Better Beverages, Inc. v. U.S.
| Citation | 619 F.2d 424 |
| Decision Date | 18 June 1980 |
| Docket Number | No. 78-2880,78-2880 |
| Parties | 80-2 USTC P 9516 BETTER BEVERAGES, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. S. A. STRANE and wife, Alice F. Strane, and Billy F. Strane, individually and as independent executor of the Estate of Adele Strane, Deceased, Plaintiffs-Appellees. v. UNITED STATES of America, Defendant-Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Robert I. White, Martin B. Whitaker, Houston, Tex., for plaintiff-appellant.
M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, William A. Whitledge, Jonathan S. Cohen, Attys., Tax Div., U. S. Dept. of Justice, Washington, D. C., for United States of America.
Fulbright & Jaworski, Kenneth L. Stewart, Charles W. Hall, Houston, Tex., for S. A. Strane, et al.
Appeals from the United States District Court for the Southern District of Texas.
Before JONES, GEE and REAVLEY, Circuit Judges.
This appeal was born of the inconsistent treatment of a portion of the proceeds from the sale of a going business, the Dr. Pepper Bottling Co. of Victoria, Texas, by its sellers, S.A. and Billy F. Strane, and its purchaser, Better Beverages, Inc., on their respective federal income tax returns. The question presented is whether any portion of the lump sum purchase price should be characterized as payment for the sellers' covenant not to compete rather than for the transfer of the goodwill of the business 1 despite the absence from the parties' agreement of any express allocation to this or any other item. 2 Each party reported this aspect of the transaction in the manner that afforded it the least onerous tax consequences. Thus, Better Beverages, attempting to secure a substantial amortization deduction, characterized over half of the purchase price as payment for the covenant. The Stranes, on the other hand, reported the entire amount of the excess of the proceeds over their basis in the business as gain from the sale of capital assets, making no allocation at all to the covenant and, thus, implicitly ascribing all proceeds not attributable to physical assets to the transfer of goodwill or "going concern value."
In order to resolve this inconsistency and protect the revenue, the Internal Revenue Service ("IRS") asserted protective deficiencies against both parties (alternatively disagreeing with each party's characterization), and then successfully moved to consolidate their individual refund actions in the court below, realistically seeking judgment not against both, but only against one side or the other. 3 Consistent with this approach, the district court granted summary judgments against Better Beverages in favor of IRS and, congruently, against IRS in favor of the Stranes. The court rejected Better Beverages' unilateral allocation of any portion of the price to the covenant, in the absence of any evidence or allegation that both parties agreed to an allocation. Better Beverages attacks that summary judgment, arguing generally that the court strayed from proper summary judgment procedure by resolving genuine issues of material fact and assuming unsubstantiated facts in reaching its decision. Most significantly Better Beverages contends that, given the lack of an express, agreed apportionment of the purchase price among any of the components of the business, an allocation of a portion of that lump sum price to the covenant not to compete, as to any other item, may be inferred upon proof of its real economic value, and that the assertions in its affidavits of the high value it placed on the covenant were sufficient to raise a genuine question of fact on this point. We reject these contentions and affirm the judgment of the district court.
Early in 1970, representatives of Better Beverages approached the Stranes, seeking to purchase their Dr. Pepper bottling and distribution business. Their negotiations culminated in a brief "Letter of Intent," executed by both sides on February 4, 1970, reflecting their intention to effect the desired sale and purchase. Under the rough terms of this Letter of Intent, the Stranes were to transfer to Better Beverages all of the assets of their company, except real property and office equipment, for $400,000. The agreement contained no mention of a covenant not to compete and made no breakdown of the $400,000 among the various components of the business being transferred. This Letter of Intent was to bind the parties until April 1, 1970, unless the agreement were carried out earlier.
