*280 Decision will be entered under Rule 50.
1. A corporation, regularly engaged in the manufacture and sale of wine, sold its entire stock and leased its winery to the purchaser after its sole shareholder had decided to discontinue the business. The lease was canceled the following year and the corporation sold the winery to a purchaser unconnected with the lessee. Held:
(a) The evidence adduced does not support a finding that any part of the consideration paid for the wine was applicable to the good will of the business.
(b) Profit from the sale of the wine was ordinary income and not capital gain, as the intent to discontinue the business did not convert stock in trade into a capital asset.
2. The California franchise tax imposed for the privilege of doing business in 1944, which tax is measured by income realized in 1943, held, not accrued and deductible in 1943. Central Investment Corporation, 9 T. C. 128.
*158 The Commissioner determined deficiencies of $ 10,740.53 and $ 114,190.49 in petitioner's declared value*281 excess profits tax and excess profits tax, respectively, for 1943, in part by treating as ordinary income a profit from the sale of its entire stock of wine, and by adding to income reported a capital gain of $ 99,002.64 from the sale of its winery. No deduction was claimed or allowed for an amount paid in 1944 to California as a franchise tax. Petitioner contends that, since it was in liquidation, its wine stock was a capital asset; that the profit from sale is taxable as a capital gain; and that the franchise tax is deductible as accrued in 1943. The parties are now agreed that the winery was sold in 1944, and that the resulting gain is not taxable in 1943.
FINDINGS OF FACT.
Petitioner, a California corporation with principal place of business at Santa Rosa, California, kept its books on an accrual basis of accounting and filed its 1943 income tax returns, prepared on that basis, with the collector of internal revenue for the first district *159 of California. In 1943 and for many years prior thereto it was engaged in various enterprises, including farming, grape growing, and the manufacture and sale of wines and beer. It owned stock in other corporations, among them Grace*282 Brothers Brewery of Los Angeles, the Fresno Brewing Co. and the Santa Rosa Ice & Cold Storage Co. All of petitioner's stock was owned by its president and manager, Joseph T. Grace, of Santa Rosa, a man active in numerous civic, financial, industrial, and agricultural enterprises, and for over twenty years a vice president of the Bank of America.
In 1921 petitioner purchased a wine-manufacturing plant, long known to the trade as the DeTurk Winery. It operated the plant until 1943, producing, from grapes grown by it or bought from others, sweet and dry types of wine and some brandies, which it sold to a regular clientele, partly in bottles bearing the label "DeTurk Winery" and partly in barrels to wholesale customers who bottled and sold it under their own labels. "The DeTurk Winery, Established 1876" appeared above petitioner's name on its invoices. Petitioner's product was accepted by the trade as a wine of high quality, it was successfully marketed, and the net profits from its sale for the years 1936-1942 were as follows:
| 1936 | $ 26,610.18 |
| 1937 | 33,184.93 |
| 1938 | 20,377.92 |
| 1939 | 16,100.84 |
| 1940 | $ 10,459.86 |
| 1941 | 7,995.20 |
| 1942 | 18,959.53 |
In 1941 petitioner's sales were*283 157,518 gallons of dry wine in bulk and 8,888 gallons in bottles, at an average price of 22.6 cents a gallon, and 46,943 gallons of sweet wine in bulk and 12,443 gallons in bottles, at an average price of 37.2 cents a gallon. In 1942 it sold 114,046 gallons of dry wine in bulk and 7,028 gallons in bottles at 22.2 cents a gallon, and 46,009 gallons of sweet wine in bulk and 10,268 gallons in bottles at 36.8 cents a gallon. During the years 1936-1942 petitioner's average investment in this section of its business was $ 150,000, of which roughly $ 60,000 was attributable to the plant and $ 90,000 to inventory. As dry wine should be held two years or more and red wine one year for aging, petitioner kept a substantial inventory in stock.
