The opinion
A. GIURLANI & BRO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
A. Giurlani & Bro. v. Commissioner
Docket No. 91797.
United States Board of Tax Appeals
41 B.T.A. 403 ; 1940 BTA LEXIS 1190 ;
February 16, 1940 , Promulgated
*1190 Petitioner, a California corporation, had as its principal business the importation and sale of a certain distinctive brand of olive oil, which was imported from an Italian corporation, the two principal stockholders of which were brothers of the two principal stockholders of petitioner, the four brothers individually owning in common the trade-mark of the olive oil imported. In the taxable year the Italian corporation went into bankruptcy. In order to protect its source of supply of the distinctive blend of olive oil, petitioner paid the debts of the Italian corporation. Held, the expenditure was neither an ordinary expense of trade or business under section 23(a), nor a loss under section 23(f) of the Revenue Act of 1934.
Martin J. Dinkelspiel, Esq., and Frank T. Andrews, C.P.A., for the petitioner.
T. M. Mather, Esq., for the respondent.
DISNEY
*404 This proceeding involves income tax in the amount of $4,565.47 and excess profits tax in the amount of $980.72, both for the taxable year 1935. The issue is as to alleged error by respondent in disallowing a deduction claimed as ordinary and necessary expense, or loss sustained in *1191 business. From evidence adduced by testimony and a written document we make the following findings of fact.
FINDINGS OF FACT.
Petitioner is a corporation, organized under the laws of the State of California and engaged since 1911 in the wholesale grocery business, including the importation of olive oil. The principal stockholders of petitioner are two brothers of Italian birth, A. Giurlani and Giuseppe Giurlani. For the last 15 years the greater part of petitioner's olive oil importations has been of "Star Brand" olive oil, purchased from Gaetano Giurlani, S.A., an Italian corporation of Lucca, Italy, the principal stockholders of which are two brothers of the two principal stockholders of petitioner. The brothers in Italy had no stock in petitioner and the brothers in America had no stock in Gaetano Giurlani, S.A.; and the two corporations had no common stockholders. Petitioner never had any ownership in, nor right to, the name "Star Brand" which identifies the product of Gaetano Giurlani, S.A. The trade-mark "Star Brand" was never registered in the United States.
The petitioner's merchandise sales for the calendar years indicated were as follows: Calendar year Sale of Star Brand olive oil Sale of other merchandise Total merchandise sales
1933 $262,545.28 $387,142.56 $649,687.84
1934 273,822.58 432,817.78 706,640.36
1935 353,670.76 542,774.90 896,445.66
*1192 The total gross profit on all merchandise sales in the calendar year 1935 was $142,323.61, of which $103,280.26 was from the sale of Star Brand olive oil.
Petitioner was the largest importer of olive oil on the Pacific Coast.
In 1935 Gaetano Giurlani, S.A., became financially involved and was placed in bankruptcy, and petitioner received notice that its *405 assets were to be auctioned off in bankruptcy sale. The secretary told the president and vice president - the two Giurlani brothers - that the business was going to finish soon if they were unable to serve the quality of oil they had. The president and vice president admitted that closing the source of supply of Star Brand olive oil would reduce the corporation to an inconsequential corporation. After a conference of the two Giurlani brothers in San Francisco and the secretary of the company, the secretary was sent to Lucca, Italy, with full power to do everything to save the California company. The secretary negotiated, compromised, and settled with the creditors of Gaetano Giurlani, S.A., for the sum of $32,962.50, receiving therefor no consideration, tangible or intangible.
Star Brand olive oil has a distinctive *1193 aroma and flavor and body and color recognizable by merchants, cooks, and other users thereof There is no other exactly the same, though there is one brand from Lucca, Italy, something like it. In 1934, during the teamsters' and longshoremen's strike, petitioner could not get the Star Brand olive oil from the docks. They bought about 160 gallons from other importers from Lucca, substituted it, and sold it in Star Brand cans There was trouble. Some refused to pay, claiming that they did not get Star Brand oil. Some oil had to be taken back. Petitioner had to take the oil back from three grocers with six gallons each, and two families refused to pay. Several letters of complaint were received. The oil was sold at about $1.95 per gallon. In 1935 petitioner handled altogether about 78,000 gallons of olive oil.
