Docket No. 23172.
Allen G. Gartner, Esq., and Edward I. Sproull, C.P.A., for the petitioner. John A. Gilmore, Esq., for the respondent.
Petitioner, in order to obtain a liquor license for transfer to it by the Board of Commissioners of the City of Jersey City for use in another location, was compelled to purchase the premises for which the license was issued, and chattels therein. Thereafter, while the application for transfer was pending before the Board of Commissioners, petitioner sold the premises and chattels for $2,900 less than the cost basis of all of the property, including the license. Held, that that amount, also attorneys' fees paid for services rendered in connection with the issuance of a license by transfer, were expenditures for a capital asset having an indeterminable life, and that none of the amounts is deductible as an ordinary and necessary business expense. Allen G. Gartner, Esq., and Edward I. Sproull, C.P.A., for the petitioner. John A. Gilmore, Esq., for the respondent.
This proceeding involves, for the fiscal year ended June 30, 1945, deficiencies in income and excess profits taxes in the amounts of $3,234.77 and $2,693.20, respectively. The issues are whether petitioner sustained a loss on the sale of a parcel of real property, and if so, the amount thereof, and whether amounts paid as attorney fees in connection with the cancellation and acquisition of a license to sell liquor are deductible as business expenses.
FINDINGS OF FACT.
The Concourse Grill Corporation, a New Jersey corporation hereinafter referred to as ‘old corporation,‘ 90 per centum of stock was owned on June 3, 1944, by Louis Deutsch and the remainder in equal amounts by Jennie Deutsch and Harry Ehrlich, who were president, vice president and secretary-treasurer, respectively, until June 27, 1944, held a class C license granted by the Board of Commissioners of Jersey City, New Jersey, to sell liquor at its place of business located at 12 Tube Concourse, Jersey City, New Jersey. The license was revoked on June 27, 1944, effective immediately, by Alfred E. Driscoll, Commissioner of the Department of Alcoholic Beverage Control of the State of New Jersey, on the basis of a plea of non vult to charges of bottling for sale various labeled brands of whiskey containing alcoholic beverages not genuine as labeled. The revocation order prevented it from obtaining a license for the next fiscal year commencing July 1, for which an application was pending, and regulations of the Board of Commissioners rendered the licensee ineligible to receive a license for a period of 2 years from the effective date of the revocation. The corporation was represented at the hearing by counsel, which included Charles Hershenstein who had been counsel for it since 1939 on a retainer basis. Promptly thereafter the lessor of the premises being occupied by the old corporation served notice of termination of the lease. The old corporation is still in existence.
Promptly upon the issuance of the revocation order, Hershenstein informed his client, in effect, that he was unable to do anything more in the matter and under the circumstances suggested that the best legal talent be employed with the view of saving something for it. He recommended that John Milton be employed for that purpose. Hershenstein had been an employee of the Law Department of Jersey City since 1924 and for several years had been assigned to work in which the mayor was interested.
John Milton had been a practicing lawyer in Jersey City almost continuously since his admission to the bar in 1903. He was assistant city attorney for Jersey City during the years 1908 to 1911, corporation counsel for the same city from 1913 to 1922, prosecutor of Hudson County from 1923 to 1928, and United States Senator for a short time by appointment to fill a vacancy. He was personal counsel for Frank Hague, mayor of Jersey City in 1944 and, as mayor, Chairman of the Board of Commissioners who was in charge of the Department of Public Safety, which had jurisdiction over the issuance of liquor licenses. Milton had considerable influence and the members of the Board of Commissioners had a high regard for him.
After discussing the matter of his services with Hershenstein, Louis Deutsch, Harry Ehrlich, and David Herzog, on June 28, 1944, Milton agreed, without specifying the fee he would charge, to represent the old corporation with a view of repairing the damage caused by the revocation order and working out some solution to the problem with which it was confronted. Thereafter Milton had conferences with Driscoll at least twice, on the first of which he was accompanied by Hershenstein. They endeavored to persuade him, without success, to reopen the revocation proceedings to take evidence and at that or one of the other conferences Milton suggested the formation of a new corporation to become a licensee by transfer of an existing license. The suggestion resulted in a statement by Driscoll that he would not disapprove any transfer authorized by the Board of Commissioners. Thereafter on five or six occasions, Milton discussed the matter with Daniel Casey and at least once with the mayor of Jersey City, or the deputy mayor. He was assured that an application for the transfer of an existing license would be approved by the Board of Commissioners. Casey would not have approved a transfer without the concurrence of the mayor. Milton and Driscoll belonged to opposite political parties and there was no close relationship between them.
