
    379 F. 2d 569
    JACK DANIEL DISTILLERY, LEM MOTLOW, PROP, INC. v. THE UNITED STATES
    [No. 302-63.
    Decided June 19, 1967]
    
      
      N. Barr Miller, for plaintiff. J. Marvin Haynes, attorney of record. J oseph H. Sheppard, Jeróme D. Meeker, Robert S, Berseh, Walter D. Haynes, and Haynes <& Miller, of counsel. Theodore D. Peyser, with, whom was Assistant Attorney General Mitchell Rogovin, for defendant.
    Before Covrasr, Ghief Judge, Laramore, Dureee, Davis, ColliNS, SkeltoN, and Nichols, Judges.
    
   Nichols, Judge,

delivered the opinion of the court:

This is a suit for refund of corporation income tax and assessed interest in the total sum of $4,274,803.73 for the fiscal years ended April 30,1958 through 1962. While plaintiff does not claim a refund for the fiscal year ended April 30, 1957, it claims entitlement to a carryover of a net operating loss from such year to the fiscal year ended April 30, 1959. Defendant by counterclaim seeks a judgment for income tax and interest previously refunded in the sum of $559.99 for the fiscal years 1958 through I960, and for unpaid assessments of income tax and interest in the sum of $211,838.02 for the fiscal years 1961 and 1962.

With the approval of the trial commissioner, the trial has been limited by agreement of the parties to the issues of law and fact relating to the right of each party to recover, reserving the determination of the amounts of recovery, if any, for further proceedings.

Plaintiff, a newly-formed Tennessee corporation, acquired the stock of a predecessor Tennessee corporation of the same name (hereinafter called Old Jack Daniel) on August 29, 1956, for a total purchase price of $18 million, with a down-payment of $5.4 million in cash and the 'balance of $12.6 million in negotiable promissory notes. On September 17,1956, plaintiff liquidated Old Jack Daniel and thereby acquired all its assets and assumed its liabilities, and thereafter carried on the whiskey distillery business previously operated by Old Jack Daniel at Lynchburg, Tennessee. Plaintiff had been incorporated by its parent, Brown-Forman Distillers Corporation, on August 25,1956, for the specific purpose of acquiring the Old Jack Daniel stock and then liquidating Old Jack Daniel. There are two issues in this case:

1. The fair market value of the inventory of barreled whiskey, the tax-paid whiskey in bottling tanks, and the goodwill acquired by plaintiff from Old Jack Daniel for purposes of section 334 of the Internal Kevenue Code of 1954; and

2. Whether the amount of $3.5 million paid to plaintiff by its parent, Brown-Forman Distillers Corporation, on August 28,1956, was a loan or a contribution to capital.

VALUE OF UNBOTTLED INVENTORY AND GOODWILL

The point of beginning for the valuation issue is section 334(b) (2) of the Internal Kevenue Code of 1954, 26 U.S.C. § 334(b) (2) (1964). It provides that if property is received in complete liquidation of a subsidiary under section 332 (b) and certain Other criteria are met (all of which occurred in the instant case), the 'basis of the property received shall be the adjusted basis of the stock with respect to which the distribution was made. Treasury Regulations § 1.331-1 (c) (4) (viii) (1954 Code), 26 C.F.R. § 1.334^1 (c) (4) (viii) (1961) provides, for the purposes of this case, that the adjusted basis of the stock shall be allocated among the tangible and intangible assets received in proportion to the net fair market value of the assets received. The parties have stipulated the value of all items other than the three in dispute. The undisputed assets acquired by plaintiff in the liquidation of Old Jack Daniel included the distillery plant, buildings and equipment, land, cash, accounts receivable, raw materials and supplies, and others, and as to these defendant has accepted as fair market value the amounts shown on plaintiff’s books. The valuations of the parties concerning the disputed items, and the cost basis of such assets on the books of Old Jack Daniel, are as follows:

The wide gap between the valuations given by the parties results in part from a use of two completely different methods of valuation and in part from a difference as to what incidents of ownership are part of fair market value.

Jack Daniel whiskey is and was what is known in the distilling industry as an irreplaceable whiskey, that is, it is a unique whiskey which has gained a reputation for its distinctive taste. Jack Daniel, being considered irreplaceable, was not sold on the bulk whiskey market. Examples of irreplaceable whiskeys were such bourbons as Old Grand-Dad, Old Forester, and Old Fitzgerald. Jack Daniel was even more distinctive than snch irreplaceable bonrbons, because the unique method by which it was produced gave it a taste distinct from both rye and bourbon, and it was unlike any other whiskey on the market in 1956. It was also, at that time, the highest priced domestic whiskey.

Some years prior to 1956, the distilling industry, believing that the market price for bulk whiskey did not adequately reflect the value of irreplaceable whiskeys, entered into an agreement with insurance underwriters to use a new method of valuing irreplaceable whiskey for insurance purposes. The method used was to take the case price of the whiskey in glass and subtract from this, excise taxes, bottling costs, and other charges as yet unincurred with respect to the bulk inventory. The resulting figure was considered to be the value of the matured whiskey in barrels and bottling tanks. The value of freshly distilled whiskey was established on the basis of production cost. The intermediate age whiskey was valued by prorating, according to age, the difference between the values of the mature whiskey and the fresh whiskey.

When sale negotiations began between the Old Jack Daniel stockholders and the representatives of Brown-Forman, the sellers’ asking price for the Old Jack Daniel stock was placed at $20 million. This amount was arrived at by two methods. First, the anticipated combined earnings for Old Jack Daniel and its sales affiliate, Nashville Sales Company, for the fiscal year 1956 were $2 million. The Old Jack Daniel stockholders considered that a sales price of 10 times earnings, or $20 million, was reasonable. The second method was that the net tangible assets of Old Jack Daniel were valued at $15 million, and to this was added $5 million as the value of goodwill. In determining the net tangible asset value of Old Jack Daniel, the bulk inventory was valued by the same method as that used for insurance valuation.

After the initial negotiating session, Brown-Forman verified to its satisfaction the valuation given the tangible assets. In order to determine whether, for tax purposes, it could write up the unbottled inventory to the insurance value, it consulted its regular outside auditors, Lybrand, Boss Bros. & Montgomery. The auditors reviewed the pro] ected income and cash flow, and determined that the valuation given the inventory would yield an extraordinary gross profit. They then advised Brown-Forman that they considered the proposed valuation a correct accounting method for determining basis under § 334(b) (2) of the Internal Bevenue Code of 1954.

After further negotiations, Brown-Forman and the Old Jack Daniel stockholders agreed on a purchase price of $18 million, and the sale of the Old Jack Daniel stock was consummated on August 29,1956, with the subsequent liquidation of Old Jack Daniel on September 17,1956.

In accordance with the market value insurance formula, plaintiff valued (as did Old Jack Daniel) the transferred inventory of ‘barreled whiskey (3,125,277.06 original proof gallons) at $11,571,381.51, and the transferred inventory of whiskey in bottling tanks (1,350 regauged proof gallons) at $26,248.56, for a total valuation of $11,597,630.37, all in the manner detailed in findings 42 through 45.

In computing its income tax liability for the fiscal period August 25,1956 to April 30,1957, and the fiscal years ended April 30,1958-1962, plaintiff used as its basis for computing the cost of the unbottled inventory acquired by the liquidation of Old Jack Daniel the aforementioned valuation used for determining insurance values. These values were entered on its books on September 17, 1956. Plaintiff filed timely income tax returns for the fiscal period ended April 30,1957, and the fiscal years 1958-62, showing taxable income or loss and tax paid, as follows:

The Internal Bevenue Service audited plaintiff’s returns for the fiscal years 1958-62, and determined the following deficiencies:

Income Taso Tasoable Year Deficiency
1958 _$1,170,404 69
1959 _ 1,223,537.00
1960 _ 731,917.64
1961 _ 324,146. 59
1962 _ 23,081.62
$3,473,087.54

The foregoing deficiencies resulted from the Commissioner’s use of the Old Jack Daniel cost basis for the assets, rather than the basis recorded on plaintiff’s books on September 17, 1956, in computing cost of goods sold and allowances for depreciation of the assets acquired from Old Jack Daniel. The 1959 deficiency also results in part from the disallowance of a deduction for a net operating loss carryover, based on plaintiff’s original calculation that it incurred losses for fiscal 1957 and 1958, such losses giving rise to a deduction in 1959. In recomputing plaintiff’s income for fiscal 1957 and 1958, the Commissioner determined that plaintiff had income for those periods.

Before this court, the defendant has retreated, to a degree, from the original position of the Commissioner that the fair market value of the bulk whiskey was the cost basis on the books of Old Jack Daniel. To the Old Jack Daniel cost basis, $3,265,551, defendant has added a “future worth factor” of $539,649, computed at 6.5 percent per year, compounded semiannually for each seasonal distillation, for a total valuation of $3,805,200. The “future worth factor” was intended to take into account interest on the original investment as the whiskey matured and the storage and other charges incurred on the inventory as it matured.

The above outlined methods of valuation are the factual bases for the divergent positions of the parties. The legal definition of fair market Value is the price at which property would change hands in a transaction between a willing buyer and a willing seller, neither being under compulsion to buy or sell, and both being reasonably informed as to all relevant facts. Wood v. United States, 89 Ct. Cl. 442, 29 F. Supp. 853 (1939).

The principal difficulty in valuing the unbottled whiskey inventory is that because Jack Daniel is distinctive and irreplaceable, it has never been sold in bulk. Since its value has never been tested by sales in the market place, the determination of fair market value of the unbottled inventory will necessarily be constructive in nature, based upon careful consideration of the reliable and relevant testimony and evidence pertaining to what price would have been reached on September 17,1956, between a willing seller and a willing buyer, both reasonably informed as to the facts. Old Jack Daniel proposed the insurance value as being the fair market value of the unbottled inventory, and this value was accepted by the representatives of Brown-Forman. Brown-For-man’s regular independent auditors determined that a purchase of the whiskey inventory at the insurance values would yield an extraordinary before-tax profit, and that the valuation was therefore a reasonable one.

In the trial of this case, It. L. Buse, Jr., president of both a whiskey brokerage company and a distillery company, Vernon O. Underwood, president of a large whiskey wholesaler, and G. K. McClure, treasurer of Stitzel-Weller Distillery, a whiskey distiller, all testified that, in their opinion the insurance value was the fair market value of the Jack Daniel inventory. In addition, Buse and Underwood testified that in 1956 they would willingly have purchased (if financing could have been obtained), or participated in a joint venture to purchase, the Jack Daniel inventory at the insurance value, assuming that they would have the right to sell the same under Jack Daniel labels. ■

The testimony is convincing that the Jack Daniel inventory could have, in 1956, been sold to a third party or parties for the insurance valuation given the inventory, if the purchaser or purchasers were given the right to sell the same under Jack Daniel labels.

Defendant makes two attacks on plaintiff’s valuation which raise questions about what elements of value attach to fair market value.

As stated above, plaintiff’s witnesses, in considering the fair market value of the unbottled inventory, assumed that their purchase of the inventory would have included the right to market the whiskey under the Jack Daniel labels. Defendant contends that the use of the Jack Daniel labels is an intangible and should not be included in the valuation of a tangible asset.

The testimony of plaintiff’s witnesses indicated that the addition of the right to use the Jack Daniel label would substantially increase the value of the unbottled inventory. For purposes of this opinion, it can be conceded that the sale of the unbottled whiskey does not automatically carry with it the right to use the Jack Daniel label. The question then arises whether the value attributable to such right has to be excluded from the fair market value.

In the ordinary commercial situation, when an item is manufactured and put into inventory, it is ready to be sold to the consuming public. If it is a unique item, the value attributable to a name or trademark will have adhered to the item at that point in time. For example, a Cadillac automobile or a Baldwin piano has a certain value when produced, and the value of the name would be virtually inseparable from the value of the item as a whole.

Of course, the whiskey inventory had a value even without the Jack Daniel name, albeit a lower one. As to the bottled inventory, defendant accepted the value placed thereon by plaintiff. Thus, defendant (at least by implication) has conceded that the whiskey in labeled bottles had the market value which plaintiff contends should be placed on the matured whiskey (and prorata on the maturing whiskey) in barrels and in bottling tanks, less the cost of bottling and other unincurred costs. Defendant’s distinction between the unbottled and bottled inventory (the latter carrying the right to use the Jack Daniel labels) is in essence the difference between finished stock and work in process. This distinction is not entirely inapt, the unbottled inventory having some characteristics of work in process. The inventory had to age for a certain number of years and then be bottled and labeled before the analogy between Jack Daniel whiskey and a Cadillac would be full and complete.

