Schilling Grain Co. v. Commissioner of Internal Revenue, Docket No. 5939.

• Decision Date: 29 October 1927
• Docket Number: Docket No. 5939.
• Citation: 8 BTA 1048
• Parties: SCHILLING GRAIN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

8 B.T.A. 1048 (1927)

SCHILLING GRAIN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 5939.

Board of Tax Appeals.

Promulgated October 29, 1927.

Samuel A. Dew, Esq., for the petitioner.

John D. Foley, Esq., for the respondent.

This is a proceeding for the redetermination of a deficiency of $4,380.47 for 1920. The deficiency results from the respondent's refusal to include an amount of $10,560.60 as the value of good will on March 1, 1913, in determining the profit on the sale by the petitioner of its business and assets.

At the hearing the respondent amended his answer so as to allege that a deduction of $4,500 taken by the petitioner as a commission had been erroneously allowed in the determination of the deficiency.

FINDINGS OF FACT.

The petitioner is a Missouri corporation organized in 1905 with its principal office at Kansas City.

In 1886, C. H. Schilling opened a feed and seed business in the "West Bottoms" section of Kansas City, Mo. Schilling bought feed and grain and sold it to transfer companies, livery stables, retail feed stores, dairies and similar businesses in wagon-load lots or less. Solicitors were employed to obtain orders. About 1890 state regulations made it advisable to acquire a warehouse and a weighing machine, both of which were acquired.

About 1889, Schilling took his son, H. J. Schilling, into the business, which thereafter operated under the name of C. H. Schilling & Son. The general nature of the business remained the same. In 1898, the elder Schilling died and the business was conducted by the son.

In 1905, the business was incorporated under the name of the petitioner. The company acquired title to a part of the real estate where its warehouse was located and leased a part of the real estate. The equipment owned and used by the company in the operation of its business consisted of horses, mules, wagons, buggies, machinery for grinding feed, a shop, elevators, and various other kinds of machinery of similar character. The company continued to conduct a local grain and seed business, supplying the class of trade it had theretofore served. Sales were made in amounts ranging from 10 cents upward to the company's customers, who ran into the hundreds and were located principally in Jackson and Clay Counties, Missouri and Wyandotte County, Kansas. Jackson County includes Kansas City, Mo., a number of small towns, an area of good farming country and towns to the north, while Wyandotte County includes Kansas City, Kans., and farming country and towns west and north. Practically all deliveries could be made by truck or wagon and were within a radius of from 10 to 20 miles of Kansas City. Shipments by rail were infrequent and of little importance, since this class of business was not solicited. H. J. Schilling personally had membership on the board of trade at Kansas City, Mo., through which he made purchases for the Schilling Grain Co. as its needs required. Under the rules of the board of trade such membership had to be held individually and could not be transferred to a corporation or a partnership.

Early in 1920 the petitioner through H. J. Schilling, its president, entered into negotiations for the sale of its business and certain of its property. These negotiations resulted in the execution on April 20, 1920, of an agreement whereby C. C. McConnel and V. R. Miller were given an option for 30 days to purchase certain property of the company. The option was exercised and as a result the following agreement was entered into:

THIS AGREEMENT, made and entered into this 19th day of May, 1920, by and between HENRY J. SCHILLING and SCHILLING GRAIN COMPANY, a corporation, parties of the first part, and V. R. MILLER and CHARLES C. McCONNEL, parties of the second part, WITNESSETH:

For and in consideration of the sum of Thirty Thousand ($30,000.00) Dollars, payable as follows: Five Thousand ($5,000.00) Dollars on June 1st, 1920; Ten Thousand ($10,000.00) Dollars on the first day of October 1920; Ten Thousand ($10,000.00) Dollars on the first day of October, 1921, and Five Thousand ($5,000.00) Dollars on the first day of October, 1922, the parties of the first part agree to sell, transfer and deliver to the parties of the second part on October 1st, 1920, the following described property, real, personal and mixed, being situated in the County of Wyandotte, State of Kansas, to-wit:

