Opinion ID: 1473730
Heading Depth: 1
Heading Rank: 6

Heading: The Oral Testimony Analyzed.

Text: In what precedes, we have stressed chiefly the terms of the written agreements and the acts which followed their execution. The oral testimony did not strengthen the position of petitioner. We give it in substance. Prior to October, 1942, petitioner had decided to go out of the wine business. Mr. Joseph T. Grace, president of the petitioner, and its sole stockholder, testified that he told Mr. L. A. Weller, agent of the purchaser, that he would not sell the wine inventory unless he sold everything connected with the business, including the good will. He testified further that he advised Weller that the winery was worth $125,000 and the inventory of wine on hand and the good will were worth $250,000. This latter figure was based on an estimate of $100,000 good will, arrived at by computing the net profits per year, and multiplying them by 5, for a five-year period; and $150,000 inventory. After various negotiations, the petitioner entered a contract with Garrett & Company, whereby the latter agreed to lease the petitioner's winery and equipment for five years at an agreed rental and to purchase all its wine at 50 cents per gallon. The wine brought approximately $250,000. Grace testified: I told him (Weller) we wanted $250,000 for the wine inventory and the good will. He indicated that Garrett and Company might be interested in leasing the winery and in paying the price to us for the wine that would meet the price we asked for the wine business. The license and the permit to manufacture were surrendered. The bottles and labels, and the plant personnel were turned over to the buyer, but there is no evidence that Garrett & Company ever put out wine under the DeTurk label. Grace testified that the total value of the winery was $375,000. In April, 1944, Garrett & Company was released from the lease agreement, and the plant was sold to others for $150,000. Apart from Grace's testimony, there was testimony by another witness that the DeTurk Winery had a value in excess of the value of the tangible assets, but the exact amount was not given. There was also testimony that Mr. Grace's method of evaluating the good will was the correct one. It is to be borne in mind that the sales memorandum dated January 20, 1943, spoke of the petitioner having sold and Garrett and Company bought the wine inventory. Grace admitted that there was nothing in the corporate minutes that showed any intention to transfer or actual transfer of the good will. There is no evidence that the good will was carried on the books of the company at any valuation other than the value of the inventories and physical assets, such as the plant. No entries appear to have been made in the books against the item of good will, after the consummation of the transaction. Another very interesting fact speaks against the unitary theory. Part of the proceeds received in 1942 from Garrett and Company, the petitioner treated as income and included it in its income and excess profits tax for that year. This conformed to the expressed desire of the petitioner during the negotiations that the matter be so treated, in order to avoid too high an excess profits tax in one war year. In his testimony, Grace identified a telegram sent by him to Garrett and Company on December 29, 1942, which stated (among other things) Anxious to close deal immediately to get part of sales in this year income tax returns. In the face of this record and of the reference in the same telegram and in the answering telegram of Garrett & Company of December 30, 1942, to inventory and lease and rental of plant, the Tax Court was not required to take at its face value Grace's oral statements contradictory of these written documents and others, through which the sale was consummated, to the effect that, at the very time when these exchanges were taking place, it was his intention to part with the good will. As to this undisclosed and floating intention, we are in the same situation as this Court was in In re American Mail Line, 9 Cir., 1940, 115 F.2d 196, 199, when it said: We cannot say as a matter of law that the court below was compelled to believe it. As said in another case: The circumstances surrounding the alleged oral agreement, the time, place, and the care with which the written agreement apparently was drawn, all contradict the evidence of petitioner on this point and the Board was justified in concluding that the testimony was incredible. Woodall v. Commissioner, 9 Cir., 1939, 105 F.2d 474, 478. And see, Cohen v. Commissioner, 2 Cir., 1945, 148 F.2d 336. And, as already appears (Part II (a) and (b) of this opinion), the accompanying legal reasoning of the Tax Court accords with the principles long sanctioned by this Court that only actual transfers of a going business and of the good will, which divest the transferor of the benefits accruing from the ownership of such business or good will shall be considered in determining capital gain or loss. See Stilgenbaur v. United States, 9 Cir., 1940, 115 F.2d 283; United States v. Adamson, 9 Cir., 1947, 161 F.2d 942.