On the other hand, the unbottled Jack Daniel inventory is unlike the usual work in process in many respects. The addition of the word “Cadillac” to an automobile chassis or “Baldwin” to a piano leg enhances the value of the object very little, if at all. This is in complete contrast to the Jack Daniel situation. The evidence indicates that the unique qualities of Jack Daniel whiskey are generated in specialized distillation and leaching processes accomplished prior to its being placed in barrels for aging, and that the holding of the same in barrels for aging does not fit the concept of work in process in the usual sense. In addition, ordinary work in process might have little liquidation value, but only a salvage value, whereas the Jack Daniel inventory had a substantial liquidation value with or without the Jack Daniel name.

Taking all the above factors into consideration, it is apparent that, even though the unbottled inventory could technically be called work in process, it had already reached a stage where its distinctiveness had given its name a value inseparable in fact, if not in law, from the item itself. In the world of commercial reality, the fair market value of the inventory included the right to use the Jack Daniel label. Indeed, no businessman desiring to maximize bis profit would have entertained tbe notion tbat the whiskey would be sold, unbranded, on the bulk market. The fair market value test is predicated in part on the highest and best use which can be made of the subject matter, and the evidence certainly shows that the Jack Daniel whiskey would in 1956 have sold at the highest price under its own labels. In assessing fair market value, due consideration should be given to the realities of commercial transactions, and particularly to the plain facts concerning the best use to be made of the subject matter of a sale. As a recognized commentator in the tax field has said: “Fair market value in essence means sound value; it is the price for which the owner would hold out if he could.” It would seem to have been sound commercial practice for the Old Jack Daniel stockholders and Brown-Forman to place the value on the unbottled inventory, which they did. It must be concluded that the fair market valuation has to include, in this instance, any value attributable to the use of the Jack Daniel trade name and labels in connection with any disposition of the unbottled inventory transferred by liquidation of Old Jack Daniel.

The second problem raised by defendant is whether an asset can have a different fair market value in varying contexts, i.e., whether an asset has a different value as part of a sale of a going business than it would have if sold separately; and, if that question is answered affirmatively, whether the valuation of the unbottled inventory is affected by that factor in this case.

In two cited decisions, the Tax Court rejected valuations of the Commissioner which were based on the liquidation value of the asset, i.e., the amount the asset would bring if sold separately from the business. Kraft Foods Co., 21 T.C. 513 (1954), rev’d on other grounds 232 F. 2d 118 (2d Cir. 1956); Philadelphia Steel & Iron Corp., 23 T.C.M. 558 (1964), aff’d per curiam,, 344 F. 2d 964 (3d Cir. 1965). Defendant argues that these cases support the general proposition that all assets sold as part of a going business should be valued in that light. Therefore, if an asset is shown to have a lower value if sold as part of a going business, the lower value should be the fair market value for purposes of § 334(b)(2).

However, both the above cases assigned the assets in dispute a fair market value higher than the liquidating value. Plaintiff therefore claims that these cases support the general proposition advanced by it that fair market value must be determined with reference to highest and best possible use of the property.

The factual patterns in the two last-cited cases are complex and substantially different from this case, and no hard commitment can or should be made to either party’s contention concerning any general principle to be derived from those opinions, especially when it is remembered that determination of fair market value is basically a factual decision, no matter how complicated the reasoning process involved. Even if defendant’s interpretation of the two Tax 'Court opinions is accepted, the value of the unbottled inventory as part of a going business was at least that reasonably and in good faith given it by the parties to the arm’s-length sale of all of the Old Jack Daniel stock. Moreover, defendant’s method of valuation has no relationship to either a liquidating fair market value or a going business fair market value.

The potential profit to plaintiff from purchasing the inventory at insurance value was extremely high, as was shown by the profit projections of plaintiff’s auditors. The actual before-tax profit realized from the sale of the inventory was $6.2 million, more than a 50 percent return on the original investment in the whiskey inventory, and more than a 25 percent return on total costs (except taxes). Defendant has not shown why this valuation does not, in fact, represent the going business value of the unbottled inventory. Defendant contends that the valuation of the individual monthly distillations was arbitrary because plaintiff showed a loss upon the disposition of a substantial portion of the unbottled inventory. While it may be true that the valuation placed on monthly distillation did not reflect fair market value, the issue is the value of the inventory as a whole, and the evidence makes it abundantly clear that the overall valuation is fair. In this context, plaintiff has provided a proper basis for valuation. See Kraft Foods Co., supra, at 592-593.

Defendant has raised other minor attacks on plaintiff’s method of valuation. It argues that the $6.2 million profit does not justify plaintiff’s valuation of the whiskey when one considers that plaintiff had to pay almost $20 million and wait 5 years to realize the gain. While acknowledging that there is a certain factor for the use of capital which is not reflected in plaintiff’s profit figures, it is concluded that such factor is not nearly as great as defendant suggests. In the first place, the amount of capital tied up because of the inventory purchase was $11.9 million, not $20 million. An interest allocation based on the total purchase price of $18 million would be proper only if the other assets had no independent economic value prior to the sale of the unbottled inventory. That is manifestly not the case here. Secondly, the capital was being returned to plaintiff throughout the period when the inventory was being bottled and sold, and not all in one lump sum at the end of the period, as defendant suggests. Even taking into account an interest factor for the use of capital, plaintiff still obviously made a substantial profit on its total costs for the unbottled inventory.

Defendant also points out that the profit which Old J ack Daniel would have made if it had sold the $12 million whiskey inventory separately would have been $8.5 million, which it terms “grossly excessive,” being a return of approximately 243 percent on the Old J ack Daniel cost of production of $3.5 million. But, if defendant’s valuation is accepted, plaintiff had a before-tax profit of 350 percent of its original investment, and approximately 55 percent of its total costs (exclusive of taxes). In addition, defendant’s valuation attributes no gain to Old Jack Daniel from the sale of the inventory as part of the business.

Defendant relies upon United States v. Cornish, 348 F. 2d 175 (9th Cir. 1965), but that case does not militate against the conclusion that plaintiff’s valuation method was proper. The taxpayer in Oomish used a “work-back” formula in valuing timber and timber cutting rights. The Court of Appeals rejected the use of a “work-back” formula for two reasons. First, it took into account the prospect that the taxpayer’s partnership would make a larger profit because of the unique sawmills owned by the partnership. This was a factor already taken into account in determining the fair market value of the sawmills, and if also allowed as an element of value for the timber, would result in one element of value being attributed to two assets. Second, it also took into account the prospect that the partners would exercise their unique skills in the future to continue the highly profitable nature of the business.

In the instant case the skills necessary to produce the distinctive Jack Daniel whiskey had already been exercised at the time of sale; the remaining factors (aging and bottling) are a rather minor part of the overall operation, and are relatively simple and unskilled operations.

As the testimony and evidence in the present case indicate, the value of the whiskey as Jack Daniel’s whiskey adhered to the inventory when it was placed in barrels to age. It had a substantial value at that time as Jack Daniel whiskey. The timber in Oomish had no greater value as such because certain unique skills and operations would ultimately result in an operation more profitable than other sawmills. Factually, Oomish is in nowise comparable with the Jack Daniel situation.

Defendant’s evidence on valuation was presented by an appraiser for the Internal Revenue Service, Robert V. Brown. The unbottled inventory valuation was computed by taking the cost of production, $3,265,551, and adding a “future worth factor” for each seasonal distillation of 6.5 percent, compounded semiannually, for $539,649. The total valuation was thus $3,805,200.

This method of valuation must be rejected, as being purely arbitrary, because it completely ignores the “market” concept in the term fair market value. Fair market value could in the abstract be higher or lower than cost, but equating cost and market price is grossly inconsistent with the seller’s market for Jack Daniel whiskey existing in 1956, and with the general economic conditions prevailing at that time. Defendant here made no attempt to investigate the “market” and establish a valuation on the basis of same. Since there had been no sales of the unique Jack Daniel whiskey in bulk, the fair market value of the unbottled inventory would have to be established by the expert testimony of persons knowledgeable in market conditions relating to Jack Daniel whiskey. But because there had been no bulk sales of such whiskey, it does not follow that the “fair market value” standard can be disregarded, and an inapt standard substituted.

The testimony has overwhelmingly established that the unique method of distilling Jack Daniel produced a distinctive whiskey which was in great demand. From this it can be assumed that even as a part of the going business, the fair market value of the unbottled inventory exceeded its cost. Yet defendant, in its valuation method, ascribes no profit to the inventory. The “future worth factor” is not profit, it is an allowance for additional costs incurred as the inventory matures and a percentage of interest on the capital investment in the inventory.

Defendant attempts to buttress its valuation by reference to buy-back clauses in several contracts made by distillers of irreplaceable bourbons with distributors for the sale of such whiskey in barrels. Such clauses permit the distiller to repurchase the whiskey upon the happening of certain stated events.

There are two plain reasons why defendant’s valuation fails to gain weight by reliance on buy-back clauses. First, such clauses only become operable when conditions arise that force the distributor to sell the whiskey. They cannot be considered to establish an open market price, since they only operate in one direction, i.e., by placing a floor but not a ceiling on the barrel price, and the contingency against which these clauses are intended to guard is a distress sale which would dump irreplaceable bourbon on the bulk market. Secondly, the barrel sales prices of irreplaceable bourbon under such contracts must have included a profit to the distiller, which, as pointed out previously, defendant has ignored in arriving at its valuation herein.

From all the foregoing, it is concluded that plaintiff’s valuation of the unbottled inventory constitutes the fair market value as of September 17, 1956, and was properly used by it as a basis for computing its cost of goods sold and income for the years in question.

The remaining valuation problem relates to the fair market value of the goodwill transferred to plaintiff from Old Jack Daniel. During the negotiations for sale of the Old Jack Daniel stock, the goodwill was agreed to have a value of $2.5 million, and approximately this amount was entered on plaintiff’s books as goodwill when Old Jack Daniel was liquidated. Plaintiff’s approach to the valuation was essentially what defendant characterizes as “residual,” i.e., when the fair market value of the tangibles is established, the remaining amount which the purchaser is willing to pay for the business is attributable to the goodwill.

Defendant arrived at a valuation for the intangibles by capitalizing anticipated excess earnings. Briefly stated, this was done by obtaining an average after-tax net profit (using plaintiff’s earnings projections and deducting estimated average costs); applying a 6.5 percent rate to defendant’s net tangible valuation to obtain a return on the tangibles; then deducting the return on the tangibles from the total projected income. The resulting sum is considered the earnings attributable to the intangibles. This amount was then multiplied by eight (standing for the estimated length of time that it would require a competitor to market Tennessee whiskey) and then reduced to its present -worth, by discounting it at 5 percent.

The residuary -method, though lacking in precision for use in all cases, may in a proper -case be accepted as the reasonable way to value goodwill. When it is the method actually used in good faith by the parties to the sales transaction, as in -the present case, and when such parties have reasonably established the value of all other assets, there appears to be no compelling reason for rejecting it. The residuary method has been used in a substantial number of cases -and appears clearly to be the proper method for this case, since the fair market value of the tangible assets and the value of the business are and were firmly established. See Philadelphia Steel & Iron Corp., supra; 10 Mertens, supra, 59.37 and cases therein cited. The parties actively bargained in good faith over the value of the goodwill after they had settled on the value of the other assets. The sellers originally wanted $5 million, the buyer originally offered $1 million, and they finally agreed upon $2.5 million.

TREATMENT OE $3.5 MILLION PAID TO PLAINTIFF BY BROWN-FORMAN IN EXCHANGE FOR A PROMISSORY NOTE

The defendant has counterclaimed for the tax attributable to amounts accrued on plaintiff’s books for the fiscal period and years involved as interest on a promissory note which was issued to Brown-Forman in return for $3.5 million of the $5.5 million in cash received from Brown-Forman when plaintiff was incorporated, $5.4 million of which was in turn paid over to Old Jack Daniel stockholders as part payment for the Old Jack Daniel stock. Defendant contends that the $3.5 million was a capital contribution rather than a loan, and that therefore plaintiff incorrectly accrued the interest deductions.

