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its shareholder-employees whether payments to them represent salary or dividends. Bramlette Building Corp. v. Commissioner, 424 F. 2d 751 (C.A. 5, 1970), affirming 52 T.C. 200 (1969). The shareholders are taxable on either. More importantly, the employment contract required that all compensation, including bonuses, was to be deducted from undistributed taxable income (in years in which a subchapter S election was in effect) in computing the "undistributed net profits" to be distributed to the shareholder-employees. The contract was, therefore, self-contradictory by defining as a portion of "annual compensation" the shareholder's percentage of the net profits and yet also providing that all compensation was to be deducted from the undistributed taxable income in computing "undistributed net profits." Depending upon whether or not deductions on the premiums paid on individual life insurance policies covering the lives of officers, directors, or employees of the corporation--which amounts were also to be deducted from undistributed taxable income-were allowable under section 264, the "undistributed net profits" were otherwise equivalent to its undistributed taxable income as a subchapter S corporation. The undistributed taxable income was taxable to the shareholders in any event even though no distributions were made. Sec. 1.1373–1 (e), Income Tax Regs.

Moreover, it is obvious that this corporation could not enter into such an employment contract with nonshareholders because 100 percent of the net profits were already siphoned off to the shareholderemployees by use of the employment contract. We, therefore, conclude that the petitioners' respective shares of the undistributed net profits of the corporation did not constitute compensation for purposes of section 401(a).

The profit-sharing plan before us is not on its face discriminatory with respect to the allocation of employer contributions. The plan provides that each participant is entitled to one unit of contributions for each $100 of annual compensation paid him or accrued for him in excess of $4,800. The prohibited discrimination exists by reason of the operation of the plan. While the plan provides for allocations to be made on the basis of a percentage of annual compensation, defined in the plan as "the regular salary or commission of a participant, exclusive of all special payments of every nature," the actual allocations herein have been based upon regular salary plus a share of the corporation's undistributed taxable income (which we have found not to be compensation) in the case of the shareholder-employees participants and upon salary alone in the case of the remaining nonshareholder participants.

Respondent's determination must, therefore, be sustained.

The second issue involves the deduction under section 162 as an ordinary and necessary business expense of the amount of $8,500 which was paid by the corporation to Penzner Associates when the corporation replaced Penzner as the exclusive sales agent for Burndy in marketing electronics equipment in Oklahoma. Petitioners assert that the payment was in the nature of a consultant's fee paid to Penzner for introducing Robertson, Inc., to the customers in the Oklahoma market area and for acquainting it with the products being manufactured in that area. Respondent contends that the payment was for the purchase of customer lists and the right to represent Burndy in Oklahoma, both of which are intangible capital assets the acquisition of which is a nonductible capital expenditure under section 263.

We agree with respondent on this issue. Petitioners have not met. their burden of proving that the expenditure was made for consultation services provided by Penzner relating to Robertson, Inc.'s replacement of Penzner in Oklahoma. On the contrary, the evidence presented by petitioners clearly indicates that the payment was made for two purposes: (1) To acquire the customer mailing list, the customer correspondence file, the customer order file, and the customer mailing list plates held by Penzner; and (2) to obtain the right to represent Burndy in Oklahoma by securing the relinquishment of Penzner's exclusive sales agency in that State. As to the customer mailing list and related items, there is no doubt that these materials are capital assets. Aaron Michaels, 12 T.C. 17, 19 (1949). Petitioners have shown that Robertson, Inc., lost only one customer in Oklahoma in 1971, and the loss was caused by Burndy. We have consistently held that an asset which has a value in the taxpayer's business for a period greater than 1 year is a capital asset, the total cost of which is a capital expenditure rather than a deductible business expense. Manhattan Co. of Virginia, Inc., 50 T.C. 78, 86 (1968). See Richard M. Boe, 35 T.C. 720, 725 (1961), and cases cited therein, affd. 307 F. 2d 339 (C.A. 9, 1962). There was no showing of the useful life of the asset.

Purchasing the right to represent Burndy in Oklahoma constituted an expenditure made in the acquisition of business which was also of a capital nature. Carl Reimers Co., 19 T.C. 1235, 1239 (1953), affd. 211 F.2d 66 (C.A. 2, 1954). Robertson, Inc., obtained the release of Penzner's contract rights and also acquired an expanded sales agency agreement with Burndy, the costs of which represent capital expenditures. The business acquired was that of an exclusive sales agency for electronics products of Burndy in Oklahoma. See Falstaff Beer, Inc., 37 T.C. 451, 460 (1961), affd. 322 F. 2d 744 (C.A. 5, 1963).

The correspondence exchanged between Robertson, Inc., and Penzner supports the conclusion that the payment was made for customer

lists and the right to represent Burndy. Consultation and introduction of Oklahoma customers were not part of the agreement. In a letter written to Jerry S. Penzner, the president of Penzner, Paul Neblett indicated that Robertson, Inc., would need Penzner's customer correspondence file, order file, mailing list, and mailing list plates covering the Burndy customers in the State of Oklahoma. The letter did not specify the nature of any consultation which was to be extended the successor representative and merely expressed the "hope that [Jerry Penzner] can find the time to make at least one trip through the Oklahoma territory with our Glen Smith to introduce him to the customers you are now servicing in the Oklahoma territory." Penzner's response that he would "certainly do everything possible to make a trip through the area" makes it obvious that the introduction of Robertson, Inc., to Oklahoma customers was not one of the items for which Robertson, Inc., paid $8,500. Moreover, it was at Penzner's suggestion that a Robertson representative meet with Penzner's Kansas City officials in order that the customer correspondence file could be inspected. To the extent that 1 day's activity could in any way be termed "consultation," the Penzner suggestion was nothing more than a gratuitous gesture on Penzner's part and only incidental to the sale of its customer lists and exclusive agency to Robertson, Inc.

