Court Opinion

ID: 4602757
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:30:26.973467+00
Date Added: 2024-06-11T07:52:43.417450
License: Public Domain

August Braun, Petitioner, v. Commissioner of Internal Revenue, RespondentBraun v. CommissionerDocket No. 21481United States Tax Court14 T.C. 473; 1950 U.S. Tax Ct. LEXIS 248; March 22, 1950, Promulgated *248 Decision will be entered under Rule 50.  Sale by petitioner held on facts to have constituted disposition of his entire business, so that, O.P.A. ceiling prices on individual machines being concededly inapplicable, no ground exists for applying I. T. 3811.  Murray M. Weinstein, Esq., Samuel J. Warms, Esq., and Edward Baumgarten, Esq., for the petitioner.Maurice S. Bush, Esq., for the respondent.  Opper, Judge.  OPPER*474  Petitioner contests a deficiency in income tax of $ 26,226.40 for 1944.  He concedes that a portion of the deficiency was correctly determined.  The sole remaining issue is whether respondent was correct in determining that a certain transaction constituted a sale by petitioner of machinery above O.P.A. ceiling prices; that only the excess of the ceiling price over petitioner's adjusted basis is subject to section*249  117 of the Internal Revenue Code; and that the remainder of the gain is taxable to petitioner as ordinary income.  Some of the facts were stipulated.FINDINGS OF FACT.The stipulated facts are hereby found.Petitioner resides in Union City, New Jersey, and he filed his return with the collector of internal revenue for the fifth district of New Jersey.From October, 1928, to July 6, 1944, petitioner was engaged in the embroidery-manufacturing business as a sole proprietor under the trade name of Congress Embroidery Works.  On July 6, 1944, petitioner's business was located in premises in Union City, New Jersey, which he occupied under a lease for an eight-year term, four years of which were still unexpired.  Petitioner had acquired a reputation in the industry for high quality work as a subcontractor, and he had several customers of long standing.  Petitioner had four employees, all of whom had been in his employ for many years and were highly skilled.  At that time the embroidery trade was receiving large orders for chevrons and insignia for the armed services, and during the war period the embroidery business enjoyed great prosperity.Petitioner owned and used in his business three*250 Reiner embroidery machines. All such embroidery machines in the United States have been manufactured in Germany and imported to this country as new or used machines. The sales agent for such machines has been the Robert Reiner Co., which manufactures repair parts.  During the recent war no Reiner machines were imported, and there were no dealers engaged in buying or selling new or used machines. Used machines were difficult to secure and could be purchased during this period only from actual users, that is, from embroidery manufacturers.  The Robert Reiner Co. did not register a schedule of maximum prices on such machines with the Office of Price Administration, since it had no machines to sell at the time that ceiling prices became effective, and it did not expect to secure any during the war.On July 6, 1944, petitioner's machines were in good condition and each machine had a rental value of approximately $ 300 to $ 500 per month.  The machines were ten to eleven yards long, several feet wide, and each weighed about seven or eight tons.  To diminish vibration and noise, the machines were set in concrete foundations.  To move a *475  single machine from one location to another*251  results in an expense of about $ 2,500, due to the weight, bulk, and intricacy of the machine.One June 29, 1944, petitioner and Jacob Rohde executed "Articles of Agreement" providing that in consideration of the sum of $ 80,000 to be paid to petitioner by Rohde, petitioner agreed to execute a conveyance of certain property to Rohde.On July 6, 1944, petitioner executed and delivered to Rohde a bill of sale carrying out the aforesaid agreement.  The bill of sale provided, among other matters, that "the Seller does covenant and agree, to and with the said Buyer, to warrant and defend the sale of said goods and chattels and embroidery business hereby sold * * *." Adjustments were made to the amount of the consideration for prepaid rent, insurance, and taxes.  