It was not possible to obtain a new liquor license at that time on account of the fact that the outstanding licenses exceeded the maximum of 500 provided by an ordinance adopted in 1937. The only means open to the officers of the old corporation to obtain a license was to acquire one by transfer, which required the filing of an application the same as for an original license and the approval of the Board of Commissioners to the transfer. The ordinance also provided that no transferee of a license could occupy premises within 750 feet of the premises of an existing holder of a like license. At that time there were several holders of class C licenses within the restricted area.
The services of Michael Halpern, the accountant for the old corporation, and an attorney, were engaged to locate a class C liquor license that could be purchased. After calling upon from seventy-five to one hundred licensees he ascertained that the license held by Fred Schubert, doing business at 111 Franklin Street, Jersey City, located four or five miles from 12 Tube Concourse, could be acquired in connection with a purchase of the premises and fixtures used in the business being conducted therein. The property was acquired on July 24, 1944, for $4,950. The sellers agreed in a single written agreement both to sell the property and to execute whatever agreements were necessary to transfer the liquor license for the business to the purchaser, or his nominee. Title was taken in the name of David Herzog to prevent the seller from knowing the real purchaser. The purchase price was paid by Hershenstein, who performed the legal work connected with the purchase without any help from Milton, for which he later received reimbursement from the petitioner. On August 9, 1944, Herzog agreed to sell the property, exclusive of the liquor license, for $3,000, to one Burcz. The agreement with Burcz recited that it was subject to consummation and completion of an agreement with Schubert and wife, of July 24, 1944, ‘wherein the said David Herzog agreed to purchase * * * the aforementioned premises, together with all the tavern fixtures and equipment now in said premises, together with the retail plenary consumption license for said premises.‘ The legal work connected with the sale was performed by Hershenstein.
The petitioner was organized on July 25, 1944, under the laws of New Jersey. The legal work incident thereto was performed by Hershenstein, without any assistance from Milton. Its stock was issued in equal amounts to Louis Deutsch, Harry Ehrlich, and David Herzog, who became its first officers and directors. The filing of an application for a certificate of incorporation was delayed until it was known that a class C license could be acquired for transfer and Milton had been assured that an application for transfer of a license to petitioner would be approved by the Board of Commissioners. An application for transfer of the license acquired from Schubert was filed with the city of Jersey City on July 27, 1944, and was approved by the Board of Commissioners thereof on August 15, 1944, by granting the request made by Schubert to transfer his license to petitioner. The granting of the application involved approval of the personal qualifications of petitioner's stockholders and officers. The transfer was made on the original license by substituting petitioner's name and address for Schubert's and a certificate of the Acting City Clerk that the transfer was authorized by the Board of Commissioners. The transfer did not serve to increase the number of outstanding licenses.
Class C liquor licenses are issues by the city of Jersey City for a term of 1 year from July 1 for an annual fee of $500. A licensee has the privilege of applying for renewal of the license without any limitation upon the number of times. It has been the practice of the city of Jersey City for many years to renew licenses upon proper application and payment of the annual fee if the applicant has complied with the law and regulations under the current and any previous licenses issued to him.
The first class C license was issued to the old corporation in 1937 and was renewed each year thereafter until revoked. The license granted to petitioner on August 15, 1944, has been renewed each year since that time.
A new lease was entered into at an increased rental for the unexpired term of the old lease. The negotiations for the new lease were conducted by Hershenstein with some assistance of minor importance from Milton.
A commission in the amount of $300 was paid by petitioner in connection with the sale of the premises at 111 Franklin Street. Halpern was paid a fee of $1,500 for services rendered by him in connection with the purchase of the property, including the liquor license.
Hershenstein charged and was paid a fee of $1,000 for services rendered in obtaining the new lease. The deductibility of the amount is not in controversy. In addition thereto he rendered a bill for and was paid by petitioner $4,000 for services rendered ‘in re new license to Tube Bar, Inc., and assisting Mr. Milton.‘ Of this amount, $1,000 for services rendered to the old corporation and $350 for organizing petitioner, are no longer in issue. Of the remaining amount of $2,650, $650 was for services rendered in connection with the purchase of the property at 111 Franklin Street, including the liquor license obtained in connection with it, and the sale thereof, except the license, and $2,000 was for services rendered to petitioner in obtaining the agreement of licensees operating within 750 feet of 12 Tube Concourse to withhold any objection they might have to the issuance of a license to petitioner, and other services in connection with the issuance of a license to petitioner. Their consent to refrain from objecting to the transfer was obtained at the suggestion of Milton. Hershenstein did not at any time discuss the matter of a license for petitioner with officials of the city of Jersey City.
For all of the services rendered by him, Milton charged a fee of $10,000, which was paid by petitioner.
