Rev. Rul. 57-503

Advice has been requested concerning the treatment, for Federal income tax purposes, of the asset goodwill in connection with the abandonment of the business using this asset.

The taxpayer in the instant case was incorporated in 1948 and acquired through purchase two entirely separate businesses consisting of book distribution clubs. One business was the operation by mail order of a fiction book club, the members of which were enrolled through advertising in newspapers, magazines, and other periodicals. The other business consisted of the publication of certain types of non-fiction books under the imprint of the corporation's name. These are sold to readers by mail order and at wholesale to retail stores and other buyers. The corporation itself has never published a work of fiction. The corporation operated the two businesses as separate and distinct divisions.

On the date of the acquisition of the fiction book business, the club had a substantial number of members. The aggregate fair market value of the goodwill, trade name, and membership rolls of the fiction book club on the date of acquisition was appraised at 400 x dollars, and this figure has represented the corporation's basis in the asset goodwill as related to that business. The trade name of the fiction book club was never registered with any registration agency. The corporation retained the right to use the name solely through usage. The solicitation for club members has always been made independently and without reference to other book clubs or activities of the corporation, which resulted in little, if any, duplication of members in any of the book clubs.

From 1948 to 1950, the corporation was unsuccessful in expanding the membership in the club and in 1950 decided to discontinue membership advertising and to furnish books to the existing membership without incurring any further expenditures to acquire new members. From 1950 to 1955, the membership of the club declined to a small fraction of its original number when acquired. Upon sustaining a loss from the operation of the club for the calendar year 1954, the fiction book club business was completely abandoned in 1955. The remaining active members of the club were notified that the club was discontinued and that no further books would be forthcoming.

The active and inactive membership rolls were destroyed by the corporation, since it does not intend to conduct any future business under the name of the discontinued club or in any other name which would require the use of the name or any of the assets which comprise the club. Upon abandonment of the club business and the notification to members of such abandonment, and through the corporation's discontinuance of the trade name of the club, the corporation lost all rights to the trade name and considers that the name will be free to be used by anyone who so chooses.

Section 165(a) of the Internal Revenue Code of 1954 provides that there shall be allowed as a deduction any loss sustained during the taxable year not compensated for by insurance or otherwise. This section corresponds to section 23(f) of the Internal Revenue Code of 1939. Section 39.23(e)-1(b) of Regulations 118, applicable to section 1954 Code by virtue of Treasury Decision 1954 Code by virture of Treasury Decision 6091, C.B. 1954-2, 47, provides that, in general, losses for which an amount may be deducted from gross income must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed.

Generally, a loss from the abandonment of some or all of the assets used in a business when their usefulness is suddenly terminated is deductible. It is required that the taxpayer shall have discontinued the business or discarded such assets permanently from use in order to claim an abandonment loss for the year in which he takes such action. However, the year in which a deduction for a loss is allowable is not necessarily the year in which an overt act of abandonment of the property or loss of title thereof occurred. See section 39.23(e)-3 of Regulations 118, also applicable by virtue of Treasury Decision 6091, supra; Rev. Rul. 54-581, C.B. 1954-2, 112; and Reuben H. Donnelley Corporation v. Commissioner , 26 B.T.A. 107. In Metropolitan Laundry Co. Ltd. v. United States , 100 Fed.Supp. 803, where a laundry abandoned several of its laundry routes and claimed a deduction for loss of goodwill because of such abandonment, the District Court for the Northern District of California stated that, when the taxpayer abandoned its regular delivery service over its routes and sold its delivery equipment, it abandoned the only business to which the goodwill of its route patrons was attached. The court held that the taxpayer was entitled to a deduction under section 23(f) of the 1939 Code for loss of the value of such goodwill in the taxable year of abandonment.

In the instant case, the actions of the corporation in permanently discontinuing in 1955 its business in the fiction book club constitute an abandonment of that business in that year.

Accordingly, it is held that where a corporation abandons a business during a taxable year and, in the same year, abandons all the assets of the business, including purchased goodwill, the corporation's basis in the asset goodwill is deductible as an ordinary loss in arriving at taxable income for that taxable year. In the event the deductions for the year of abandonment, including the deduction for goodwill, exceed the gross income for such taxable year, the excess will be taken into consideration in determining the net operating loss of the taxable year pursuant to section 172 of the 1954 Code.