Winn-Dixie Montgomery, Inc. v. United States

• Decision Date: 17 June 1971
• Docket Number: No. 29859.,29859.
• Citation: 444 F.2d 677
• Parties: WINN-DIXIE MONTGOMERY, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

444 F.2d 677 (1971)

WINN-DIXIE MONTGOMERY, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 29859.

United States Court of Appeals, Fifth Circuit.

June 17, 1971.

Neal C. Newell, Edward L. Hardin, Jr., Birmingham, Ala., J. Shepard Bryan, Jr., Jacksonville, Fla., Richard H. Hunt, Jr., Steven A. Schultz, Miami, Fla., Hare, Wynn, Newell & Newton, Birmingham, Ala., for appellant; Smathers & Thompson, Miami, Fla., of counsel.

Wayman G. Sherrer, U. S. Atty., E. Ray Acton, Asst. U. S. Atty., Birmingham, Ala., Johnnie M. Walters, Asst. Atty. Gen., William K. Hogan, Lee A. Jackson, Attys., Tax Div., U. S. Dept. of Justice, Washington, D. C., Joseph M. Howard, Crombie J. D. Garrett, Benjamin M. Parker, Attys., Tax Division, Dept. of Justice, Washington, D. C., for appellee.

Before WISDOM and GOLDBERG, Circuit Judges, and DAVIS,^* Judge.

DAVIS, Judge.

Winn-Dixie Montgomery, Inc. is a wholly-owned subsidiary and one of eight marketing divisions (with its own warehousing and cold storage facilities) of Winn-Dixie Stores, Inc., a major food retailer in the southeastern United States.¹ On August 1, 1962 it acquired and took over a chain of retail grocery outlets which belonged to Hill Grocery Company, Inc. The latter was a family corporation owned and managed for half-a-century by two brothers, James and Nelson Hill. It operated 35 supermarkets in Birmingham and other North Alabama communities, controlling 28 or 29 per cent of the grocery market in the Birmingham area. The agreement between Winn-Dixie and Hill provided for the purchase price of "all properties, assets and rights" acquired by the buyer to be the net book value of those "properties, assets and rights" computed as of the close of business on July 28, 1962, "and Four Million Four Hundred Twenty Thousand Dollars ($4,420,000)."

The tax dispute before us centers on what that "premium" of $4,420,000 should be deemed to have bought. Winn-Dixie filed its income tax returns for fiscal years 1963 and 1964 on the assumption that this sum represented acquisition costs of leaseholds purchased from Hill, and accordingly amortized those costs over the ascertainable lives of the leases. The Internal Revenue Service disallowed these amortization deductions on the ground that none of the "premium" of $4,420,000 was apportionable to the leases; deficiencies of $390,000 and $422,500 were assessed and collected for the two years. In this refund suit, Winn-Dixie would now allocate $3,375,000 to the leaseholds and the rest of the $4,420,000 to certain tangible assets.² The Government maintains, consistently with the Service, that the entire sum should be treated as having been paid for goodwill or other non-amortizable intangibles. The District Court, sitting without a jury, upheld the latter contention, 307 F.Supp. 1304.

1. The purchase-and-sale agreement makes no allocation of the $4,420,000 figure to any asset, tangible or intangible, and the record is indisputable that Winn-Dixie and Hill did not make any such apportionment during their discussions. The "premium" was simply bargained for as a lump sum. In all probability, this mode of negotiation, which obviously entails certain risks for the signatories, was deliberately followed by mutual understanding, so that neither side would be definitively precluded by the wording of the pact from urging its most advantageous tax position to the revenue officials. The result is that the courts must solve the tax problems as best they can, without express guidance from the mutual agreement of the contracting parties, on the basis of the document's test and context, as well as of the testimonial and other evidence presented at the trial.

