Best Brewery Co. v. Commissioner

BEST BREWERY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Best Brewery Co. v. Commissioner Docket No. 19139. United States Board of Tax Appeals 16 B.T.A. 1354; 1929 BTA LEXIS 2393; July 17, 1929, Promulgated *2393 1. Membership dues paid to a trade association by the petitioner should be deducted from gross income in the taxable year as an ordinary and necessary business expense. Independent Brewing Co.,4 B.T.A. 870, followed. 2. Loss resulting from obsolescence of renewal rights of saloon licenses allowed as deduction from gross income in the taxable year, under authority of section 234(a)(4) of the Revenue Act of 1918. McAvoy Company,10 B.T.A. 1017, followed. Robert Hardison, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. LANSDON *1354 This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent for 1919 and 1920, in the amounts of $2,068.37 and $263.28, respectively. The petitioner assigns as errors on the part of the respondent, the following: (1) Failure to allow adequate deductions for depreciation; (2) failure to allow deductions for obsolescence of physical assets due to prohibition legislation; (3) disallowance as an expense deduction of dues paid to a brewers' trade association in 1919, in the amount of $2,317.32; and (4) refusal*2394 to allow any deductions for obsolescence of renewal rights of saloon licenses. FINDINGS OF FACT. Petitioner is an Illinois corporation with its principal office at Chicago. Counsel for both parties, under date of December 8, 1928, entered into a written stipulation, as follows: (1) That depreciation was allowed by the Commissioner of Internal Revenue on saloon fixtures for 1919 and 1920 in the amounts of $4,949.39 and $3,755.19, respectively, based on rate of 12 1/2 per cent per annum. (2) The cost of saloon fixtures for the year 1904 and subsequent additions and eliminations to 1920, inclusive, to be used as a basis of depreciation, is as follows: Year. Cost. [1904] $16,930.83 1905 additions 10,589.00 1906 additions 11,053.91 1907 additions 6,704.92 1908 additions 15,101.33 1909 additions 7,741.31 1910 additions 13,620.66 1911 additions 9,229.08 1912 additions 6,194.03 1913 additions $7,790.39 1914 additions 11,110.85 1915 additions 6,514.34 1916 additions 7,819.11 1917 eliminations 3,501.20 1918 eliminations 310.69 1919 eliminations 1,271.85 1920 eliminations 2,413.30 *1355 (3) It is agreed that the cost of beer*2395 pumps and saloon fixtures and additions (and eliminations) on the respective dates shown below are as follows: BEER PUMPS SALOON FIXTURES Year Cost Jan. 1, 1909, additions $11,040.13 [1904] $16,930.83 Jan. 1, 1910, additions 9,041.37 1905 additions 10,589.00 Jan. 1, 1911, additions 11,590.62 1906 additions 11,053.91 Jan. 1, 1912, additions 6,382.03 1907 additions 6,704.92 Jan. 1, 1913, additions 9,494.21 1908 additions 15,101.33 Jan. 1, 1914, additions 6,993.18 1909 additions 7,741.31 Jan. 1, 1915, additions 5,679.72 1910 additions 13,620.66 Jan. 1, 1916, additions 7,811.59 1911 additions 9,229.08 Jan. 1, 1917, additions 2,846.38 1912 additions 6,194.03 Jan. 1, 1918, additions 828.50 1913 additions 7,790.39 Jan. 1, 1919, additions 604.70 1914 additions 11,110.85 Jan. 1, 1920, additions 534.20 1915 additions 6,514.34 1916 additions 7,819.11 1917 eliminations 3,501.20 1918 eliminations 310.69 1919 eliminations 1,271.85 1920 eliminations 2,413.30 (4) It is further agreed that amount paid to the Brewers' Protective Association in the year 1919 was $2,317.32. (5) It is further*2396 agreed that saloon license assignments in the City of Chicago, Illinois, were purchased over the period from 1910 to 1916 at the costs indicated as follows: Date of purchase From whom purchased License number By whom purchased Cost [1910] Oct. 10 Eugene Wiltgen [5896] George H. May $1,400.00 Dec. 27 Louis Friedman [4238] Ignatz Neumann 2,000.00 [1911] Nov. 22 Max Kutzner [5748] do 2,000.00 [1912] Nov. 4 M. Meyer [5904] Best Brewing Co 1,556.54 Aug. 29 M. A. Price [5879] Ignatz Neumann 1,600.00 [1913] Apr. 29 Wm. Wengler [3076] do 1,400.00 Apr. 19 Harry Holmberg [4708] do 1,232.55 May 20 Edw. Formanek do 1,300.00 