Fox & Hounds, Inc. v. Commissioner of Internal Revenue, 092762 FEDTAX, 77775

Docket Nº:77775.
Opinion Judge:TURNER, Judge:
Party Name:FOX & HOUNDS, INC., a corporation, petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Attorney:Bruce I. Hockman, Esq., and Abram Salkin, Esq., for the petitioner. Walter S. Weiss, Esq., and Paul G. Wilson, Esq., for the respondent.
Case Date:September 27, 1962
Court:United States Tax Court

21 T.C.M. (CCH) 1216 (1962)

T.C. Memo. 1962-229

FOX & HOUNDS, INC., a corporation, petitioner,



No. 77775.

United States Tax Court.

September 27, 1962

Bruce I. Hockman, Esq., and Abram Salkin, Esq., for the petitioner.

Walter S. Weiss, Esq., and Paul G. Wilson, Esq., for the respondent.


TURNER, Judge:

The respondent determined a deficiency in income tax against the petitioner of $12,716.61 for the year ended June 30, 1955. The issues are (1) whether petitioner claimed excessive depreciation in the amount of $35,480.49, or in any sum, on depreciable assets acquired in the acquisition of a going restaurant business, and (2) whether petitioner is entitled to deduct $2,000 for the amortization of an agreement not to compete. In each issue there is the question whether good will was one of the assets acquired in the purchase of the restaurant business and its assets.


Some of the facts have been stipulated and are found as stipulated.

Petitioner is a California corporation organized in July 1954, with its principal place of business at 2900 Wilshire Boulevard, Santa Monica, California, where it operates a restaurant known as the Fox and Hounds. It filed its income tax return for the taxable year with the district director of internal revenue at Los Angeles, California.

In or about 1947, Harold and Elsie Gelber, husband and wife, opened the Fox and Hounds Restaurant at the above location. The restaurant was owned by the Fox and Hounds Restaurant Company, a California corporation, referred to sometimes herein as Restaurant Company. The Gelbers owned all of the outstanding stock of Restaurant Company. The land and building where the restaurant was located was owned directly by the Gelbers.

From its opening to its sale in 1954, the Fox and Hounds Restaurant grew steadily in patronage and reputation. It had an excellent regular following and catered largely to people in the upper income strate. Harold and Elsie Gelber devoted all their time and attention to the restaurant's business and were responsible for its operation. About one-third of the restaurant's business was from charge account customers.

Under the Gelbers, the name ‘ Fox and Hounds' received favorable national publicity upon being mentioned by such newspaper columnists as Walter Winchell, Hedda Hopper, and Jimmy Starr. The restaurant obtained further publicity nationally when it received a write-up in Holiday magazine and on the occasion of a coast-to-coast telecast in or about July 1954, when it was presented with the Holiday award for excellent of food particularly, and also of service and atmosphere.[1]

In or about August 1952, the Gelbers entered into negotiations with Boyd J. and Emmett O'Donnell for the purchase by the latter of the land and building where the restaurant was located, and for the purchase of the restaurant as an operating business. The parties arrived at a satisfactory selling price of $300,000 for the land and building and a like amount for the restaurant business, but as a condition, the Gelbers requested the O'Donnells to purchase insurance policies on their lives to protect the Gelbers against loss until the purchase price was paid. Upon the O'Donnells' refusal, negotiations ceased.

The O'Donnells wanted to buy the assets of the Restaurant Company, but were uninterested in the corporation. As composing the restaurant assets, the negotiations were directed to the equipment and fixtures; a lot on an adjoining street, with a storage building on it; a liquor license; food and liquor inventory; accounts receivable of about $30,000; and good will. The O'Donnells estimated the value of the good will as the excess of the $300,000 purchase price over the value of the other assets. The O'Donnells had in mind the continued operation of the restaurant as the ‘ Fox and Hounds,‘ and in arriving at the purchase price were agreeable to the inclusion of good will at $90,000 to $100,000.

Prior to December 9, 1952, Harold Gelber also conducted negotiations for the sale of the restaurant with Sheldon MacHenry, another local restaurateur. MacHenry was not interested in continuing the operation of the restaurant as the ‘ Fox and Hounds,‘ but intended to change the name of the operation to ‘ MacHenry's.’ His offer was much less than the Gelbers were willing to sell for, and was rejected.