In its return for the taxable year, filed with the collector of the fifth district of New Jersey, petitioner claimed the amount of $2,250 as a deduction for ‘License.‘ The amount represents the difference between the purchase and selling price of the property at 111 Franklin Street, not including sale of the liquor license, plus the commission of $300 paid in connection with the sale. In addition thereto petitioner claimed as a deduction the amount of $19,715 for ‘Legal and Auditing.‘ Of the aggregate deductions, in the amount of $21,965, respondent disallowed $18,750 as a business expense without assigning any reason for his action, but he capitalized $1,000 of the amount so disallowed for amortization over the term of the new lease as leasehold expense.
The petitioner is contending that it is entitled to a deduction for an ordinary loss of $2,900 alleged to have been sustained in the sale of the Franklin Street property and fixtures, and a total of $13,500 as a deduction for legal expenses. The amount of the alleged loss is the difference of $1,950 between the consideration paid to Schubert and the selling price of the property, without the license, plus the selling commission of $300, and $650 for the fee paid to Hershenstein for legal services rendered incident to the purchase and sale. The $650 was added to the loss alleged, by amendment to conform to proof. The legal expenses consist of fees of $1,500 and $10,000 which were paid to Halpern and Milton, respectively, and $2,000 for services rendered by Hershenstein in connection with the license issued to petitioner.
The position of the respondent is that the alleged loss of $2,900 and the fee paid to Halpern, represent capital expenditures incurred to acquire the license issued to petitioner; that the services of Milton were as a primary proposition rendered, in part, to the (a) old corporation, (b) petitioner's stockholders as individuals, and (c) in connection with the new lease and to the extent otherwise rendered to petitioner, for the acquisition of the license, and that the services of Hershenstein were rendered for the stockholders or in the acquisition of the license.
The parties do not differ on the amount of the alleged loss. Petitioner seeks to have us treat the purchase and sale as transactions having no relation to the license issued to it by transfer, whereas, respondent's view is that the dealings were merely incidental to the acquisition of the license, and accordingly, the amount should be regarded as the cost of the license, and renewal privileges thereunder, which he contends is a capital asset having an indeterminable life. The question should not be considered without the surrounding facts. So considered, more appears than an isolated sale of property.
The license issued the old corporation having been revoked, effective immediately, it was necessary to obtain a modification of the order or another license to resume business. A new license could not be obtained because the maximum number of licenses was then outstanding. After declining to reopen the revocation proceedings, Commissioner Driscoll agreed not to disapprove if the Board of Commissioners of the city of Jersey City authorized a license through the means of a transfer of an existing license. Transfers of license from person to person were not possible under the regulations without the approval of the Board of Commissioners of Jersey City. Halpern, after considerable effort, located a licensee who was willing to give up possession of his license in connection with the purchase of the premises in which he was doing business, and the fixtures used in his business. By that time Milton had received assurances that the Board of Commissioners would approve the transfer of an existing license, and later Hershenstein, at the suggestion of Milton, to make a better case before the Board of Commissioners, obtained agreements from licensees in the restricted area to refrain from objecting to the transfer.
No steps were taken to organize petitioner until arrangements had been made to acquire a license which could be made the subject of an application for transfer and until Milton had received assurances that the Board of Commissioners would approve a request for transfer. The license held by Schubert was acquired and while the application for transfer was pending before the Board of Commissioners, an agreement was entered into to sell the Franklin Street property and the fixtures.
Petitioner's intention at all times was to conduct a business at 12 Tube Concourse, where its predecessor had operated. A license being essential, petitioner was willing to purchase property not required in its contemplated business in order to obtain an existing license could be made the subject of an application for transfer. The license was its ultimate objective, and the acquisition of the real estate and chattels was merely incidental thereto. Under the evidence, a transfer of the license could be secured only by purchasing the real estate where it was being used. Obviously, here the property was obtained only in order to secure the license, and was a mere incident. The unimportance of the real estate and chattels is shown also by the sale thereof even before the transfer of the license was approved. It is evident that the purchase and sale of the property were mere steps of a single transaction to obtain a license to operate a liquor business.
The petitioner's income tax return did not claim the item as a loss, but set forth $2,250 (without the $650 attorneys' fees) as ‘license‘ under ‘other deductions,‘ from which it is apparent that petitioner originally regarded the item not as the loss now contended for, but as cost of the license. We consider the first view the correct one. Moreover, the entire purchase, i.e., property and license, has never been disposed of, the license having been retained. The $4,950 paid to Schubert was not under the evidence allocated between property and license, so that no basis for the property alone appears from which to compute loss thereon even if otherwise there might be recognizable loss on the sale of the property.
