APPEAL OF WHITE HOUSE MILK CO.

• Decision Date: 16 October 1925
• Docket Number: Docket No. 2342.
• Citation: 2 BTA 860
• Parties: APPEAL OF WHITE HOUSE MILK CO.
• Court: U.S. Board of Tax Appeals

2 B.T.A. 860 (1925)

APPEAL OF WHITE HOUSE MILK CO.

Docket No. 2342.

Board of Tax Appeals.

Submitted May 6, 1925.

Decided October 16, 1925.

C. F. Sammond, C. P. A., for the taxpayer.

John D. Foley, Esq., for the Commissioner.

Before GRAUPNER, TRAMMELL, and PHILLIPS.

This appeal is from the determination of a deficiency in income and profits tax for the fiscal years ended April 30, 1922, and April 30, 1923, in the amounts of $6,470.11 and $6,864.16, respectively. The deficiency arose from the refusal of the Commissioner to include a certain item of $50,000 alleged good will in invested capital and as an item of cost of assets in computing the profits of a sale, and also from the disallowance, as a deduction from the net profit of the taxpayer, of the net loss of a predecessor corporation for the preceding year.

FINDINGS OF FACT.

1. The taxpayer is a Wisconsin corporation with its principal place of business at West Bend.

2. The White House Milk Products Co., the predecessor corporation, was organized under the laws of Wisconsin on June 15, 1917, and engaged in the business of condensing and canning milk. That company operated until April 30, 1921, at a loss. In order to obtain a supply of milk, it had to develop "milk routes." This was done by employing field agents, who solicited and made arrangements for a steady supply of milk from the farmers and established regular routes for the daily collection of the milk. It also purchased and salvaged the Wallau Dairy Co. plant to reduce the demand for raw milk from farmers and thereby increase the supply for the company. The said predecessor corporation carried on its books an account called "milk routes and good will," which was as follows:

                1918 — Purchase of Wallau Dairy Co. and Myria Cheese Co. plant ___________  $12,875.88
                1918 — Less salvage, Wallau Dairy Co. plant ______________________________    2,859.45
                                                                                            __________
                                                                                             10,016.43
                1919 — Less salvage, Wallau Dairy Co. plant ______________________________      108.00
                                                                                            __________
                                                                                              9,908.43
                1919 — Excess price of 30¢ per cwt. on all milk purchased from
                  Jan. 1, 1918, to Aug. 1, 1919, totaling 17,131,912 lbs., @ 30¢
                  per cwt., including all extra expense, auto service, etc., in developing
                  the various milk routes ________________________________________________   51,395.73
                                                                                            __________
                                                                                             61,304.16
                Less 10 per cent charged off _____________________________________________    6,130.41
                                                                                            __________
                Dec. 31, 1919, balance ___________________________________________________   55,173.75
                1920 — Salvage, Wallau Dairy Co. plant ___________________________________    4,600.00
                                                                                            __________
                                Balance to date __________________________________________   50,573.75
                

It is this item, $50,573.75, which the taxpayer is claiming as good will in the subsequent transactions hereinafter described.

3. On April 23, 1921, the White House Milk Products Co. dissolved by action of its stockholders and sold its entire assets to an individual, H. M. Langer, for a nominal sum ($200), who also assumed all liabilities. A new company, the White House Milk Co., the taxpayer herein, was formed on or about April 29, 1921. Eleven stockholders out of 45, representing 1,045 shares out of 2,099 shares, entered the new company, subscribing and paying cash for 460 out of 985 shares in the new company. The only new stockholder subscribed for 25 shares. The remaining 500 shares were issued to H. M. Langer for the assets of the old company. The new company assumed the liabilities of the old from the said H. M. Langer. The 500 shares issued to Langer were then transferred by him, without consideration, to the other stockholders of the new company in proportion to their holdings or stock subscriptions.

4. The taxpayer immediately commenced operations on May 1, 1921, and continued to October 31, 1922, at a profit. On this latter date it sold its fixed assets to the A. & P. Products Corporation of New York for the sum of $275,000 and voted to dissolve. The A. & P. Products Corporation took over and operated the plant of the taxpayer without interruption, and with it took over all employees, inventories, goods in process, and the milk-collection organization. The book value of the tangible assets included in this sale to the A. & P. Products Corporation was $178,768.82 and the intangible assets $50,573.75, causing a gross profit of $96,231.18 if the intangibles be excluded, and $45,657.43 if the intangibles be included.

5. During the period from January 1, 1921, to April 30, 1921, the White House Milk Products Co. (the predecessor corporation) had a net loss of $29,076.10. The taxable income of the taxpayer for the fiscal year ended April 30, 1922, was $26,603, and for the fiscal year ended April 30, 1923, $16,456.50. The taxpayer seeks to have the net loss of the predecessor company, to wit, $29,076.10, deducted from the net profit of the taxpayer herein for the succeeding taxable years. The Commissioner excluded the $50,573.75 claimed as invested capital, disallowed as a deduction the loss of the...