Oct. 14 Sebastian Copaul [6589] do 1,350.00 June 9 John Wehr [4374] do 1,000.00 [1914] Feb. 3 Adolph Wolf [4595] do 2,000.00 Feb. 6 Ben Mincer [3183] do 2,000.00 Mar. 23 Peter J. Jonaitis [2269] Leonard H. Wolf 2,250.00 Apr. 13 Theodore Marck [1660] Ignatz Neumann 2,100.00 Mar. 13 Stanley Maccomick [3729] do 2,200.00 May 4 Abraham Bernstein [6029] do 2,600.00 [1915] Feb. 13 Annie Brickholn [3741] John Fay 1,000.00 Nov. 1 Abe D. Garden [6532] Ignatz Neumann 50.00 Feb. 18 John Fay [3741] I. Neumann 1,300.00 [1916] Apr. 29 J. Curtin Ignatz Neumann 100.00 Sept. 6 J. U. Zuter [6982] Ignatz Neumann 500.00 30,939.09 *2397 *1356 At the hearing on January 31, 1929, counsel entered into a further stipulation, as follows: (1) That depreciation on saloon fixtures shall be computed at the rate of eight per cent per annum on the cost values stipulated under paragraph 2 of the Agreed Statement of Facts filed with the United States Board of Tax Appeals on December 8, 1928. (2) That obsolescence of saloon fixtures and beer pumps shall be allowed the petitioner in an amount to represent the cost of such saloon fixtures and beer pumps as stipulated in the Agreed Statement of Facts filed with the United States Board of Tax Appeals on December 8, 1928, and such obsolescence shall represent the unexhausted cost of the items of equipment above mentioned, as of January 1, 1919 allowing in such loss for obsolescence a salvage value of ten per cent of the cost of such equipment not exhausted by depreciation on January 1, 1919. (3) It is further agreed that in the year 1919, the Best Brewing Company, petitioner, paid dues and fees to the United States Brewers Association, in the sum of $2,317.32. This brewers' protective association was a large trade organization to which the principal brewers throughout*2398 the United States belonged. Its income was used for the promotion of the interests of the brewery industry. The association maintained an office in the City of Chicago, Illinois, and helped to regulate the brewery business, worked out labor contracts and rendered such service as it could to the petitioner, that came up pertaining to the brewery industry, affecting petitioner's rights, and made reports to the petitioner of any breach of the law or moral conduct in the saloons handling petitioner's product. (4) It is further stipulated and agreed, that the Best Brewing Company, petitioner, had purchased by assignment renewal rights of twenty-one saloon licenses, at various times and from various persons, as shown in stipulation filed herein on December 8, 1928, at the actual cost to petitioner of $30,939.09. That in obtaining the renewal rights of saloon licenses, petitioner did not take the same in its own name, but had the assignment made out to trusted employees of the Best Brewing Company, petitioner, on forms provided by the City of Chicago, Illinois. That these assignments were recorded in books kept for that purpose, in the office of the City Collector of Chicago. That*2399 reassignments in blank were executed by the trusted employees of the Best Brewing Company and were left in possession of petitioner for its protection, in case anything should happen to the employee. That the petitioner, however, acquired and controlled these renewal rights. That the city officials of the City of Chicago, Illinois, knew that the assignments of the saloon license renewal rights in the name of the trusted employees of the Best Brewing Company, belonged to the petitioner, and recognized its rights and ownership, acquired in assignments of the renewal rights as they existed therein. That from 1906 (after the passage of the Harkins Limitation Ordinance by the City of Chicago, Illinois) to 1919, it was the uniform custom and practice in the City of Chicago among those interested in the brewery business, to acquire, purchase and sell in the manner stated, renewal rights of saloon licenses. That such rights permitted the renewal of the license at other locations, in the discretion of the officials and under existing laws and ordinances. That the Best Brewing Company acquired these renewal rights to give it a market for its product