The opinion of the court was delivered by: POWELL
This is an action to recover income taxes paid because of a disputed deficiency assessment.
Pigeon-Hole Parking, Inc. is a Washington corporation, with principal offices in Spokane, Washington. Its fiscal year ended on January 31 and the two tax years involved are the ones ending January 31, 1955, and January 31, 1956. The Internal Revenue Service audited the Federal Income Tax Returns as filed and claimed a deficiency for the two years.
Certain net operating loss carry back to the fiscal years of 1955 and 1956 affect the tax liability in this case. However, the problem may be treated without particular reference to the years involved as they are specifically set out in the pretrial order.
The two questions involved are as follows:
1. Is the corporation entitled to treat as capital gain the amounts which were received on the sale of franchises for the use of units of Pigeon-Hole Parking, Inc., and
2. Is the plaintiff corporation entitled to deduct as interest the total amount of $ 33,330 representing payments to Messrs. Blandi and Young, or was that transaction a stock transaction?
The plaintiff had certain patents in connection with the construction and operation of its parking units. They made no grant of any interest in the patent and reserved the right to construct the elevator portion of the units.
The contract, which is referred to as the 'Fairfax Service, Inc. Contract' (Plaintiff's Exhibit 7-b) is recognized as a typical contract for the sale of the franchises.
The question for determination is whether the transaction constitutes a sale or whether it is a license. In reviewing the evidence and the authorities cited, it is my conclusion that Schmitt v. Commissioner, 9 Cir., 271 F.2d 301, is controlling. In that case the issuance of a license similar to that involved in this case was denied capital gain treatment.
It is my holding that the plaintiff in this case is not entitled to treat the franchise sales as sales but they are the issuance of licenses and they are not entitled to capital gain treatment.
2. Claimed Interest Deduction.
Mr. Taylor, as agent for the plaintiff corporation, contacted Blandi and Young in Pittsburgh. The corporation needed $ 50,000 to aid in the repurchase from Schusett of a franchise granted to him for certain states. At that time the stock of the plaintiff was selling at $ 3 per share and 16,666 shares, totaling in value $ 50,000, were sold to Blandi and Young under a contract, under which, at the option of Blandi and Young, the stock would be repurchased by plaintiff by a certain time at $ 4.50 per share.
The attorney who drew the instrument, Mr. McKinley, states that he knew when he drew the instrument that it was a capital gains item and would be so treated on the Blandi tax returns, and it has been so treated. Mr. McKinley also ...