The $8,500 expenditure to Penzner is clearly not deductible as a business expense.

Decisions will be entered for the respondent.

FRIZZELLE FARMS, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 6837-70. Filed March 13, 1974.

Petitioner exchanged 4,000 shares of Lorillard stock for like
amounts of Loew's debentures and warrants in a taxable transac-
tion occurring on Nov. 29, 1968. Held, the value of the warrants
received by petitioner in the transaction exceeded 30 percent of the
selling price and petitioner may not report his gain using the install-
ment method under sec. 453.

Frank P. Meadows, Jr., and Jeff D. Batts, for the petitioner.
Harvey S. Jackson, for the respondent.

IRWIN, Judge: Respondent determined a deficiency of $158,926.26 in the income tax of petitioner for 1968. Several questions were settled prior to trial, and petitioner conceded an alternative issue on brief.1

1 At trial petitioner contended that the merger of P. Lorillard Corp. and Loew's Theatres, Inc., was a nontaxable reorganization under sec. 368(a)(1)(A) of the 1954 Code. No mention of this contention was made in petitioner's brief, and we have treated this issue as conceded.

Accordingly, the only issue for decision is whether petitioner may report the gain realized on its exchange of 4,000 shares of Lorillard stock for debentures and stock warrants of Loew's by use of the installment method under section 453.2

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. Petitioner is Frizzelle Farms, Inc. (hereafter petitioner), a North Carolina corporation which at all relevant times maintained its principal office and place of business in the town of Maury, N.C.

Petitioner maintains its books and records on the cash method of accounting and compiled its 1968 income tax return on the cash method of accounting. For the taxable year 1968 petitioner filed its income tax return, Form 1120, with the director, Southeast Service Center, Chamblee, Ga.

Petitioner was incorporated on or about January 14, 1957, at which time it acquired 4,000 shares of P. Lorillard Corp. (hereafter Lorillard) stock having a basis of $34,010.26. At all times prior to December 11, 1968, petitioner was the beneficial and record owner of the 4,000 shares of Lorillard common stock.

On September 5, 1968, a proposed merger of Loew's Theatres, Inc. (hereafter Loew's), and Lorillard was first publicly announced. On September 4, 1968, the closing price of Loew's common stock was $95 and the closing price for Lorillard common stock was $58.125. In 1968 the principal business activity of Loew's was the operation of 14 hotels throughout the United States and the Caribbean and the ownership and operation of 110 motion picture theaters in the United States. In addition, Loew's derived income from its portfolio of marketable securities.

The principal business of Lorillard in 1968 was the manufacture and sale of cigarettes and other tobacco products. In addition, the wholly owned subsidiaries of Lorillard were engaged in the manufacture and sale of pet food and candy.

By letter dated October 22, 1968, the stockholders of Lorillard were informed of a special meeting of Lorillard stockholders to be held on November 26, 1968, "to vote upon an Agreement of Merger of a newly formed subsidiary of Loew's Theatres, Inc. (Loew's) and Lorillard, upon terms such that Lorillard will become a wholly owned subsidiary of Loew's."

The letter was accompanied by a proxy statement which set forth in detail the terms of the proposed merger and certain financial information pertaining respectively to Loew's and Lorillard.

All statutory references are to the Internal Revenue Code of 1954, as amended.

The closing quotations for the common stock of Loew's and Lorillard on October 18, 1968, were $127.50 and $69.375, respectively.

The proposed merger of Loew's and Lorillard was well publicized in publications such as Barron's, the Commercial and Financial Chronicle, the New York Times, and the Wall Street Journal.

The Lorillard stockholders at the special meeting held on November 26, 1968, approved the merger with Loew's. The merger became effective at the close of business on November 29, 1968.

As a result of the Loew's-Lorillard merger on November 29, 1968, each share of Lorillard common stock automatically became $62 principal amount of Loew's 6%-percent subordinated debentures due 1993 and a 12-year warrant to buy 1 share of Loew's common stock, par value $1 per share, at $35 a share during the first 4 years of the warrant, at $37.50 a share during the next 4 years, and at $40 a share during the last 4 years. Each certificate for shares of Lorillard common stock represented and evidenced ownership of Loew's subordinated debentures and warrants.

The stock market reacted very favorably to the proposed Loew'sLorillard merger and there was continuous and in-volume trading in the securities involved in the merger transaction both before and after the effective date of the merger.

The Loew's common stock was trading on November 29, 1968, for a high-low average price of $157.25 per share. On the same date, the anticipated 3-for-1 split shares of Loew's common stock were trading on a "when issued" basis for a high-low average price of $52.875 per share. The term "when issued" is a contraction of the phrase "when, as and if, issued" which means that settlement of the sales transaction is contingent upon the issuance of the subject securities.

The Loew's warrants were trading on a "when issued" dealing on the over-the-counter market on November 29, 1968, at an average bidask price of $29.375. The Loew's warrants were admitted to trading on the American Stock Exchange on December 16, 1968, and continued trading on a "when issued" dealing until January 2, 1969, at which time trading on a "regular basis" or "regular way" commenced.

For the period November 26, 1968, through November 29, 1968, there were actual purchase and sale transactions in the over-the-counter market of Loew's warrants on a "when issued" dealing as follows:

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