Computing & Software, Inc. v. Comm'r of Internal Revenue

• Decision Date: 15 May 1975
• Docket Number: 4009-72,8184-74.,Docket Nos. 4008-72
• Citation: 64 T.C. 223
• Parties: COMPUTING & SOFTWARE, INC., SUCCESSOR BY MERGER TO COMPUTERCOMPUTERCREDIT CORPORATION, ET AL.,1 PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

64 T.C. 223

COMPUTING & SOFTWARE, INC., SUCCESSOR BY MERGER TO COMPUTERCOMPUTERCREDIT CORPORATION, ET AL.,1 PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 4008-72

4009-72

8184-74.

United States Tax Court

Filed May 15, 1975.

Mark Townsend, for the petitioners.

Stephen W. Simpson, for the respondent.

Petitioners and their predecessors acquired the assets of three credit-reporting organizations including the voluminous files containing information used in the credit-reporting businesses. Depreciation deductions for the files were claimed based upon an allocation of a substantial part of each purchase price to the cost of the file. Held: The credit information is intangible property with a useful life of 6 years. Its value is separable from the goodwill and going-concern value of the acquired businesses. Held, further, amount of each purchase price allocable to the cost of the file determined. Held, further, petitioners are not entitled to compute the allowable depreciation deduction under the 150-percent declining-balance method.

FEATHERSTON, Judge:

Respondent determined that petitioners are liable as transferees under section 6901² for the following deficiencies in Federal income taxes in these consolidated cases:

+---------------------------------------+
                ¦Docket No.  ¦TYE          ¦Deficiency  ¦
                +------------+-------------+------------¦
                ¦            ¦             ¦            ¦
                +------------+-------------+------------¦
                ¦4008-72     ¦Oct. 29, 1967¦$33,286.00  ¦
                +------------+-------------+------------¦
                ¦            ¦Nov. 3, 1968 ¦211,850.00  ¦
                +------------+-------------+------------¦
                ¦4009-72     ¦Dec. 31, 1966¦97,219.00   ¦
                +------------+-------------+------------¦
                ¦            ¦Aug. 30, 1967¦63,862.00   ¦
                +------------+-------------+------------¦
                ¦8184-74     ¦Nov. 2, 1969 ¦75,778.97   ¦
                +---------------------------------------+
                

Petitioners do not dispute their liabilities as transferees if the underlying income tax deficiencies are due, but they contest the determined deficiencies, raising two issues:

(1) Whether certain credit information files purchased by petitioners or their predecessors are subject to a depreciation allowance under section 167 for the tax years at issue; and

(2) If so, whether the allowance may be computed under the 150-percent declining-balance method for computing depreciation.

FINDINGS OF FACT

Petitioner Cordura Corp. is a corporation organized under the laws of the State of California with its principal place of business in Chicago, Ill., at the time of the filing of the petitions herein. Petitioner Computing & Software, Inc. (hereinafter C & S), became the Cordura Corp. upon approval of a name change by shareholder vote on or about March 2, 1973. At the time of the filing of the petitions herein, C & S's principal place of business was Century City, Calif.

The income tax returns herein involved were filed with the District Director of Internal Revenue at Los Angeles, Calif.

Consumer Credit Clearance, a sole proprietorship, was organized in 1942 for the purpose of serving as a credit information service. In 1963, all of the assets of Consumer Credit Clearance were sold to Hughes Dynamics, Inc. (hereinafter referred to as Hughes). Consumer Credit Clearance thereupon became a division of Hughes.

On December 17, 1964, Hughes sold its Consumer Credit Clearance division to Consumer Credit Clearance, Inc. (hereinafter referred to as CCC), a new corporation owned by Daniel Sperling and Sidney Morgan. The total purchase price was $2,050,000. The agreement of sale contained a covenant not to compete and an agreement not to divulge trade secrets. The agreement did not allocate this purchase price among the assets purchased, which included the goodwill and trade name of the seller.