The question whether a receipt of funds by a subsidiary corporation from its parent is a loan or a capital contribution has given rise to much litigation, resulting in apparently conflicting judicial opinion. To state the problem is simple: did the words used by the taxpayer actually and accurately describe the economic relationship of the parties, that is, did the parties intend, at the time of the issuance of the instrument, to create a real debtor-creditor relationship ?; to arrive at an answer is the difficult task.

This area is devoid of black-letter law, as is true of any tax inquiry seeking the “substance” of a given transaction. In fact, “[t] here is no one characteristic * * * which can be said to be decisive in the determination of whether the obligations are risk investments in the corporations or debts.” John Kelley Co. v. Commissioner, 326 U.S. 521, 530 (1946); also see Moughon v. Commissioner, 329 F. 2d 399, 401 (6th Cir., 1964); Byerlyte Corp. v. Williams, 170 F. Supp. 48, 53 (N.D. Ohio, 1958), aff’d on rehearing 170 F. Supp. 60 (N.D. Ohio, 1959), reversed and remanded on other grounds 286 F. 2d 285 (6th Cir., 1960) (“In the plethora of precedent on this issue there is to be found no single rule, principle or test that is controlling or decisive of the question whether advances by stockholders to a closely held or solely owned corporation are to be considered as debts or contributions to capital.” at 53). Therefore, the Court must consider the specific facts of this case to determine the plaintiff-taxpayer’s relationship with Brown-Forman in regard to the advance in question. The Court must examine these facts in light of the signposts that have previously been laid out, always recognizing that the burden of establishing that the advance was a loan is upon the taxpaper. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); White v. United States, 305 U.S. 281, 292 (1938); Arlington Park Jockey Club v. Sauber, 262 F. 2d 902, 905 (7th Cir., 1959).

While it may be somewhat repetitious, we will again state those introductory facts specifically bearing on the Government’s counterclaim.

Early in 1956 Brown-Forman learned that Old Jack Daniel might be for sale. This prospect interested Brown-Forman as it coincided with its interest to diversify and expand its operations. Brown-Forman first offered to buy the assets of Old Jack Daniel but the latter’s shareholders were only willing to consummate the purchase of Old Jack Daniel by a sale of their stock. Brown-Forman agreed to this format, setting up a subsidiary, New Jack Daniel, the plaintiff-taxpayer, to purchase the stock for $5.4 million in cash and $12.6 million in secured, negotiable, promissory notes. Old Jack Daniel was thereafter to be liquidated into New J ack Daniel.

When New Jack Daniel was incorporated, Brown-Forman decided that in addition to the Old Jack Daniel assets, New Jack Daniel would need a permanent equity capitalization of $2,000,000 in order to carry on the distillery business. This sum was paid by Brown-Forman in cash and in return it received all of New J ack Daniel’s stock. At the same time Brown-Forman loaned New Jack Daniel $3,500,000 and received in return its subordinated note for the same amount.

In 1956, in order to expand and diversify its activities, Brown-Forman borrowed $19,600,000 (with $9.95 million of it being used to pay off prior long-term debt) from its usual banking sources. At that time Brown-Forman showed the $3.5 million of the new loan would provide the funds for the loan to New Jack Daniel. The additional $9.65 million loan was obviously made with this in mind.

We now turn to the specific facts and applicable standards which have led us to conclude that Brown-Forman did in fact lend $3.5 million to New Jack Daniel. Our decision, favoring New Jack Daniel, is so made because we consider the facts tending to show the note represented a true debt to outweigh those suggesting the opposite conclusion.

Brown-Forman and New Jack Daniel clearly intended to create a valid debtor-creditor relationship here. The note received by Brown-Forman contained an unqualified promise to repay the principal and interest on or before a fixed maturity date, regardless of New Jack Daniel’s earnings. Haffenreffer Brewing Co. v. Commissioner, 116 F. 2d 465, 468 (1st Cir., 1940), cert. den. 313 U.S. 567 (1941). During the period when the $3.5 million note was outstanding, Brown-Forman represented it as a loan on its books, in its reports to the Securities and Exchange Commission and the American Stock Exchange, to its lending institutions, and to its stockholders. Interest was regularly accrued by New Jack Daniel on its books and interest receivable was regularly accrued by Brown-Forman and both companies so reflected the interest on the tax returns.

It is true, as the Government stresses, that the note in question was subordinated to the purchase money notes given to the Old Jack Daniel stockholders. However, the note was not subordinated to the claims of other creditors. “Moreover, that the indebtedness was subordinated is outweighed [by tbe other factors herein,] by the lack of other claims and the obvious benefit in facilitating any future refinancing.” Brighton Recreations, Inc. v. Commissioner, 20 CCH Tax Ct. Mem. 127, 136 (1961). This latter consideration is borne out by the fact that New Jack Daniel, soon after the loan from Brown-Forman, was able to borrow an additional $300,000 from one of the banks which participated in the loan to Brown-Forman, giving its ««secured note in return, as to which the $3.5 million note to Brown-Forman was not subordinated. In fact, the bank President testified that if the plaintiff had requested additional credit at the time when the $300,000 loan was made it would have been granted. We must also stress the fact that Brown-Forman was not required to make any further advances to New J ack Daniel, Cf. Affiliated Research, Inc. v. United States, 173 Ct. Cl. 338, 351 F. 2d 646 (1965) (where after the initial advances had been made the corporation still required further advances on several occasions) and New J ack Daniel was able to repay the loan in full in 1963. Oak Motors, Inc. v. Commissioner, 23 CCH Tax Ct. Mem. 520, 524 (1964); Cf. Affiliated Research, supra, (where the advances, with small exceptions, were never repaid).

Another factor that could be on the Government’s side of the scales is the fact that the note was unsecured. The Government contends that this shows Brown-Forman really subjected its money to the risk that New Jack Daniel would not succeed in its venture, though this risk would materialize only if the failure to succeed was such that the equity capital ($2 million) was first wiped out. “To say that the advances were * * * placed at the risk of the business does not help [the Government]. All unsecured loans involve more or less risk. On all available information, the risk here was a good one.” The value of the aging whiskey inventory, as we have determined, was appreciating at a rate of more than $250,000 a month and New Jack Daniel had almost $3 million in working capital. Of the $5.5 million received from Brown-Forman, $5.4 million was paid to the Old Jack Daniel stockholders, leaving a balance of $100,000. New Jack Daniel received $2,845,574.76 in cash upon the liquidation of Old Jack Daniel. In addition, there were also received accounts receivable worth $527,630.53 and a life insurance policy with a cash surrender value of $17,432.85. By 1956 orders from distributors exceeded the supply of Jack Daniel whiskey and allocation had to be made among the distributors, in part because of a production cutback in 1954. The Jack Daniel whiskeys were then the highest priced domestic whiskeys with the highest fro-fit to the distiller.

Here there was a reasonable expectation that the amounts advanced would be repaid (Finding 68) and Brown-Forman had contributed a substantial amount of equity capital to plaintiff. These two factors are important in plaintiff’s favor.

“Essential to the creation of a debtor-creditor relationship is the existence of a reasonable expectation of repayment at the time of the transaction.” Irbco Corp. v. Commissioner, 25 CCH Tax Ct. Mem. 359, 366 (1966); accord Earle v. W. J. Jones & Son, supra, n. 22. Mr. Sam Fleming, President of the Third National Bank in Nashville, a bank which participated in the loan to Brown-Forman, testified that “* * * barring some unforeseen event, like prohibition or depression, * * * they [New Jack Daniel] should be able to pay the $3.5 million loan.” And, when it was negotiating for its $19.6 million loan, Brown-Forman prepared sales projections for New Jack Daniel to support the probability of its ability to repay Brown-Forman on time. As it turned out, the projections were conservative when compared with New Jack Daniel’s actual sales for the years involved. Finally, the reasonableness of the expectation of repayment was verified by the fact that the loan was repaid in 1963 with interest. In Irbco Corp., supra, at 366, the Tax Court, in emphasizing the fact of actual repayment in determining that a bona fide loan existed, said:

Bespondent belittles the significance of the repayments made by Irby & Co. He states that even substantial repayment “doesn’t control” as a reflection of what the parties intended when the loan was made, citing [cases]. All of these cases involved repayments, but in none was there a substantial repayment at a time when no further advances were being made. Furthermore, the factual complexions of [the cases cited] are unlike that here present. Two involved advances to new businesses with unproven earning ability. In the other, the borrower had no income in several of the years during which advances were made. These factors overcame the importance of repayments.

The Government argues that the likelihood of ultimate repayment is, as explained in Affilitated Research, supra, at 342, 351 F. 2d at 648, of much less importance than the question of whether repayment is dependent upon the success of the recipient corporation. Even if this is so, and it is so only with the qualification stated above, it is only one factor to be considered and although there are cases finding an advance to be an equity investment even though there was a reasonable expectation of repayment, Fellinger v. United States, 363 F. 2d 826 (6th Cir., 1966), the other factors in this case outweigh this consideration. We note that in Fellinger, supra, the lenders had not made a substantial equity investment in the borrower. Moreover, the case at bar is distinguishable from Affiliated Research, supra, on two important grounds: first, the corporation there did not have a substantial amount of equity investment in it, and second, and more important, there was no finding there that there was a reasonable expectation of repayment.

We have found (Finding 66) that “Brown-Forman determined that a capitalization of $2 million would be adequate for plaintiff’s needs and that the Old Jack Daniel assets would be sufficient to carry on the distillery business.” Brown-Forman had years of experience in the whiskey business and was well qualified to make this judgment. That its judgment was correct is borne out by the following facts: (1) upon the liquidation of Old Jack Daniel plaintiff acquired ample cash to supply its needs for working capital (the approximate amount of which was, of course, known to Brown-Forman when the purchase negotiations were proceeding), (2) Brown-Forman never bad to make further advances to New Jack Daniel for the operation of the distillery business, and (3) New Jack Daniel was able to pay the $3.5 million loan with interest in 1963. “There.is ‘no rule which permits the Commissioner [of Internal Bevenue] to dictate what portion of a corporation’s operations shall be provided for by equity financing rather than by debt’;” Nassau Lens Co., Inc. v. Commissioner, 308 F. 2d 39, 46 (2d Cir., 1962), the choice is that of the stockholders. Rowan v. United States, 219 F. 2d 51, 54 (5th Cir., 1955).

In American Processing and Sales Company v. United States, our latest decision in this area (though specifically dealing with a bad debt situation), before looking at the bona fide nature of the debt in question, we first asked whether the purpose of incorporating the borrower was to perpetrate a tax hoax. Here, as well as there, there were valid business reasons for setting up a new corporation. In the instant case, the Old Jack Daniel stockholders refused to sell the company’s assets directly to Brown-Forman. They wanted their former assets and business to be the security for the purchase money notes. The way this desire was fulfilled was by having Brown-Forman set up a new subsidiary to buy the Old J ack Daniel stock, with the subsidiary’s stock acting as security for the notes given by it in part-purchase of the old company’s stock. In addition, Brown-Forman wished to maintain the local identity of the J ack Daniel business to forestall any adverse public reaction to a change in the control of the business. This was done by incorporating New J ack Daniel as a Tennessee corporation with the same name as Old Jack Daniel, by having New Jack Daniel employ the same officers and personnel as Old Jack Daniel, and by never mentioning Brown-Forman’s name in Jack Daniel advertising. It was crucial to the assurance of the continued right to distill Jack Daniel whiskey in Moore County, Tennessee, that the Tennessee identity of the distiller be preserved.

The Government also argues that the burden was on the plaintiff to show that it could have borrowed the $3.5 million from an unrelated source and on the same terms as those actually granted. It is true that the courts have considered this factor in the past. Matthiessen v. Commissioner, 16 T.C. 781 (1951), aff’d 194 F. 2d 659 (2d Cir., 1952). But the mere fact that a loan could not be obtained from an unrelated source does not preclude the existence of a bona fide loan. Brighton Recreations, Inc., supra, at 135; American Processing and Sales Company, supra, n. 23, 178 Ct. Cl. at 370, 371 F. 2d at 852. In Brighton, supra, the corporation involved was actually unable to secure loans from outside sources, yet countervailing circumstances enabled the court to find the existence of a bona fide debt. The case at hand is much stronger (for the taxpayer’s position) than those cited for when Brown-For-man borrowed the $19.6 million from its usual banking sources the latter obviously knew and took into account the fact that $3.5 million of that sum was going to be lent by Brown-Forman to New Jack Daniel. In addition, the Third National Bank of Nadhville, after having lent Brown-Forman $792,000, lent an additional $300,000 to New Jack Daniel, taking in return its -imsecured note. See Jaeger Auto Finance, supra, n. 17.

