APPEAL OF MANHATTAN BREWING CO.
| Decision Date | 22 April 1927 |
| Docket Number | Docket No. 693. |
| Citation | 6 BTA 952 |
| Parties | APPEAL OF MANHATTAN BREWING CO. |
| Court | U.S. Board of Tax Appeals |
A. L. Hopkins, Esq., H. B. Sutter, Esq., and R. S. Doyle, Esq., for the petitioner.
John D. Foley, Esq., for the Commissioner.
Robert N. Miller, Esq., J. Robert Sherrod, Esq., and Edward McCarthy, Jr., Esq., as amici curiae.
This is an appeal from the determination of a deficiency in income and profits taxes for the year 1918, in the amount of $141,294.31. The issues stated in the appeal are (1) whether the petitioner is entitled to a reasonable allowance for the obsolescence of tangible and intangible assets during the taxable years; (2) whether the Commissioner erred in refusing to allow the petitioner to offset income for 1918 by an alleged net loss sustained in 1919; and (3) whether the petitioner may restore the amount of $70,000 to invested capital.
FINDINGS OF FACT.
1. The petitioner is a corporation organized under the laws of the State of Illinois in February, 1893, with a capital stock of $500,000, fully paid up, and with its principal place of business at Chicago. All the capital stock was issued to Charles Shaffner and Edwin Meyers, for a certain brewery and its business at Chicago. The value of the tangible assets for which the stock was issued was $225,000, and the value of the intangible assets was $275,000.
2. The petitioner manufactured exclusively draught beer, known as "Manhattan Beer," and from the first was a successful and profitable concern. The volume of business done by the petitioner is illustrated by the following table of the number of barrels sold annually, the net tangible assets, and the net earnings as shown upon the books of the petitioner for each of the years from 1894 to 1898 and 1905 to 1919, inclusive.
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| | Net tangible | Net
Year. | Barrels. | assets. | earnings
---------------------------------|-------------|--------------|-----------
1894 ___________________________ | 50,615 2/8 | $225,000.00 | $62,015.32
1895 ___________________________ | 75,480 7/8 | 225,000.00 | 67,686.00
1896 ___________________________ | 83,232 5/8 | 272,686.00 | 131,886.76
1897 ___________________________ | 73,662 1/8 | 415,882.53 | 92,105.68
1898 ___________________________ | 88,734 2/8 | 402,500.00 | 80,000.00
1905 ___________________________ | 135,905 7/8 | 671,250.00 | __________
1906 ___________________________ | 150,579 3/9 | ____________ | __________
1907 ___________________________ | 165,474 | 832,500.00 | __________
1908 ___________________________ | 174,430 6/8 | 755,178.54 | 131,008.24
1909 ___________________________ | 179,989 7/8 | 746,186.78 | 109,500.76
1910 ___________________________ | 191,766 7/8 | 675,687.54 | 161,033.96
1911 ___________________________ | 193,514 4/8 | 686,721.50 | 119,753.43
1912 ___________________________ | 190,252 5/8 | 806,474.93 | 165,906.72
1913 ___________________________ | 219,651 5/8 | 861,883.54 | 248,803.81
1914 ___________________________ | 213,191 3/8 | 920,687.35 | 234,640.90
1915 ___________________________ | 213,265 6/8 | 932,919.45 | 130,855.41
1916 ___________________________ | 210,773 1/8 | 881,519.59 | 174,663.03
1917 ___________________________ | 195,435 | 885,025.68 | 226,670.46
1918 ___________________________ | 143,636 | ____________ | __________
1919 ___________________________ | 69,184 | ____________ | __________
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The average net value of tangibles used in the business for the period 1908 to 1917 was $813,228.49. The average net income for the period 1908 to 1917 was $170,283.57.
