26 T.C. 1005 (1956), 54638, Friedlaender v. C. I. R.

Docket Nº:54638.
Citation:26 T.C. 1005
Opinion Judge:KERN, Judge:
Attorney:Murray Rosof, Esq., Morris M. Cahen, Esq., and Jacob I. Isaacs, Esq., for the petitioner. Richard G. Maloney, Esq., for the respondent.
Case Date:September 11, 1956
Court:United States Tax Court

Page 1005

26 T.C. 1005 (1956)




No. 54638.

United States Tax Court.

September 11, 1956

Page 1006

Murray Rosof, Esq., Morris M. Cahen, Esq., and Jacob I. Isaacs, Esq., for the petitioner.

Richard G. Maloney, Esq., for the respondent.

Petitioner opened a men's haberdashery store in the last part of September 1946 and sold it for cash and stock in the purchasing corporations on April 7, 1947. Held, proceeds received by petitioner for goodwill not long-term capital gains since record does not prove existence of goodwill for 6 months prior to sale. Held, further, (a) petitioner's valuation of the stock received sustained; (b) an ordinary loss allowed to the extent of a $3,000 discount granted in the sale of the merchandise inventory; (c) disallowance of rent expense sustained; and (d) amount and capital nature of specific furniture, fixtures, and leasehold improvements not proven.

The Commissioner determined a deficiency in petitioner's income tax for 1947 in the amount of $19,851.34. The issues for decision are:

1. Whether upon the sale of a business conducted by the petitioner as a sole proprietorship the consideration received by him in excess of the basis of the assets thereof was long-term capital gain or ordinary income as either: (a) A payment made to induce him to enter into a contract; (b) advance compensation for services to be rendered; (c) rent; (d) short-term capital gain on the sale of goodwill.

2. The fair market value of certain stock received by the petitioner as part of the consideration for the sale of his business.

3. Whether petitioner suffered an ordinary loss in the amount of $3,000 upon the sale of his merchandise inventory.

4. Whether petitioner had deductible rent expense of $583.34.


Petitioner resides in New York, New York. His income tax return for 1947 was filed with the collector of internal revenue for the third district of New York.

In 1937 at the age of 28 petitioner was employed as a stocking dyer at a salary of approximately $10 a week. He later worked as a shipping clerk in a department store at $15 a week and in May of 1938 became a salesman for the Custom Shops in New York at the same salary. At the time he left in January of 1944 he was general manager of 9 stores at a salary of $125 a week. He was dismissed due to disagreements with Mortimer Levitt, the owner of the 4 corporations controlling the stores. His next position was in the statistical department of Wallachs in New York City at a salary of $125 a week. He was dismissed in November of 1945 when a new president brought in his own staff, and after unsuccessful efforts to obtain a new position, he decided to open his own business.

In August of 1946 petitioner was offered a store on the corner of Madison Avenue and 55th Street in New York City, then occupied by Eve Brand, at a price of $15,000. It had been used by Brand for fancy packaging and was decorated and furnished in an elegant manner. After a period of negotiations, petitioner and Brand agreed on a price of $10,250 on September 11, 1946. Upon being informed by the real estate agent for the building that he would be able to obtain a lease for the store, petitioner entered into an agreement with Brand on September 14, 1946. This agreement acknowledged the payment by petitioner to Brand of $1,000 to be applied on the purchase

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price of $10,250 for the store and for specified articles of furnishings and furniture therein. The agreement further provided that $4,000 additional would be paid upon the execution and delivery of a lease and a bill of sale; that petitioner would give Brand a chattel mortgage covering the fixtures in the store in the amount of the balance due of $5,250 which was to paid off in installments. Brand was obligated to deliver to petitioner at the closing, which was to take place on September 17, 1946, a 1-year lease from October 1, 1946, at an annual rental of $8,750. This agreement was carried out.

On September 16, 1946, petitioner entered into a 1-year lease with the landlord of the store purchased from Brand, the term of which ran from October 1, 1946, until September 30, 1947, at an annual rental of $8,750. The lease did not contain any option or other provision respecting renewal, but petitioner was assured orally by the agent that the store would be leased to him on a year-to-year basis. The first month's rent of $729.17 was paid at the time of the execution of the lease.