The most important factor, in our minds, leading to a decision for the plaintiff, is the obvious awareness of Brown-Forman’s bankers that $3.5 million of their loan to Brown-Forman was going to be passed on to the plaintiff. In substance, the bankers loaned $3.5 million to Brown-Forman in reliance on the fact that while Brown-Forman was going to lend that sum to the plaintiff, it had been satisfactorily established that plaintiff was going to be able to repay that sum in 1963. The bankers were most concerned with Brown-Forman having both a debt and equity position in plaintiff. Had that position been solely equity, as the Government contends it was, Brown-Forman’s chance of getting repayment of its advance in case of plaintiff’s insolvency would be much less than if it also had a creditor standing. Knowing that the $3.5 million was a loan certainly influenced the bankers’ decision in estimating the probability of repayment. This situation is very similar to that in OaJe Motors, supra, where the Tax Court stated (at p. 524) in allowing the corporate taxpayer an interest deduction on the stockholder’s loan:

For this purpose, [the stockholder Boyte] was a mere conduit and nothing else. The evidence shows that the Third National Bank * * * considered Boyte’s advance — and the note which represented it — to be a bona fide debt of petitioner. This is corroborated by the fact that the bank clearly was relying on repayment of petitioner’s indebtedness to Boyte to enable Boyte to repay his own loan, in the same amount, to the bank.

So here, the banks were relying upon repayment of New Jack Daniel’s debt to Brown-Forman to enable Brown-Forman to fully meet its loan obligation. Brown-Forman needed timely repayment from New Jack Daniel in order to pay its $9.65 million loan. In this situation, to call the advance made to New Jack Daniel one of equity capital would be to ignore the “substance” of the transaction. Irbco Corp., supra, at 366; Miller’s Estate v. Commissioner, 239 F. 2d 729, 732-733 (9th Cir., 1956).

Accordingly, the plaintiff is entitled to recover on its petition and the defendant is not entitled to recover on its counterclaim. Judgment is therefore entered for plaintiff.

Since the decision in this case has been limited to the issues of law and fact relating to the right of each party to recover, the amounts of recovery, relying upon our decision herein, will be determined pursuant to Buie 47 (c) (2) of the Buies of this court.

FINDINGS on Fact

1. Plaintiff is a Tennessee corporation organized on August 25, 1956, as the Lynchburg Distilling Company. On September 17, 1956, its name was changed to Jack Daniel Distillery, Lem Motlow, Prop., Inc. Its principal place of business is at Lynchburg, Tennessee. It is engaged in distilling and selling Tennessee sour mash whiskey.

2. At all times since plaintiff’s incorporation, its outstanding capital stock has been owned by Brown-Forman Distillers Corporation, a Delaware corporation organized in 1933, with its principal place of business at Louisville, Kentucky. The business of Brown-Forman is the manufacture, purchase, storage, warehousing, distribution, and sale of distilled spirits.

3. The Jack Daniel Distillery (hereinafter referred to as Old Jack Daniel) was founded in 1866 at Lynchburg, Moore County, Tennessee, and was operated there until 1910. In 1909, Tennessee had enacted legislation prohibiting manufacture of distilled spirits, which went into effect on January 1,1910. During 1910, the distillery was moved to St. Louis, and was operated there until National Prohibition became effective in 1920. Although National Prohibition was repealed in 1933, Tennessee did not permit whiskey manufacture until 1937, when a bill was passed permitting county option for whiskey manufacture. Moore County legalized whiskey manufacture in 1938, and Old Jack Daniel resumed operation in Moore County during that year.

4. Jack Daniel whiskey is Tennessee sour mash whiskey produced by a handmade process, the most distinctive part of which is “leaching,” in which newly distilled whiskey is seeped through tanks packed with charcoal made from hard sugar maple trees. The charcoal is produced by the burning in open air of cords of the hard maple stacked in ricks. The whiskey thus produced has a distinctive taste.

In 1956, and for many years prior thereto, the whiskey had been sold under the brand names: Jack Daniel Black Label (5 years old) ; Jack Daniel Green Label (4 years old) ; and Lem Motlow (1 year old). Most of the names and phrases on the labels were protected by trademarks.

5. The whiskey made by Old Jack Daniel since 1938 was essentially the same whiskey made by its originator, Jack Daniel, and then by his nephew, Lem Motlow, in the pre-Prohibition era. It won the highest gold medal at the St. Louis Exposition in 1904, and additional gold medals at Liege in 1905, Ghent in 1913, and at the Anglo-American Exposition in London in 1914.

In addition to whiskey, Old Jack Daniel had at times made apple, peach, and pear brandies under the name Jack Daniel, and corn whiskey under the name Topaz Corn. No corn whiskey or brandy was sold after 1954-, and no brandy was manufactured after Lem Motlow’s death in 1947.

6. To protect the Jack Daniel trademarks during the period between repeal of National Prohibition and repeal of the Tennessee prohibition laws, Lem Motlow allowed the use of the J ack Daniel name on a 4-year-old Kentucky straight bourbon, manufactured by a well-known distilling company and sold in Illinois and Missouri. This use of the Jack Daniel name on a Kentucky bourbon adversely affected the subsequent sales of Jack Daniel Tennessee whiskey, particularly in the St. Louis area.

7. The Federal labeling regulations in effect in 1956 required that labels on bottles of domestic whiskey had to show among other things, the brand name, the state of distillation, and the type of whiskey. Jack Daniel whiskey falls within the definitions given in the regulations for bourbon whiskey, straight whiskey, and straight bourbon whiskey. During 1940, the old Jack Daniel 'Company sought to use the term “straight whiskey” on its label. The Bureau of Internal Revenue refused the request and notified the distillery- that in the future, it would have to place the word “bourbon” on its label. This ruling was protested, and the Bureau was sent samples of the whiskey and an explanation of the distilling and leaching process employed. Thereupon, on March 28,1941, the Bureau ruled that the Jack Daniel whiskey “has neither the characteristics of bourbon or rye whiskey but rather is a distinctive product which may be labeled whiskey.”

8. In 1956, J ack Daniel was one of the most widely known whiskey brand names in the United States. Demand for this whiskey has been very strong since World War II, and by 1956, orders from distributors exceeded the supply and allocation was made among the distributors. Since the distillery was reactivated in 1938, no Jack Daniel whiskey has been sold in bulk; all of it has been bottled and sold in glass. In the fiscal year ended April 30,1956, Jack Daniel whiskey was sold in every State in the United States (except Arizona and New Hampshire) and some was exported; but approximately 40 percent of the total sales were in three States: California, Tennessee and Texas. The Jack Daniel whiskeys were then the highest priced domestic whiskeys with the highest profit to the distiller.

9. Many different types of distilled spirits are manufactured and sold in the United States by a large number of distillers. Many bourbons are sold in bulk and there exists a bulk market for such whiskeys. Bulk prices of such whiskeys vary according to age, supply, and demand, the quality of the product and the reputation of the distiller, and speculative possibilities based on projected future demand. One whiskey brokerage company distributed periodically a letter stating its opinion as to prices on the bulk whiskey market per original proof gallon. In its letter of January 9, 1956, the estimates ranged from a low of $1.10 for fresh distillation to a high of $2 for whiskey more than 7 years old; and in a September 5, 1956 letter, the price range was from $1.15 to $1.90.

10. Certain whiskey distillations are considered within the whiskey industry to be irreplaceable. They are considered irreplaceable because they are so distinctive in taste that an attempt to market a different distillation under the brand name of the irreplaceable whiskey would result in severe damage to its reputation and goodwill. Examples of Kentucky bourbons so considered irreplaceable are Old GrandDad, Old Forester, and Old Fitzgerald. Jack Daniel is probably the most unique whiskey produced in this country, because its taste is distinctive and differs generically from both bourbon and rye, and is properly classified as an irreplaceable whiskey.

11. Jack Daniel whiskey, because it was considered irreplaceable, was never sold on the bulk whiskey market. Loss of such an inventory results in a total loss of sales by the distiller, since another distillation cannot be substituted for the lost inventory.

12. The Jack Daniel whiskey inventory was, during 1956, insured against loss by fire, lightning or theft. In the event of a covered loss of replaceable bulk spirits, insurance contracts provide for reimbursement to the extent of the market price of the whiskey. For irreplaceable distilled spirits, because no bulk market exists, the insurance underwriters agreed with the Distilled Spirits Institute to use an industry valuation formula more fully described below, based upon the distiller’s market price in glass for such spirits. This formula is set forth in a uniform Market Value Clause.

13. The formula used in the Market Value Clause is based on the distiller’s selling price per case of whiskey, from which is deducted Federal excise taxes, bottling, selling, storage, and other expenses incurred in converting the whiskey from bulk goods to bottled goods. The resulting figure is considered the market value of the bottle-ripe whiskey. The market value of the newly distilled whiskey is then determined on the basis of production cost. The difference between these two figures is then spread pro rata over the whiskey of intermediate age to determine its value. For example, the Market Value Clause value of bottle-ripe 5-year-old Jack Daniel Black Label (as of September 17, 1956) was $7.06 per original proof gallon. The assigned value of the fresh distillation was $1.25. The difference of $5.81 was spread pro rata over the 60-month intermediate period, which meant that approximately 10 cents per month were added to the value of the intermediate distillation as it aged.

14. Under the provisions in its insurance policy, the distiller is required each month to report the value of its inventory of irreplaceable whiskey, determined in accordance with the formula prescribed in the Market Value Clause. Periodic checks are made by the insurance companies to insure that the whiskey inventory is in fact irreplaceable. The accounting practices of such insureds may also be evaluated to assure that accounting practices adequate to accurately report the Market Value Clause valuation are being followed. Failure to maintain an adequate accounting and reporting system may result in cancellation of the insurance. The insurance underwriters, after such verification, accept the reported value of an inventory of irreplaceable whiskey determined under the Market Value Claus© as representing the fair market value of the inventory on the reporting date.

15. Since about 1951, Old Jack Daniel insured its inventory under the Market Value Clause, as irreplaceable whiskey. Plaintiff reported to its insurer that the actual cash value of its whiskey inventory, as of August 31, 1956, was $11,615,800. The insurance underwriters accepted such reported 'value as the fair market value of the inventory as of that date. In the event of total loss of the inventory on August 31, 1956, the insurance underwriters would have paid such an amount, subject to their verification that the insured’s method of reporting valuations was proper, that the quantities on hand were correct, and that the insured’s current report was otherwise correct. The same insurers have paid the values reported under the Market Value Clause for irreplaceable whiskeys that have been lost by fire or other covered casualty.

16. Values computed irnder the Market Value Clause have no relationship to the market values for bulk whiskey. The insurance value of irreplaceable whiskey is affected only by the factors mentioned in the Market Value Clause, i.e., the bottle price of the whiskey less taxes and unincurred expenses. The value of bottle-ripe whiskey, as computed under the Market Value Clause, included all the profit the distiller would realize if the whiskey is bottled and sold.

17. Prior to 1956, Brown-Forman was primarily engaged in distilling and selling premium Kentucky straight bourbon whiskeys, including Early Times, one of the three top-selling Kentucky straight bourbon whiskeys, and Old Forester bonded Kentucky bourbon whiskey, one of the four top grade bonded Kentucky bourbon whiskeys sold nationally.

18. Brown-Forman has both preferred and common stock outstanding. The stock is listed on the American Stock Exchange. It had approximately 1500-1600 common stockholders in 1956, but the Brown family controlled the company. Because the Brown family did not wish to dilute its equity position in the company, expansion of the company was possible only through plowing back earnings or borrowing the necessary funds. As early as 1954, Brown-Forman had determined that it should diversify within the distilled spirits field. It was felt that the best chance for profitable expansion, taking into account the limited funds available for such purpose, was to buy up and heavily promote existing premium priced brands of liquor which had an already established national following and a high profit margin.

