*232 Decision will be entered under Rule 50.
Income -- Rent -- Additional Rent or Purchase Price of Service Station "Goodwill" by Tenant. -- "Goodwill" of going gasoline stations held separately acquired by the petitioner and separately sold to the petitioner's tenants at prices not exceeding cost.
*1150 The Commissioner determined deficiencies of $ 20,101.55 and $ 5,727.30 in the petitioner's income tax for its fiscal years ending March 31, 1950 and 1951. The issues are whether payments to the petitioner in each year were advanced rents or amounts realized from the sale of "goodwill" of gas stations at a price not greater than the petitioner's cost; whether the compensation paid to its officers in the taxable fiscal year 1951 was reasonable in amount; and whether the petitioner is entitled to deduct business expenses for that period in excess of the amount allowed by the Commissioner.
FINDINGS OF FACT.
The petitioner, a New York corporation with its principal place of business in Brooklyn, filed its income tax returns with the collector of internal revenue*233 for the first district of New York. Its books and returns were on an accrual basis of accounting.
The entire outstanding stock of the petitioner was owned equally by Louis Goldstein, Irving Goldstein, Joshua Hacker, and Roy Rayvid. Louis was president; Irving, vice president; Joshua, treasurer; and Roy, secretary.
The petitioner was organized for the purpose of accumulating a number of retail gasoline stations which would buy their gasoline, oil, and petroleum requirements from it. It was able to buy those products from the oil companies at less than prevailing posted dealers' prices. It did not operate any gasoline service stations during the taxable years, but all of the tenants of the gasoline stations which it acquired agreed to purchase all of their gasoline, oil, and petroleum from the petitioner or its designee during the term of the lease at prevailing posted dealers' prices, which were the same prices they would have been charged had they purchased directly from the oil companies.
The petitioner purchased, on March 15, 1950, a gasoline service station and four stores located on Fort Hamilton Parkway, Brooklyn, New York. The purchase price was $ 105,000. $ 80,000 of *234 that amount *1151 was attributed to the realty and $ 25,000 was attributed to "the gas station good will with equipment and possession" in negotiating the purchase price.
The petitioner entered into an agreement with Joseph Vinacour on February 28, 1950, whereby Vinacour agreed to purchase "the goodwill" of the gasoline station on the Fort Hamilton property for the sum of $ 25,000 and the petitioner agreed to lease to Vinacour the gasoline service station on the Fort Hamilton property for a term of 21 years. The agreement was conditioned upon the petitioner's acquiring the fee in the Fort Hamilton property.
The petitioner leased to Vinacour, on March 15, 1950, the gasoline service station for a term of 21 years at a rental of $ 425 per month during the first 7 years of the lease and $ 450 per month during the balance. The petitioner allowed Vinacour a rebate of one-half cent per gallon on all gasoline purchased by him from the petitioner or its supplier and also on whatever rebate Chatsworth received on any other oil products supplied to Vinacour. Vinacour was to have the use of the station equipment but title to it remained in the petitioner.
Paragraph 53d of the Vinacour *235 lease provided as follows:
In the event of condemnation, the entire award shall be paid to and belong to the fee owner of the premises. Out of such award the Tenant shall receive from such owner, upon vacating and surrendering the premises, a sum equal to that portion of $ 25,000.00 as the unexpired portion of the lease bears to the entire term thereof. For example, if at condemnation the lease has one-third of the period to go, the Tenant shall be entitled to receive one-third of $ 25,000.00.
Vinacour paid to the petitioner $ 22,000 during the 1950 fiscal year and $ 3,000 during the 1951 fiscal year pursuant to the agreement.
The petitioner entered into an agreement on August 3, 1949, to purchase from Harold and William Sigman for $ 25,750 real property located on Third Avenue, Bronx, New York, together with the gasoline service station business being operated on it and its goodwill.
The Sigmans executed on August 25, 1949, a bill of sale of the Third Avenue gasoline service station business, together with all fixtures, equipment, and goodwill of the business.