3. By reason of national prohibition legislation in December, 1917, affirmative action on the proposed constitutional amendment by many state legislatures during 1918, and congressional war-time prohibition legislation in November, 1918, the petitioner, believing that a large part of its brewery plant and property had then become obsolete and would be wholly obsolete on the effective date of the national prohibition amendment, charged off its books as of December 31, 1918, the amounts of $255,488.56 for obsolescence of its tangible assets, and $474,002.30 for obsolescence of its intangible assets, including its good will, trade name, and trade brands, and deducted the amounts so charged off from its gross income in its income and profits-tax return for 1918. For 1919, the Commissioner allowed a loss of $347,533.83 on the sale of the petitioner's tangible assets, and determined a net loss of $138,986.34 for that year. This loss was computed, however, without restoring to the book value of the tangible assets the amount of $255,488.56 charged off the books in 1918 for obsolescence of tangibles or the amount of $474,002.30 taken for obsolescence of intangibles in the same year, but disallowed by the Commissioner as deductions from gross income for that year.
4. In the years 1903 and 1906, the petitioner charged off on its books for real estate the sum of $70,000. This sum was restored by the Commissioner in computing the loss on the sale of assets in 1919, but the Commissioner erroneously failed to restore this same amount to assets in computing invested capital for the year 1918.
5. Early in 1919, the petitioner made investigations with a view to utilizing its plant for some other business. It considered the availability of its physical property for use as a packing, cold storage, or vegetable drying plant, but found it suitable for none of these purposes. In February, 1919, it asked for and received bids for salvaging the plant. It received three bids in the amounts of $13,780, $15,000, and $20,000, respectively, and also a bid for wrecking the plant and removing the debris in the amount of $135,000, cost to the petitioner.
6. In the Chicago territory it was the custom of the brewery trade for purposes of purchase and sale, to arrive at the value of a brewery business from the annual sales of barrels of beer. On or about March 1, 1913, the value of a brewery operating at or near capacity and showing reasonable profits would be fixed at between $10 and $12 per barrel, and the value of the good will alone would be fixed at between $5 and $8 per barrel. The petitioner had many trade advantages and was a successful brewery. It produced only one grade of draught beer in a plant specially designed, planned, and constructed for that purpose. Advertising, together with the quality of its product, produced a large demand for this "Manhattan Beer," so that the brewery was able to operate at capacity and choose its customers. It sold its product exclusively to selected saloons within a short radius of the brewery, thereby reducing the usual transportation and delivery costs. The sales by barrels, the tangible assets and net earnings on or about March 1, 1913, were as follows:
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Year. | Barrels. | Tangible | Net earnings
| | assets. |
----------------------------------|-------------|-------------|--------------
1912 ____________________________ | 190,252 5/8 | $806,474.93 | $165,906.72
1913 ____________________________ | 219,651 5/8 | 861,883.54 | 248,803.81
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7. The capital stock of the petitioner, consisting of 5,000 shares of the par value of $100 each, was closely held. On February 3, 1905, Mr. Shaffner, the president, purchased 50 shares at $300 each from an estate. On January 25, 1907, he purchased 100 shares at $325 each. In 1912 he refused an offer of $350 per share for 1,500 shares.
8. The petitioner did not brew any new beer for sale after November, 1918, but, on July 1, 1919, it had on hand about 25,000 barrels of beer that had been brewed prior to November, 1918. This beer was not in a salable condition. It was dealcoholized to conform with the law, treated with a solution of sugar and water in order to sell it as "near beer," and blended with new brews in order to give it life. This venture was not a financial success. The total sales of beer from January 1 to July 1, 1919, and of the new product of near beer for the balance of the year was 69,184 barrels as compared with the average of about 200,000 barrels of beer for prior years.
9. On December 31, 1919, the petitioner sold all its tangible assets to the Malt Maid Co., an Illinois corporation, taking in payment $199,000, par value, of Malt Maid Co. stock, which it distributed to its stockholders. The Malt Maid Co. was capitalized in the sum of $200,000. The stockholders of the new corporation were the same as of the petitioner, with the exception of one share of stock, and so continued for approximately three years. After January 1, 1920, the new company manufactured and marketed cereal beverages in bottles and sustained losses as follows:
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Years. | Barrels | Net loss
| sold. |
------------------------------------------|---------|-----------
1920 ____________________________________ | 23,967 | $29,211.60
1921 ____________________________________ | 31,016 | 48,527.04
1922 ____________________________________ | 24,896 | 18,156.41
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The bulk of the business of the Malt Maid Co. was with a new line of customers and in goods sold in bottles instead of barrels. The business of the petitioner had been with a select class of saloons, while the new company dealt with delicatessens, grocery stores, and soda fountains. The name of ...
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