19. Because of its interest in expansion, Brown-Forman asked Fred Peyser of Hallgarten and Company, New York investment bankers, to find companies which would fit into its expansion plans. In February or March 1956, Peyser advised that Old Jack Daniel might be for sale. Peyser then arranged a conference between representatives of Brown-Forman and Old Jack Daniel. It was held on March 7, 1956, at the office of Sam M. Fleming, president of the Third National Bank of Nashville, Tennessee, who was also a stockholder and director of Old Jack Daniel and was principal negotiator for its stockholders in the sale of the stock to plaintiff.

20. Daniel L. Street, executive vice president of Brown-Forman, was the principal negotiator for it at the March 7, 1956, meeting and the subsequent discussions leading up to the sale of the Old Jack Daniel stock. From the time negotiations were initiated until the stock sale to plaintiff, no officer, director, or stockholder of either party to the negotiations (Old Jack Daniel and Brown-Forman) was an officer, director, or stockholder of the other party.

21. The stockholders of Old Jack Daniel were interested in selling the company for a number of reasons, among which was the possibility of having to sell the company, in any event, to obtain cash to pay inheritance and estate tax due if one of the Motlow brothers, the principal stockholders, died. Also, several of the original stockholders had died, and their widows wanted more income than they were receiving from Old Jack Daniel.

22. While no definite decision to sell had been reached by the stockholders of Old Jack Daniel prior to the March 7, 1956, meeting, they had agreed that they would not accept less than $20 million. This price had been determined by two methods, both arriving at approximately the same figure. First, it was anticipated that the total profit for Old Jack Daniel and its sales affiliate, Nashville Sales Company, would be $2 million during the fiscal year 1956. Dow-Jones price-earnings ratios indicated that companies were being sold for approximately 13 times earnings, and it was therefore felt that a selling price of 10 times earnings, or $20 million, would be reasonable. The second method was that the net value of the tangible assets was determined to be $15 million. To this was added $5 million as a fair value for the goodwill of the company. In arriving at a $15 million valuation for net tangible assets, cash and its equivalent were given their face value; buildings, machinery and equipment were valued on the basis of a recent appraisal, and the whiskey inventory was given its insurance value as computed under the Market Value Clause. The insured value of the whiskey inventory in the spring of 1956 was slightly over $11 million. In so valuing the inventory, it was assumed that it would be sold in glass with the Jack Daniel brand name and labels, and upon such assumption, the insurance value was felt to be reasonable. No consideration was given to current bulk whiskey prices. The total value of the tangible assets was determined to be $17 million. Deducted from this were outstanding liabilities of $2 million to arrive at a valuation of $15 million for net tangible assets.

23. At the March 7, 1956 meeting, Fleming advised the Brown-Forman representatives that the Old Jack Daniel stockholders were only interested in a stock sale, and that the asking price for this stock was $20 million, based on the considerations outlined in the preceding finding, and supported by an interim balance sheet and an operating statement as of January 31,1956.

24. Fleming gave the Brown-Forman representatives a statement of the total barreled whiskey inventory broken down into original proof gallons by month of distillation, showing slightly over 3 million such gallons in inventory. The Brown-Forman representatives then contacted the insurance agent and verified that the whiskey was in fact insured under the Market Value Clause as being irreplaceable. An examination in detail of the whiskey inventory statement revealed that there had been a substantial cutback in production during 1954. Tbe Brown-Forman representatives believed that the relative lack of 1954 whiskey would result in the sales for the fiscal years 1957-1959 being sharply reduced from the 1956 level. This belief proved well-founded, for fiscal 1957 and 1958 sales were almost 100,000 cases below 1956, and 1959 was 80,000 cases below 1956. At the March 7th meeting Street pointed out to Fleming that sales would be sharply reduced in the immediate future and argued that Old Jack Daniel could not possibly be worth the $20 million asking price.

25. During the negotiations for the sale, Street advised Fleming that Brown-Forman would be unable to pay the entire purchase price in cash, that a down payment of $5 million in cash could be arranged, and that the balance would have to be financed through notes issued by a subsidiary organized by Brown-Forman to buy the Old Jack Daniel stock. At the conclusion of the March 7th meeting in Nashville, the Brown-Forman representatives indicated a definite interest in acquiring Old Jack Daniel. They then went to Lynchburg and spent the remainder of the day inspecting the distillery.

26. Brown-Forman initially wanted the purchase of Old Jack Daniel to be cast in the form of purchase of assets, but the Old Jack Daniel stockholders made it immediately clear that, on the advice of tax counsel, they would only sell stock. The divergent viewpoints were reconciled by a plan whereby Brown-Forman would set up a subsidiary, which would then purchase the Old Jack Daniel stock and then immediately liquidate Old Jack Daniel, enabling the new Brown-Forman subsidiary to write up the value of the assets to fair market value under § 334(b) (2) of the Internal Kevenue Code of 1954. This plan was confirmed in an offer to buy, dated August 25, 1956, sent to Beagor Motlow, president of Old Jack Daniel.

Having determined to sell their stock, the stockholders of Old Jack Daniel were interested in obtaining the best price for the stock, entitlement to capital gain treatment on the sale, and assurance that the purchaser would make the deferred payments for tbe stock. On tbe other band, the valuation of tangible assets was important to Brown-Forman, because of its important tax consequences to tbe buyer. When it became clear that tbe purchase would be an installment purchase, tbe question of valuation also became important to tbe selling stockholders, because the higher the inventory valuation, the lower would be the tax liability of the acquiring corporation, with the result that it would have more cash to pay the deferred portion of the purchase price.

27. After the March 7th meeting, the Brown-Forman representatives were furnished with operating statements of the Nashville Sales Company, and the appraisals of the buildings, plant, and equipment. Upon returning to Louisville, they verified the valuation given the whiskey inventory under the Market Value Clause formula and accepted it as fair market value. They also satisfied themselves that the appraisal of the building, plant, and equipment was correct.

28. Brown-Forman next wished to determine whether for tax purposes, it could write up the basis of the inventory to the amounts which it had verified as being correct under the Market Value Clause. It consulted Lybrand, Boss Bros, and Montgomery, its regular auditors. The auditors verified the projected income from the inventory and other assets, reviewed the cash flow projections resulting therefrom, and determined that the valuation given the inventory was such as to return an extraordinary gross profit. Having determined this, they advised Brown-Forman that they considered the proposed valuation a correct accounting method and that it would be proper to write up the inventory to that sum, for determining basis under § 334 (b) (2) of the Internal Bevenue Code of 1954.

29. After determining that the tangible assets had a fair market value in the approximate amount given by Fleming, the final problem was to determine how much to pay for goodwill. Brown-Forman concluded that it could only pay $16 million’for the Old Jack Daniel stock, because the 1954 cutback in production and the resulting lowered sales for the next 3 years did not justify paying more than $1 million for the Old Jack Daniel goodwill. Brown-Forman concluded that $16 million would 'be a fair purchase price for the Old Jack Daniel stock, and decided to start with that amount in negotiations. Cash flow schedules were prepared which showed that a $16 million purchase price would enable Brown-Forman to operate the business and pay off the debt which would be incurred upon the purchase of the Jack Daniel 'business.

30. Street and Fleming met in the middle of April 1956. Street offered $16 million for the stock, but Fleming restated that the asking price was $20 million. Street advised Fleming that, although it accepted the $15 million net value of the tangible assets, Brown-Forman could not accept a goodwill valuation of $5 million, since the goodwill would have to be capitalized and no tax advantage would be gained from it. Being a publicly held company with substantial outstanding-debt, it was felt that the creditors and stockholders of Brown-Forman would not be satisfied with such a large payment for goodwill. Included in the goodwill valuation was the right to use the Jack Daniel labels and trade names on whiskey to be produced in the future. The value of the right to use the labels and trade names on the existing whiskey inventory was not considered part of goodwill. It was included as part of the inventory valuation.

31. After a number of additional conversations, a meeting was held in early August 1956, and the parties orally agreed to a purchase price of $18 million. Brown-Forman submitted to Beagor Motlow, president of Old Jack Daniel, a letter offer to this effect, and also sent a letter to Evans Mot-low, president of Nashville Sales Company, stating that it wanted generally to continue the employment of the Nashville Sales employees and would not change the brokers, distributors, or salesmen of Jack Daniel for 2 years.

32. On August 25, 1956, a letter agreement of sale was signed, plaintiff offering $18 million for the Old Jack Daniel stock, $5.4 million in cash and $12.6 million in negotiable promissory notes. Plaintiff’s offer was accepted by the Old Jack Daniel stockholders, organization of plaintiff was completed, and the closing was held on August 29, 1956. The notes were made payable at the rate of $2.1 million annually, with the first payment to be made on May 1,1958. The notes bore interest at the rate of 4 percent, payable semiannually, beginning May 1,1957.

Plaintiff’s stock was pledged as security for the notes, but Brown-Forman assumed no direct liability for payment of the notes. Any debt owed by plaintiff to Brown-Forman was to be subrogated to the purchase money notes. Old J ack Daniel was liquidated on September 17, 1956.

33. In the letter agreement of August 25, 1956, plaintiff agreed that only the whiskey distilled by Jack Daniel would be bottled at the Jack Daniel plant, and that no bulk whiskey distilled by Jack Daniel would be moved from Lynchburg. The purpose of this was to insure that the Jack Daniel bulk inventory would physically remain on the plaintiff’s premises.

34. Both before and after the Old Jack Daniel purchase, Brown-Forman engaged in discussions with its financial creditors to increase its long-term borrowing. Part of the additional long-term debt was to be used to pay off short-term notes which were issued to obtain the cash portion of the Old J ack Daniel purchase price. ■ The favorable cash flow projections based on the intention to write up the inventory to $11 million were explained to the lending institutions.

Brown-Forman prepared a projection of operations in support of a request for $21 million in long-term loans. The intention to write up the inventory on the basis of the insurance method of valuation (except that it was on a per barrel rather than original proof gallon basis) and the method of the writeup was fully explained. A loan of $19.6 million was granted on October 1,1956, with $9,950,000 of the proceeds being used to pay off the prior long-term debt owed the same lending group.

35. In order to insure continuity of management and to forestall any local reaction against the Jack Daniel sale, Keagor and Evans Motlow were to continue as president and vice president respectively, and all the personnel of Old Jact Daniel and Nashville Sales Company would continue to be employed by plaintiff. Reagor Motlow later became a director of both plaintiff and Brown-Forman.

Brown-Forman originally intended to have a Delaware corporation take over the Old Jack Daniel business, but it was later decided that a Tennessee corporation with the same name as Old Jack Daniel would be created to take over the business. Brown-Forman wanted to maintain the Jack Daniel name and operation, and as one of the means of achieving this end, Brown-Forman has never been mentioned in the Jack Daniel advertising. An additional hazard to the continuity of the business arose from the fact that Moore County permitted only the manufacture but not the sale of distilled spirits. This placed a distiller there in a very exposed position vis-a-vis local sentiment.

36. When plaintiff liquidated the Old Jack Daniel Company on September 17, 1956, it assumed the outstanding liabilities of the old company as of that date in the amount of $1,843,434.41. At that time, plaintiff determined that Old Jack Daniel had sustained a total loss of $28,945.85 for the period August 29,1956 to September 17,1956. Accordingly, the plaintiff determined that the total basis of all assets including cash and equivalent items acquired from Old Jack Daniel on September 17,1956, was $19,814,488.56, determined as follows:

Purchase price of stock_$18, 000, 000. 00
Liabilities assumed- 1, 843,434.41
19, 843,434.41
Less: Net Loss 8/29/56-9/17/56_ 28, 945. 85
Total adjusted basis of stock allocated to assets by plaintiff- 19, 814,488. 56

37. The accompanying table shows the assets acquired by plaintiff from Old Jack Daniel, the value of such assets on the books of Old Jack Daniel, and the fair market value assigned to such assets on plaintiff’s books as of September 17, 1956.