The petitioner, prior to August 3, 1949, entered into an agreement with Harry Pariser wherein Pariser agreed to lease *236 the Third Avenue property. The lease was to be held in escrow until the petitioner obtained the fee in the property. Pariser agreed to pay the petitioner $ 4,500 upon execution of the lease "for the goodwill of the gasoline business being turned over to [him] at the time of delivery of possession of the demised premises." The agreement provided that "a condition precedent to the granting of the lease to Pariser is [his] agreement to purchase the good will of the said business for the aforementioned sum."
*1152 The petitioner leased the Third Avenue property to Pariser on August 3, 1949, for a term of 15 years at a rental of $ 150 per month.
Paragraphs 33rd and 39th of the Pariser lease provided as follows:
33rd. In the event that the land whereon the demised premises stand be condemned for public use, then and in such event, the Landlord agrees to pay to the Tenant upon the termination of his lease and his removal from the premises pursuant to an order of condemnation, a sum equivalent to $ 300.00 a year for each remaining year of the original term of this lease, remaining after the tenant's removal by reason of such condemnation.
* * * *
39th. The Tenant shall be required*237 to keep the business on the demised premises in full operation during the entire term of this lease, and there shall be no cessation of business activities on the Tenant's part any time during the term hereof despite the fact that the Tenant may continue to pay the rent. This provision goes to the essence of this agreement by reason of the fact that the Tenant is required to pay additional rent based upon the volume of business to be done and, in addition, the fact that the Tenant has agreed to purchase his petroleum requirements exclusively from the Landlord herein.
Pariser paid the $ 4,500 to the petitioner during the fiscal year 1950.
The petitioner, as lessee, and Millie Katz, as lessor, entered into a lease on November 1, 1949, for the real property, together with the gasoline service station and its equipment located on Grand Concourse in Bronx, New York, for a term of 10 years to commence November 1, 1949, at an annual rental of $ 18,000 payable in monthly installments of $ 1,500 with an option to renew the lease for an additional 5 years. Millie held the property as a lessee at a rental of $ 1,250 per month. The petitioner was required to deposit $ 25,000 in United States*238 Government bonds as security. Millie agreed to return one $ 1,000 bond each year for 10 years, the remaining $ 15,000 to be returned on the termination of the lease if the lease was not renewed. She also agreed, in this event --
to pay to the Tenant the sum of money to be computed at the following rates: The sum of Two Thousand ($ 2,000.00) Dollars per annum for the unexpired portion of the first seven (7) years of the term hereof; the sum of One Thousand ($ 1,000.00) Dollars per annum for the unexpired portion of the next three years of the demised term. The said sum shall be computed from the date of taking of the said premises for public use. No payment shall be made to the Tenant in the event that this lease is extended or renewed by operation of Law or otherwise.
The petitioner agreed on October 21, 1949, to sublease the property and equipment to Renee Gouirand for 10 years with a 5-year option to renew for the same annual rental of $ 18,000. Gouirand agreed to pay $ 17,500 to the petitioner for the "purchase * * * [of] the good will" of the gasoline station located on the Grand Concourse property in addition to the monthly rental.
The petitioner executed the sublease *239 of the Grand Concourse property to Gouirand on November 1, 1949, for the same term of years *1153 and the same rental payment as provided in the lease between the petitioner and Millie Katz.
Gouirand agreed in the sublease to keep the premises open for business during all working hours and further agreed to deliver to the petitioner on the termination of this sublease a list of his charge customers, which in turn the petitioner had agreed to turn over to Millie Katz.
The sublease agreement to Gouirand from the petitioner provided for the subleasing of all equipment used in the operation of the service station, which equipment was included in the lease from Millie Katz to the petitioner.
Paragraph 43d of the sublease provided that in the event of condemnation the petitioner would pay to the sublessee (Gouirand) one-third of the money received by the petitioner from Millie Katz pursuant to the provisions of their lease.
