Credit Bureau of Erie, Inc. v. Comm'r of Internal Revenue, Docket No. 1996-68.

• Decision Date: 06 April 1970
• Docket Number: Docket No. 1996-68.
• Citation: 54 T.C. 726
• Parties: CREDIT BUREAU OF ERIE, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

54 T.C. 726

CREDIT BUREAU OF ERIE, INC., PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1996-68.

United States Tax Court

Filed April 6, 1970.

[54 T.C. 726]

Bertram C. Linsey (an officer), for the petitioner.

D. Alden Newland, for the respondent.

Held: (1) That the burden of proof did not shift to respondent because no new matter was pleaded in his answer, Rule 32, Tax Court Rules of Practice; (2) that respondent did not conduct a second examination of petitioner's books and records in violation of sec. 7605(b), I.R.C. 1954; and (3) that the petitioner is not entitled to a depreciation deduction under sec. 167, I.R.C. 1954, in each of the taxable years ended Feb. 28, 1965, and Feb. 28, 1966, with respect to collection accounts (intangible assets) received by it in the purchase of a collection business because such collection accounts constitute an indivisible mass asset in the nature of goodwill with an indefinite useful life. Sec. 1.167(a)-3, Income Tax Regs.

DAWSON, Judge:

Respondent determined the following Federal income tax deficiencies against the petitioner:

+-------------------+
                ¦TYE ¦
                +-------------------¦
                ¦ ¦ ¦
                +--------------+----¦
                ¦Feb. 28, 1965 ¦$440¦
                +--------------+----¦
                ¦Feb. 28, 1966 ¦440 ¦
                +-------------------+
                

The issues presented for decision are (1) whether the burden of proof in this proceeding has shifted to the respondent because of certain language contained in his notice of deficiency, (2) whether the respondent conducted a second examination of the petitioner's books and records in violation of section 7605(b), I.R.C. 1954,¹ and (3) whether the petitioner is entitled to a depreciation deduction under section 167 in each of the taxable years ended February 28, 1965, and February 28, 1966, with respect to intangible assets received by it in the purchase of a collection business.

FINDINGS OF FACT

Some of the facts have been stipulated by the parties and are found accordingly.

Credit Bureau of Erie, Inc. (herein called petitioner), is a credit association and collection agency which was incorporated under the laws of the commonwealth of Pennsylvania on February 8, 1951. Its principal place of business was in Erie, Pa., at the time the petition was filed in this proceedings. Petitioner filed its Federal corporation income tax returns for the fiscal years ended February 28, 1965, and February 28, 1966, with the district director of internal revenue at Pittsburgh, Pa.

[54 T.C. 727]

From its incorporation until February 1960, the petitioner operated solely as a supplier of credit information for merchants and other businessmen granting credit in or about Erie.

Pursuant to a written agreement dated June 30, 1958, the petitioner had a working arrangement with Thomas Warren Smith, who owned and operated, as a sole proprietorship, a collection business. Although Smith was the sole owner and operator of this business, he operated it under the name of the Collection Department of the Credit Bureau of Erie, Inc., at the same business location as the petitioner.

Under the terms of their agreement, (1) the petitioner paid all the operating expenses of the collection business for which it was subsequently reimbursed by Smith, and (2) the petitioner obtained all the information pertinent to its credit-reporting business from the accounts referred to Smith for collection.

Information with respect to all such accounts was entered on both a credit and a collection record. The credit records normally contained information such as the individual's name, his wife's name, the number of his children, his employer, previous employment, and addresses. The collection records, on the other hand, disclosed the names of both the creditor and debtor the debtor's address, his phone number, his employer, as well as the efforts made to collect. The collection records on which information relating to the collection accounts was kept were never destroyed by either Smith or petitioner.

In addition to recording all pertinent information at the time an account was referred for collection, petitioner's personnel also frequently referred thereafter to the collection, petitioner's personnel also frequently referred thereafter to the collection records to determine if a particular individual had a delinquent account and if the account had been paid.

During the time Smith operated the collection business, he had no written agreements with the creditors, or owners of the claims, to provide them with collection services. They could terminate their arrangements with Smith at will.

On February 29, 1960, petitioner purchased the collection business, consisting primarily of approximately 100,000 accounts, as a going concern from Smith for the total sum of $23,000. The agreement of sale provided, in pertinent part, as follows:

The subject matter of the sale shall be Smith's entire business, including all records pertaining to said accounts, all furniture, fixtures, equipment, supplies, files, goodwill, contracts, and methods of operation.

In arriving at the total purchase price, the parties did not separately value the individual collection accounts.

Subsequent to February 29, 1960, petitioner operated the newly acquired collection business without any change in its name, without

[54 T.C. 728]

any substantial change in its operating procedure, and without notifying any of Smith's former customers that there had been a change in ownership. All of Smith's former employees...