Property Received TJpon Distribution Value Shown on Books of Old Jack Daniel at Date of Distribution Value Recorded on Plaintiff’s Books as of Date of Distribution
Cash $2,845,574.76 $2,845,574.76
Accounts Receivable 527,630.53 527,630.53*
Gash Surrender Value of Life Insurance Policy 17,432.85 17,432.85*
Inventories:
Barreled Whiskey in Bond $3,249,294.87 Tax-paid Whiskey in $11,571,381.51
Bottling Tanks 16,256.55 26,248.86
3,265,551.42 11,597,630.37
Cased Goods 255,165.54 363,055.09
Total Whiskey 3,520,716.96 11,960,685.46
Raw Materials and Supplies 112,816.86 112,816.86
Grain in Process of Distillation 2,679.90 2,679.90
Cattle 103,575.56 119,223.90
3,739,789.28 12,196,406.12
Other Current Assets 2,458.45 2,458.45*
Prepaid Expenses:
U.S. Excise Tax 95,445.90 95,445.90*
State Stamp Tax 3,246.53 3,246.53*
Total 98,692.43 98,692.43
Insurance 120,348.63 120,348.63*
Taxes and Licenses 2,251.13 2,251.13*
Advertising Materials 221,292.19 27,651.04 248,943.23
Buildings and Equipment 1,372,311.69 1,423,044.32
Less Allowance for Depreciation (402,024.36) 970,287.33 1,423,044.32
Land 14,200.00 14,200.00
Goodwill 2,539,798.30
$8,338,665.39 $19,814,488.56

38. The parties are now agreed that the loss sustained by the Old Jack Daniel Company for the period August 29,1956 to September 17,1956 is $60,745.85, rather than $28,945.85 as plaintiff originally determined. Since the amount of such loss is increased, it accordingly reduces the total basis of the assets which plaintiff acquired by $31,800. The parties have agreed that the correct amount to be allocated pursuant to section 1.334-1 (c) of the Treasury Regulations to the property (other than cash and its equivalent) which plaintiff received on liquidation is $16,168,299.78, computed as follows:

Purchase price of the stock-$18,000,000.00
Plus liabilities assumed- 1,843,434.41
Less cash & its equivalent received- (3, 614,388.78)
Less deficit in earnings & profits for Old Jack Daniel for the period 8/29/56-9/17/56- (60,745.85)
Total_$16,168, 299.78

The parties are agreed that the fair market value of the assets which plaintiff acquired from Old Jack Daniel for purposes of Treasury Regulations Section 1.334r-l(e) (4) (viii) are as set forth in finding 37, the values recorded on plaintiff’s books, except for the value of the inventory of barreled whiskey, the tax-paid whiskey in bottling tanks, and the goodwill.

39. Included in the assets of agreed value is the bottled whiskey inventory, such value having been determined by plaintiff by the method of valuation used in the Market Value Clause.

40. The barreled whiskey inventory which plaintiff acquired from Old Jack Daniel contained 3,125,277.6 original proof gallons of whiskey. Each barrel had the following stencil on the barrel head:

Jack Daniel Distillery
Lem Motlow, Prop., Inc.
No. 1, Lynchburg, Tenn.

41. Included among the intangibles acquired by plaintiff when Old Jack Daniel was liquidated are:

(a) The corporate name of Old Jack Daniel.
(b) The Jack Daniel brand name.
(c) All trademarks and labels owned and used by Old Jack Daniel.
(d) The formula for making Jack Daniel whiskey.
(e) A State of Tennessee distillery license.

42. Plaintiff computed the value of the barreled whiskey inventory in accordance with the accepted industry formula for valuing irreplaceable whiskey under insurance contracts. Since the inventory of barreled whiskey acquired would be sold under the three labels, i.e., Black Label, 5-year-old whiskey, Green Label, 4-year-old whiskey, and Lem Motlow, 1-year-old whiskey, the first step in the valuation was to determine how many gallons would be sold under each of the three brands. Based upon the past selling experience of Old Jack Daniel and the experienced judgment of Brown-For-man executives, it was determined that approximately 50 to 51 percent oí the barreled inventory could be sold as Black Label, about 43 percent as Green Label, and the remainder as Lem Motlow. Having made this determination, the inventory was allocated according to the number of gallons which would be necessary to accommodate the projected volume of sales under each of the three labels. It was anticipated that the total barreled inventory would produce the following number of cases, basis fifths, for sale under the three brand names:

No. of Oases Brand (basis fifths)
Black Label_ 664, 328
Green LaJbel_ 475,530
Lem Motlow_ 11,017
Total 1,150, 875

43. Having allocated the entire inventory of barreled whiskey to the amount needed to maintain the projected sales pattern of the three brands, the plaintiff then applied the insurance formula for determining the fair market value of the inventory. Commencing with the f.o.b. distillery selling price for Black Label whiskey per case of fifths of $51.74, for Green Label of $43.74 per case of fifths, and for Lem Motlow of $31.74 per case of fifths, the plaintiff first deducted Federal excise taxes and bottling costs. Next, disposal costs were deducted. The disposal costs which were deducted were based on the prior 2 years’ experience of the Nashville Sales Company and Old Jack Daniel and reflected all pertinent selling, administrative, and general expenses incident to selling the whiskey. The net realizable value per case of fifths which was arrived at after the foregoing deductions was the value for a case of whiskey containing 2.16 regauged proof gallons. Those regauged proof gallons were then converted to original proof gallons because whiskey in the barrel is measured in terms of original proof gallons. The difference in regauged proof gallons and original proof gallons is the outage or leakage and evaporation which occurs during the aging process. The longer whiskey ages the greater the outage; and based on prior experience, it was determined that 78 percent of the original proof gallons remained in the barrel when 5-year-old Black Label was ready for bottling, that 81.53 percent remained when 4-year-old Green Label was ready for bottling, and that 92.36 percent remained when 1-year-old Lem Motlow was ready for bottling. The plaintiff therefore applied the foregoing percentages to the value per regauged proof gallon and arrived at the value per original proof gallon for bottle-ripe 5-year-old, 4-year-old, and 1-year-old whiskey which was ready to be bottled or put in glass. Finally, the plaintiff deducted interest at the rate of 4 percent per annum for 3 months to cover the time lag from the date of bottling and selling the whiskey until the date payment would be received. On the basis of the foregoing method of valuation, the plaintiff determined that the value in the barrel of 5 years or more old whiskey ready for bottling as Black Label was $7.06 per original proof gallon; that the value of the 4-year-old whiskey ready for bottling as Green Label was $5.20, and the value of 1-year-old whiskey ready for bottling as Lem Motlow was $2.18.

44. After plaintiff determined the value of the bottle-ripe whiskey in the barrel as described in finding 43, it determined that the minimum value of fresh new whiskey was $1.25, which value was based on a cost of about $1 per original proof gallon to produce the whiskey. In order to arrive at the fair market value in the barrel of the aging whiskey between fresh new distillation and bottle-ripe whiskey, the plaintiff subtracted the amount of $1.25 (value of new distillation) from $7.06, $5.20 and $2.18 (bottle-ripe value of 5-year-old, 4-year-old and 1-year-old whiskey). It then interpolated such differences evenly by month of distillation over the entire aging inventory allocated to each of the three brands. The value of each brand at each month of distillation was then added, and the average price for all the whiskey for the two seasons of each year, i.e., spring and fall, was determined. On the basis of the foregoing method described in this finding and in finding 43, the plaintiff determined that the fair market value of the entire 3,125,277.6 original proof gallons of whiskey in the barrel on September 17,1956, was $11,571,381.51.

45. On September 17, 1956, there were 1,350 regauged proof gallons of whiskey 5 or more years of age in the bot-fling tanks which would produce 625 cases, basis fifths, of Black Label. The value of such whiskey per regauged proof gallon based on the method of valuation described in finding 43 was $9.14. The Federal excise taxes of $10.50 per regauged proof gallons had been paid on this whiskey, however, which increased its value by the amount of such taxes. The plaintiff made allowance for the period in which the distiller’s money would be tied up from date of bottling to date of payment — 3 months at 4 percent per annum — and arrived at a fair market value for the entire 1,350 regauged proof gallons of $26,248.86.

46. Plaintiff’s total valuation of $11,960,685.46 (the entire whiskey inventory) was entered on its books and used by it as its cost of acquisition for computing cost of goods sold. Plaintiff’s total net sales on such inventory were $55,473,215.98, on which Federal excise taxes were paid in the total amount of $25,281,376.27. Plaintiff’s total allocated disposal costs on the entire whiskey inventory acquired upon liquidation of Old Jack Daniel (exclusive of taxes) amounted to $23,955,348.29. Computing its profit with the above cost basis, plaintiff realized a net profit before taxes of $6,236,491.42, and a net after-tax profit of $2,923,257.02. Plaintiff thus had a before-tax return of more than 50 percent on the original investment, and more than a 25 percent return on total costs, with an after-tax return of 24.4 percent on the cost of acquisition and about 12 percent of total disposal costs, exclusive of taxes. Using the above valuations, plaintiff incurred a loss on the whiskey in the bottling tanks and on a portion of the barreled whiskey, but had the above-noted profit on the sale of the total inventory.

Using defendant’s valuation of $3,805,200 (unbottled whiskey inventory), plus the undisputed value of the bottled inventory ($363,055.09), for a total valuation by defendant of $4,168,255.09, plaintiff would have had a profit on the disposal of all individual seasonal increments of whiskey, and would have had a total before-tax profit of $14,028,921.79.

47. Defendant’s valuation witness, Robert V. Brown, a valuation engineer for the Internal Revenue Service, valued the barreled whiskey inventory at $3,788,000 and the tax-paid whiskey in the bottling tanks at $17,200, for a total unbottled inventory valuation of $3,805,200. This was computed by taking the cost basis of the unbottled inventory as shown on the books of Old Jack Daniel, and adding a “future worth factor” of 6.5 percent per year, compounded semiannually for each seasonal distillation. The “future worth factor” was intended to provide a percentage of interest for the investment tied up in the maturing inventory and for the storage and other charges which would be incurred as the inventory matured. No factor for profit was included in the valuation.

The interest factor was arrived at by reference to “buyback” clauses (See findings Nos. 52, 53, and 55) in certain contracts for the sale of freshly distilled bourbons by the barrel. The buy-back clauses gave the distiller a right to buy the whiskey back (in circumstances related in subsequent findings) for the original sales price plus a certain percentage of increase as the whiskey aged. The interest factor in the buy-back clauses was approximately 6 percent, which Mr. Brown reduced to 3 percent because Jack Daniel whiskey was easily sold, and then increased to 6.5 percent in order to take into account the storage costs.

48. Defendant established a valuation for the goodwill by capitalizing the earnings it attributed to goodwill. The mechanics of this method are as follows: To its valuation of the unbottled inventory ($3,805,200), defendant added plaintiff’s values for the other tangible assets for a total tangible asset valuation of $9,482,100. Liabilities of Old Jack Daniel which were assumed by plaintiff ($1,843,400) were deducted from the total tangible assets, for a net tangible asset valuation of $7,638,700. Next, defendant computed an average yearly net profit for the fiscal years 1957-61 of $1,534,100. This was done by taking plaintiff’s projected net sales for the 5 pertinent years and deducting estimated costs and taxes. The cost of goods sold was estimated to be 60 percent of net sales, based on the average cost of goods sold by Old Jack Daniel as shown on its tax returns for the fiscal years 1953-56. The estimated average disposal cost for J ack Daniel was 27 percent of gross profit. This was based on Old Jack Daniel disposal costs for the fiscal year 1956, as taken from computations in a schedule made by Brown-Forman for its long-term creditors. This schedule covered fiscal year 1955, as well as 1956. It showed the percentage of disposal costs to the sale price of whiskey to be 23.28 percent in 1956, and 30.90 percent in 1955, for a 2-year average of 27.09 percent. The percentage of disposal costs to gross profit for fiscal 1955 was 35.29 percent ($1,399,148.25 to $3,963,562.93), and with the above-stated ratio of 27 percent for fiscal 1956, the 2-year average was approximately 31 percent. Use of a 2-year average, rather than the single year 1956, would have increased the average disposal cost by $186,120 and decreased the after-tax net profit by slightly more than half that sum.

Brown next determined that a reasonable rate of return for the net tangible assets would be 6.5 percent, and applying that percentage to his valuation of the tangible assets, he concluded that the after-tax net profits attributable to the tangible assets was $496,500.

