterly,
1st. Ten per cent (10%) of the net premiums (same being gross premiums less return premiums, whether such return premiums are on policies issued before or after October 1, 1922) on all business of every character and description, individual and otherwise, or coming through audits, renewals and new business, written for such customers as appear on the books of the parties of the first part as of effective date of purchase under this contract, provided such1929 BTA LEXIS 2170">*2173 customers shall not be on October 1, 1922 also customers of said second parties with direct business effective on their books.
2nd. Ten per cent (10%) of the net premiums on business of customers of first parties who are also customers of second parties with direct business effective on their books October 1, 1922, on the renewals of the business in force on the books of said first parties for such joint customers.
3rd. Ten per cent (10%) of the net premiums on new business produced by first parties for account of second parties.
17 B.T.A. 1213">*1215 Said payments hereinbefore specified to continue until the full amount of the deferred payments on said contract price is paid.
Said second parties shall render to said first parties quarterly statements on or before the 15th days of January, April, July, and October in each year, respectively, for the business transacted during the last three calendar months prior to the month in which said statement shall be rendered. Such statement shall be in detail, showing the premiums credited to the account of first parties and the return premiums charged thereto. There shall also be included the date, policy number, company, customer, 1929 BTA LEXIS 2170">*2174 amount insured and premium, and each quarterly statement shall be accompanied by the payment of the ten per cent provided for by the terms of this contract, said statements and payments to be delivered to first parties at such place in Kansas City, Missouri, as they may designate.
The first parties shall have the right at any time, at their own expense, during the life of this contract, to make an examination of such books and records of said second parties as may be necessary for the purpose of verifying the correctness of such statements.
Said second parties agree to carry on and conduct, in the name of R. B. JONES & SONS, the business hereby sold to them, using their utmost endeavor to prosecute said business successfully to the end that deferred payment hereinbefore required to be paid by second parties to first parties shall be fully paid at the earliest possible date.
Said first parties agree that neither they, nor either of them, will solicit or cause to be solicited any renewals of the business hereby sold, whether the same be original or subsequent renewals, except for the benefit of second parties. And in further consideration of the premises, and of the payments1929 BTA LEXIS 2170">*2175 by said parties of the second part of the consideration hereinbefore expressed, and for the purpose of enabling the said parties of the second part, their personal representatives and assigns, to acquire and enter upon, manage, conduct, continue and carry on the business herein conveyed, the said parties of the first part, for themselves, their personal representatives and assigns, have covenanted, granted, promised and agreed, and do by these presents covenant, grant, promise and agree to and with the said parties of the second part, their personal representatives and assigns, and each of them, that from and after the first day of October, 1922, neither they, nor either of them, will at any time for the period of ten years from and after October 1, 1922, either alone or jointly with or as agent for or employee of any person or persons, firms or corporations, excepting only for the parties of the second part, either directly or indirectly, set-up exercise, conduct or be engaged, employed or interested in or carry on in the Counties of Jackson and Clay, in the State of Missouri, or the Counties of Wyandotte and Johnson, in the State of Kansas, any insurance business, other than personal1929 BTA LEXIS 2170">*2176 accident health and life: Provided, however, that nothing herein contained shall prevent said first parties from accepting the position of State or Special Agent, Assistant Manager or Manager of an insurance company where his duties will not bring him into active competition with the parties of the second part.
It is further stipulated and agreed that Walter J. Bales will, without compensation to himself other than as is expressed in this contract, and without expense to himself, occupy a desk in the office of second parties from the effective date of transfer until January 1, 1923, and that Leslie C. Gray will, without further compensation to himself, and without expense to himself, associate himself actively with the second parties for the purpose of assisting in holding the business purchased by the parties of the second part from the 17 B.T.A. 1213">*1216 parties of the first part, from the effective date of transfer until January 1, 1923.