The Star Brand up to 1935 belonged to the four Giurlani brothers alike, having been inherited by five brothers from their father, who died about 1916, and one brother, who died in 1934. After the secretary of petitioner had finished his work in closing the bankruptcy of Gaetano Giurlani, S.A., and was leaving Italy, he was advised by a government administrator that there *1194 should be a written declaration of the facts already existing about the trade-mark "Star Brand" in order that the position of A. Giurlani and Giuseppe Giurlani in the United States should be clear. An instrument was therefore prepared and offered at Rome for registration. A high tax was suggested, but after explanation to the government that the instrument was a declaration of facts already existing between the brothers in Italy and the brothers in San Francisco, the government bureau decided that no tax was applicable, that the writing was not a new document. The instrument prepared contained recitations in effect that the Star Brand trade-mark had been registered with the Government of Italy in 1914 by Gaetano Giurlani, who died in 1916; that his daughters transferred their rights to the five sons; that one brother died in 1934, leaving his property to his brothers, resident *406 in Italy; that in fact for more than ten years the trade-mark had been exclusively used in America by the two brothers living in America and in Italy and elsewhere, except North America, by the two brothers resident in Italy; that the document verified and authenticated the division of use of the *1195 trade-mark; that the above statements should be understood as an integral part of the present contract; and the division between the brothers, in fact, for over ten years is declared and recognized and that by the document it is "inscribed" that the use and ownership of the trade-mark be exclusively for Angelo and Giuseppe Giurlani in North America and exclusively for Raffaello and Francesco Giurlani, only proprietors of the firm of Gaetano Giurlani, in Italy and elsewhere, except North America; that either party has the right to provide for their interest and that the parties reciprocally bind themselves to cooperate in all that may be opportune.
OPINION.
DISNEY: The only question presented is whether $32,962.50 paid in 1935 by petitioner to creditors of the Italian corporation to save it from bankruptcy was deductible as an ordinary and necessary business expense or, in the alternative, as a loss sustained in trade or business.
Petitioners contend that the money was paid to protect the source of its supply of a distinctive and uniform olive oil, and that the payment averted the pending bankruptcy of the Italian corporation, the source of supply. In fact the evidence is *1196 sparse in regard to the object of the payment, or the effect. The petitioner alleges that petitioner's representative was dispatched to Italy to investigate and obviate the impending loss of its vital olive oil business. This is by the answer denied. The only evidence adduced as to purpose of the payment was that the company in San Francisco received notice of the impending auction sale of the source of olive oil and was told "You have to take care of your future interest", that the secretary of petitioner told the Giurlani brothers, the president and vice president of the corporation, that "our business was going to finish soon if we were unable to serve the brand of our oil and - The oil, the quality of the oil that we had"; that the "president and vice president knew, and admitted that closing the source of the supply of Star Brand olive oil, we would at once be reduced to an inconsequential corporation", and that as a result of this discussion or meeting he was sent to Italy with "full power to do everything on account to save our company." Nothing further appears, and we are not informed as to the effect of the payment, except that at a later date petitioner bought Star Brand *1197 olive oil from Gaetano Giurlani, S.A. Since no issue is made in this regard and no evidence *407 adduced to contradict the little produced by petitioner, we shall assume that the purpose was to protect the source of supply of olive oil. Was the expenditure either ordinary and necessary expense, or loss, of business? As stated very recently in Deputy v. du Pont, 308 U.S. 488 , upon the same question here presented, "Review of the many decided cases is of little aid since each turns on its special facts." Petitioner stresses as controlling First National Bank of Skowhegan, Maine, 35 B.T.A. 876 , and several other cases from the Board; also Seufert Bros. Co. v. Lucas, 44 Fed.(2d) 528 ; and cites Welch v. Helvering, 290 U.S. 111 ; and respondent puts equal, but contrary, emphasis upon Welch v. Helvering, supra , as controlling, pointing also to Amtorg Trading Corporation v. Commissioner, 65 Fed.(2d) 583 ; Commissioner v. Field, 42 Fed.(2d) 820 ; and *1198 Foye Lumber & Tie Co., 33 B.T.A. 271 .
The fact of an implication of the ordinary, in assistance rendered by banks to others, particularly in connection with the strain of the depression, is a major ground of decision in the First National Bank of Skowhegan, Maine, supra , case. Such implication can not be found here. We think that case can not prevail under the facts herein involved against what is said in Welch v. Helvering, supra , and in particular the latest expression in Deputy v. du Pont, supra , covering this subject, and more parallel and applicable to the situation here.
Certainly we must say, of the expense here involved, as was said in the du Pont case, supra, "We can not assume that they are embraced within the normal overhead or operating costs of such activities." Though sale of Star Brand olive oil was a very important element of petitioner's business, we think that the protection of a source of supply by discharge of the liabilities in bankruptcy of the foreign corporation which sold to petitioner is distinctly out of the ordinary. A customer does not by normal standards pay the *1199 debts of a bankrupt manufacturer merely because of such relation as customer. It is patent that petitioner, in fact, relies upon no ordinary fact - the fact that only a certain distinctive unusual blend of olive oil would satisfy its trade - not even a brand like it made in the same city in Italy, but not exactly like it. Ordinarily, certainly, such a slight difference in a manufacturer's product does not impel a distributee to pay the debts of the manufacturer when it becomes bankrupt. We conclude and hold that the expenditure of $32,962.50 by petitioner was not an ordinary expense of business under section 23(a) of the Revenue Act of 1934. We also hold that it was not a loss under section 23(f) of the same act. We think the expenditure has not the attributes of loss.
Decision will be entered for the respondent.