The 6.5 percent rate of return was derived from an analysis of eight corporations engaged in the distilling business. Brown computed their average yearly per share earnings for the 5 years 1952-1956, and computed their net tangible asset valuation per share for 1956. The average earnings per share for the eight companies was approximately 6.5 percent of the net tangibles. Brown did not compute a rate of return for the net assets as a whole, without regard to the number of shares outstanding. He did not have sufficient information to make any further breakdowns of the earnings of these companies, i.e., comparing the return from distilling and selling an irreplaceable whiskey with distilling or importing other types of whiskeys, selling wines and beers, or engaging in activities outside the alcoholic beverage industry. None of the companies studied engaged solely in the distilling and selling of one irreplaceable whiskey, and a number of them were highly diversified, with extensive operations outside the alcoholic beverage industry.

Subtracting the earnings he attributed to the net tangibles from total anticipated earnings, the balance of $1,037,600 was considered to represent plaintiff’s earnings attributable to the intangible assets. This was capitalized by multiplying it by 8 — for the estimated 8 years it would take a competitor to make and market a Tennessee whiskey — and reducing it to its present worth by discounting it at 5 percent. The result was a valuation of $6,706,000 for plaintiff’s goodwill.

Defendant’s calculations of fair market value resulted in a total fair market value of $12,573,800 for all of plaintiff’s assets. This was $3,594,499.78 less than the amount agreed upon by the parties as the amount to be allocated. Defendant then allocated this differential pro rata among all plaintiff’s assets other than cash or equivalent to arrive at a final asset valuation.

49. Vernon Underwood, president of Young’s Market Company, testified in the trial of this case. Young’s Market Company is a wholesale distributor and jobber of distilled spirits throughout Southern California. It distributes no whiskey other than Jack Daniel and the Brown-Forman products, Early Times and Old Forester. Its sales volume of wholesale distilled spirits has ranged from $40 million in 1955 to $68 million in 1964. In 1956 it sold approximately 20,000 cases of Jack Daniel, with a ratio of Black Label to Green Label of 5 to 1. At that time, it was not able to obtain all the Jack Daniel whiskey that it wanted and received a quota allotted by the manufacturer. If the entire inventory acquired by plaintiff had been offered to Young’s Market for $11,960,685.46, with the right to sell the inventory using Jack Daniel labels, Young’s Market would have organized a group of wholesalers to purchase it at that price and would have taken 15 percent of the inventory for itself.

50. The B. L. Buse Company of Cincinnati, Ohio, has been engaged in the whiskey brokerage business since approximately 1913, and in more recent years in the operation of a whiskey distillery company. Mr. B. L. Buse, Jr., president of the company testified at the trial of this case. During the period 1948-1956, the company handled annually from 125 to over 300 separate bulk whiskey transactions in annual dollar amounts from $3.5 million to over $10 million. Most of them involved Kentucky bourbon whiskeys. If the barreled whiskey inventory acquired by plaintiff had been offered for sale on September 17, 1956, including with it the right to use Jack Daniel labels, it was the opinion of Mr. Buse that a group of purchasers could have been found to buy it at the price of $11,571,318.51. It was Mr. Buse’s opinion that plaintiff’s valuation represented the fair market value of the barreled inventory as of the date of acquisition. Mr. Buse also testified that plaintiff’s method of valuation was the only basis for determining fair market value of an irreplaceable whiskey, since there were no bulk sales of it on the market. The Buse Company would have been interested in purchasing plaintiff’s barreled whiskey inventory for the valuation given it by plaintiff, if it could have arranged financing by a joint venture or otherwise.

51. The Stitzel-Weller Distillery, founded in 1849, makes Kentucky straight bourbon whiskey. In 1956, its bourbon was marketed under the brand names of Very Old Fitzgerald, 8-year-old bottled-in-bond; Weller’s Original, 1 years old; Old Fitzgerald, 6-year-old bottled-in-bond; and Cabin Still, 5 years old. Stitzel-Weller whiskey is not traded on the ‘bulk market, and only whiskey made by Stitzel-Weller is sold under the foregoing brand names. In the states where it is economically feasible and permitted under state law, Stitzel-Weller enters into exclusive dealership contracts in which it grants a distributor the exclusive right to market its whiskeys within a particular area. The distributors buy Stitzel-Wel-ler whiskey in bulk at approximately 1 month of age. It is stored in barrels in Stitzel-Weller warehouses until it is ready to be bottled. Pursuant to the contracts, such whiskey (1-month-old) was sold in 1956 at $1.50 per O.P.G. The contracts require that the whiskey be held for at least 4 years, that it must be bottled at an age and proof acceptable to Stit-zel-Weller, and that it must be bottled under a label owned by and agreeable to Stitzel-Weller. By selling the whiskey when originally distilled, the cost of financing the whiskey as it matured was transferred from Stitzel-Weller to its distributors. In 1956 these contracts contained a “pooling” agreement which determined the price at which Stitzel-Weller or its distributors would transfer whiskey in the event that Stit-zel-Weller or a distributor lost, through a casualty, the distillation of a particular age. The formula for determining the transfer price in a “pooling” transfer is essentially the same as that used to determine insurance valuations, i.e., taxes and unincurred costs are stripped from the case price. Stitzel-Weller insured its whiskey under this formula in 1956'. Mr. C. K. McClure, treasurer of Stitzel-Weller and employed by it for 25 years, testified that the prices determined under its pooling agreement represented the fair market value of its whiskey. He further testified that in his opinion the value given by the plaintiff to its 'barreled inventory, including the assumption that it would be sold under the Jack Daniel label, represented the fair market value of such inventory.

52. Stitzel-Weller’s contracts with distributors also include a “buy-feack” clause, requiring the distributor to offer the whiskey to the distiller if for any reason the distributor wishes to sell the whiskey in bulk, if the contract is terminated, or if there is a change of ownership or management of the distributor. The buy-back price is the distributor’s cost plus 6 percent interest and carrying charges, including insurance, storage, and taxes. The “buy-back” clause enables the distributor to recoup his investment without loss if for some reason he has to sell the whiskey before it matures, while at the same time it enables 'Stitzel-Weller to prevent its irreplaceable whiskey from being sold in the bulk market.

If a distributor requests additional bulk whiskey, Stitzel-Weller may sell the whiskey from its own stock, if any is available, or it may arrange a trade with another distributor. If it is sold by Stitzel-Weller, the selling price would in effect be the “buy-back” price. Trades are normally arranged only for mature whiskey, and are arranged at an artificial price, plus the difference in carrying charges between the two distillation years involved. Trades are not made on the basis of insurance values.

53. In 1956, Brown-Forman had a contract with Young’s Market Company to sell Early Times in bulk. This contract contained a “buy-back” clause, providing, under specified circumstances, for repurchases at the cost to Young’s Market plus 1 cent per gallon per month from the date of original purchase. A repurchase at the end of 3 years would have resulted in a return to Young’s Market of its original investment plus 8 to 8y2 percent per year.

The contract further provided that if Young’s Market sold more than a stated amount of Early Times in 1959, it would have the right in 1960 to buy additional bottle-ripe Early Times at the bulk price ($1.1-5 per O.P.G.) plus 1 cent per gallon per month, after entry into bond. Early Times was not considered an irreplaceable whiskey.

54. In August 1957, Brown-Forman entered into a contract with the R. L. Buse Company for the bulk sale of 30,000 barrels of Early Times at cost, but not to exceed $1.15 per O.P.G-. Brown-Forman had an option to repurchase the whiskey at sales price plus 1^4 cents per month per O.P.G. from the sale date. Buse was required to provide insurance on the whiskey it owned, while Brown-Forman agreed to assume all storage charges and taxes accrued on any whiskey repurchased from Buse. In a repurchase of whiskey for which Buse had paid the maximum of $1.15 per O.P.G., Buse would have received a “monthly fee” equivalent to 13 percent per annum straight interest on the purchase price ($.15 per year on $1.15 investment). Brown-Forman did in fact repurchase whiskey under this contract, and Buse made a profit on such transaction, but such price was not considered by Buse to represent the fair market value of Early Times.

55. The Glenmore Distilleries Company, Louisville, Kentucky, entered into contracts during 1955 and 1956 for the sale of newly distilled bourbon in barrels. The contracts contain buy-back clauses which provided that, under conditions similar to those discussed in the previous findings relating to buy-back clauses, Glenmore could repurchase the whiskey at the distributor’s cost plus carrying charges and compound interest of 4y2 percent for the 1955 contracts, and 4 percent for the 1956 contracts.

56. The plaintiff adopted a fiscal year ended April 30, and it accordingly filed a Federal corporation income tax return for the fiscal period August 25, 1956, to April 30, 1957, on which it reported a net operating loss in the amount of $377,-667.55. In computing such net operating loss, the plaintiff used the basis of assets as recorded on its books on September 17, 1956. It accordingly claimed cost of goods sold of $2,753,667.40, an allowance for depreciation of $61,634.76, and a deduction for advertising expenses of $437,021.66 which amount included the $27,651.04 of advertising materials acquired on September 17, 1956. The plaintiff included as a part of its return for the fiscal period August 25,1956 to April 30, 1957, the information required by Treasury Regulations § 1.332-6 with respect to the liquidation of Old Jack Daniel.

57. Tlie Internal Revenue Service subsequently audited the plaintiff’s return for the fiscal period August 25,1956, to April 30, 1957, and following such audit, the plaintiff received a letter from the District Director of Internal Revenue at Nashville, Tennessee, dated May 15, 1958, stating that the return for such fiscal period was being accepted as filed. If plaintiff had used the basis of assets in the hands of Old Jack Daniel in computing the cost of goods sold, the allowance for depreciation and the deduction for advertising expenses, it would have reported taxable income of $1,972,080.56 rather than a loss of $377,667.55 for the fiscal period August 25,1956, to April 30,1957.

58. Within the time prescribed by law, the plaintiff filed its Federal corporation income tax returns for the fiscal years ended April 30,1958-1962, inclusive, and paid the taxes therein reported on or before the statutory due dates. On such returns, the plaintiff reported the following amounts of taxable income or loss:

59.In computing the amount of taxable income or loss reported on the returns for the fiscal years ended April 30, 1958-1962, inclusive, the plaintiff, in computing cost of goods sold, used as the basis for the whiskey purchased from Old Jack Daniel the value of such whiskey as entered on plaintiff’s ‘books on September 17, 1956. All other whiskey sold in those years was whiskey produced by the plaintiff after the acquisition of Old Jack Daniel and was therefore inventoried at cost of production to the plaintiff. In computing the allowances for depreciation on all of the buildings and equipment acquired from Old Jack Daniel, plaintiff used the basis at which such assets were entered on its books on September 17, 1956. Any additional properties 'acquired after that date were depreciated on the basis of their cost to the plaintiff.

60. For the fiscal years ended April 30, 1857-1962, the firm of Lybrand, Eoss Bros. & Montgomery audited the books of Brown-Forman and its subsidiaries and prepared the balance sheets and income accounts appearing in the published annual reports of Brown-Forman which were submitted to stockholders. In such balance sheets and income accounts, the inventories acquired by plaintiff from Old Jack Daniel on September 17, 1956, were reflected at the value thereof which plaintiff entered on its books as of that date. Ly-brand, Eoss Bros. & Montgomery certified such balance sheets and income accounts as follows:

* * * In our opinion the said financial statements present fairly the consolidated financial position of Brown-Forman Distillers Corporation and its wholly-owned subsidiaries * * * and the consolidated result of their operations for the year * * * in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year.

61. The Internal Eevenue Service audited the plaintiff’s returns for the fiscal years ended April 30, 1958-1962, inclusive, and determined the following deficiencies in income tax:

Income Taco Deficiency Taxable Tear
$1,170,404.69 1958—
1,223,537.00 1959—
731,917.64 1960 — .
324,146.59 1961—
23,081.62 1962_
3,473,087.54

The foregoing deficiencies resulted from the Commissioner’s use, in computing cost of goods sold and allowances for depreciation for the assets acquired from Old Jack Daniel, of the basis of such assets in the hands of Old Jack Daniel rather than the basis recorded on the plaintiff’s books on September 17,1956. In determining such deficiencies, the Commissioner disallowed the loss carryover resulting from the net operating losses reported for the fiscal period August 25, 1956 to April 30, 1957, and for the fiscal year ended April 30, 1958. In disallowing the loss carryover from the fiscal period ended April 30, 1957, and from the year 1958, the Commissioner recomputed tbe amount of plaintiff’s taxable income for both periods by using as tbe basis of assets acquired from Old Jack Daniel tbe basis of such assets in tbe bands of Old Jack Daniel rather than tbe basis as recorded on plaintiff’s books on September 17,1956.