Finding his numerous activities excessive, Grace decided late in 1942 to discontinue the wine business, and petitioner limited its production for that year to 4,959 gallons extracted only from the grape supply grown by it, whereas normally its annual production was about 200,000 gallons. None the less, it had an inventory of 522,761 gallons at the end of the year, produced in 1942 and prior years.
In November 1942 Grace advised L. A. Weller, an old*284 acquaintance and vice president of Garrett & Co. of New York, that he intended to abandon the wine business. Weller manifested interest, asking the quantity of wine available for sale; saying that his firm's lease on a *160 California plant was about to expire and making inquiry about a lease of the DeTurk winery and the possibility of installing in it certain machinery. After Weller's return to New York, Garrett & Co. requested Grace by a telegram of December 28, 1942, to submit details if "interested in selling your inventory and leasing winery." Grace replied the following day "that we have several purchasers for our inventory and lease of winery and distillery"; offered specified quantities of several types of wine at 40, 55, 60, and 65 cents a gallon, respectively, and a lease "of winery, distillery and bonded warehouse" for five years at an annual rental of $ 12,000. In further negotiation by telegraph, Grace inquired what part of the inventory was of interest, adding: "anxious to close deal immediately to get part of sales in this year income tax returns * * *." Agreement was reached by telephone and confirmed by a telegram of Garrett & Co. to Grace on December 31, *285 1942. By the contract Garrett & Co. agreed to purchase all petitioner's wine at 50 cents a gallon, to pay 20 per cent of the purchase price immediately, and to lease the winery for 5 years at $ 10,000 annual rent. On the same day petitioner delivered 104,000 gallons, received $ 52,000 therefor from Garrett & Co., and reported the profit on its 1942 income tax return.
There remained 418,761 gallons of wine, carried on petitioner's books at $ 79,046.33, consisting of 248,635 gallons of dry wine and 170,126 gallons of sweet wine. During 1943 petitioner made delivery of this entire stock, receiving $ 124,317.50 for the dry wine and $ 94,862.41 for the sweet wine. The price paid for the latter was by agreement somewhat in excess of 50 cents a gallon because 73,628 gallons contained a higher sugar content than required by California standards. Garrett & Co. also agreed to purchase 600 wine barrels from petitioner at $ 4 each. On January 20, 1943, the parties signed a detailed memorandum of the agreement, setting forth its terms as above described, and on January 30 they signed the contemplated contract of lease. By its terms petitioner leased to Garrett & Co. the premises of the winery, *286 "together with all wine-making machinery and equipment located therein" and the right to use the spur track of a railroad on the east side of the property. The annual rental was fixed at $ 10,000 and the term of the lease at 5 years, with the right of renewal for an additional 5 years. The lessee agreed to keep the equipment in good working order and in a reasonable state of repair; it reserved the right to remove all machinery and equipment installed by it within 60 days of the lease's expiration. The lessor reserved a small office and the use of well water on the leased premises for its adjoining cold storage plant. It agreed to carry fire insurance except on equipment installed by the lessee, and in case of damage to make repairs with due diligence. If the winery should be totally destroyed, the lease was to terminate.
*161 In giving possession to Garrett & Co. petitioner surrendered its permit to manufacture and sell, so that the lessee could procure a permit to operate on the premises, and turned over to the lessee all its wine stocks, cooperage, and labels, its list of customers, and its regular staff of 8 or 10 experienced employees. Thereafter neither petitioner*287 nor Grace engaged in making or selling wines. Garrett & Co. paid petitioner rent under the lease to the end of April 1944, when the parties terminated it by mutual agreement. On April 15, 1944, petitioner sold the winery to Taylor & Co. for $ 150,000. Taylor & Co. was not a subsidiary of or owned by Garrett & Co.
On or about March 15, 1944, petitioner filed a California bank and corporation franchise tax return for 1943, indicating a tax due of $ 9,385.03, which it paid in 1944. This tax was imposed for the privilege of doing business in the state in 1944, and was measured by income realized in 1943.
