7 T.C. 1162">*1162 The Commissioner determined a deficiency in petitioners' income tax for the calendar year 1941 in the amount of $ 21,049.59. Of the five issues originally presented, respondent has conceded error with 7 T.C. 1162">*1163 respect to one. The four issues remaining relate to the respondent's action in including in the taxable income of petitioners the sum of $ 7,185.35 received by petitioners in connection with the settlement of a suit for damages; in increasing petitioners' reported gain on liquidation of a corporation by the amount of $ 18,965.13 representing good will of the corporation; in disallowing certain claimed business expenses; and in including in petitioners' taxable income an additional item of income in the amount of $ 3,481.84 resulting from an alleged overstatement of inventory acquired from two solely owned corporations.

FINDINGS OF FACT.

The facts have been stipulated in part, and such facts are found to be as stipulated.

Petitioners1946 U.S. Tax Ct. LEXIS 33">*36 are husband and wife, residing in Cleveland, Ohio. They filed their joint income tax return with the collector of internal revenue at Cleveland. For the sake of convenience, petitioner Maurice A. Mittelman will be identified herein as the petitioner.

Issue No. 1. -- Petitioner and Adolph M. Goetz owned all the capital stock of a Michigan corporation originally known as I. Miller Salon, Inc., but the name of which was subsequently changed, first to Goetz, Mittelman, Inc., and later to A. M. Goetz, Inc. The corporation was engaged in the business of selling shoes at retail, and operated a store for this purpose in Detroit, Michigan. On January 31, 1940, and for several years prior thereto, the Michigan corporation also owned, among its assets, all the issued and outstanding shares of a New York corporation called I. Miller Stores, Inc., which operated a retail shoe store in Buffalo, New York, and all the issued and outstanding shares of a Delaware corporation, known as Goetz & Mittelman, Inc., which engaged in the sale of footwear at retail in Cleveland, Ohio.

Pursuant to stipulation of the parties, we incorporate herein by reference our findings of fact in the case of .1946 U.S. Tax Ct. LEXIS 33">*37

On January 13, 1940, petitioner entered into an agreement with Adolph M. Goetz which provided, among other things, that the Michigan corporation would transfer to petitioner all the outstanding stock of the New York and Delaware corporations owned by that corporation, in consideration of petitioner's transfer to the Michigan corporation of all petitioner's shares in that corporation and the payment by petitioner of a sum of money to be determined in accordance with a formula set out therein. The authority to determine the sum to be paid by petitioner was delegated to S. D. Leidesdorf & Co., certified public accountants in New York. S. D. Leidesdorf & Co. determined the amount to be so paid by Mittelman to be $ 18,399.71, which Mittelman 7 T.C. 1162">*1164 paid and the transaction involving the separation of the business interests of Mittelman and Goetz, for which purpose the contract was entered into, was consummated on January 31, 1940, when the exchange of stock and payment of the money occurred.

Petitioner, in his income tax return for the year 1940, reported for taxation his gain from the disposition, as above described, of his stock in the Michigan corporation, using as his basis for1946 U.S. Tax Ct. LEXIS 33">*38 the computation thereof the original cost to him of the Michigan stock, which was $ 20,580.40, plus $ 18,399.71, paid by him in cash, a total of $ 38,980.11. Petitioner's income tax for the year 1940, as disclosed by that return was in the amount of $ 5,928.76, and was paid by him in the year 1941.

In March of 1941 it was discovered that petitioner should have been required to pay to the Michigan corporation only $ 9,199.86, or one-half of the amount which he had been required to pay. He made a demand upon S. D. Leidesdorf & Co. for the return to him of the overpayment. He caused a petition to be prepared by counsel for the purpose of instituting litigation, which was done on June 21, 1941. In this petition he demanded damages in the sum of $ 9,199.85, with interest thereon from April 1, 1940. A settlement was reached as of August 18, 1941, by payment of $ 8,000 to petitioner by S. D. Leidesdorf & Co., out of which petitioner paid legal fees and expenses amounting to $ 814.65. S. D. Leidesdorf & Co. was reimbursed directly or indirectly, for the payment so made by it by A. M. Goetz or the Michigan corporation. Petitioner accepted the $ 8,000 in full settlement of his claim 1946 U.S. Tax Ct. LEXIS 33">*39 against S. D. Leidesdorf & Co., and executed releases to S. D. Leidesdorf & Co. and to Adolph M. Goetz, individually, and the Michigan corporation.