Forty-eight (48) feet of ground and all buildings thereon, legally known and described as Lots Fifty-Two (52) and Fifty-four (54), in Ewing Street Addition in and to Kansas City, Kansas; also the lease now held by the parties of the first part on the ground and building known as No. 29 to 35 Ewing Street, Kansas City, Kansas; all of the machinery, mill and elevator equipment, spouts, furniture, fixtures and office equipment, platform and wagon scales, one Ford Motor Car, all teams and wagons, harness and delivery equipment in and about aforesaid buildings belonging to the Schilling Grain Company, a corporation organized and existing under the laws of the State of Missouri, together with the good will of the business of the Schilling Grain Company aforesaid (it being understood, however, that this does not carry with it to the parties of the second part the right to operate under the name of Schilling Grain Company); all of the machinery, tools and equipment aforesaid to be delivered to the parties of the second part in first class working condition. All of the property above set out, which is not conveyed by deed or assignment of lease to be set out in an inventory hereto attached and made a part thereof.

It is further agreed by and between the parties hereto that should any damage result to the property above set out by reason of fire, flood, storm, riot, act of God or the public enemy, which would materially impair or interrupt the business to any great extent between the signing of this contract and the first day of October, 1920, then this contract and the obligation on the part of the parties of the second part shall cease and determine. Should damage result from any cause to the machinery, horses, wagons, automobiles, or other equipment, which would not necessitate an interruption of the business, then adjustment shall be made by and between the parties hereto based upon the inventory hereto attached.

Parties of the first part hereby agree to employ W. R. Miller, one of the parties of the second part, from and after the first day of July to the 30th day of September, 1920, at a salary of Two Hundred Dollars per month, and agree to familiarize him in every respect with the business of the Schilling Grain Company, and acquaint him as far as possible with all of its customers.

Parties of the first part agree that in the event that this contract becomes terminated by reason of any of the provisions hereof before October 1st, 1920, and the delivery of said property together with proper conveyance and transfer thereof to the parties of the second part, then the Five Thousand ($5,000.00) to be paid by the parties of the second part to the parties of the first part on June 1st, 1920, shall be refunded and repaid to the said parties of the second part.

The parties of the first part agree that they will not enter into the wholesale or retail feed and seed business within the confine of the limits of Jackson and Clay Counties, Missouri, and Wyandotte County, Kansas, for a period of two years from the date of the transfer of said property to the parties of the second part. Nothing herein contained, however, shall be construed to prevent said first parties or either of them from operating on the Board of Trade of Kansas City, Missouri and from conducting the usual Board of Trade business, or from entering the hay business.

Parties of the first part agree that they or each of them will not employ any of the present employees of the Schilling Grain Company within a period of six months from October 1st, 1920, without the written consent of the parties of the second part.

It is agreed by parties of the first part that if for any reason the owners of the building and ground now occupied by the Schilling Grain Company at 35 Ewing Street, Kansas City, Kansas, will not consent to an assignment of the present lease, then this contract shall become null and void.

It is also agreed by parties of the first part that the business of Schilling Grain Company between June 1st and October 1st, 1920, shall continue in the usual course and manner, with a view of increasing and building up the business as much as can reasonably be done, and that good faith and proper measures and methods shall be followed by the parties of the first part to keep the business and good will of the present customers of the Schilling Grain Company pending the consummation of the transfer of said property and business.

It is agreed that if any additional machinery, furniture, fixtures, horses, wagons, or equipment of any kind is purchased by the Schilling Grain Company between April 30th and October 1st, 1920, then parties of the second part agree to take the same over at market value October 1st, 1920, or the parties of the first part will keep same as later agreed upon, it being understood that the present equipment, machinery, etc., shall be kept in a good state of repair by the parties of the first part up to October 1st, 1920.

It is further agreed that upon the delivery of possession of the property herein mentioned to the parties of the second part, together with proper instruments of conveyance and transfer, then said parties of the second part will execute and deliver to the Schilling Grain Company their mortgage on the real property and chattel mortgage on the personal property to secure their promissory notes for the unpaid portion of said purchase price, which notes shall bear interest at the rate of six per cent per annum from date of October 1st, 1920, and shall be negotiable in form.

The restraint on...