In computing petitioner's income tax, declared value excess profits tax, and excess profits tax for 1943, the Commissioner determined (1) that petitioner realized ordinary income of $ 140,133.58 from the sale of wine in 1943, and not a capital gain in that amount, as reported by it; and (2) that petitioner realized a capital gain of $ 99,002.64 from the sale of the winery. Deduction of the California franchise tax for 1943 was neither claimed by petitioner on its return nor allowed by the Commissioner.
OPINION.
The parties are agreed that petitioner realized a profit of $ 140,133.58*288 from the sale transaction with Garrett & Co., but petitioner assails the determination that this amount is taxable as ordinary income, advancing three contentions under which all or a part of such profit should be classed as capital gain and so taxed.
First, it argues that despite the literal language of the sale contract and communications leading up to it, the sale was not of wine merely, but also of the good will of the business. Grace testified that in his preliminary negotiations with Weller he offered to sell all the business and assets for $ 375,000; that he arrived at this figure by assigning $ 125,000 to the plant, $ 150,000 to the stocks of wine, and $ 100,000 to good will, and that the price obtained for the wine was intended to cover good will. This price was $ 271,179.91, inclusive of the $ 52,000 received and reported in 1942. We can not find such an offer upon the evidence adduced. In our opinion the telegrams affirmatively indicate that petitioner did not seek to sell the plant, because, in pressing Garrett & Co. for a decision, Grace wired that he had "several purchasers for our inventory and lease of winery and distillery," while nothing in the interchange of*289 communications even suggests an intention or offer to sell the winery.
*162 In any event the actual transaction, not an unaccepted offer, is determinative of tax incidence, and, even if Grace attempted to sell the plant and business as an entirety, that attempt would not color the lease with the characteristics of a sale. Petitioner cites several cases to the general effect that a profitable business presumptively has good will, Helvering v. Security Savings & Commercial Bank (C. C. A., 4th Cir.), 72 Fed. (2d) 875; White & Wells Co., 19 B. T. A. 416, and that, when sold in its entirety, a part of the consideration paid is properly attributable to that good will, whether or not the sale contract so specifies. Pfleghar Hardware Specialty Co. v. Blair (C. C. A., 2d Cir.), 30 Fed. (2d) 614; Betts v. United States, 62 Ct. Cls. 1. Counsel stresses that in giving possession of the winery petitioner turned over to Garrett & Co. its labels, list of customers, and staff of experienced employees, together with its existing stocks of wine, and we are asked*290 to hold that in so doing it necessarily conveyed the good will of its business.
We should be impressed by this argument if there had been a sale, as in the cited cases, but under the facts here shown the advantages of whatever good will was inherent in petitioner's business passed to Garrett & Co. by lease, not by sale, and there is no controversy about the rental. In making the lease it is true that petitioner sold its entire stock of wines, but a sale of merchandise, particularly of goods that had been held as stock in trade, does not effect a conveyance of the seller's good will. In phrasing his argument, counsel alleges "the transfer of petitioner's entire winery business," including good will of a value of $ 100,000, and concludes that "therefore $ 100,000 of the price received from Garrett & Co. should be allocated as the amount received for the said intangible or going-concern value." But "the price received" was explicitly for wine, and we are not convinced by Grace's testimony that the amount of it exceeded the wine's fair market value by $ 100,000 intended to cover good will. In the preliminary negotiations four different prices per gallon were quoted for four grades *291 of wine, and the transaction was consummated on a compromise price of 50 cents a gallon for all types and later adjusted upward slightly in respect of wines having a high sugar content. This method of price determination is wholly incompatible with the theory that something more than wine was being bought, nor can we believe that Garrett & Co. would have paid $ 100,000 above market to obtain good will which it abandoned a little over a year later by canceling the lease so that petitioner could sell the winery to Taylor & Co. Significantly, petitioner offered no evidence of the market price of its grades of wine in December 1942, apart from Grace's general testimony that the price paid by Garrett & Co. was excessive by $ 100,000. We are unable to make such a finding or to hold that the sale contract covered any more than its terms indicate.