Issue No. 2. -- As the result of the transaction hereinbefore described, petitioner, in January 1940, acquired ownership of all the capital stock of the New York corporation, I. Miller Stores, Inc., and the Delaware corporation, Goetz & Mittelman, Inc., the name of which was changed to M. A. Mittelman, Inc. Each of these corporations was engaged in the business of selling ladies' shoes at retail, the former in Buffalo, New York, and the latter in Cleveland, Ohio.

In January of 1941 petitioner entered into a contract with each corporation for the purchase of its assets as of January 31, 1941, at an amount equivalent to their book values as of that date. The purchase price was to be paid by the assumption by petitioner of the corporation debts and the execution by petitioner of notes payable to each corporation in a total amount equal to the excess of the sale price over the debts of the corporation thus assumed. These notes were later distributed by the corporations to petitioner as dividends and liquidating dividends. Included 1946 U.S. Tax Ct. LEXIS 33">*40 in the assets of the corporations thus acquired by petitioner was the merchandise owned 7 T.C. 1162">*1165 by each. The merchandise was recorded on the books of each corporation on a gross basis against which there was a reserve for discounts. This reserve was treated on the books of each corporation for accounting purposes as deferred income, but, for tax purposes, the corporations treated the discounts as income, since they were on an accrual basis.

In determining the book value of and consequent price at which the business and assets of each corporation were transferred to petitioner, there was included a figure for inventory which was computed on a discounted inventory basis, and the total of these figures in the sum of $ 73,433.70 was the figure employed by petitioner in computing and reporting for taxation his capital gain incident to the liquidation of the corporations immediately after the transfers in 1941.

In computing for 1941 the net profit from the business formerly carried on by the two corporations and operated by him individually in 1941, petitioner included in the total of "merchandise bought for sale" the amount of $ 76,915.54, which was the gross basis of such inventory1946 U.S. Tax Ct. LEXIS 33">*41 in the hands of the corporations, i. e., the cost without deduction of discount.

Issue No. 3. -- The Delaware corporation, M. A. Mittelman, Inc., was, prior to its dissolution by petitioner in 1941, engaged in the operation of the shoe department in the department store owned and conducted by the Lindner Co. in the city of Cleveland. In his 1941 tax return petitioner reported a gain from the liquidation of M. A. Mittelman, Inc., of $ 4,246.99. Respondent has increased this gain by the amount of $ 18,965.13 determined to represent the "going concern value of the business" of that corporation.

M. A. Mittelman, Inc., had a lease with the Lindner Co. which provided, among other things, for the use by the Mittelman corporation of the specified space in the department store, where a full line of new and salable stock of merchandise should be kept for sale during the business hours of the store, and in accordance with all the rules of the store; that if the store should be moved to another location, the shoe department would also move to the new location; that the lessor should supply to the lessee twine and wrapping paper, heat, light, local telephone service, janitor, elevator, 1946 U.S. Tax Ct. LEXIS 33">*42 and delivery service, charge account service to the lessor's charge customers only, pay roll and window trimming service, and sales books and sales checks. The lessee agreed to employ the help necessary to conduct its business, and to purchase its supplies, equipment and merchandise, to expend each year for advertising an amount equal to 4 per cent of the aggregate net sales for the preceding year, which advertising was to be done under the general direction and in the name of the Lindner Co., in publications approved by it, the copy to be approved by the Lindner Co. The lessee 7 T.C. 1162">*1166 agreed to sell all its goods in the name of the Lindner Co. and to stamp the name of the Lindner Co. upon the lining of all except nationally advertised brands of shoes such as I. Miller shoes.

The lease described above, and the later extension thereof, were assigned by M. A. Mittelman, Inc., with the consent of the Lindner Co., to M. A. Mittelman individually, who has continued to operate the business.

All sales made in the shoe department in the Lindner Co. were made in the name of that company, and the name M. A. Mittelman was never used in the public operation or advertising of the business.