and thereby increase its income and revenue. *2400 That the City of Chicago prevented the lapsing of saloon licenses by recognizing the assignments of the renewal rights. That the Best Brewing Company, the petitioner, acquired these renewal (license) rights at the cost herein set out. *1357 (5) That the renewal rights of the saloon licenses acquired by the Best Brewing Company in the manner above stated cost $30,939.09. That in the year 1919 the renewal rights of the petitioner to the saloon licenses became worthless. On June 25, 1906, the City Council of Chicago enacted an ordinance, known as the Harkins Limitation Ordinance, which provided, among other things, that all lawful licenses issued and in force on July 31, 1906, "for the keeping of a saloon or dram-shop within the City of Chicago shall be renewed or re-issued upon strict and full compliance with the laws and ordinances in force in the City of Chicago at the time of the application for such renewal or reissue, but no new license (other than a renewal or reissue as hereinafter provided) for the keeping of a saloon or dram-shop shall at any time thereafter be granted or issued until the number of licenses in force at the time shall be less than one for every*2401 five hundred of the population of the City of Chicago as ascertained by the then last preceding school census, whereupon such new licenses may be issued from time to time to lawful applicants, according to priority of application * * * until the total number of licenses in force shall equal one for every five hundred of population * * *." From 1906 to 1919, the custom and practice of assignment of renewal rights to saloon licenses was recognized by the mayor and other officials of the City of Chicago. Saloon licenses were issued to the assignees of such renewal rights, provided such persons were deemed competent under the police power of the city. In any case in which a controversy arose as to the person controlling the renewal rights of a certain license, proceedings were had before the city collector, testimony taken under oath, and the license issued to such person as that official found to be the owner of the renewal rights. The city officials knew that the renewal rights of saloon licenses were being purchased by breweries during this period; and said officials furnished printed forms to breweries and others for the assignment of renewal rights, and required that they be*2402 recorded with the city collector for which a fee of $1 was charged. Prior to March 1, 1913, the petitioner purchased the renewal rights of five saloon licenses, at a total cost of $8,556.54. On March 1, 1913, these same renewal rights had a fair market value in excess of cost. OPINION. LANSDON: The parties have stipulated all of the basic and essential facts for a proper disposition of the first and second assignments of error. Depreciation and obsolescence of saloon fixtures and beer pumps should, therefore, be computed in accordance with the stipulation. *1358 Dues of $2,317.32 paid during 1919 to the United States Brewers Association constitute an ordinary and necessary expense of carrying on the business, and as such are a proper deduction from gross income. . The respondent erred in disallowing the deduction. The facts presented as to the loss in 1919 of petitioner's investments in the renewal rights of saloon licenses are essentially the same as those presented to this Board in *2403 . Our decision in the latter case, therefore, is controlling as to the issue here. The respondent correctly refused to allow a deduction for obsolescence of renewal rights of saloon licenses, but the loss sustained, as the result of such rights becoming worthless in 1919 following prohibitory legislation, is a proper deduction under the provisions of section 234(a)(4) of the Revenue Act of 1918. Since the fair market value as of March 1, 1913, of renewal rights owned at that date, plus cost of renewal rights subsequently purchased, is greater than the cost of all such renewal rights, the amount of the loss to be deducted is the cost of such rights, to wit, $30,939.09. Judgment will be entered under Rule 50.