The assets conveyed were listed in a schedule as follows: One (1) Used Reiner Shuttle Embroidery Machine #15324, and Automat #3245 and Motor Attached;One (1) Used Reiner Shuttle Embroidery Machine #15391 and Automat #3123 and Motor Attached;One (1) Used Reiner Shuttle Embroidery Machine #16073 and Automat #4040 and Motor Attached;One (1) Punching Machine #478/15120;One (1) Repeating Machine #2008;One (1) Mending Machine;*252  One (1) Chainstitch Machine;All Shuttles used in the operation of the above machinery;At Least two (2) sets of borers to each embroidery machine;Three (3) sets of 8/4 machine needles;All flourescent [sic] fixtures; all motors and tools incidental to and used on the aforesaid machinery;Leasehold Interest of Seller; the goodwill of the business herewith sold; and use of Seller's interest in telephone without any reservations subject to the telephone company rules, regulations and restrictions.Specifically excepted from said sale are all account receivables, finished goods, unfinished goods, yarns and bobbins, patterns, punchings, safe, filing cabinet, and all other goods and chattels in said factory not specifically set forth in the foregoing Schedule, and the same are not included in said sale.  Seller has the privilege to enter factory premises during working hours to remove the property not included in said sale for a period of two months after closing date.The bill of sale also contained a provision stating the following:The Seller herein agrees not to engage in the Schiffli Embroidery Business within Hudson County for a period of three (3) months after the date*253  of this sale; Seller further agrees that the Buyer shall have the use of Seller's trade name of "Congress Embroidery Works", provided Buyer notifies Seller in writing of his intention to use said trade name within three months after the date of this sale, and upon Buyer's failure to exercise his right to use said trade name, then the use of same shall revert to Seller.At the same time and affixed to the same instrument, petitioner executed an affidavit in compliance with the Bulk Sales Act of the State *476  of New Jersey stating that "he is the proprietor of Congress Embroidery Works, and that he is this day selling the business and good will and that he is the sole owner of and in the possession of the chattel property mentioned * * *" and that no debts were owing to creditors.The tangible assets described in the bill of sale had an adjusted cost basis to petitioner on that date of $ 5,179.82, had been held by petitioner for a period of more than six months prior to the sale, had been used by him in his business, and he was not a dealer in those items.  Petitioner's total expense in connection with the transaction was $ 3,650.Petitioner and Rohde had no discussions concerning*254  the value of the individual assets, and petitioner made no apportionment of the proceeds of the sale.In addition, petitioner sold to Rohde, for a consideration of $ 100, a number of miscellaneous items used by petitioner in his embroidery business, consisting of two electric fans, curtains, a clock, a nine-yard table, two shears, an office desk and office chair, two other tables, and a scale.  He also sold to Rohde for $ 94.20 some boxes of yarn, which were inventory items.On July 31, 1944, Rohde elected to use petitioner's trade name of "Congress Embroidery Works" under the provisions of the bill of sale. Petitioner executed a consent to the use of the trade name.Subsequent to July 6, 1944, Rohde kept six to twenty workers in his employ, including three of petitioner's four former employees.  For a period of about five or six months after July 6, 1944, Rohde operated his business in petitioner's former premises, paying the same monthly rental of $ 100 a month to the same landlords.  Rohde operated his business twenty-four hours a day.  An ordinance of Union City, New Jersey, adopted on August 21, 1941, provided that no embroidery shop should be allowed to operate between the *255  hours of 10 p.m. and 7 a.m. On September 12, 1944, one of the owners of the premises swore out a complaint for violation of that ordinance. On September 29, 1944, Rohde pleaded guilty and on October 6, 1944, he was fined $ 100.  Several months later Rohde and the owners of the premises terminated the lease, and Rohde removed the business to another city.Since July 6, 1944, petitioner has not engaged at any time in the embroidery-manufacturing trade, and he entered into the sale with the intention of retiring from business.Petitioner's income tax return for 1944 reported a sale of machinery and equipment for a gross sales price of $ 80,194.20, on which there was to be taken into account a net long term capital gain of $ 35,682.19.  