Gouirand paid the $ 17,500 to the petitioner during the fiscal year 1950. The petitioner reported $ 500 as ordinary income in its return for the fiscal year 1950 and $ 1,200 as ordinary income in the fiscal year 1951.
The petitioner entered into an agreement on *240 September 26, 1949, to purchase a leasehold for an unstated term covering premises on Soundview Avenue, Bronx, New York, "together with the good will thereof" and enumerated filling station equipment, from Frank and John Certo, a copartnership, for $ 25,000, $ 4,000 of which was to be paid at the signing of the agreement, $ 11,000 of which was to be paid at closing of title, and the remaining $ 10,000 to be paid in a series of interest-bearing notes of $ 200 each, commencing 1 month from date of closing.
Frank and John Certo gave a bill of sale to the petitioner for their interest in the lease on the Soundview property, "together with the good will thereof" and the service station equipment.
The petitioner executed a chattel mortgage on September 30, 1949, to Frank and John Certo on the equipment purchased from them to secure the payment of the monthly notes referred to above, and "the payment of the balance of the purchase price of the gasoline station, fixtures, etc."
The petitioner entered into an agreement with Harold and William Sigman on September 30, 1949, in which it was provided that, in consideration of the petitioner's subleasing the gasoline station at Soundview Avenue *241 for the operation of a gasoline station, the Sigmans would pay $ 16,000 to the petitioner, $ 6,000 "upon the signing of this memorandum" and
Ten Thousand ($ 10,000.00) Dollars in the form of fifty (50) monthly serial promissory notes, each in the sum of Two hundred ($ 200.00) Dollars, plus interest at four (4%) per cent, per annum, such notes coming due November 1st, 1949, and monthly thereafter.
*1154 The memorandum provided that the payment of the $ 16,000 should in no way affect the obligation of the Sigmans to pay the rental specified in the sublease.
The petitioner leased the Soundview property to Harold and William Sigman on October 1, 1949, for a term commencing October 1, 1949, and ending July 30, 1968, at the same rental set forth in the original lease from Patrick J. Hangley to Frank and John Certo.
Paragraph 26th of the lease between the petitioner and the Sigmans granted the Sigmans privilege to use the equipment owned by the petitioner and located on the premises. The lease also provided that the subtenants would purchase all of their gasoline, oil, or other petroleum products from the petitioner or its designee, to be used at the station during the duration *242 of the leasehold.
The Sigmans paid to the petitioner $ 7,000 in the 1950 fiscal year and $ 2,400 in the 1951 fiscal year.
The petitioner investigated the past business activities of the prior service station operators, i. e., the gallonage pumped, the quality and quantity of the trade, the related sales of tires, batteries, and other accessories, and other factors which would indicate the value of the service station operation, before acquiring a property.
It is customary in the service station industry in connection with the acquisition of service station property, either by purchasing or leasing, to pay an amount termed "goodwill money" for the purchase of operating filling station businesses based upon the gallonage the station pumped, associated sales of related items, such as tires, batteries, accessories, amounts of labor involved, and operating records of the service station. The amount of goodwill money paid by a lessee in acquiring property upon which is located an operating service station varies and is affected by the length of the lease.
The Commissioner stated in the notice of deficiency with respect to the amounts regarded by the petitioner as having been paid to it *243 for goodwill:
It is held that gross income was understated on your return for the taxable years ended March 31, 1950 and 1951 in the respective amounts of $ 50,500.00 and $ 4,200.00.
The petitioner reported total income as $ 22,838.28, net income of $ 6,306.84, and deducted no officers compensation on its 1950 return. The petitioner claimed a deduction of $ 10,900 for compensation of officers on its 1951 return. It reported total income for that year of $ 69,373.12 and net income of $ 1,436.64.
The amount of officers compensation claimed for the fiscal year 1951 was $ 4,700 each for Louis and Irving, $ 500 for Joshua, and $ 1,000 *1155 for Roy. The Commissioner determined that $ 500 was a reasonable allowance for compensation to each officer. The petitioner set up the officers compensation as accruals at the end of the fiscal year ended March 31, 1951.