The parties of the first part hereby consent that the individual names of said first parties may be carried on the stationery of said second parties until the payments required to be made to first parties by said second parties, under this contract, 1929 BTA LEXIS 2170">*2177 have been made in full. Said first parties further agree that they will not consent to the use of their names, or the names of either of them, by any other person than parties of the second part in connection with any local agency insurance business in the territory and during the time specified hereinbefore.
Said second parties jointly and severally hereby indemnify and agree to save harmless said first parties and each of them from any and all liability of every kind which may hereafter accrue, either directly or indirectly, out of the partnership business of said second parties.
The parties hereto hereby bind themselves, their executors, administrators and assigns to the faithful performance of all and singular the conditions and requirements and obligations of this contract.
IN WITNESS WHEREOF the parties to this agreement have hereunto set their hands to two copies, both originals, on this 1st day of September, 1922.
The intangible assets acquired under the above contract consisted of a list of customers, skeleton policies, insurance contracts then in force, and the agreement of all partners of the selling organization that they would not engage in a like insurance1929 BTA LEXIS 2170">*2178 business during the next ten years. The name of Bales, Hogsett & Gray and their location were not used. A record kept of the insurance business done by R. B. Jones & Sons as a result of the acquisition of the business of Bales, Hogsett & Gray for the years 1922 to 1924 was approximately as follows:
| 1922, (Oct. 1, 1922, to Jan. 1, 1923) | $20,000 |
| 1923, full year | 124,000 |
| 1924, full year | 75,000 |
In soliciting business from the former customers of Bales, Hogsett & Gray, the fact that R. B. Jones & Sons had acquired the business was mentioned only during the first year after the purchase.
On his income-tax returns for 1922 and 1923, the petitioner deducted from his distributive partnership net earnings his pro rata share of depreciation applicable to the intangible assets acquired from Bales, Hogsett & Gray on the basis that the intangibles purchased would be exhausted at the end of the ten-year period. Upon audit of such returns the respondent disallowed the deduction on the ground that good will is not a depreciable asset.
OPINION.
LANSDON: The petitioner contends that the partnership of which he is a member purchased certain intangible assets other than1929 BTA LEXIS 2170">*2179 good will for $45,000; that at the end of ten years, when the members of 17 B.T.A. 1213">*1217 the vendor partnership may again become competitors, the assets purchased will be exhausted. It is contended that good will may not be separated from a going concern and that here only the assets were sold, the insurance business of the vendors ceasing.
Section 214 of the Revenue Act of 1921 provides, in part, as follows:
(a) That in computing net income there shall be allowed as deductions:
* * *
(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the case of such property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913.
We are not impressed with petitioner's contention that the partnership of R. B. Jones & Sons purchased intangible assets other than good will. The contract of purchase provides that none of the selling parties may solicit renewals except for the benefit of the second parties and that they will refrain from engaging in a like insurance business for a period of ten years. 1929 BTA LEXIS 2170">*2180 Such contract provided for the sale of a profitable insurance business, the principal asset of which was good will. The courts and this Board have held that good will is not such a wasting asset as may be the proper subject of deductions for depreciation or obsolescence. ; ; ; ; ; ; . A case holding to the contrary is Haberle Crystal Springs Brewing Co.v. Clarke, 30 Fed.(2d) 219, certiorari granted, . The facts of the instant proceeding are distinguishable from those of the Crystal Springs case. There good will was limited in duration to a definite period after which it had no value. The court found that the plaintiff's good will would terminate in 715 days and held that the value of such good will should be exhausted over that period. In1929 BTA LEXIS 2170">*2181 the instant case the intangible assets acquired by R. B. Jones & Sons had no definite life. Perhaps petitioner's firm will be unable to hold any of the customers of Bales, Hogsett & Gray, in which case the intangibles acquired will have little or no value, or perhaps they may be able to hold the customers indefinitely. The good will acquired is not limited in duration to a definite period. The petitioner is not entitled to the deductions claimed.
Decision will be entered for the respondent.