CIR v. Chatsworth Stations, Inc.

• Citation: 282 F.2d 132
• Decision Date: 28 July 1960
• Docket Number: Docket 25527.,No. 11,11
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CHATSWORTH STATIONS, INC., Respondent.
• Court: U.S. Court of Appeals — Second Circuit

282 F.2d 132 (1960)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CHATSWORTH STATIONS, INC., Respondent.

No. 11, Docket 25527.

United States Court of Appeals Second Circuit.

Argued March 28, 1960.

Decided July 28, 1960.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Kenneth E. Levin, Attys., Dept. of Justice, Washington, D. C., for petitioner.

Alvin Wayne, New York City (Norman W. Arnheim, New York City, of counsel), for respondent.

Before WATERMAN, BARNES^* and MOORE, Circuit Judges.

WATERMAN, Circuit Judge.

Respondent is a New York corporation engaged in the distribution of automobile petroleum products. It has been able to purchase petroleum products from oil companies at less than prevailing posted dealers' prices. Accordingly it sought to accumulate a number of gasoline stations as retail outlets for these products. During the taxable years involved in the present case it did not itself operate any retail gasoline stations; instead it leased gasoline stations to independent operators with the proviso that the lessees would purchase their petroleum requirements exclusively from respondent or its designee. Apparently, although we have found no express confirmation of this assumption in the record, the lessee would retail the petroleum products under respondent's trade name. The present case involves four gasoline stations in New York City which respondent came to control either by purchase or lease in the period between August 25, 1949 and March 15, 1950. These four stations, in the order of respondent's acquisition, are designated herein as: the Third Avenue Station, the Soundview Avenue Station, the Grand Concourse Station, and the Fort Hamilton Parkway Station. Prior to obtaining control of each station respondent selected the individual to whom it was to lease the station, and the lease between it and this individual was executed either before respondent obtained control of the station or immediately thereafter. In the case of each station, simultaneously with the execution of each lease, respondent in a separate document purported to sell to its lessee the good will of the gasoline station. The Tax Court held that it was an established practice in the New York area to make this kind of payment for the good will of a gasoline station. The Tax Court also held that the amount of stated rent respondent charged its lessees was not low enough to justify a conclusion that the purported "good will" payments to respondent were in reality prepayments of rent. Finally, the Tax Court held that the several sums which respondent received for the sale of good will were never more than the sums which respondent had itself paid therefor; and that, accordingly, respondent had not realized any gain by these purported transfers of good will assets. For reasons which will become apparent the Tax Court's Findings of Fact as to the transactions involving each of the four stations must be set forth in detail.

Third Avenue Station

On August 3, 1949 respondent agreed to purchase from Harold and William Sigman the real property, the service station business, the good will, and the fixtures and equipment of this station. The purchase price was $25,750 and a bill of sale was executed August 25. In neither the purchase agreement nor the bill of sale did the Sigmans or respondent allocate the purchase price among the various assets purchased. Moreover, there is nothing in the Tax Court's Findings of Fact to suggest that the Sigmans and respondent reached any parol agreement as to the allocation of the purchase price. Nor do the Findings of Fact indicate any such allocation with respect to the other three stations.

In an undated agreement executed sometime prior to August 25, respondent agreed to lease the property to Harry Pariser. The lease was to be for a term of fifteen years to commence October 1, 1949. The annual rent was to be $1,800. In a separate document, but executed simultaneously and as a "condition precedent" to the granting of the lease, Pariser agreed to pay respondent $4,500 for the station's good will.

Soundview Avenue Station

On September 26, 1949 respondent agreed to purchase from Frank and John Certo the Certos' lease of this station "together with the good will thereof." The total purchase price was $25,000. The Certos' lease had approximately eighteen years to run.

On October 1 respondent subleased the station to Harold and William Sigman. The rent was to be the same as that paid by the Certos under the original lease, and the sublease was to expire on the same date as the original lease. On September 30 as consideration for respondent's granting the sublease to them the Sigmans agreed to pay respondent $16,000 for the "continued operation" of the station. Of this sum $10,000 was to be paid in a series of monthly serial promissory notes.

Grand Concourse Station

On November 1, 1949 respondent entered into a ten-year lease from Millie Katz covering this real property and the gasoline station and its equipment thereon. She was herself a lessee, and the length of her lease has been undetermined. For all that we can discover no mention was made of transferring the good will. The annual rent was $18,000 and respondent was given an option to renew for an additional five years.

On October 21 respondent agreed to lease the station to Rene Gouirand for the same ten-year period with the same option to renew for five years. The rent was to be the same as respondent's rent to Millie Katz, $18,000 a year. In addition, Gouirand agreed to pay respondent $17,500 for the good will of the station. Gouirand also agreed that, at the expiration of the lease, he would turn over to respondent a list of his charge customers, which list, in turn, respondent had agreed to deliver to Millie Katz.

Fort Hamilton Parkway Station

On March 15, 1950 respondent purchased from Jack Chanin this realty, together with the gasoline station and four stores located thereon. The purchase price was $105,000. In its Findings of Fact the Tax Court states that of this purchase price $80,000 "* * * was attributed to the realty and $25,000 was attributed to the gas station good will with equipment and possession * * *." However, it is clear that this attribution was not made by the parties to the sale of the property but was made in an undated letter to respondent's secretary by the real estate broker who acted as agent for respondent. Indeed, we can discover nothing from the Tax Court's Findings of Fact or from the record on appeal indicating whether respondent's vendor even purported to part with the good will of the station.

On February 28 respondent agreed to lease the station to Joseph Vinacour. The term of this lease was to be twenty-one years with an annual rental of $5,100. In addition, Vinacour agreed to purchase the good will of the station for $25,000.

The sale of a going business is to be comminuted into its fragments. Williams v. McGowan, 2 Cir., 1945, 152 F.2d 570, 572, 162 A.L.R. 1036. Although the parties to the sale of a going business may expressly provide for the allocation of the purchase price among the various assets sold, the Commissioner is not bound to accept the parties' allocation; instead he may reallocate the purchase price according to what he deems to be the realities of the transaction. Copperhead Coal Co. v. C.I.R., 6 Cir., 1959, 272 F.2d 45. If the taxpayer attacks the Commissioner's allocation, the taxpayer carries the burden of proof. Cf. Ullman v. C.I.R., 2 Cir., 1959, 264 F.2d 305, 308. The taxpayer's burden in challenging the Commissioner's allocation is more difficult to sustain where, as here, the parties have made no express allocation of the purchase price. Violet Newton, 1949, 12 T.C. 204; Mertens, Law of Federal Income Taxation, § 22.51. In order for us to sustain the holding of the Tax Court that respondent realized no gain upon its sale of the good will in each of the four stations, that Court's Findings of Fact must indicate a rational basis for the conclusion that respondent sustained its burden of proof that it sold the good will at no greater price than the price at which the good will was purchased. We find nothing to indicate how the Tax Court determined the amount that taxpayer paid for the good will of the stations as distinct from the amount it paid for...