I. LEWIS CORPORATION v. Commissioner
| Citation | 1963 TC Memo 13,22 TCM (CCH) 35 |
| Decision Date | 15 January 1963 |
| Docket Number | Docket No. 73793. |
| Parties | I. Lewis Corporation (Formerly I. Lewis Cigar Manufacturing Company) v. Commissioner. |
| Court | United States Tax Court |
Benjamin Alpert, Esq., 810 Broad St., Newark, N. J., and John E. Mahoney, Esq., for the petitioner. Henry L. Glenn, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent has determined deficiencies in petitioner's income tax for the calendar years 1952 and 1954 in the respective amounts of $266,717.65 and $236,233.67. The year 1952 is in issue only because petitioner claims a loss for 1954 which it seeks to carry back to 1952.
The issues remaining for our determination are (1) whether petitioner suffered a loss of $1,634,544.45 in 1954 because of the formal abandonment of certain trade-marks, patents and brand names, and (2) whether petitioner correctly accrued $19,500 of vacation pay on December 31, 1954.
Some of the facts have been stipulated and are so found.
Petitioner, I. Lewis Corporation, formerly known as I. Lewis Cigar Manufacturing Company, is a corporation organized on June 2, 1910, under the laws of the State of New Jersey with an authorized capital stock of $3,600,000, consisting of 10,000 shares of $100 par value preferred stock and 26,000 shares of $100 par value common stock. On July 31, 1956, petitioner's name was changed from I. Lewis Cigar Manufacturing Company to I. Lewis Corporation.
Petitioner filed its 1952, 1953, and 1954 Federal income tax returns on an accrual basis with the district director of internal revenue, Newark, New Jersey.
Israel Lewis started in the cigar business about 1870, and operated it as a sole proprietorship until its incorporation in 1910. During that period he had absorbed various other cigar manufacturers, including Allen Tobacco Company, Interboro Cigar Company, and a cigar box manufacturer. In 1906 he acquired the cigar business of Morris Jacoby and Company, and among the assets purchased were many brand names, including the names John Harper and John Ruskin. The brand "Seidenberg" was purchased by Israel Lewis in 1906 for $250. The trade-mark "Nellie Melba" or "Flor de Melba" was purchased by petitioner for $1 in 1914.
On June 2, 1910, petitioner acquired all the assets and assumed all the liabilities of the cigar manufacturing business conducted by Israel Lewis as sole proprietor, for which the petitioner, pursuant to a resolution of its board of directors, issued its capital stock for an aggregate par value of $3,200,000, consisting of 6,000 shares of preferred stock having an aggregate par value of $600,000, and 26,000 shares of common stock having an aggregate par value of $2,600,000. Shortly after incorporation, additional preferred stock was sold to outsiders at $100 per share to bring in more capital. Some purchasers of the preferred stock received shares of common stock as a bonus.
The proprietorship received preferred stock in return for its equity in the business and for $150,000 spent on advertising during the 15 months preceding March 31, 1910. Although the petitioner was incorporated on June 2, 1910, the transaction between it and Israel Lewis was deemed to have taken place at the close of business, March 31, 1910. The opening balance sheet of the petitioner and the closing balance sheet of the proprietorship were as follows:
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As per books of Values assigned by
proprietorship petitioner upon
Assets March 31, 1910 acquisition
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Real estate and buildings ..................... $ 157,660.07 $ 157,660.07
Machinery and plant ........................... 110,382.66 110,382.66
Furniture and fixtures ........................ 3,984.52 3,048.79
Investments ................................... 66,385.72 66,385.72
Accounts and bills receivable.................. 240,845.30 240,845.30
Inventories ................................... 832,200.05 832,200.05
Interest and insurance paid in advance......... 8,808.34 8,808.34
Cash .......................................... 25,671.58 25,671.58
Brands, trade-marks, patents, formulae, etc.... ........... 2,600.000.00
........... 150,000.00*
_____________ _____________
Total assets ............................... $1,445,938.24 $4,195,002.51
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Liabilities and Capital
Bills payable ................................. $ 769,392.82 $ 769,392.82
Accounts payable .............................. 152,242.00 152,242.00
Mortgages payable ............................. 69,010.00 69,010.00
Salaries and wages accrued .................... 3,986.67 3,986.67
Taxes accrued ................................. 371.02 371.02
_____________ _____________
Total liabilities .......................... $ 995,002.51 $ 995,002.51
Proprietorship ................................ 450,935.73
Preferred stock ............................... ........... 600,000.00
Common stock .................................. ........... 2,600,000.00
_____________ _____________
Total liabilities and capital............... $1,445,938.24 $4,195,002.51
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The assets so acquired by petitioner from the proprietorship and described on its books as "Brands, Trade-marks, Patents, Formulae, Etc." consisted in part of the trade-marks or trade names acquired from Morris Jacoby & Co., two patents, and the good will of the proprietorship. The entire business of Morris Jacoby & Co. had been purchased in 1906 by the I. Lewis proprietorship for $5,000.
For the purpose of the settlement of the petitioner's excess profits tax liability for the years 1942 to 1945, inclusive, the respondent and the petitioner had agreed that the value of the intangible assets of the petitioner should be considered as paid-in capital for the purpose of determining average equity invested capital. Therefore, the excess profits tax credit of the petitioner for those years was computed to be $1,725,000, in accordance with the method set forth in the revenue agent's reports. The computation of the revenue agent is set forth below:
Common stock — valuation applied to
intangible assets
Total consideration received for
common stock ..................... $2,475,000
Plus: Preferred stock issued for
specific brands .................. 150,000
__________
Total stock issued for.............. $2,625,000
Intangible assets
January 1, 1918, valuation applied 825,000
__________
Excess under 1918 valuation......... $1,800,000
Adjustment for 50% of value......... $ 900,000
Plus January 1, 1918, valuation..... 825,000
__________
Net valuation applied to intangible
assets considered as paid-in
capital .......................... $1,725,000
The above item reading "January 1, 1918, valuation applied" refers to the valuation of the petitioner's intangible assets made by the respondent in 1923 for the purpose of determining the amount of petitioner's invested capital, excess profits tax credit, and excess profits taxes for the year 1918, under section 326 of the Revenue Act of 1918 which provided, in short, that intangible property paid in for stock should be included in invested capital for excess profits tax purposes "in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding * * * at the beginning of the taxable year, whichever is lowest." No closing agreement pursuant to section 3760, 1939 Code, was ever made with respect to the value of the intangible assets of the petitioner for any purpose.
I. Lewis Cigar Manufacturing Company received two patents from Israel Lewis at incorporation. No royalties were ever received on the patents and we find that they had no value.
In ascertaining the value to be given to the intangibles transferred by the sole proprietorship to petitioner, its directors capitalized anticipated profits for a 10-year period. An audit dated May 11, 1910, prepared by Marwick, Mitchell & Co., revealed that the proprietorship had earned $107,387.36 for the 15-month period ending March 31, 1910, and $49,131.09 during the first 3 months of 1910, which earnings figures we find as facts. Based on the general pattern in the cigar industry that the first three months of a year are poor months, petitioner estimated its 1910 earnings to be $250,000 to $300,000, and based on this estimate, issued $3,200,000 of stock to I. Lewis in exchange for the business of the sole proprietorship.
As of the date of incorporation, approximately 250 of the brands transferred to petitioner by Israel Lewis had not been...
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