On September 18, 1946, Brand executed and delivered a bill of sale to petitioner in which she conveyed to him various furnishings and equipment located in the store, agreed to discontinue her business at the premises, and to surrender the store to petitioner on September 30, 1946, the key to which was delivered to petitioner upon the signing of the bill of sale. On the same date, petitioner executed a series of promissory notes payable monthly until October 1, 1948, covering the balance due on the purchase price, and, as security therefor, a chattel mortgage in the amount of $5,250, covering the lease between petitioner and the landlord and the furnishings and equipment purchased by petitioner from Brand.

Brand, by letter dated September 18, 1946, gave possession of the fixtures to petitioner as of that date and simultaneously gave him the right to enter and leave the store premises with both parties having the right to utilize the store until midnight, September 30, 1946, without petitioner being liable for any rent until October 1, 1946. Petitioner was also authorized by Brand's letter to remove her possessions from the premises after September 30, 1947, [1] and store them at her expense, and was further authorized to remove any persons of her organization from the premises. Petitioner took possession of the store on September 18, 1946, and on September 19 filed with the clerk of New York County a certificate of doing business under the name of ‘ de Free's.’

On September 19, 1946, petitioner engaged an interior decorator to remodel the premises at the cost of $2,500 for use as a high class men's furnishings store and gave him a deposit of $200 on that day.

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Petitioner made a further payment of $800 to the decorator on October 3, 1946, for work done to that time, and paid the balance owed him by January 1947. Petitioner also paid the following amounts by check:

Date Payee Amount Purpose

Sept. 25, 1946 Cash $25.00 Carfare to manufacturers

Oct. 1, 1946 N.Y. Telephone Co 9.63 Store phone

Oct. 4, 1946 The Moore Business Cash register and cash

Forms, Inc 48.95 receipt forms

The store, which was the first men's store to open in what until then had been a women's shopping area, was designed on a new and unusual principle. It was decorated in a salon fashion and, instead of containing counters for the display of merchandise under glass, it had open display shelves of a tong type in the nature of outstretched hands which permitted the customers to closely examine and to touch the various articles. The store was given considerable publicity in men's fashion magazines due to its unusual nature. On September 19, 1946, petitioner notified the Office of Price Administration by registered mail of his intention to open a retail store dealing in men's haberdashery and on September 25, 1946, the receipt of his report was officially acknowledged and he was authorized to use specified regulations in order to determine the ceiling prices of the articles he was to sell. Petitioner placed an order with a shirtmaker for 20 dozen dress shirts on September 24, 1946, for delivery between October 1 and 10 and a second order on October 1, 1946, for approximately $6,000 of merchandise for shipment on October 10, 1946. Some merchandise purchased by petitioner for his store was delivered in September 1946 and sales were made for cash during the latter part of that month in rooms behind the main store, which was then undergoing the alterations designed by the interior decorator. These rooms had been left well furnished by Brand and were not changed by petitioner. Upon the advice of his accountant, petitioner did not enter these first cash sales in his books of account but used the receipts therefrom to meet minor cash expenses incidental to setting up the store. The accountant was of the opinion that such expenses would be deductible but difficult for petitioner to keep a record of and that the Government would not, in the final analysis, be defrauded of any income tax due on the sales receipts so used. The first entries recorded in petitioner's books of account were:

Record Date Matter

Purchases Oct. 8, 1946 Invoice of $751.70 for shirts

Sales Nov. 7, 1946 Sales that day of $452.49

(Oct. 17, 1946 $50 deposited in bank under

Bank deposits ( name of " de Free's"

(Nov. 7, 1946 $452.49 from cash sales

Page 1009 In February 1947, Levitt, petitioner's former employer, visited the store at an extremely busy time and returned several times to observe the volume of business being done. Later, he inquired if petitioner was interested in selling the store and was informed that he was not. In March of 1947, Levitt offered petitioner 20 percent of his own business, the Custom Shops, in return for the store which would have amounted to a purchase price of approximately $25,000 to $35,000. Petitioner rejected the offer but a subsequent meeting was held by petitioner, Levitt, and petitioner's counsel, Murray Rosof. Petitioner stated that if he sold the store he wanted to be sure of...

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