Winter Garden, Inc. v. Commissioner

THE WINTER GARDEN, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Winter Garden, Inc. v. Commissioner Docket No. 8246. United States Board of Tax Appeals 10 B.T.A. 71; 1928 BTA LEXIS 4189; January 21, 1928, Promulgated *4189 1. Where one purchased a going business intending to continue its operation as it then stood, but within a few days found it necessary to completely after and remodel the plant, which resulted in the scrapping or demolition of most of the equipment, held, the cost of the scrapped equipment constitutes a deductible loss under section 234(a)(4) of the Revenue Act of 1921. 2. In determining the value of such equipment the judgment of corporate officers experienced in such values is entitled to weight. E. J. Aye, C.P.A., and Whitney E. Smith, Esq., for the petitioner. Brice Toole, Esq., and LeRoy Hight, Esq., for the respondent. MARQUETTE *71 This proceeding seeks the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1921 amounting to $3,844. FINDINGS OF FACT. The petitioner is a corporation duly organized under the laws of California and located in Los Angeles. Its business was that of conducting a chain of cafes in and near Los Angeles. About December 1, 1921, petitioner took possession of an Italian restaurant, the Roma, which had been in operation about two and one-half*4190 years. The purchase price was $60,000. Officers of the petitioner made no inventory as such before purchasing; they accepted the seller's inventory as to kitchen and dining-room equipment and estimated the lease and good will at $40,000 and the equipment at $20,000; of the latter sum petitioner allocated $13,000 to dining-room equipment and $7,000 to kitchen equipment. After operating the Roma Cafe for three days, from Thursday morning to Saturday midnight, petitioner closed the place because of insufficient patronage and within a few days thereafter began a thorough remodeling. The kitchen and dining room were practically made over and the guest capacity nearly doubled. The various changes made it necessary to discard most of the equipment and decorating, the value of which was estimated by petitioner to be $15,000. This was a total loss. The entire cost of remaking and equipping the cafe was approximately $36,000. At the time the Roma Cafe was purchased it was the intention of the petitioner to operate the restaurant as it then stood, with no extensive alterations. Meats and other food supplies were bought in the manner usual for a continuing business, in quantities*4191 far in excess of the needs of only three days of operation. It was only because *72 of the poor patronage during the first three days of business that the plans were changed and immediate remodeling decided upon. In making it income-tax return for the year 1921 the petitioner deducted from its taxable income the sum of $15,000, the estimated cost of equipment scrapped in remodeling the Roma Cafe, claiming that amount to be a loss not compensated for by insurance or otherwise and one occurring in trade or business. This deduction was disallowed by the respondent. OPINION. MARQUETTE: The petitioner bases its claim for the deduction of $15,000 as a loss upon section 234(a)(4) of the Revenue Act of 1921. This section provides that in computing net income there shall be allowed as a deduction losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business. The respondent has denied the claim on the ground that it is unreasonable to suppose a group of men would conduct their business affairs in the manner in which petitioner bought and conducted the Roma Cafe. He therefore allocated $55,000 of the purchase*4192 price paid for that restaurant to lease, good will and the like, leaving $5,000 as the fair value of the equipment, and as the petitioner admits it kept and used $5,000 worth of the equipment, respondent concludes that no loss whatsoever was sustained by the petitioner. However good this line of reasoning may be, it starts with a false premise and reaches a wrong conclusion. We have to deal with a condition, as shown by the facts, not with a theory as to what constitutes sound business methods. The evidence shows that petitioner did purchase the Roma Cafe without knowing that the business was earning a profit; that petitioner intended at the time of purchase to continue operating the restaurant in its then condition, but that this plan was changed after three days' operation showed a loss. The evidence also shows that petitioner, through its officers, placed a valuation of $40,000 upon the lease and good will of the Roma Cafe, and a valuation of $20,000 upon the equipment of the restaurant, including expensive decorations. In the estimation of these men the dining-room equipment and decorations were valued at $13,000 and the kitchen equipment at $7,000. In the remodeling of the*4193 place there was practically no salvage as to the dining room, while about $2,000 worth of kitchen equipment was scrapped. It is true that petitioner's valuations, as given above, were the opinion of corporate officers of petitioner, but these men had had years of experience in the lunch room and restaurant business and *73 were familiar with the values of property used therein. There is also evidence tending to show that the equipment which petitioner valued at $20,000 had actually cost nearly $7,000 some two and one-half years previously. This Board has held on several occasions that the opinion of the corporate officers as to the value of depreciated property is entitled to considerable weight. ; ; . In view of all of the evidence we are disposed to accept the values fixed by these witnesses. We think, also, that there was no intent by the petitioner to remodel the Roma Cafe and change its character and atmosphere at the time of its purchase. This is corroborated by the fact that petitioner gave instructions to the*4194 steward to continue operating the restaurant as usual. This was done and supplies placed in store far in excess of the needs for only three days' business. The intention to remodel and change the atmosphere of the restaurant was an after-thought, following three days' experience in operation. Our conclusion follows that petitioner did sustain a loss of $15,000 as claimed and such loss is deductible under section 234(a)(4) of the Revenue Act of 1921. ; As there was no appreciable depreciation in the equipment scrapped during the few days intervening between the time of its purchase and its demolition, the loss should be allowed in full. Judgment will be entered on 15 days' notice, under Rule 50.