Medd v. Commissioner, Docket No. 4576-63-4580-63
| Decision Date | 22 October 1968 |
| Docket Number | 4582-63.,Docket No. 4576-63-4580-63 |
| Citation | 27 TCM (CCH) 1224,1968 TC Memo 244 |
| Parties | Richard L. Medd and Alberta E. Medd, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Francis B. Stine, 135 S. LaSalle St., Chicago, Ill., for the petitioners in docket Nos. 4576-63 through 4580-63. John F. Kelly and Duane P. Benson, for the petitioner in docket No. 4582-63. Donald J. Forman, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner has determined deficiencies in the income tax of the petitioners for the indicated years as follows:
Petitioners Docket No. Year Deficiency
Richard and Alberta Medd ........... 4576-63 1955 $ 5,086.48
Cecil and Mildred Medd ............. 4577-63 1955 16,434.27
Robert and Nancy Medd .............. 4578-63 1955 5,120.66
Ralph and Jean Medd ................ 4579-63 1955 5,290.48
Ronald and Roma Medd ............... 4580-63 1955 5,216.48
Lark Sales Company ................. 4582-63 1955 109,791.04
1956 93,635.42
1957 69,875.71
1958 52,118.70
As a result of concessions by the parties, the issues presented for determination are as follows:
In the cases of petitioners Medd, docket Nos. 4576-63 through 4580-63
(1) Whether the gain realized in 1955 by Ohio Dairy Queen, a partnership, sometimes hereinafter referred to as the Medd Partnership, from the sale of its Dairy Queen businesses and properties in Ohio and Eastern New York to Lark Sales Company constituted capital gain or ordinary income, and (2) whether a deduction of $39,503.83 taken by Medd Partnership in its partnership return of income for 1955 for legal expenses constituted an obligation of Lark Sales Company and therefore was not deductible as a business expense by the partnership.
In the case of Lark Sales Company, docket No. 4582-63
(1) Whether Lark's taxable income for 1955 should be increased by an amount of $150,000 as representing the purchase price of the Medd Partnership's Ohio and Eastern New York Dairy Queen businesses and properties which was written off by Lark on its books and used by it in its income tax return for 1955 to reduce its taxable income for that year, and (2) whether a deduction of $39,503.83 taken by Lark for 1955 for legal fees constituted a capital expenditure incurred by it in its acquisition of the Medd Partnership's Dairy Queen businesses and properties in Ohio and Eastern New York.
Additional Issues in the case of Lark Sales Company, docket No. 4582-63
(3) Whether during 1956, 1957, and 1958, the petitioner was the owner of the property interest of "2¢ East" and thereby realized taxable income from Dairy Queen royalties in the amounts of $53,795.04, $62,079.19, and $44,938.09 during the respective years, (4) whether the petitioner purchased the property interests of the Medd Partnership in 1955 in Ohio and Eastern New York and thereby realized income from Dairy Queen royalties and other receipts from those areas in the amounts of $56,597.69, $45,787.99, and $46,342.76 during 1956, 1957, and 1958, respectively, (5) whether income accruals by petitioner for expense charges to Ar-Tik Systems, Incorporated, during 1955, 1956, 1957, and 1958 in the amounts of $93,053.35, $53,568.20, $27,140.73, and $12,279.19, respectively, and reported by petitioner as sales for such years, should be eliminated from the income reported by petitioner in its income tax returns for those years, (6) whether the petitioner was entitled to deduct as ordinary and necessary business expenses for 1956, 1957, and 1958 the amounts of $59,913.50, $29,408.25, and $13,570.50, respectively, which were accrued by petitioner as payable to L. S. Murchie & Company as accounting fees, (7) whether petitioner is entitled to a reduction of its income for 1955 of $8,538.95, representing a portion of an amount of $17,077.91 (so-called Grafton expenditures), deducted by petitioner as part of its cost of goods sold, and which was disallowed by respondent, (8) whether petitioner is entitled to a deduction from its income for 1955 of $4,155.35, representing expenditures, hereinafter referred to as the Rockford expenditures, which the petitioner in its income tax return deducted as cost of goods sold and which respondent disallowed, and (9) whether petitioner sustained a net operating loss in 1958 of $186,906.43 which was available for being carried back and allowed as a net operating loss deduction in 1955, 1956, and 1957.
In the cases of petitioners Medd and in the case of Lark Sales Company
Some of the facts have been stipulated and are found accordingly.
