Smoak v. Commissioner of Internal Revenue, Docket No. 100036.

• Decision Date: 13 March 1941
• Docket Number: Docket No. 100036.
• Citation: 43 BTA 907
• Parties: ELLIOTT B. SMOAK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

43 B.T.A. 907 (1941)

ELLIOTT B. SMOAK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 100036.

Board of Tax Appeals.

Promulgated March 13, 1941.

Frank B. Murdoch, Esq., for the petitioner.

Bernard D. Daniels, Esq., for the respondent.

The respondent determined deficiencies in income tax for the years 1936 and 1937 of $1,759.78 and $45.60, respectively. The petitioner alleges that the respondent erred in treating the gains from the sale of an agency contract as ordinary income rather than as capital gains under section 117 (a) of the Revenue Act of 1936.

FINDINGS OF FACT.

The petitioner is a resident of Philadelphia, Pennsylvania. He made his income tax returns for 1936 and 1937 to the collector at Philadelphia.

For a number of years prior to 1936 the petitioner had been engaged in the production and distribution phases of the dairy industry. He had pioneered in the packaging of milk in paper containers and had successfully distributed milk in such containers in the Philadelphia area under the title of "Sylvan Seal."

About the beginning of 1936 the petitioner negotiated with the American Paper Bottle Co., of Toledo, Ohio, for the agency of that company for the leasing and licensing of machines to package milk in paper containers. He entered into an oral agreement with the company to act as its agent for such machines in the territory of the United States east of the Rocky Mountains, effective February 26, 1934. The contract was reduced to writing under date of August 1, 1934. Under this contract the petitioner agreed to set up a sales organization for the leasing or licensing of the machines to dairy companies throughout his territory, and to undertake the installation and minor maintenance of such machines.

Under this contract the petitioner was to receive a portion of the royalties paid by the lessees or licensees in his territory.

Pursuant to this contract the petitioner, at his own expense, set up an office, established a sales and service organization, instituted an extensive advertising campaign, and proceeded to negotiate for the rental, installation, and minor maintenance of the machines. He expended a considerable amount of his own money in establishing such agency, estimated by him at from $25,000 to $26,000.

On March 23, 1935, the American Paper Bottle Co. pooled its rights with the Ex-Cell-O Aircraft & Tool Corporation. The Ex-Cell-O Aircraft & Tool Corporation decided to market, service, and repair the machines through its own established agencies and negotiated with the petitioner for the acquisition of all of his interests in the agency contract which he held with the American Paper Bottle Co. Such an agreement was entered into on April 23, 1936, and reads in material part as follows:

AGREEMENT, made this 23rd day of April, A. D., 1936, between ELLIOTT B. SMOAK, of Philadelphia Pennsylvania (hereinafter called Smoak), and EX-CELL-O AIRCRAFT AND TOOL CORPORATION, a corporation, of Detroit, Michigan, (hereinafter called Ex-Cell-O).

WHEREAS, Smoak on February 26, 1934 entered into a contract with the American Paper Bottle Company, a corporation of Toledo, Ohio, (hereinafter called Bottle Company), which was reduced to writing and executed on August 1, 1934, whereby Smoak was granted a certain exclusive sales agency, together with certain rights, royalties and other compensation; and

* * * * * * *

WHEREAS, Ex-Cell-O wishes to purchase all of the right, title and interest of Smoak in the foregoing agreement and to acquire the sales agency therein provided for; and

WHEREAS, Smoak has agreed to sell and relinquish all of his right, title and interest in and to said contract and the sales agency provided for therein for the sum of Twenty-six thousand Dollars ($26,000) cash and the sum of Nineteen thousand two hundred Dollars ($19,200.) payable Two hundred Dollars ($200.00) monthly for eight years commencing May 15, 1936;

NOW, THEREFORE, IT IS AGREED between Ex-Cell-O and Smoak as follows:

Smoak, in consideration of the sum of Twenty-six thousand Dollars ($26,000.) cash to him in hand paid, receipt whereof is hereby confessed and acknowledged, and in consideration of the further sum of Nineteen thousand two hundred Dollars ($19,200) to be paid in installments of Two hundred Dollars ($200.00) each month commencing May 15, 1936, does hereby sell, transfer and set over unto Ex-Cell-O all the right, title, interest, royalties, benefits and advantages to be derived by Smoak under and by virtue of the aforesaid contract of February 26, 1934; and he does hereby relinquish any and all rights conferred upon him thereby, or by any subsequent assignment thereof; and does hereby release both Bottle Company and Ex-Cell-O from any and all obligations thereunder or which flow either directly or indirectly therefrom.

Smoak also assigns, transfers and sells to Ex-Cell-O all of his files pertaining to the sale of Pure-Pak-Paper Bottle Machinery.

Under the above sales agreement the petitioner received from Ex-Cell-O Aircraft & Tool Corporation $27,600 in 1936 and $2,400 in 1937 which, in his returns for those years, he reported as capital gains taxable under section 117 (a) of the Revenue Act of 1936 to the extent of 60 percent thereof. The respondent has determined that the amounts of such gains are taxable to the petitioner in toto as ordinary income.

OPINION.

SMITH:

In his deficiency notice in this proceeding the respondent states:

(a) You have treated as capital gains to the extent limited by Section 117 (a) of the Revenue Act of 1936, the payments made to you in 1936 and 1937 by the Ex-Cell-O Aircraft and Tool Corporation, successors to the American Paper Bottle Company, and included in net income 60 percent of the amount...