1946 U.S. Tax Ct. LEXIS 33">*43 Petitioner has had continuous business relationships with I. Miller & Sons Co., a manufacturer of women's shoes, since 1917, and has been selling I. Miller shoes in Cleveland since 1924, and since 1936 in the Lindner Co. store. They are excellent and expensive shoes, and the Lindner Co. is one of the best stores in Cleveland.

Petitioner, or the corporation before its dissolution, has had the exclusive right to sell I. Miller shoes in Cleveland from 1922 through the tax year. This right was granted to petitioner by oral license and was terminable at will. In 1936 the I. Miller Corporation agreed with the Lindner Co. in writing that, if petitioner and the Lindner Co. terminated their agreement before the expiration of its five-year term, I. Miller Corporation would continue to sell its shoes in the Lindner Co. during the balance of the term. This agreement was extended in 1941 for another five years, and a similar agreement was in effect for the same extended term with the Carlisle Shoe Co., from which Mittelman also had held exclusive sales rights for the Cleveland territory. These latter rights were also created orally, were for an indeterminate period and were cancellable at1946 U.S. Tax Ct. LEXIS 33">*44 will.

Issue No. 4. -- In his income tax return for 1941, petitioner claimed deductions for business expenses in the sum of $ 5,131.31, representing travel expenses incurred in carrying on the business of the stores in Cleveland, Rochester, and Buffalo. The respondent allowed a deduction on that account of $ 1,218.23, and disallowed the balance.

Petitioner, in 1941, made twenty-two trips to Rochester and Buffalo from Cleveland, and ten trips to New York on behalf of all the stores. He paid all his actual transportation costs, hotel bills, meals, taxicab fares, and costs of entertainment of the persons with whom he had business contacts and dealings, as well as telephone and telegraph expenses.

While on these trips he spent a total amount of $ 3,960. No itemized record was kept of these expenditures. The amount of expenditures made by petitioner in payment of ordinary and necessary business expenses incident to these trips during the taxable year was $ 2,100.

7 T.C. 1162">*1167 OPINION.

Issue No. 1. -- The first of the four issues presented here for our decision is whether there was error in the respondent's determination that petitioner realized taxable income when he received1946 U.S. Tax Ct. LEXIS 33">*45 in 1941 the net amount of $ 7,185.35 in settlement of a cause of action arising out of the error of a firm of accountants which resulted in petitioner's having paid in 1940 an excessive price for stock of a certain corporation which, in the same year, was exchanged by him for certain other stock. This exchange was a taxable transaction. Petitioner's basis for computing his taxable gain on the 1940 transaction included the excessive payment, and his tax, so paid, was less in amount than it would have been had the accounting error, and the payment pursuant thereto, not been made.

Petitioner argues simply that the amount of $ 7,185.35 received by him in 1941 was a return to him of a portion of his capital, and can not therefore be taxed as income.

It is the respondent's position that, petitioner having received a tax benefit in 1940 from the use of the higher cost basis as the result of a mistake, his recovery, in 1941 upon the rectification of the error, of a part of that expenditure which was so used to reduce his 1940 taxes is taxable as income, under the tax benefit theory.

The fact that the basic character of the item in question is capital in nature does not preclude the application1946 U.S. Tax Ct. LEXIS 33">*46 of the tax benefit theory. See ; ; .

We are of the opinion that, under the facts before us, the petitioner is properly taxable on the net amount of his recovery to the extent that he received a tax benefit in 1940 by reason of the payment thereof. The extent of this benefit and the consequent extent to which the amount of his recovery is includible in petitioner's taxable income for 1941 may be determined under Rule 50.

We are not persuaded to a different conclusion because the recovery came, nominally, at least, from the accountants who made the error, in view of the evidence which indicates the accountants served mainly as conduit for the return of the money from the payee to petitioner. See ; ; affd., .