2. In that inquiry the first matter to appraise — since appellant insists that it bought no goodwill at all and did not acquire the smaller chain as a going business but only some of its specific assets — is what type of property was actually transferred. Under the agreement, Hill sold Winn-Dixie "all of the seller's then existing assets and business as a going concern, including properties, assets and rights relating to the operation of its thirty-five (35) retail stores but specifically excluding all of Seller's warehouse operations in Birmingham, Alabama." (emphasis supplied) The detailed items mentioned as transferred³ form a rather comprehensive schedule of the things needed for a successful retail grocery operation. To be sure, a few assets were not acquired, notably Hill's Birmingham warehouse facilities, but we do not think any of the excluded items impaired the "going concern" nature of the business taken over. The Birmingham warehouse was left out because, as appellant admits, Winn-Dixie's Montgomery warehouse was more than adequate for its operations in that area, which includes Birmingham. A prime impetus for the acquisition had been Winn-Dixie's desire to gain additional retail outlets in the Northern Alabama region in order to improve the efficiency of its warehousing operation there. The Montgomery warehouse was fully capable of supplying all the retail stores acquired from Hill, and was used to service them after the take-over. Among the other excluded assets were the "Continental Gin property", on which Hill had planned to construct a new warehouse, and $2,000,000 in cash which Hill had accumulated to build the warehouse. Winn-Dixie did not need the Continental Gin property, and it concedes that it had sufficient cash to substitute for the money retained by Hill. Significantly, Winn-Dixie did get the change funds customarily carried at the Hill stores, which amounted to about $57,000.

It is also revealing that appellant took over Hill's employees; it agreed "to retain at substantially their present compensation all Seller's retail store and market personnel." It also committed itself to give the retained employees credit for their past full-time employment by the seller, and to assume liability for accrued vacation pay for all of these employees except warehouse and delivery workers. In return Hill undertook not to increase compensation to any of its employees before the transfer, and to furnish Winn-Dixie with a list of those who were earning $7,500 or more annually. There are still further indications in the agreement that a going business, and not merely a collection of assets, was being transferred. Hill was required to warrant that "since December 31, 1961 there has not been * * * any event or condition of any character materially and adversely affecting the Seller's business or prospects * * *". The seller also agreed that it would not enter into "any contract or commitment relating to the retail food business being purchased by Buyer."

The implementation of the purchase-and-sale agreement followed in the same channel. Winn-Dixie took over the Hill stores at the close of business on Saturday, July 28, 1962, and they opened the following Monday morning, July 30. There was no interruption, and appellant stepped right into the shoes of its predecessor, using Hill's supplies and change-funds, and selling its inventory until depleted. The record is overwhelming, in a word, that, under the terms of the agreement and in the contemplation of both its parties, Hill transferred a going concern to Winn-Dixie.

3. Nevertheless, appellant argues that it did not purchase or pay for any goodwill. We are told that Hill had no goodwill to sell because "goodwill, as such, does not exist in the retail food chain industry." In support of this rather startling proposition, taxpayer offered an expert witness who testified that (1) retail food store shoppers are not loyal customers, (2) the location of a grocery store, in terms of convenience to the shopper's home, is the most important factor in determining patronage, and (3) the "name" of the store is unimportant to the shopper. We think that taxpayer's reliance on this testimony misconceives the nature of goodwill, which is the expectancy that "the old customers will resort to the old place." Commissioner of Internal Revenue v. Killian, 314 F.2d 852, 855 (C.A.5, 1963); Nelson Weaver Realty Co. v. Commissioner of Internal Revenue, 307 F.2d 897, 901 (C.A.5, 1962); Karan v. Commissioner of Internal Revenue, 319 F.2d 303, 306 (C.A.7, 1963). "The essence of goodwill is the expectancy of continued patronage, for whatever reason." Boe v. Commissioner of Internal Revenue, 307 F.2d 339, 343 (C.A.9, 1962). It is clear that Hill possessed a great expectancy of continued patronage in 1962, and that it therefore had substantial goodwill. The Hill brothers had operated the chain for fifty years and enjoyed a major portion of the Northern Alabama retail grocery market and an unusually high earnings record.⁴ Like another retail food concern in a comparable situation, Hill possessed goodwill by virtue of the "most successful retail food marketing operations in that vicinity." Montesi v. Commissioner of Internal Revenue, 340 F.2d 97, 99 (C.A.6 1965). Location may indeed be a key element in retail food store patronage, but to the extent location contributes to the expectancy that the old customers will resort to the old place it is an element of goodwill. Commissioner of Internal Revenue v. Seaboard Finance Co., 367 F.2d 646, 651 n. 6 (C.A.9, 1966); Boe v. Commissioner of Internal Revenue, supra, 307 F.2d at 343.

All the elements which gave Hill this considerable goodwill were passed to appellant. As we have noted, Winn-Dixie purchased the business as a going concern and immediately assumed operation of all thirty-five stores. It agreed to "retain at substantially their present compensation all Seller's retail store and market personnel." See Barran v. Commissioner of Internal Revenue, 334 F.2d 58, 61 (C.A.5, 1964). It acquired "all rights to the name of Seller and/or trade name `Hill's' or `Hill Food Stores'."

Winn-Dixie's assertion that these names had no value is squarely contradicted by its own actions. After it got...