Newton v. Comm'r of Internal Revenue, Docket No. 13651.
| Decision Date | 17 February 1949 |
| Docket Number | Docket No. 13651. |
| Citation | 12 T.C. 204 |
| Parties | VIOLET NEWTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
The petitioner and her husband, a marital community in the State of Washington, sold the business owned by them for a lump sum consideration. Included in the assets sold were an inventory of merchandise, accounts receivable, credit deposits, good will, and the right to use the firm name. There was no breakdown or allocation in the selling price on account of the tangible and intangible properties sold. The petitioner treated the gain from the sale of the business as all capital gain, while the respondent determined that the gain constituted 95.51224 per cent ordinary gain and 4.48776 per cent capital gain. Held, that insufficient evidence was introduced to establish a selling price for good will and other intangibles, and the respondent's determination is sustained. Wilford H. Payne, Esq., for the respondent.
This proceeding involves a deficiency in income tax for the taxable year ended December 31, 1943, in the amount of $707.66. The deficiency is due to two adjustments to petitioner's net income as disclosed by her return for the year 1943, as follows:
Respondent explained these adjustments in a statement attached to the deficiency notice as follows:
(a) It is held that a sale of the business known as the Puget Sound Novelty Company in which you have an interest on a community property basis, resulted in a capital gain derived from the sale of the fixed assets and an ordinary business gain from the sale of the inventories, the percentage of gain being apportioned to each classification pro rata, in accordance with the following:
+------------------------------------------------------------------------+
¦Profit reported per your husband's return ¦$6,301.81¦
+--------------------------------------------------------------+---------¦
¦Receipts from sale understated by ¦1,000.00 ¦
+--------------------------------------------------------------+---------¦
¦ ¦ ¦ ¦
+--------------------------------------------------------------+---------¦
¦Total profit realized ¦$7,301.81¦
+--------------------------------------------------------------+---------¦
¦Depreciated fixed assets, per books ¦$659.36 ¦4.48776% ¦
+------------------------------------------------+-------------+---------¦
¦Cost of inventories sold ¦14,032.05 ¦95.51224%¦
+------------------------------------------------+-------------+---------¦
¦ ¦$14,691.41 ¦100% ¦
+------------------------------------------------+-------------+---------¦
¦ ¦ ¦ ¦
+--------------------------------------------------------------+---------¦
¦Gain allocated to sale of inventories (95.51224% of $7,301.81)¦$6,974.12¦
+--------------------------------------------------------------+---------¦
¦One-half reportable as your share of community income ¦$3,487.06¦
+--------------------------------------------------------------+---------¦
¦Reported per return ¦0 ¦
+--------------------------------------------------------------+---------¦
¦ ¦ ¦ ¦
+--------------------------------------------------------------+---------¦
¦Income increased by this adjustment ¦$3,487.06¦
+--------------------------------------------------------------+---------¦
¦(b) In accordance with the explanation under (a) above: ¦ ¦
+--------------------------------------------------------------+---------¦
¦Capital gain realized (4.48776% of $7,301.81) ¦$327.69 ¦
+--------------------------------------------------------------+---------¦
¦50% taxable as long term gain ¦$163.85 ¦
+--------------------------------------------------------------+---------¦
¦One-half reportable by you as your share of community income ¦$81.93 ¦
+--------------------------------------------------------------+---------¦
¦Reported per return ¦1,575.46 ¦
+--------------------------------------------------------------+---------¦
¦ ¦ ¦ ¦
+--------------------------------------------------------------+---------¦
¦Decrease of income by this adjustment ¦$1,493.53¦
+------------------------------------------------------------------------+
The petitioner concedes that in computing the gain in 1943 from the sale of the business owned by the marital community the receipts from the sale thereof were understated by $1,000. Petitioner, by appropriate assignments of error, contests the remainder of the adjustments.
The sole issue for our consideration is whether the amount of gain realized upon the sale in 1943 of the business known as the Puget Sound Novelty Co. constituted a capital gain in its entirety, as claimed by petitioner, or constituted 95.51224 per cent ordinary income and 4.48776 per cent capital gain, as determined by respondent.
Petitioner is an individual, residing in Seattle, Washington. Her income tax return for the year 1943 was filed with the collector of internal revenue for the district of Washington, at Tacoma, Washington.
During the year 1943 the petitioner, Violet Newton, was the wife of Cly C. Newton, and she and her husband constituted a marital community under the laws of the State of Washington.
In 1943 Cly C. Newton and Violet Newton owned the Puget Sound Novelty Co. which was engaged in business as a wholesale distributor of pinball machines and amusement devices. The business was located at 114 Elliott Avenue West, Seattle, Washington. The business was sold on December 24, 1943, for a total consideration of $22,150. The amount of the gain realized on the transaction was $7,301.81.
The sale of the Puget Sound Novelty Co. covered all its assets and property, including furniture, fixtures and equipment, the stock of merchandise on hand, a deposit on equipment ordered but not yet delivered, amounting to $2,950, a reserve with the American Discount Co. of approximately $2,670, accounts receivable, good will, and the right to use the name ‘Puget Sound Novelty Company.‘ The purchasers, A. J. Sandtner, George Schnabel, Vern H. Preston, and Thelma Oliver, agreed to assume the debts and obligations of the business, with certain limitations. Among the assets sold were an inventory of pinball machines, various amusement devices, and related equipment, listed at $14,033.05, some of which were in good and some in poor condition. This inventory was dated November 30, 1943. The amounts listed in the inventory for the various machines were based on the cost of the machines, either cash paid therefor or by way of allowance on trade-ins on other machines. In many instances, in order for these machines to be salable it was necessary that they be repaired and reconditioned.
Paragraph 1 of the agreement of sale provided as follows:
The SELLER agrees to sell all the assets of the Puget Sound Novelty Company, including the furniture, fixtures and equipment, the stock of merchandise on hand, the deposit on equipment ordered but not yet delivered in the sum of $2,950.00, the reserve with the American Discount Company which will hereafter accrue in the sum of approximately $2,670.00, Accounts Receivable, Good Will, and the sole exclusive right to use the name ‘Puget Sound Novelty Company.‘
Petitioner and her husband claimed in their returns for 1943 that the entire amount of the gain realized from the sale of the business constituted capital gain.
The respondent, on the other hand, determined in his deficiency notice that the sale resulted in ordinary gain, derived from the sale of inventories and equipment, and capital gain from the sale of fixed assets in the proportions of 95.51224 per cent and 4.48776 per cent respectively.
The business known as the Puget Sound Novelty Co. was acquired by W. F. Duggan on or about July 24, 1940, on behalf of Cly C. Newton. At the time of its acquisition the business was known as the Evergreen Novelty Corporation, and its name was later changed to ‘Puget ...
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