*4020 The value of good will determined for estate tax purposes.
*864 This is a proceeding for the redetermination of a deficiency in estate taxes of $110.48, which arises by reason of the fact that the respondent increased the value of the good will of the decedent's business, as returned by his estate, from $25,000 to $37,500.
FINDINGS OF FACT.
Prior to his death on March 27, 1924, the decedent was engaged in the retail drug business, located in the Cobb Building, Seattle, Wash. The business was different from the ordinary type of drug store in that it did not carry druggist sundries, etc.; it was a pharmacy devoted to the filling of prescriptions. The Cobb Building was occupied exclusively by physicians and dentists who, by means of a dictaphone system installed throughout the building, could communicate with the pharmacy at all times during the day or night.
At or about the time of the decedent's death, a new building was under construction, or was about to be constructed, just across the street from the Cobb Building, and it was understood that*4021 many of the tenants in the Cobb Building had arranged to move to that new building, and, furthermore, that a new prescription pharmacy would be located therein. There was also another medical building in contemplation at or about that time which, however, was to be several blocks distant, which was to be devoted entirely to physicians and surgeons, and certain of the occupants of the Cobb Building had secured quarters in that building. Still another building was in contemplation directly opposite the Cobb Building in which a drug store was planned.
The decedent's widow decided to sell the business and she had no difficulty establishing a sale price for the fixed assets and inventories satisfactory to the prospective purchasers; the good will value, however, could not be agreed upon. Negotiations were entered into with several interested persons and offers were made by them for the good will of the business as low as $15,000 and as high as $25,000. When the offer of $25,000 was eventually made she had changed her mind *865 and had concluded not to sell the business but to organize a corporation and continue its operation, which she did. She capitalized the corporated*4022 at $55,000 which was the total of the items of good will, valued at $25,000, inventory, fixtures, accounts and something over $900 in cash which she paid in for working capital. She sold $15,000 of the capital stock to four employes at par.
The net profits of the decedent's business for the years immediately preceding his death were:
| 1921 | $10,552.32 |
| 1922 | 23,323.52 |
| 1923 | 28,861.00 |
| Jan. 1, 1924 to Mar. 27, 1924 | 4,244.72 |
The estate reported, in its estate-tax return, a value for the decedent's business of $53,404.75, arrived at as follows:
| Stock on hand | $18,320.29 |
| Fixtures | 4,234.00 |
| Accounts receivable | 5,850.46 |
| Good will | 25,000.00 |
| Total | 53,404.75 |
One-half of that amount, or $26,702.38, was reported for estate-tax purposes, since the other half of the total sum was regarded as the property of the wife under the community property laws of the State of Washington.
The respondent, by use of the earnings of the decedent's business for the three years immediately preceding his death, arrived at a valuation for the good will of $37,500.
OPINION.
MORRIS: The sole question presented by this proceeding is whether the respondent was*4023 justified in increasing the value of good will of the decedent's business, as returned by his estate.
Considering the decedent's death and the undoubted loss to the business thereby, coupled with the offers made for the good will by prospective purchasers, the potential competition in the immediate vicinity of the decedent's business which greatly threatened its future prosperity, the highly specialized nature of the business and the sale at par of $15,000 of the capital stock of the subsequently organized corporation which took over the good will of the business at $25,000, all of which elements were carefully considered by the estate in arriving at the value returned, we are of the opinion that the respondent was in error in increasing the value of the good will to $37,500.
Judgment will be entered for the petitioner upon 15 days' notice, under Rule 50.