Louis and Irving devoted all of their time to the petitioner's business during the years involved. Joshua operated a plastics business which he owned. He had operated his own service station and a chain of service stations and had been in the oil and gas business on a wholesale level. He had also been involved in the purchase*244 and sale of at least 65 gas stations.
Roy was the petitioner's secretary. He held a full-time position apart from any work done for the petitioner.
The petitioner's officers all performed some personal services for the petitioner during the taxable years in question. They participated in the acquisition and disposition of the four gasoline service station properties previously mentioned. Louis and Joshua spent time seeking, viewing, and analyzing potential property locations and negotiating with reference to some of them. Louis and Irving also spent time visiting the four operating stations, and Louis, with some help from Irving, managed the stores and real estate which the petitioner owned.
There was no set agreement as to the amount of compensation to be paid to each officer of the petitioner, but it was determined primarily by Louis and his brother Irving. Louis and Irving loaned the petitioner between $ 75,000 and $ 85,000 during the fiscal years ended March 31, 1950 and 1951. Joshua and Roy loaned the petitioner "a few thousand dollars" during this period. These loans were taken into consideration in arriving at the amount of officers compensation. The compensation claimed*245 was not based altogether upon services rendered the petitioner.
Reasonable compensation deductible for the services of the petitioner's officers for the fiscal year ended March 31, 1951, is $ 2,000 each for Louis and Irving and $ 500 each for Joshua and Roy.
The petitioner claimed on its 1951 return additional deductions of $ 15,530.39 authorized by law. The Commissioner, for lack of substantiation, determined that certain of the items claimed as deductions were unallowable in whole, or in part, as follows:
| Disallowed | Deducted on | |
| return | ||
| Auto expenses | $ 5,000 | $ 5,000 |
| Telephone | 1,050 | 1,125 |
| Entertainment | 4,600 | 4,600 |
| Sundry | 1,000 | 1,012 |
*1156 The deducted expenses were placed on the petitioner's books as accrued items. The petitioner expended money in the period in question for each of the above items.
The petitioner had ordinary and necessary expenses for the fiscal year ended March 31, 1951, for the items designated, in the following amounts:
| Auto expenses | $ 1,250 |
| Telephone | 125 |
| Entertainment | 600 |
| Sundry | 50 |
All stipulated facts are incorporated herein by this reference.
OPINION.
The first question for decision is whether the payments totaling *246 $ 50,500 in the first year and $ 4,200 in the second year were amounts realized from the sale of service station goodwill or were really prepaid rent. Making payments of this kind for goodwill is an established practice in New York with relation to filling stations. The amounts were separately negotiated. The parties themselves described the amounts as payments for the goodwill of the stations. The petitioner did not make money on this item since it disposed of the goodwill of each station immediately upon acquiring it, and the price it received from its tenant was never in excess of the amount which it had paid for the goodwill. The amounts charged by the petitioner as rentals were not too low. The conclusion has been reached, after considering the entire record, that the payments were not advance rentals but were amounts realized from the sale of goodwill.
The reasonable compensation for the services rendered by the petitioner's officers to be deducted for the fiscal year ended March 31, 1951, has been found from the evidence. No compensation was paid to them in the previous fiscal year and apparently no dividends have ever been paid. The petitioner introduced no evidence*247 of compensation paid to officers doing comparable work for comparable companies, and from the record, including the rather general evidence disclosing the nature and importance of the work of the various officers, the reasonable amount of the value of their services has been determined. .
The petitioner produced no receipts, vouchers, or records to substantiate enumerated expense items claimed as deductions on its return for the fiscal year ended March 31, 1951. There is general evidence that the petitioner reimbursed its officers for the use of their cars; that two of the officers made considerable use of their cars for the purpose of inspecting gas service station properties throughout the metropolitan area of New York; and that another officer *1157 used his car about one-half as much. There is also general evidence as to the requirements for telephone, entertainment, and sundry expenses. Findings of fact have been made disposing of these issues.
Decision will be entered under Rule 50.