*163 Second, petitioner argues that "the transaction with Garrett & Co. involved the disposition of a unitary business as distinguished from particular assets, and therefore the entire profit from the transaction should be treated as a long-term capital gain." For the reasons above stated, we can not accept petitioner's factual premise, and*292 hence the legal arguments based on it become moot. The "transaction" with Garrett & Co., we would point out, was not single, but comprised a sale of wine and barrels and the lease of a winery, and if it could be treated for tax purposes as a unit, the "profit from the transaction" would comprise not only the $ 140,133.58 gain from the wines delivered in 1943, but also the undisclosed profit from the sale of wine in 1942, from the sale of barrels, and from rents due under the five-year lease which was prematurely terminated. These considerations point up the unsound character of petitioner's contention, for under its own theory the entire proceeds of "the transaction" were not, and by their nature should not have been, reported on its income tax return for 1942.
Third, petitioner contends that because of an intent to liquidate, followed by a "disposition" of the entire business, its wine stocks lost their character as stock in trade or property held for sale to customers in the ordinary course of business and became capital assets within the meaning of section 117 (a) (1), Internal Revenue Code, so that all profit from their sale is taxable as a capital gain, and, since the wine *293 was held over six months (with exception of the 4,959 gallons produced in 1942), as a long term capital gain.
We are unable to agree with the view that Grace's intention to liquidate converted petitioner's stock in trade into capital assets, and we hold here that the wine's character as stock in trade was not lost and did not change by virtue of Grace's decision to discontinue petitioner's wine business and by petitioner's sale of that stock in its entirety.
Petitioner cites Three States Lumber Co. v. Commissioner (C. C. A., 7th Cir.), 158 Fed. (2d) 61, as to the contrary, but we are of opinion that by implication it strongly supports our conclusion. The taxpayer there terminated its business of cutting, sawing, and selling timber in 1919, and then endeavored to sell its land, but without success until it began to sell parcels on the installment basis after 1930. Rejecting the Commissioner's contention that its profits were taxable as ordinary income, the court held them capital gains because there was no evidence to "support the conclusion that petitioner was engaged in business primarily for the purpose of selling land to customers in the ordinary*294 course of its trade or business." Inferentially, if there had been such evidence, the profits would have been ordinary income, notwithstanding liquidation. Graham Mill & Elevator Co. v. Thomas (C. C. A., 5th Cir.), 152 Fed. (2d) 564, also cited by petitioner, even more strongly supports that view. The liquidating taxpayer there sold all its assets, including notes and accounts receivable, and on *164 the latter it claimed an ordinary loss deduction. But the Circuit Court of Appeals for the Fifth Circuit held the notes capital assets and the loss a capital loss, because the taxpayer:
* * * was not in the business of selling notes and accounts, and had never so dealt with its notes and accounts before.
* * * They represented the taxpayer's business capital, but were not a part of his stock in trade.
Under such rationale it is to be inferred that liquidation brought about no change in the assets' classification and that if, as here, the taxpayer's normal stock in trade had been the subject of consideration, the decision would have been the reverse of what it was. We adhere to the view that an intent to discontinue business or to liquidate*295 does not convert stock in trade into a capital asset, and we sustain the Commissioner's determination that petitioner's profit from the sale of wine is taxable as ordinary income.
Petitioner assigned as error the Commissioner's inclusion in 1943 income of a capital gain of $ 99,002.64 realized from its sale of the winery to Taylor & Co. The parties have stipulated that this sale occurred in 1944, and are agreed that the gain is not taxable in 1943.
On its tax return for 1943 petitioner did not claim and the Commissioner did not allow deduction for $ 9,385.03 representing the California bank and franchise corporation tax covering the year 1943, but paid in 1944. Petitioner contends that this tax is deductible as accrued in 1943. This issue was decided adversely to petitioner's contention in Central Investment Corporation, 9 T. C. 128, and, adhering to that decision, we approve the Commissioner's action.
Decision will be entered under Rule 50.