Fred Schmid is a professional consultant in the field of planning, designing and engineering food facilities of all kinds. He manages the firm of Fred Schmid Associates, of Los Angeles, the operations of which are not limited to the Los Angeles area.

Prior to December 9, 1952, Schmid heard about Gelber's negotiations with MacHenry. Schmid contacted Gelber and told him there was a restaurant operator in Chicago who might be interested in buying the restaurant. Gelber furnished Schmid with detailed information about the operation of the restaurant and the properties for sale. Gelber personally conducted Schmid through the restaurant and showed him the furnishings, fixtures, facilities and equipment.

By letter dated December 9, 1952, Schmid informed David Breitbart, a Chicago restaurateur, that the Fox and Hounds Restaurant was for sale; that the owners of the business also owned the land and building where the business was conducted; and that the land and building, worth approximately $300,000, could also be purchased. Schmid advised Breitbart, who had been in the restaurant business for 30 years, that the restaurant operation was good, was about six years old, a combination liquor and food operation, with food accounting for 75 percent of the $800,000 volume in 1952, and that the restaurant had a total seating capacity of 293, with 150 seats in the main dining room, 75 seats in an adjoining private dining room, 50 seats in a cocktail lounge, and 18 seats in a bar. Schmid also advised Breitbart as follows:

The owners want to sell the assets consisting of cash*, accounts receivable*, fixtures and equipment* (*worth approximately $325,000); on and off sale liquor licenses; one piece of property for customer parking approximately 100 190 (paid $47,000.00); inventory (over $50,000.00). They want $350,000 for the above.

The letter further advised Breitbart that Schmid ‘ never imagined the place was for sale because it does nothing but business and makes nothing but money.’ Schmid showed the letter to Gelber before he sent it to Breitbart. He had known Brietbart for many years.

Upon receiving Schmid's letter, Breitbart telephoned his attorney in Los Angeles, Louis A. Chase, and instructed him to contact Schmid and to negotiate for the purchase of the restaurant and the land and building. Chase and Breitbart had been friends for many years, and Chase as an attorney had participated in the purchase and sale of restaurants in Chicago. The negotiations with the Gelbers and their attorneys, Paul Gordon and Leonard Weinberg, extended over a period of about 18 months. During such period Chase met with the Gelbers, Gordon, and Weinberg 25 or 30 times to discuss different phases of the transaction. Breitbart attended a few of these conferences when in Los Angeles, and was otherwise kept informed about the progress of negotiations through telephone calls and conferences with Chase. During the course of the negotiations Breitbart and Schmid discussed various phases of the transaction with Chase separately and with each other.

Throughout the negotiation the Gelbers were determined that the sale should be that of their corporate stock, not a sale of the corporate assets.

During the period of negotiations, Breitbart made six trips to Los Angeles. On each trip he visited the Fox and Hounds Restaurant at least twice and personally examined and inspected its facilities. As a result thereof, he was personally acquainted with the physical layout and the type of restaurant operation being conducted at the Fox and Hounds, and that such operation was profitable. He was also aware of the extent and the condition of the restaurant's furnishings, fixtures, inventories and other assets.

Prior to May 1954, Chase had inspected the books and records of the Restaurant Company and was familiar with the values shown by the books for the assets, including that of the real property owned by Restaurant Company.

The sales agreement was prepared by Gordon and Chase. In the course of this work, Chase brought up the matter of an agreement from the Gelbers not to compete within a radius of 20 miles from 2900 Wilshire Boulevard and suggested $16,000 of the amount to be paid for the stock as the amount to be allocated thereto. Gelber, upon being advised of the matter, suggested that the radius be fixed at 5 miles, but accepted a radius of 15 miles, and the covenant provision in the sales agreement was written accordingly.

On May 13, 1954, the Gelbers and the Breitbarts consummated their purchase and sale transaction in the escrow department of the Bank of California. The Gelbers, Gordon, Breitbart, Chase, and the trust officer of the bank were present at this time. The Gelbers and Breitbart executed the sales agreement, and made the Bank of California holder of the escrow deposit.

By the terms of the agreement, Harold and Elsie Gelber, as sellers, sold to David Breitbart and his wife, as buyers, all of the outstanding shares of the capital stock of Fox and Hounds Restaurant Company, consisting of 5,000 shares, with a par value of $1 per share. In addition, the Gelbers sold to the Breitbarts the land and building where the restaurant was located. The purchase price of the stock was $300,000 and the purchase price of the land and building...

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