Regardless of the fact that petitioner chose to institute action1946 U.S. Tax Ct. LEXIS 33">*47 formally against the accountants instead of the corporation to which the amounts in question had been mistakenly paid, and the fact that the releases given recite the receipt of the money paid to petitioner in settlement of his claims to have been received (except for the nominal amount of $ 1) from the accountants, we can not close our eyes to the 7 T.C. 1162">*1168 realities of the situation. The amounts mistakenly paid by petitioner in 1940 were to the Michigan corporation, or, beneficially, to Goetz; those payments resulted in increasing his cost basis of the Michigan corporation stock transferred by him in a taxable exchange in that year; this increased cost basis was used by him in computing his gain on this exchange and the gain thus computed was included in his income reported for taxation in 1940; his taxes for that year were thereby reduced from the amount which they would have been had a correct basis for the Michigan corporation stock been used; the real reason for the payments made to petitioner in 1941, regardless of the legal causes of action pleaded by him in the suit against the accountants, was to rectify, to the extent of these payments, the mistake of 1940, and the greater1946 U.S. Tax Ct. LEXIS 33">*48 part, at least, of these payments came to petitioner indirectly from the corporation to which the excessive payment had been made by mistake in 1940.

Respondent also makes a contention upon this issue which he summarizes on brief as follows:

This was an amount received in settlement of litigation and it is impossible to determine from the evidence whether any portion of such payment is properly allocable to capital recovery; as an alternative, the respondent contends that the pleadings on which the litigation was founded set forth claims for the recovery of lost profits rather than for recoupment of capital.

This contention, as well as the contention of petitioner that the recovery in question was simply the recovery of damages based on a claim of misfeasance against the accountants and should be treated as such, with no regard to the taxable transactions of 1940, are equally specious in that they both exaggerate the importance of the formal pleadings and releases in the suit against the accountants, and minimize the realities of the transactions of which this suit was but a part.

Issue No. 2. -- In January 1941 petitioner purchased the assets of two solely owned corporations1946 U.S. Tax Ct. LEXIS 33">*49 at a price equivalent to the book value of their assets at the time of purchase. The payment of this price was by the assumption of the corporation's debts and the execution of notes to the corporations in the amount of the excess of the book value of their assets over these debts. In 1941 the corporations were liquidated and petitioner reported as taxable gain the difference between his cost basis of the stock owned by him and the face amount of his notes distributed to him by the corporations as liquidating dividends. In computing the book value of the assets of the corporations, and, consequently, the amount of the notes, the inventory of merchandise of the corporations was treated as having a book value of $ 73,433.70, which was their invoice price less discount. This discount was carried on the books of the corporations in a so-called "Reserve" account. As merchandise was sold by the corporations, the discount in the 7 T.C. 1162">*1169 reserve account was charged out to profit and loss; in effect, deferring the income from discounts until the merchandise was sold. For income tax purposes, however, the corporations, being on an accrual basis, reported the discounts taken during 1946 U.S. Tax Ct. LEXIS 33">*50 the entire year for taxation, whether the merchandise was sold or not in that year. The figure at which the inventories were carried on the corporate books, invoice price less discount, was, as of the time of the liquidation, $ 73,433.70 instead of $ 76,915.54, which was the gross invoice price of the inventories. Petitioner reported as his gain on the liquidation the difference between his cost of the stock turned in and the amount of the notes distributed to him on liquidation of the corporations. The amount of these notes, and, consequently, the amount of petitioner's taxable gain, would have been greater in the amount of $ 3,481.84 had the gross invoice figure for inventory been used. Petitioner took the inventories up on his individual balance sheet as of February 1, 1941, at the net cost at which they had been carried on the corporate books, or $ 73,433.70. But, in reporting his profit on the sale of the merchandise during 1941 for taxation, he computed his profit by the use of the gross inventory cost figure, which was $ 76,915.54, resulting in a smaller taxable profit.

Petitioner is attempting to adopt, it seems to us, inconsistent positions with respect to this item of1946 U.S. Tax Ct. LEXIS 33">*51 inventory. He purchased the assets of his solely owned corporations in January 1941 at a price which was computed by ascribing a value of $ 73,433.70 to the inventory in question. Therefore, this was petitioner's basis for the inventories thus acquired by him. As we have pointed out it was also the figure adopted by him for the purpose of determining the amount of the purchase money notes given by him to his corporations, and later distributed to him upon their liquidation; and his capital gain upon such liquidation was less by $ 3,481.84 than it would have been had the gross inventory figures been used. For the petitioner to be permitted to then use the gross inventory figures to calculate his profit from the sale of merchandise would result in an inconsistency not warranted by the statute. The bookkeeping methods or tax accounting practices of the corporations are extraneous to the issue. We are of the opinion that there was no error in respondent's determination on this point.