We conclude and hold that the alleged loss of $2,900 constitutes part of the cost of the license obtained by transfer.
The fee charged by Halpern was for services rendered in locating a licensee who would agree to deliver possession of his license in connection with the purchase of the property in question. The amount thereof falls within the same classification as the fee charged by Hershenstein for legal services incident to the purchase and sale, and the sales commission, and, therefore, constitutes part of the cost of the license issued to petitioner.
We do not concur in the view of respondent that some part of the fee of Milton and $2,000 of the fee charged by Hershenstein were for services rendered to petitioner's stockholders. The basis for his contention is that, under the laws of New Jersey, no license could have been issued to petitioner without consideration of the qualifications of the stockholders to receive a license as individual applicants. The transfer was applied for by, and was issued to, petitioner, the real party in interest. The qualifications of its stockholders under the statute were only incidental to the fitness of the applicant to receive a license. The part their qualifications played in obtaining the license is not, in our opinion, sufficient to justify ignoring the corporate entity.
Aside from one or more conferences with Driscoll with the view of having him reopen the revocation proceedings, Milton had one conference in New York City to negotiate a new lease. His services before Driscoll were, in part, for the benefit of the old corporation and the portion of his fee for the conference in New York City constitutes part of the cost of the new lease. The absence of any allocation in the evidence — Milton declined to allocate it — does not relieve us of the duty to make one the best we can. Cohan v. Commissioner, 39 Fed.(2d) 540. Accordingly, we hold that of his fee of $10,000, $3,000 was for services rendered to the old corporation and $500 in connection with the new lease. The remaining amount of $6,500, and the $2,000 fee charged by Hershenstein for services rendered by him, are chargeable as costs in acquiring the license. The question remains whether these amounts are ordinary expense or capital expenditure.
Petitioner's contention that the attorneys' fees are deductible as ordinary and necessary business expenses is based largely upon the theory that the license granted to it, including such renewal privilege as are incident thereto, is not, as respondent asserts, a capital asset.
In Morris Nachman, 12 T.C. 1204, we held that the purchase of a liquor license in the course of being issued by the city of Jacksonville, Florida, was an expenditure for a capital asset having an indeterminable life, and that except for the portion thereof allocable to the fee of the current year, none of the cost was deductible as a business expense. Petitioner seeks to distinguish the case upon the grounds that the petitioners there purchased nothing other than the license, instead of as here realty and chattels, and got a license with it, and that transfers from person to person are permitted in Florida and prohibited in New Jersey. Any distinction of facts in the cases is not material.
The ordinance of the city of Jacksonville did not require that preference be given to holders of licenses but it was the practice of the municipal license inspector, acting within his discretion, to grant such preferences. It was the custom there to recognize transfers of licenses, provided the assignment was evidenced by a written instrument. The issuance of all licenses was within the discretion of the inspector. Here, instead of a purchase of realty and chattels, in connection with which a license was received, there was, in substance, a purchase of the license, with the other property incidental thereto. There is no evidence of a formal transfer of the license by Schubert but he agreed to execute such instruments as were necessary to assign it and subsequently requested the Board of Commissioners to transfer his license to petitioner. The specific action of the Board of Commissioners was approval of Schubert's request rather than granting the application of petitioner.
The holder of a license in Jacksonville had a reasonable expectation that requests for renewals would be granted. It was the policy of the Board of Commissioners in Jersey City to grant renewals in the absence of law violations. Testimony of two clerks connected with the issuance of such renewals was very positive in that regard. That petitioner's officers were aware of the custom is shown by the renewal licenses the old corporation received until its license was revoked and the renewals since 1944.
Petitioner points out that in New Jersey a licensee has no vested right in renewals. The case of Zicherman v. Driscoll, 133 N.J.L. 586, 45 At.(2d) 620, so holds. No absolute right to renewal licenses existed in Jacksonville, and none is required in situations like the one here involved. It is obvious that petitioner incurred the expense, not to obtain a license merely to operate during the remainder of the year for which the license was granted, but also for the right to apply for renewals. Under the policy long followed by the Board of Commissioners in authorizing renewals, only the behavior of petitioner's officers under the law stood between petitioner and the honoring of renewal requests in the future.
Petitioner, as in the case of the petitioners in the Nachman case, acquired a capital asset. It follows that the cost thereof is not deductible as an ordinary and necessary business expense.
As to the fees to Milton, in addition to his contention stated above, which respondent on brief calls his ‘principal contention,‘ he also states specifically as an alternative view that such fees were in fact paid to obtain political influence. Having above concurred in the principal contention we find it unnecessary to pass upon the alternative.
Decision will be entered under Rule 50.