12 T.C. 17">*17 This proceeding is brought for a redetermination of a deficiency in income tax for the year 1941 in the amount of $ 2,365.34.

The questions involved are (1) the type of income which resulted from the sale of petitioner's laundry business in 1941; and (2) whether petitioner was justified in claiming a deduction of $ 7,808.50 for legal expenses in that year.

FINDINGS OF FACT.

Petitioner is an individual, residing at Santa Monica, California. He filed his return for the calendar year 1941 with the collector for the sixth district of California.

12 T.C. 17">*18 During 1941 petitioner was doing business under the fictitious firm name of Beach Laundry and Linen Service, at Tenth and Colorado Streets, Santa Monica, 1949 U.S. Tax Ct. LEXIS 300">*301 California. It was a sole proprietorship of which petitioner was the owner; and it was the successor in 1934 of the Beach Laundry Service, Inc., a corporation which was dissolved.

In the year 1941 petitioner received the sum of $ 9,000 from the American Linen Co. as consideration for the sale to it of the business of the Beach Laundry and Linen Service, consisting of a supply of towels and linen of a value of not more than $ 1,528.85, together with a customers' list of approximately 100 names, good will, if any, and an agreement not to engage in a similar business for a period of 5 years. The adjusted basis after allowance for depreciation with respect to the tangible assets sold amounted to $ 1,960.85.

In the laundry business, by contracts and trade agreements, customers' lists were inviolate. It would not be possible for one laundry to pirate another laundry's customers. Injunctions would be brought to prevent such action. The only business available for soliciting was new business -- "somebody coming in."

"Good will" and the customers' lists were substantially the same. The agreement not to compete was an integral part of the customers' lists and good will.

From 1934 to 19411949 U.S. Tax Ct. LEXIS 300">*302 Beach Laundry and Linen Service was employed in supplying hotels, restaurants, and barber shops in Santa Monica with laundered linens and towels. It maintained offices on the same premises as the Pacific Soft Water Laundry, a corporation hereinafter called "Pacific." Pacific owned all of the machinery and it did all the work for Beach Laundry and Linen Service.

Pacific was thrown into a receivership in 1932, and Walter Hewicker, an attorney, was appointed receiver. Petitioner was president of Pacific until 1940 when, in a bankruptcy proceeding under the Chandler Act, new officers were installed. Hewicker was made president and people other than petitioner filled the other offices. The Chandler Act proceedings were dismissed in 1943.

Petitioner had owned a majority of the stock in Beach Laundry and Linen Service, Inc., and also of Pacific. When the Beach Laundry and Linen Service, Inc., went out of business in 1934 petitioner kept the linen supply business, which he operated as his individual business. He had the customers' list and made use of it. Pacific, which did his laundry work, was operated during most of this period by petitioner.

Petitioner maintained his books and 1949 U.S. Tax Ct. LEXIS 300">*303 records on an accrual basis.

For his services in the Pacific receivership proceedings, Hewicker was awarded $ 20,000 by the court, which was paid to him.

Over the period of years beginning prior to 1934 and extending to 1941, Hewicker performed legal services in connection with the Beach Laundry and Linen Service business. Hewicker rendered petitioner 12 T.C. 17">*19 a bill in 1941 in the amount of $ 7,080.50 covering the services for a number of years. Petitioner advised Hewicker he would pay the bill as soon as he could. Petitioner did not accrue it on his books. Petitioner's books and records were destroyed in a fire which took place January 25, 1943, on the premises of Pacific, where petitioner's books and records of the Beach Laundry and Linen Service were kept. Since petitioner had sold this business in 1941, those records were not considered current and were not kept in the fireproof safe on the premises.

The legal services performed by Hewicker in connection with winding up the affairs of Beach Laundry Service, Inc., consisted of adjusting pay roll claims and current bills and dealing with the Troy Machine Co., which it owed for machinery. He made a couple of trips to San Francisco. 1949 U.S. Tax Ct. LEXIS 300">*304 There were four or five suits over compensation and a couple of suits to restrain drivers.

Petitioner had no agreement with Hewicker as to fees. Petitioner figured that Hewicker was paid in 1943 by Hewicker's taking more money out of Pacific than was coming to him; that Hewicker got $ 7,000 or $ 8,000 that should have gone to petitioner.

OPINION.

We entertain no doubt that good will and such related items as customers' lists are capital assets. ; certiorari denied, ; see ; ; affd. (C. C. A., 9th Cir.), ; rehearing denied (C. C. A., 9th Cir.), . The parties agree that the linens with a stipulated selling price of $ 1,528.85 were not capital assets, so that the consequence of their sale was an ordinary income item. Petitioner concedes that the customers' lists and good will had a basis of zero. The entire proceeds of 1949 U.S. Tax Ct. LEXIS 300">*305 their sale accordingly represent capital gain, and the only remaining difficulty on this issue is the element injected by petitioner's accompanying covenant not to compete.

If such an agreement can be segregated, not so much for purposes of valuation as in order to be assured that a separate item has actually been dealt with, the agreement is ordinary income and not the sale of a capital asset. . But where it accompanies the transfer of good will in the sale of a going business and it is apparent that the covenant not to compete has the function primarily of assuring to the purchaser the beneficial enjoyment of the good will which he has acquired, the covenant is regarded as nonseverable and as being in effect a contributing element to the assets transferred. ; .

12 T.C. 17">*20 The evidence on this subject is extremely meager, but it does appear from testimony of respondent's own witness that a tightly controlled authority was exercised over the transfer of customers from one laundry company1949 U.S. Tax Ct. LEXIS 300">*306 to another, and hence that the purchase of good will and the right to service existing customers attained more than ordinary value. On the other hand, the ability of a new laundry to enter the field was apparently limited to newcomers arriving in the community -- a factor tending to diminish not only the dollars and cents value of a covenant not to compete, but also its significance as an independent element of the sale of the business as a whole. See We have accordingly found as a fact, though the matter is not free from doubt, that the agreement to refrain from competition should be treated as a capital asset ancillary to the transfer of good will and customers. The consequence is that the entire proceeds of the sale, exclusive of that attributable to the linens, is taxable as a capital gain.

The remaining question involves the deductibility of an attorney's bill rendered in the instant tax year but for services concededly attributable to a number of prior years. The evidence of what services were actually rendered, for whose account and liability, and to what extent there was ever any prospect or intention of actual1949 U.S. Tax Ct. LEXIS 300">*307 payment is so meager that we consider ourselves foreclosed from arriving at the necessary finding of fact that any services for which petitioner bore any liability were accruable in the year before us. No accrual entry was made upon petitioner's books; no payment in cash was ever made; no showing of the reasonableness of any item on the bill he received appears; and the attorney who was said to have rendered the services and whose testimony in this regard would have been of persuasive weight was neither produced nor his absence adequately explained. We can not even arrive at the necessary basis for application of the rule of , since the conclusion that some amount was due, however indefinite, is precluded by the present record and petitioner's burden of proof. On this issue we accordingly sustain the deficiency.

Decision will be entered under Rule 50.