Issue No. 3. -- The next issue relates to the determination by the respondent that petitioner's taxable income for 1941 arising from the liquidation by petitioner in that year of M. A. Mittelman, 1946 U.S. Tax Ct. LEXIS 33">*52 Inc., should be increased by the amount of $ 18,965.13 representing good will or going value of that corporation.

It is petitioner's contention that M. A. Mittelman, Inc., had no good will, since the business conducted by it in Cleveland, Ohio, was conducted in the name of the Lindner Co., the department store in which the shop was located under a lease. All the advertising was carried on 7 T.C. 1162">*1170 in the name of the Lindner Co.; the charge sales were made only to Lindner Co. charge customers, who were billed by the Lindner Co. therefor; the shoes so sold, except for specified brands, were stamped with the name of the Lindner Co. The name of M. A. Mittelman, Inc., never appeared to the public in connection with advertising, sales, or operation of the business.

The corporation had exclusive franchises for the sale of I. Miller and Carlisle shoes in the Cleveland area, but the agreements under which these franchises arose were oral and for an indeterminate period, cancellable at the will of the manufacturers. In spite of their disabilities, these franchises were without doubt valuable assets of the corporation. But they were assets, within themselves, separable and distinguishable1946 U.S. Tax Ct. LEXIS 33">*53 from all other assets, including good will, and susceptible to separate valuation. Similarly, the lease under which M. A. Mittelman, Inc., occupied the space in the Lindner Co.'s department store was doubtless a valuable asset of the corporation. It was not, however, good will, but a separate asset susceptible of valuation as such.

These are the factors which, respondent argues, go to make up the item of good will which he valued at $ 18,965.13. He admits that the chief elements of good will are continuity of place (which the Mittelman Co. had only by virtue of a nonassignable lease) and continuity of name (and the Mittelman corporation's name had never appeared before the public in connection with the operation of its business). As we have seen, whatever value existed in the location is attributable to the lease, and no value can be attributed to the corporate name itself. It seems to us that whatever intangible value attached to petitioner's business sprang from the sale of well known and respected brands of shoes, and from the sale of those shoes in a location known to the public as a part of the Lindner Co.'s store. We can find no basis, in these peculiar circumstances, 1946 U.S. Tax Ct. LEXIS 33">*54 for the allocation of any value for good will of M. A. Mittelman, Inc. We conclude, therefore, that the respondent erred in this particular.

Issue No. 4. -- Petitioner claimed a deduction in his 1941 return in the amount of $ 5,131.31 for traveling expenses paid in 1941 in connection with twenty-two trips to Rochester and Buffalo in New York and ten trips to New York City on business. Respondent allowed $ 1,218.23. At the hearing, petitioner testified that he had spent $ 3,960 on these trips, and had been reimbursed by his office for $ 3,900. He testified generally that the money was spent for railroad fare, hotel, meals, taxicabs, tips, and business entertainment. He did not offer any memoranda or documentary evidence to support his estimate. He spoke of the existence of memoranda of his expenses which he had made at or about the time of each trip, but he did not offer them in evidence, nor were any bookkeeping or other office or personal 7 T.C. 1162">*1171 records of any kind offered, although it seems most probable that such evidence was peculiarly available to the petitioner.

In our efforts to arrive at a reasonable allowance, we are especially handicapped by the complete lack1946 U.S. Tax Ct. LEXIS 33">*55 of any evidence of any kind from which we could determine the usual or average duration of petitioner's stays in New York, Buffalo, and Rochester, and by the generality of the evidence with regard to items of expenditure.

Under the rule of , and upon all the evidence in the record, we have determined that petitioner's ordinary and necessary business expenses incident to these trips amounted to $ 2,100.

The fifth issue which was originally involved herein has been resolved by the concession of respondent that a gain of $ 1,693.87 from the disposition of certain assets reported by petitioner is taxable only to the extent of 50 per cent as a long term capital gain. Effect will be given to this concession under Rule 50.

Decision will be entered under Rule 50.