The purchase price was allocated on CCC's books and records as follows:

+------------------------------------+
                ¦Total purchase price  ¦$2,050,000.00¦
                +----------------------+-------------¦
                ¦Less: Imputed interest¦135,915.49   ¦
                +----------------------+-------------¦
                ¦Net purchase price    ¦1,914,084.51 ¦
                +------------------------------------+
                

Allocation of purchase price
                Credit file                   1  1,715,000.00
                Furniture and fixtures        2  25,102.00
                Goodwill                      173,982.51
                Total                         1,914,084.51
                

1 A valuation of the files for this purpose was made in May 1965, by a professional appraiser. The value was arrived at by sampling approximately 800 of the over 4,500,000 cards in the file in order to determine the useful life of the information then in the file. The useful life was based upon the purge criteria discussed in the text which follows. The appraiser determined that in 6 years, approximately 98 percent of the information in the file would be purged. By estimating the income attributable to the file to be $360,000 per year and by applying a 7-percent capitalization rate, the value of $1,715,000 was reached.

2 Respondent does not challenge the value allocated to assets other than the files and goodwill.

The amount of $1,715,000 was entered on CCC's books as its basis in the credit file and depreciation was claimed thereon, computed by employing a useful life of 6 years and the 150-percent declining-balance method of depreciation.

On or about June 30, 1967, substantially all the properties and assets (including the credit file) and liabilities of CCC were transferred pursuant to section 368(a)(1)(C) to Computer Credit Corp., a wholly owned subsidiary of C & S, in exchange for stock of C & S. CCC then changed its name to Sperling-Morgan Corp. and was dissolved. Its remaining assets, consisting solely of C & S stock, were distributed to its shareholders, Daniel Sperling and Sidney Morgan. Computer Credit Corp. carried over to its books the adjusted basis claimed by CCC in the credit file and continued to depreciate the file based upon the same life and same method of depreciation.

The largest and most important asset purchased by CCC from Hughes was the credit information file. The file included the names of individuals in Los Angeles and Orange Counties. It was contained in 60 steel file cabinets measuring 3' x 5', 3-tiered to the base, with 54 drawers per cabinet, each drawer being 18 inches deep. The file cabinets required approximately 5,000 square feet of space.

The credit file was composed of 3' x 5' blue inquiry cards and white legal cards. There were approximately 4,587,840 cards in the file: approximately 2,821,522 blue inquiry cards (61.5 percent), 1,610,332 white legal cards (35.1 percent), and about 156,986 other cards (3.4 percent).

The blue inquiry cards contained historical data, such as the debtor's name, age, wife's name, present address, previous address, whether the debtor owned or rented at his present address, his occupation, employer, employer's location, years employed, previous employers, bank account, credit references, date inquiry was made by the customer, and the customer code number. Some of the information was derogatory, such as ‘skip account,‘ charge-off, slow pay, or repossession. The derogatory information was not removed until the blue card was removed from the file.

The white legal cards were prepared and delivered on a daily basis by the Los Angeles Daily Law Journal and contained information relating to municipal and superior court suits, judgments, bankruptcies, Federal and State tax liens, notices of default on trust deeds, mechanics' liens, real estate attachments, law and admiralty suits, and chattel mortgages. Bankruptcy information, which composed less than 1 percent of all the legal cards, was recorded on a separate 3' x 5' card because this information was kept indefinitely.

CCC's credit-reporting business was structured as follows: file cabinets were located in the center of the office with clerks and desks placed around the cabinets; when a customer telephoned for a credit report, he would give the clerk his code number and identifying inquiry information; the clerk would put him on ‘hold,‘ search the credit file, return, and read back the available information to the inquiring customer; the customer would then call the previous inquiring members for a credit rating, utilizing the information given by CCC's clerk. The clerk would add to the credit information file any new data provided by the inquiring customer not already contained in the file. The date of inquiry and customer account number were noted on the card before it was returned to the file.

There were 150 to 200 clerks working in this office, receiving calls from inquiring customers, looking up names, and filing cards. On an average day 7,000 to 9,000 cards were pulled from and returned to the files. On a busy day approximately 10,000 to 12,000 cards were pulled.

The age of credit information is important to a credit grantor in deciding whether to grant credit to an applicant. The credit grantor is interested in current credit information. The credit seeker may have been a poor risk at some time in the past, but may be a grade A credit prospect today. Derogatory information is not valuable unless current. Old legal information has more value, but is not significant either. Stale information may actually mislead the credit grantor as to the present credit-worthiness of an individual who currently has an acceptable credit status.

In order to provide only current credit information, CCC had established purge criteria for discarding stale credit information. These criteria evolved from customer demands, since customers did not want to waste time on the telephone receiving stale information. Also, old inquiry information was worthless because when the inquiring credit grantor called a previous customer, that customer would no longer have a record of the old inquiry. Thus, when a customer called, the clerk would read the most recent information first and usually would not read any older, stale information.

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