Strauss v. United States, Civ. A. No. 7529.
| Decision Date | 12 December 1961 |
| Docket Number | Civ. A. No. 7529. |
| Citation | 199 F. Supp. 845 |
| Parties | Clifford M. STRAUSS, Liquidator of F. Strauss & Son, Inc., of Shreveport, in Liquidation v. UNITED STATES of America. |
| Court | U.S. District Court — Western District of Louisiana |
B. Roy Liuzza, Hudson, Potts & Bernstein, Monroe, La., for plaintiff.
T. Fitzhugh Wilson, U. S. Atty., Shreveport, La., for the Government.
This is an action to recover certain tax benefits which would have accrued to plaintiff had the Internal Revenue Service not disallowed deductions claimed by plaintiff.
The facts are not in substantial dispute: For many years prior to 1946, what the parties have referred to as the Schuster partnership operated a wholesale liquor business in Shreveport, Louisiana. The partners were Sam Schuster, Dave Schuster, and Harold Lazarus. In December, 1945, a partnership, known as the Strauss partnership, was formed by Harold Lazarus, Irvin M. Shlenker, Herman Masur, Fred Strauss, and Clifford M. Strauss. The interests of the partners were as follows:
Harold Lazarus 1/3 Irvin M. Shlenker 1/6 Herman Masur 1/6 Fred Strauss 1/6 Clifford M. Strauss 1/6
On January 2, 1946, the Strauss partnership purchased the Schuster partnership as a going concern, paying the sum of $147,903.73 for the physical assets of the business, and the sum of $37,500 for "good will." On March 1, 1946, the Strauss partnership was incorporated under the laws of Louisiana and designated F. Strauss & Son, Incorporated. The assets of the Schuster partnership were transferred in toto to the newly formed corporation in exchange for the stock in that corporation. At the time of liquidation of F. Strauss & Son, Incorporated, approximately seven years later, the ownership and relationship between the shareholders were as follows:
Stockholder Shares Per Cent Relationship
Harold Lazarus
(Lessor) 990 29.11+
Clifford M. Strauss
(Lessor) 825 24.26+
Irvin M. Shlenker
(Lessor) 600 17.64+
Herman Masur 600 17.64+ Father-in-law of
Irvin Shlenker
Hattie K. Strauss 300 8.82+ Mother of
Clifford Strauss
Jean S. Mintz 37½ 1.10+ Daughter of
Clifford Strauss
Peggy Greenbaum 37½ 1.10+ Daughter of
Clifford Strauss
Louis Lazarus 10 .29+ Son of
Harold Lazarus
In May of 1948, Harold Lazarus, Clifford Strauss, and Irvin M. Shlenker, who together owned two-thirds of the outstanding stock of F. Strauss & Son, Incorporated, purchased a 30,000 square foot tract of land on Marshall Street in Shreveport, from the Louisiana & Arkansas Railway Company for a price of $18,000.
On July 6, 1948, F. Strauss & Son, Incorporated, entered into a written lease for the rental of this 30,000 square foot tract from Clifford Strauss, Irvin M. Shlenker, and Harold Lazarus. The term of the lease was for fifteen years and the rental price was $1,080 per annum with no provision for an option to renew. Under the terms of the lease, the lessee, F. Strauss & Son, Incorporated, was obligated to construct a building upon the land to handle its liquor, beer, and wine wholesale distributorship. The lessee was obligated to pay all taxes assessed against the property and improvements thereon. Upon termination of the lease, by expiration or otherwise, all improvements were to become the property of the lessors and no assignment or sublease of the premises could be made, in whole or in part, without the written consent of the lessors.
Pursuant to the terms of this lease, F. Strauss & Son, Incorporated, constructed a brick, steel and concrete one-story, warehouse-type building at a cost of $125,625.24, including the cost of air conditioning.
Depreciation of the improvements was to be amortized over the remaining term of the lease, fourteen years and several months, although it was reasonable to assume that the building would have a useful life in excess of that term.
