Ohio Clover Leaf Dairy Co. v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 6778

• Decision Date: 05 November 1927
• Docket Number: 13029.,Docket No. 6778
• Citation: 8 BTA 1249
• Parties: OHIO CLOVER LEAF DAIRY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

8 B.T.A. 1249 (1927)

OHIO CLOVER LEAF DAIRY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 6778, 13029.

Board of Tax Appeals.

Promulgated November 5, 1927.

Thomas O. Marlar, Esq., Harry J. Gerrity, Esq., and L. T. Konopak, C. P. A., for the petitioner.

M. E. McDowell, Esq., for the respondent.

These proceedings involve deficiencies in income tax of $10,040.82, $34,519.14, and $12,906.10 for 1919, 1920, and 1921, respectively. The controversy arises from the respondent's action in disallowing depreciation on and loss on the sale of property leased under the circumstances hereinafter set forth, and in disallowing depreciation on and loss on the sale of certain other property not under lease.

The parties have stipulated all the facts.

FINDINGS OF FACT.

The petitioner is an Ohio corporation, with its principal place of business in Toledo, engaged in and operating a dairy business. It was incorporated February 14, 1919, with an authorized capital stock of $10,000. The entire issue of stock was subscribed for by the Ohio Dairy Co. and the Clover Leaf Dairy Co., and cash was paid therefor by them in the amounts of $6,500 and $3,500, respectively. The books of the petitioner are and have been during all the times here in question kept upon an accrual basis, and its return of income and profits tax liability for the taxable period ended December 31, 1919, was made upon such basis.

On or about February 15, 1919, the petitioner became the lessee for a period of 20 years of the plant and equipment of both the Ohio Dairy Co. and the Clover Leaf Dairy Co., both corporations located in the city of Toledo, Ohio, and engaged in the business of collection, pasteurization and distribution of milk and dairy products.

The provisions of the lease pertinent to this inquiry are as follows:

THIS INDENTURE made and entered into this 15th day of February, 1919, by and between The Ohio Dairy Company, hereinafter called "Ohio Company," The Clover Leaf Dairy Company, hereinafter called "Clover Leaf Company," (said companies hereinafter called collectively "Old Companies") and The Ohio-Clover Leaf Dairy Company, hereinafter called "Operating Company";

WITNESSES:

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1. The Ohio Company and The Clover Leaf Company respectively lease to the Operating Company the property, routes, business, good will and facilities described in the annexed schedule from the 15th day of February, 1919, to the 15th day of February, 1939, upon the rentals, considerations, terms, covenants, options, provisions and conditions herein set forth.

Each of the Old Companies for itself agrees that it will not engage in the business of buying, selling or delivering milk in the City of Toledo, Lucas County, Ohio, during such period of time as this agreement is in full force and effect, or during such period of time as the Operating Company, its successors or assigns, are engaged in the business of buying, selling or delivering milk in the City of Toledo, Ohio, if the Operating Company shall acquire title to the properties hereby leased in accordance with the terms of Paragraph Sixteen (16) herein.

The Operating Company shall not have the right to use the trade name "Daisy Brand" or the name "The Ohio Dairy Company" in the manufacture, sale or delivery of ice cream.

2. The Operating Company shall take over said leased property and continue the business of supplying milk and milk products in and about the City of Toledo, and supply all customers of the Old Companies and others, using for that purpose such of the employees of the Old Companies as are best fitted for the work, and making such changes in routes and other operating methods as may be best calculated to effect the economies desired.

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4. The Operating Company shall use every effort to maintain the property and business turned over and leased to it hereunder so that on the termination of this agreement the business and property of the Old Companies, or its fair equivalent, can be returned to said Old Companies in good operating condition, but on the termination of this agreement the Operating Company shall be under no obligation to return to either of the Old Companies the identical customers, sources of supplies, business or property received from such company, but it shall be at liberty to return the full equivalent of such property, customers, sources of supply and business observing in the division of the property and business upon the termination of this agreement the percentages herein used for the payment of rentals to the Old Companies, and having due regard to future operations and giving such company sufficient property and equipment to carry on its business.

5. All horses, wagons, cans, bottles and other equipment turned over to the Operating Company shall be kept in first class order and condition at all times, and the Operating Company shall at all times have on hand at least as much physical property as was turned over to it, and at least as many customers and routes as were turned over to it, and the Operating Company shall make all repairs and renewals necessary to maintain said property in said condition.

6. The Operating Company shall keep and maintain a depreciation fund sufficient in amount to keep all said property in the state, quantity and condition aforesaid, and to replace the same when worn out or obsolete, and it shall also keep and maintain at all times a contingent fund out of which bad debts, damage claims or other losses can be paid or off-set.

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8. The Operating Company shall insure all property usually insured by Dairy Companies against loss or damage by fire or other casualty, free of expense to either of the Old Companies, and in the event of loss or damage the insurance money collected shall be used to repair or replace the property damaged or destroyed.

No damage to or destruction of the property herein described shall operate to terminate this agreement or abate the rentals hereunder or any part thereof.

9. The Operating Company may at any time during the term of this indenture sell, lease, exchange or dispose of any items or part of the property or business hereinafter described no longer used or useful in the conduct of the business. Any such lease of real estate, buildings or equipment shall be subject to termination on reasonable notice so that the Operating Company can restore such property to the owner in case of the termination of this agreement. It shall keep a strict account of the property thus disposed of and of the proceeds or property received in payment or exchange therefor, so that at the end of the term of this indenture the property acquired from each of the Old Companies, or its full equivalent, shall be returned. The entire property or business shall not be sold, exchange sic or disposed of, but shall be kept intact as a going concern.

10. The Old Companies and each of them shall on request execute, acknowledge and deliver such instruments or papers as may be required by the Operating Company to completely carry out and perform the terms of this indenture, or to complete any sale, lease, exchange or other disposition of the property made by the Operating Company.

11. The Operating Company shall observe and comply with all the laws and ordinances applicable to the business so that the value of said business shall not be impaired.

12. The business of the Operating Company shall be conducted under a system of accounting to be approved by the Presidents of the Old Companies, so that proper records of the properties and operations shall be kept, and so that there can be a correct ascertainment of the profits or losses.

If during the term of this indenture a controversy shall arise between any of the parties as to any matters of accounting or any entries made or proposed to be made on the books of the Operating Company, and the parties shall be unable to agree, the matter in controversy shall be referred to Robert McIntosh & Company, Ernst & Ernst, or Price, Waterhouse & Company, whichever the President of the Operating Company may select, and the decision of the firm of accountants thus selected shall be final and binding upon all parties.

As rental for the use of the leased property, the Operating Company shall pay to the Ohio Company an amount equal to 55.25% of its net earnings, but in any event not less than $650.00 per month, and it shall pay to the Clover Leaf Company an amount equal to 29.75% of its earnings, but in any event not less than $350.00 per month.

Said rentals in excess of the stipulated monthly rentals shall be paid annually on the 15th day of the second month following the close of the year, except as hereinafter provided.

Said rental shall be treated on the books of the Operating Company as an expense of operation and as if a fixed amount of money had been stipulated as rent. Each month the Operating Company shall set up on its books in a rental account an amount equal to 85% of its net profits for the month, and said amount shall be credited to the Old Companies and the stipulated minimum rental shall be paid monthly subject however, to the proper and necessary...