Around February 25, 1970, following some minor additional jockeying between the attorneys for both sides, the transaction was consummated, and a final Bill of Sale was executed by the Stranes. The Bill of Sale, though more formal and complete, was substantially in accord with the terms of the prior Letter of Intent. It did, however, contain three significant new provisions. First, in addition to real estate and office equipment, it excepted current accounts receivable and bank balances from the assets to be transferred to Better Beverages. Second, it included a covenant on behalf of the Stranes not to compete in the soft drink business for ten years in the surrounding trade area. Finally, the Bill of Sale made explicit the Stranes' agreement to submit their Dr. Pepper franchise for cancellation, so that Dr. Pepper might re-issue it to Better Beverages. Despite these adjustments on both sides, the lump sum cash consideration for the transfer remained at $400,000. Again, no express allocation of any portion of the purchase price was made to particular assets.
Despite the absence of a breakdown of the lump sum purchase price in any of the documents of sale, Better Beverages on its internal records apportioned $155,452.80 to the various physical assets received in the transaction, and characterized the remainder, $244,547.20, as payment for the Stranes' covenant not to compete; it attributed no amount to goodwill. R. Vol. I, p. 30. Accordingly, on each of its returns for taxable years ending June 30, 1971 and 1972, Better Beverages claimed an amortized expense of $24,454.72 in respect of the amount ascribed to the covenant. The Stranes, on the other hand, reported all income from the sale as long-term capital gain.
As noted above the district court resolved this discrepancy on July 17, 1978 when, in the consolidated refund action that followed IRS' assertion of offsetting protective deficiencies against all parties, it granted summary judgments against Better Beverages and in favor of the Stranes on the basis of the absence of a genuine issue as to the existence of the parties' mutual intent at the time of sale to allocate some portion of the purchase price to the covenant not to compete. Consequently, the ultimate question presented for our review is whether, from the affidavits and answers to interrogatories presented to the trial court, Better Beverages has demonstrated the existence of a genuine question as to any issue of material fact such as should have prevented the entry of summary judgment. Fed.R.Civ.P. 56(c); Stafford v. United States, 611 F.2d 990, 993 (5th Cir. 1980).
Better Beverages' overriding assertion in this regard, as stated earlier, is that it raised a genuine issue as to the key fact question in this case, the proper allocation of some portion of the contract price to the covenant not to compete, by its evidence of the high value it placed on obtaining the covenant. Better Beverages' president, Roland Campbell, and its accountant who was involved in the purchase negotiations, Tom Gray, both attested in affidavits presented to the court in opposition to summary judgment, that they had considered the covenant "essential" to the transaction and to securing the continued profitability of the purchased enterprise by protecting it from the Stranes' potentially hostile use of their many personal contacts in the market. R. Vol. I, pp. 110, 126-27. Thus, after the purchase Better Beverages had unilaterally estimated the covenant's value to it at $244,547.20, as reflected in their federal income tax returns. See R. Vol. I, p. 30.
In evaluating whether this evidence of the value of the covenant to the purchaser, Better Beverages, should have precluded summary judgment, it is helpful to recall that this is not simply a suit between a buyer and seller for the construction of a contract, but a tax refund action against the IRS, and that Better Beverages' attempt to attribute a portion of the contract price to that covenant is but a function of the more fundamental burden it must carry that of establishing its entitlement to an amortization deduction under Treas.Reg. § 1.167(a)-3 (). Welch v. Helvering 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933) (). More specifically, in order to show itself to be entitled to the § 1.167(a)-3 deductions that it has claimed, Better Beverages must prove, among other things, the basis from which these amortized depreciation deductions are to be calculated. 4
Generally, basis for depreciation purposes derives from the cost of the item to the taxpayer. I.R.C. §§ 167(g), 1011, 1012. The taxpayer must prove what, if anything, he actually was required to pay to obtain the item, not what he would have been willing to pay or even what the market value of the item was. Winn-Dixie Montgomery, Inc. v. United States, 444 F.2d 677, 683-84 (5th Cir. 1971). Consequently, evidence of value to the purchaser is material to basis, and, therefore, to this case in general, only if probative of actual cost. Applying that thesis to the question at hand, since Better Beverages seeks to prove its basis in the covenant by allocating to it a portion of the lump sum purchase price paid for the business, the evidence of value on which it relies may be said to have demonstrated a material fact issue that should...
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