Through April 1, 1956, the Strauss corporation carried on a successful business distributing at wholesale Falstaff beer and Schenley liquor products. Personal conflicts developed, however, between the management of Affiliated Distillers Brands Corporation, the supplier of Schenley products, and Clifford Strauss, and, effective October 31, 1955, the former terminated the supply of whiskey theretofore available to the Strauss corporation. Clifford Strauss testified that, in contrast to the beer-distributorship part of the business, the liquor business constituted approximately seventy-five per cent of the total sales volume, approximately ninety per cent of the total inventory, and approximately one hundred per cent of the total accounts receivable, this being accounted for by the fact that the beer was sold only for cash.
As the consequence of losing the Schenley franchise, the stockholders were forced to liquidate the Strauss corporation. Prior to voting to dissolve, however, the management made unsuccessful attempts to secure a franchise from another national supplier of liquor products.
On March 14, 1956, Harold Lazarus incorporated the Falstaff Distributing Company for the purpose of acquiring and operating the beer business then being conducted by the Strauss corporation. On March 16, 1956, the lessors under the Strauss corporation lease, Harold Lazarus, Clifford M. Strauss, and Irvin M. Shlenker, leased the 30,000 square foot tract to Lazarus' newly organized Falstaff Distributing Company, it being agreed between the parties that the lessee would take possession on or after April 1, 1956, although as of then, the Strauss corporation had seven years remaining on the unexpired term of the original fifteen-year lease. The record does not reveal that the Strauss corporation or its stockholders gave the lessors permission to enter into a new lease during the term of the already existing lease. Objections, however, apparently were not made and the lessors, who were, of course, controlling stockholders in the lessee-corporation, proceeded according to the terms of the new lease agreement.
On April 1, 1956, the lessors and the Strauss corporation mutually agreed to cancel the existing lease on the property with the improvements becoming the property of the lessors under the terms of the lease. The corporation subsequently dissolved, and the cash received for its assets was distributed proportionately to its stockholders. The assets incident to the distribution and sale of Falstaff beer products were sold to the Falstaff Distributing Company, and the balance was sold to third persons.
On its final income tax return for the period beginning March 1, 1956, and ending January 16, 1957, the date of dissolution, the Strauss corporation reported a net operating loss in the amount of $109,322.53. In arriving at this figure, the corporation deducted from its gross income the sum of $37,500, the price paid the Schuster partnership for the good will of the going business. Added to this was the unrecovered or unamortized cost of the improvements to the leased premises, $63,569.60. The net operating loss for the year 1957 was made the basis of a net operating loss carry-back under the provisions of Section 172(b) (1) (A) of the Internal Revenue Code of 1954, 26 U.S. C.A. § 172(b) (1) (A), and the loss was carried back against the income of the corporation reported on its income tax returns for the fiscal years ending February, 1955, and 1956. Accordingly, the Strauss corporation filed claims for refunds of taxes paid for the fiscal year 1955 in the amount of $14,689.80, and for the fiscal year of 1956 in the amount of $20,897.93.
The Internal Revenue Service caused an audit to be made of the Strauss corporation's claims for refunds and its Federal income tax returns. As the result of this audit, the corporation's deductions for good will in the amount of $37,500, and the unamortized cost of the improvements on the leased premises in the amount of $63,359.60, were disallowed and the corporation's claims for refund were administratively rejected. This suit followed.
The cost of good will in connection with acquisition of the assets of a going concern is a capital expenditure. Int.Rev. Regs. Sec. 1.263(a)-2. Here, the undisputed evidence is that the taxpayer purchased the assets of the Schuster partnership, a going concern, in 1946, and that the parties bargained for and received a fixed price in exchange for the inventory, the other physical assets, and the intangibles of that enterprise. The cost to the Strauss partnership of the good will is admitted by the government to have been $37,500 which, until the liquidation of the taxpayer, was carried on its books unchanged in valuation. No deduction for depreciation or obsolescence of good will was made at any time during the existence of the corporate taxpayer, and none would have been allowable. Int.Rev.Regs. Sec. 1.167(a)-3, Dodge Brothers v. United States, 118 F.2d 95 (4 Cir., 1941).
The taxpayer profited during the years of its existence and the government does not dispute the valuation placed upon good will at the time the Schenley franchise was terminated and the assets of the taxpayer were sold or otherwise disposed of through liquidation. The theory of the government's position is that, upon the sale of the assets used for the beer distributorship portion of the taxpayer's business, the $37,500 good will element was transferred or passed on to the Falstaff Distributing Company as a matter...
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