Petitioners Cecil R. Medd and Mildred I. Medd are husband and wife and the parents of four sons, namely, Richard L. Medd, Robert R. Medd, Ralph C. Meed, and Ronald A. Medd. Cecil R. and Mildred I. Medd filed their Federal joint income tax return for 1955 with the district director in Chicago, Illinois.
Petitioners Richard L. Medd and Alberta E. Medd are husband and wife. They filed their Federal joint income tax return for 1955 with the district director in Chicago, Illinois. Alberta is a petitioner in this case only by reason of her signing the joint income tax return.
Petitioners Robert and Nancy Medd are husband and wife. They filed their Federal joint income tax return for 1955 with the district director in Chicago, Illinois. Nancy is a petitioner in this case only by reason of her signing the joint income tax return.
Petitioners Ralph and Jean Medd are husband and wife. They filed their Federal joint income tax returns for 1955 with the district director in Chicago, Illinois. Jean is a petitioner in this case only by reason of her signing the joint income tax return.
Petitioners Ronald and Roma Medd are husband and wife. They filed their Federal joint income tax return for 1955 with the district director in Chicago, Illinois. Roma is a petitioner in this case only by reason of her signing the joint income tax return.
At all times here material, Ohio Dairy Queen (sometimes known as Cecil R. or C. R. Medd and Sons) was a partnership, and sometimes hereinafter is referred to as the Medd Partnership. The members of the partnership were Cecil R. Medd, Mildred I. Medd, Richard L. Medd, Robert R. Medd, Ralph C. Medd, and Ronald A. Medd. The partnership through predecessors in interest was formed in 1946. It reported its income on the basis of a calendar year and filed its Federal partnership return of income for 1955 with the district director in Chicago, Illinois.
Tasty Bakery, Inc., an Illinois corporation, was organized on or about December 28, 1945. On or about January 20, 1950, the corporate name was changed to Lark Sales Company, which sometimes hereinafter is referred to as Lark.
At all times material herein, the principal office of a Dairy Queen business conducted by Lark was in the Moline National Bank Building, Moline, Illinois.
Lark filed its Federal income tax returns for 1955 on the calendar year basis with the district director in Chicago, Illinois.
Leland S. Murchie, sometimes hereinafter referred to as L. S. Murchie or as Murchie, has been a certified public accountant since 1934. He is certified to practice in the State of Illinois. At all times here material, Murchie operated his accounting business in Illinois under the name of L. S. Murchie & Company. Prior to opening his own firm, he was associated with a nationally known firm of certified public accountants for 16 years. In 1938, Murchie was admitted to practice before the Tax Court of the United States and presently is authorized to practice before it. Murchie prepared the Federal income tax returns of the Medds for the years 1949 through 1954 and from time to time during those years advised them as to their business and financial affairs. He also collaborated in the preparation of a partnership agreement for the Medds who placed trust and confidence in him.
Murchie acquired all of the issued and outstanding common stock of Lark, consisting of 64 shares, which were issued to him on January 2, 1952. At all times here material, he was the sole owner of all of the issued and outstanding shares of common stock of Lark.
McCulloughs Dairy Queen, Inc., an Illinois corporation, was organized on or about April 1, 1954. All of its issued and outstanding common stock, consisting of 100 shares, was issued to Murchie on April 2, 1954, who paid $1,000 therefor. McCulloughs Dairy Queen, Inc., was organized solely for the purpose of holding title to the trademark "Dairy Queen." It was never intended that it engage in other operations.
On or about May 18, 1937, Harry M. Oltz became the owner of United States patent No. 2080971, sometimes hereinafter referred to as the Oltz patent, on a machine, sometimes hereinafter referred to as a freezer, designed to produce a soft frozen product from milk with sweetener, stabilizer, and flavor added, which product has become known as soft ice cream or ice milk. The Oltz patent expired May 18, 1954.
On or about July 31, 1939, Oltz entered into an agreement, sometimes hereinafter referred to as the Western Agreement, with H. A. McCullough pursuant to which, among other things, the latter acquired the exclusive license to use, manufacture, and sell the above-mentioned freezer in the following States: Minnesota, Wisconsin, Illinois, Missouri, Iowa, Arkansas, Louisiana, Texas, Oklahoma, Kansas, Nebraska, North Dakota, South Dakota, Montana, Wyoming, Colorado, New Mexico, Arizona, Utah, Idaho, Washington, Oregon, Nevada, and California. In 1939, McCullough originated the name "Dairy Queen" and thereafter used the name as a trade name in connection with the retail sale in the aforementioned States by him or by others licensed...
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