That return was prepared by petitioner's accountant from an examination *477  of the legal instruments and without instructions from petitioner, who signed the return.In a notice of deficiency mailed to petitioner on October 14, 1948, respondent based an adjustment upon the ground that the total sales price for the three Reiner machines had been limited by O.P.A. regulations to $ 21,675, and that the proceeds of the transaction exceeding that amount*256  constituted ordinary income to petitioner.Petitioner in fact sold to Jacob Rohde his embroidery business, and not merely machines and equipment.No O.P.A. regulation was violated by petitioner in connection with the aforesaid sale.OPINION.The price paid to petitioner on the sale of certain property has been determined by respondent to be partly ordinary income rather than capital gain under section 117 (j) of the Internal Revenue Code1 because, although the transaction was cast in the form of a sale of petitioner's entire embroidery manufacturing business, it was really only a sale of his machinery; this machinery was covered by an O.P.A. price regulation; the total amount received by petitioner was in excess of those prices; and the excess of those prices not being received for the property itself because only the O.P.A. ceiling price can be considered as having been so received, the balance is not capital gain under section 117, but ordinary income.  See I. T. 3811, 1946-2 C. B. 70.*257  Our findings of fact have disposed of the first of these premises and hence of the entire case.  It seems too clear for argument that petitioner sold his entire business. Whether he did so because that would free him from price regulations on individual machines, it is not necessary to decide.  Respondent concedes that O.P.A. price regulations did not apply to the sale of an entire business. Petitioner sold the machines; he sold his lease; he sold his good will; he sold his trade name; and he made his customers available to the purchasers.  He actually intended to and did retire from the embroidery business, as respondent concedes, and has not reentered it since.  Even incidental equipment *478  not suggested as being affected by the price regulations 2 and some inventory were included in the sale.  No one can doubt that petitioner had a business and apparently a flourishing one before the sale.  He had no business whatever after the sale was concluded.  If he did not sell it, it is difficult to gather what happened to it.*258 Since the conclusion that petitioner did not sell his business is essential to respondent's entire theory, the indicated finding, as we have said, disposes of the case.  It makes it unnecessary to decide whether there was in fact any O.P.A. ceiling for these machines and, if so, what it was, a subject on which respondent's case is silent except for bare reliance on the deficiency notice.  It makes it unnecessary to determine further whether, even if the sale were in violation of O.P.A. ceilings, the price received was something other than the selling price of the property under section 117 (j), 3 although indeed the intricacy of respondent's contention on this point may be gathered by comparing one statement in his brief that "respondent has determined that the sum of money received by the petitioner * * * above the ceiling price on his machinery was not part of the selling price" with another statement made in the argument on the factual issue that "the petitioner has thus failed to show that he sold his depreciable equipment for a sum other than the $ 80,000 determined by the Commissioner." Finally, it is unnecessary to meet petitioner's contention that if respondent's treatment*259  of a part of the selling price as ordinary income is permitted by the statute, the latter is itself unconstitutional.Having determined that this was a sale of petitioner's entire business and hence concededly permitted by the O.P.A. price regulations, it follows that the deficiency was erroneous.Decision will be entered under Rule 50.  Footnotes1. SEC. 117.  * * ** * * *(j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business.  --(1) Definition of Property Used in the Trade or Business.  -- For the purposes of this subsection, the term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.  Such term also includes timber with respect to which subsection (k) (1) or (2) is applicable.↩2. Under the general issue the burden was upon the petitioner to demonstrate that the property in question consisted of capital assets within the definition of section 117 (j)↩ and to show its basis.  He failed to do so as to some of this incidental equipment, the proceeds of which must accordingly be treated as ordinary income in its entirety.  Petitioner concedes that the inventory items must be so treated.3. But cf.  Lela Sullenger, 11 T. C. 1076↩; petition for review dismissed (C. A., 5th Cir.), -- Fed. (2d) -- (Feb. 20, 1950).