Manhattan Co. of Virginia v. Comm'r of Internal Revenue, Docket Nos. 3535-65 and 7097-65.
| Decision Date | 17 April 1968 |
| Docket Number | Docket Nos. 3535-65 and 7097-65. |
| Citation | 50 T.C. 78 |
| Parties | MANHATTAN COMPANY OF VIRGINIA, INCORPORATED (A DISSOLVED CORPORATION), PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTMANHATTAN COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
H. Cecil Kilpatrick and William J. Lehrfeld, for the petitioners.
Charles F. T. Carroll, for the respondent.
Petitioners purchased the names and addresses of a number of home pickup-and-delivery laundry customers from another laundry company. No goodwill of any other character was purchased, and the other laundry company continued with all other facets of its business. Covenants not to compete were also purchased by petitioners in the same transaction. Held: Petitioners are not entitled to deductions in the year of purchase for the entire cost of the customer lists. The information contained on the lists constituted intangible assets, portions of which were in the nature of nondepreciable goodwill and portions of which had reasonably determinable useful lives, entitling petitioners to depreciation deductions. The useful lives of the depreciable portions of the assets determined from the evidence to be 5 years.
Respondent determined deficiencies in income taxes of petitioner the Manhattan Co. in the amounts of $5,185.03, $2,322.48, and $1,470.67 for the taxable years 1961, 1962, and 1963, respectively, and determined a deficiency in the income tax of petitioner the Manhattan Co. of Virginia, Inc., in the amount of $1,399.17 for the taxable year 1962.
The issue for decision is whether petitioners are entitled to deduct the cost of customer lists in the year of purchase, or if not, whether petitioners are entitled to deductions for amortization or depreciation of such customer lists over the lives of the assets or whether such lists are capital assets of a nature not subject to depreciation or amortization.
Some of the facts were stipulated, and those facts are so found.
The Manhattan Co. (hereinafter referred to as Manhattan), is a corporation organized under the laws of the State of Maryland. Manhattan filed its Federal corporation income tax returns for the calendar years 1961, 1962, and 1963 with the district director of internal revenue, Baltimore, Md. Its principal place of business at the time its petition was filed was Washington, D.C.
The Manhattan Co. of Virginia, Incorporated (hereinafter referred to as Virginia), was a corporation organized under the laws of the State of Virginia. Virginia filed its Federal corporation income tax return for the calendar year 1962 with the district director of internal revenue, Richmond, Va. Virginia was a wholly owned subsidiary of Manhattan throughout the years here at issue and until April 2, 1964, when it was dissolved and its assets and business taken over by Manhattan.
Both Manhattan and Virginia, during the taxable years here in issue, were engaged in the laundry and drycleaning business, including home pickup-and-delivery, in the Washington, D.C., metropolitan area.
On March 20, 1961, petitioners entered into several agreements with Arcade-Sunshine, Inc. (hereinafter referred to as Arcade), and two of its officers. Petitioner Manhattan entered into an agreement with Arcade to acquire a list containing 2,601 names and addresses of customers in the District of Columbia and Maryland, all of whom were using home pickup-and-delivery services of Arcade for both laundry and drycleaning. A consideration of $33,290 was assigned to this acquisition, which was paid to Arcade by Manhattan. Arcade and Manhattan also entered into an agreement prohibiting Arcade from competing with Manhattan in the ‘retail house-to-house pickup’ of laundry and drycleaning items for a period of 10 years. A consideration of $24,000 was assigned to this agreement. Manhattan and two officers of Arcade, Leonard R. Viner (hereinafter referred to as Viner) and Ralph L. Cohen (hereinafter referred to as Cohen), entered into similar agreements whereby Viner and Cohen covenanted not to compete with Manhattan for terms of 10 years and 5 years, respectively. The agreement between Manhattan and Arcade for the purchase of the customer lists specifically provided that Arcade was not transferring or Manhattan acquiring any right to use of the Arcade name.
Also on March 20, 1961, Virginia agreed to acquire a list containing 1,753 names and addresses of customers in Virginia all of whom were using home pickup-and-delivery service of Arcade for both laundry and drycleaning. A consideration of $23,429 was assigned to this agreement, which was paid by Virginia. Arcade, for a consideration of $16,000, agreed not to compete with Virginia in the ‘retail house-to-house pickup’ of laundry and drycleaning items for a period of 10 years. Viner and Cohen also agreed not to compete with Virginia for periods of 10 years and 5 years, respectively. The agreement between Virginia and Arcade for the purchase by Virginia of the customer lists specifically provided that Arcade was not transferring and Virginia was not acquiring any right to use of the Arcade name.
Generally only persons who have laundry picked up at their homes, whether a full bundle or only certain laundry items such as shirts, use pickup-and-delivery service regularly for drycleaning. Therefore most of petitioners' drycleaning customers on their pickup-and-delivery routes are regular laundry customers.
Negotiations leading up to the execution of the agreements between petitioners and Arcade were originated by Arcade at a local meeting of laundry representatives. Arcade's president stated to this group that Arcade wished to dispose of its business of home pickup-and-delivery of laundry and drycleaning and would sell its lists of customers in that business. After considerable negotiations, petitioners and three other laundry companies reached agreement with Arcade on the terms of the sale.
The price paid for the customer lists was based upon the number of customers on each list and the gross revenues Arcade had received from those customers in 1960. In determining the price to be paid for the customer lists petitioners and Arcade did not consider and evaluate each customer separately. Petitioners did not see the lists of Arcade's customers prior to the execution of the agreements but were supplied by Arcade with only the weekly dollar volume of laundry and drycleaning from each of Arcade's routes and the number of customers in each route for the calendar year 1960. The volume of business varies considerably among customers.
The customers of Arcade on the lists acquired by petitioners included some names of customers other than individuals. Of these customers other than individuals, Manhattan, at the date of the trial of this case, was still serving the following:
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¦Eastern Area Red Cross ¦
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¦Northern Virginia Juvenile Detention Home¦
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¦Madeira School ¦
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¦St. Agnes School ¦
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¦Blessed Sacrament Rectory ¦
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¦Commercial Engineering Co. ¦
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¦U.S. Chamber of Commerce ¦
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¦National Savings & Trust Co. ¦
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¦Bowen Building ¦
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¦Cafritz Co. (two locations) ¦
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¦Julius Garfinckel & Co. ¦
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¦U.S. Treasury Building ¦
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¦Potomac Part Apartments ¦
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¦Collins & Shearer ¦
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Petitioners at the date of the trial of this case either had never acquired or had lost 15 similar customers. Approximately 159 of the names of individuals on the list showed Madeira School as their address. Generally the business which Arcade had been receiving from the customers other than individuals on the lists purchased by petitioners was for a specific type of work such as drapery cleaning or was work for an individual located at the address. Although the individual names of the customers at the Madeira School have changed since petitioners acquired the lists from Arcade, the number of individual customers served at that address has remained relatively constant. Petitioners have on their records considered any customer at the Madeira School as a former Arcade customer since they originally obtained the account from Arcade.
Petitioners would not have purchased the customer lists without the covenants not to compete. In addition to remaining in the wholesale and retail store drycleaning and laundry business, Arcade retained its rug-cleaning business and retained a copy of its customer lists to use in connection with its rug-cleaning operations. In the negotiations between Arcade and petitioners, the income tax consequences of allocating the overall price between the customer lists and the covenants not to compete were considered. Arcade wanted a higher price placed on the customer lists because of the view that such lists were capital assets, whereas payments under the covenants were ordinary income.
The names and addresses of the Arcade customers that petitioners purchased were in the form of lists that Arcade had made from its addressograph plates. On receipt of the lists, petitioners had addressograph plates made for each person on the lists, and the new plates were placed in files on petit...
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