62. On June 19,1963, the plaintiff paid tbe deficiencies asserted in tbe 90-day letter, together with deficiency interest.

63. On July 31, 1963, within the time prescribed by tbe law, tbe plaintiff filed claims for refund of tbe amounts of taxes as set forth in finding 61, together with interest with tbe District Director of Internal Revenue at Nashville, Tennessee. In such claims, tbe plaintiff asserted the same grounds for recovery as those relied upon in the instant proceeding.

64. By certified letter dated September 11,1963, the Commissioner of Internal Revenue rejected tbe claim for refund which plaintiff bad filed for tbe fiscal year ended April 30, 1958. By letter dated September 24, 1963, tbe Commissioner of Internal Revenue rejected tbe claims for refund filed for tbe fiscal years ended April 30,1959-1962, inclusive.

65. Tbe plaintiff is tbe sole owner of tbe claims asserted in this proceeding and has made no assignment of such claims or any part thereof or interest therein. No action on the claims herein asserted has been bad before either House of Congress or in any of the Executive Departments except as heretofore stated.

66. Tbe capital stock of Old Jack Daniel consisted of common and preferred with a total par value of $1.92 million, $120,000 of which represented treasury stock. At the time of its liquidation, Old Jack Daniel bad an earned surplus of approximately $4.7 million, and a total debt of $1,843,434.41, part of which was a long-term debt of $400,000. Brown-Forman determined that a capitalization of $2 million would be adequate for plaintiff’s needs and that tbe Old Jack Daniel assets would be sufficient to carry on tbe distillery business. Even though the Old Jack Daniel assets were felt to be sufficient to conduct the business, plaintiff needed $5.4 million to enable it to make the initial cash payment to the Old Jack Daniel stockholders. Brown-Forman contributed $5.5 million in cash to plaintiff, and received in return 20,000 shares of plaintiff’s $100 par value stock, aggregate value of $2 million, and a note for $3.5 million. After the liquidation of Old Jack Daniel, plaintiff had on its books a total debt of $17,936,892, part of which was a long-term debt of $16.4 million, and in addition, a capital stock liability of $2 million, with no retained earnings.

67. The plaintiff’s note to Brown-Forman for $3.5 million bore interest at the rate of 5 percent per year, with a maturity date of May 1, 1963, approximately 6 years and 8 months after the date of issuance, which was August 28, 1956. The note required payment of all interest and principal on the maturity date of the note, with no required installments. The note was subordinated to the $12.6 million in notes issued to the Old Jack Daniel stockholders, and until the Old Jack Daniel stockholder notes and interest were paid in full, plaintiff could make no payment on the Brown-Forman note. The only other money that has been advanced from Brown-Forman to plaintiff was the money needed to pay the tax deficiencies which are the subject of the instant litigation.

68. At the time of the issuance of the note, the cash flow projections for plaintiff, taking the Brown-Forman note into account, indicated that the note could be paid when due.

69. Under the purchase agreement between plaintiff and the stockholders of Old Jack Daniel, plaintiff had to maintain an excess of assets over liabilities in the amount of $6.3 million. Excluded from liabilities for purposes of this computation were any debts owed by plaintiff to Brown-Forman, the debt owed to the Old Jack Daniel stockholders, and equity capital, surplus, and surplus reserves. The bulk inventory sold to plaintiff was to be valued at the Old Jack Daniel cost.

70. Because of its acquisition, through plaintiff, of Old Jack Daniel and other expansion moves, Brown-Forman desired to increase its long-term borrowings from a group of lending institutions from slightly less than $10 million to $21 million. . In support of its request for a new loan, it prepared projections of its own operations through 1961, and plaintiff’s operations through April 30,1963, wherein the $3.5 million ¡advanced to plaintiff was represented as a loan. Be-payment by plaintiff of the Brown-Forman loan and interest was projected in 1963. Sales of almost $16 million per year were projected for plaintiff during fiscal 1962 and 1963. Old Jack Daniel’s previous 'high in sales volume was $14.3 million in fiscal 1956. The projected sales by plaintiff for fiscal 1958 were $10.9 million. After repayment of the Brown-Forman loan, plaintiff was to be left with a projected cash balance of approximately $700,000. On the basis of Brown-Forman’s projections, a new long-term loan for $19.6 million was made, replacing the old $10 million in long-term debt.

71. During the period when the $3.5 million note was outstanding, the parties represented the transaction as a debt. In Brown-Forman’s 1957 annual report, the debt is not directly reflected in the balance sheet. Because it is a consolidated balance sheet of Brown-Forman and its wholly-owned subsidiaries, the inter-company debt is wiped out, but it is described in notes to the financial statements. In its reports to the American Stock Exchange and the Securities and Exchange Commission, and to its lending institutions, Brown-Forman showed the inter-company debt.

72. At the time of its liquidation, Old Jack Daniel had outstanding $400,000 in notes payable to the Mutual Life Insurance Company at the rate of $100,000 each on December 1 from 1956 through 1959. In a letter of September 18, 1956, plaintiff requested the insurance company’s permission to assume the last $300,000 of the obligations, which was refused. The notes were paid on October 10, 1956. To obtain part of the funds to pay off the notes, plaintiff borrowed $300,000 from the Third National Bank of Nashville. The bank loan was for 14 months, was an unsecured, general obligation of plaintiff, and bore interest of 4% percent. If additional credit had been requested by plaintiff at the time when the $300,000 loan was made, it was the opinion of Mr. Fleming, the bank president, at the time of the trial of this case, that additional credit would have been granted.

73. The Third National Bank of Nashville is permitted under the national banking laws to make unsecured loans to one borrower to the extent of 10 percent of the bank’s capital and surplus. This would limit any unsecured loan by the bank to approximately $1 million. In 1956, it was not the bank’s practice to make a million dollar loan on the Brown-Forman terms, i.e., an unsecured loan, the principal or interest of which would not be repaid for 6y2 years, or one that was subordinated to other debt. However, if the prospective borrower was a good customer of the bank, and if the transaction was considered advantageous to the borrower, and if there was sufficient equity in the non-subordinated assets to cover the amount of the loan, such a loan would be considered. The bank could not accept a second mortgage. Mr. Fleming, the bank president, testified that he would have recommended to the bank finance committee that a loan of up to $1 million be made on the Brown-For-man terms, but would not have recommended anything higher, because the risk would have been too great. In so testifying, he assumed that the $12.6 million in prior notes could be paid off out of earnings. However, the cash flow projections for plaintiff assumed a cash flow much larger than earnings.

74. No consideration was given to the possibility of having plaintiff borrow a portion of the required $5.5 million from someone other than Brown-Forman, because Brown-For-man’s bankers wanted all of the outside debt consolidated in the Brown-Forman debt structure with them.

75. By October 7, 1959, the plaintiff had paid $4,200,000 of the purchase money notes given to the stockholders of Old Jack Daniel. Between October 7, 1959, and January 18, 1960, Brown-Forman purchased from the stockholders of the old company the remaining notes owed to them in the amount of $8,400,000, together with interest accrued to the date of purchase in the amount of $101,758.84, and thereafter held such notes until they were paid according to their terms.

76. On its tax return for the fiscal year ended April 30, 1957, plaintiff deducted $118,124.96 as interest on the Brown-Forman note of August 28,1956, and, on each of its tax returns for the fiscal years 1958 through 1962, plaintiff deducted $175,000 as interest on such note. On the initial audits of these returns, the Commissioner of Internal Revenue did not disallow any of these deductions.

77. On its income tax return for the fiscal year 1963, plaintiff deducted the amount of $174,999.97 as interest on the $3,500,000 note.

78. On its books, plaintiff accrued annually as interest, the amounts deducted as interest on its tax returns for the fiscal years 1957-1963, inclusive, and recorded such annual'amounts as accrued liabilities.

79. On February 25, 1963, the plaintiff paid to Brown-Forman the amount of $1,124,374.93 which plaintiff treated as interest accrued on the $3,500,000 note from August 28, 1956 through January 31, 1963. On April 30, 1963, the plaintiff paid to Brown-Forman the amount of $43,750 which plaintiff treated as interest on such note from February 1 through April 30, 1963. Also on April 30, 1963, the plaintiff paid to Brown-Forman the amount of $1,750,000 and issued to Brown-Forman a new demand note in the amount of $1,750,000 with interest at the rate of 5% percent per anrmm. The $3,500,000 note was thereupon canceled, leaving outstanding the new demand note in the amount of $1,750,000. On October 31, 1963, plaintiff paid to Brown-Forman the amount of $49,218.72 which plaintiff treated as interest on the new note, and on December 18,1963, plaintiff paid to Brown-Forman the amount of $1,762,945.21 of which plaintiff treated $12,945.21 as interest, and $1,750,000 as payment of principal.

80. During the fiscal years 1957-1964, Brown-Forman, as payee of the plaintiff’s notes as described in finding 79, accrued on its books and reported on its Federal corporate income tax returns each year the following amounts of interest income:

Mseal Tear Ended April SO Amount of Interest Accrued é Reported
1957_ _$118,124.96
1958_ _ 175, 000. 00
1959_ _ 175,000.00
1960_ _ 175,000. 00
1961_ _ 175, 000. 00
1962_ _ 175, 000. 00
1963_ _ 174, 999. 97
1964_ _ 62,163. 93

Brown-Forman reported taxable income in each of the foregoing years and paid tax on such amounts of interest income at the effective corporate rate which was the same corporate rate as that applicable to plaintiff in the same fiscal years. Thus, the taxes paid by Brown-Forman were in the same amount as the amount of the reduction in plaintiff’s taxes arising from the claimed deductions of the foregoing amounts as interest.

81. The statutory period within which Brown-Forman is permitted to file claims for refund for the fiscal years 1957-1960 expired prior to October 29, 1964, the date on which defendant first asserted the counterclaim, set forth in its First Amended Answer.

82.The defendant has refunded tax and interest to plaintiff as follows:

83. The time for making additional assessments against the plaintiff for the fiscal years 1957 through 1960 expired prior to the filing of the petition in this case.

84. On or about October 29, 1964, the Commissioner of Internal Bevenue determined that the entire $5,500,000 paid plaintiff by Brown-Forman on plaintiff’s incorporation was a capital contribution, that none of it created an indebtedness, and that plaintiff was hot entitled to any of the deductions referred to in finding 76. On the basis of this determination, the Commissioner of Internal Bevenue disallowed the deductions referred to in finding 76 for the fiscal years 1961 and 1962, and timely assessed additional tax and interest in the amount of $108,649.01 for the fiscal year 1961, and in the amount of $103,189.01 for the fiscal year 1962, none of which has been paid.

85. The Commissioner of Internal Bevenue has authorized, and the Attorney General has directed that defendant counterclaim in this action for the recovery of the amounts refunded as described in finding 82, and the unpaid assessments described in finding 84, together with interest according to law.

CONCLUSION OK LAW

Upon the foregoing findings of fact and opinion, the court concludes asi a matter of law that plaintiff is entitled to recover on its petition and that the counterclaim is dismissed. Therefore, judgment is entered for plaintiff with the determination of the amounts of recovery reserved for further proceedings under Buie 47 (c) (2).

In accordance with, the opinion of the court, a memorandum report of the commissioner and a stipulation of the parties, it was ordered on July 27,1967, that judgment for the plaintiff be entered for $4,274,804.47 for the years 1958 through 1962, with interest thereon as provided by law. 
      
      This case was referred to Trial Commissioner Roald Hogenson, with directions to make findings of fact and recommendation for conclusions of law. The Commissioner has done so in an opinion and report filed April 28, 1966. Exceptions were filed by the plaintiff to the commissioner’s second recommended conclusion of law in regard to the defendant’s counterclaim and by the defend ant to the commissioner’s first recommended conclusion of law. The court is in agreement with the findings of the commissioner as to both issues. We have adopted his recommended opinion except in regard to the defendant’s counterclaim.
     
      
      Net fair market value is fair market value less any specific mortgage or pledge to which it is subject. Treas. Reg. § 1.334-1 (c) (4) (viii), supra. None of the assets in question was subject to a mortgage or pledge. Therefore, fair market value and net fair market value are the same for the purposes of this case.
     
      
       The defendant has accepted plaintiff's valuations of all assets other than the three in dispute. Therefore, even if the valuations in dispute are resolved in defendant’s favor, plaintiff is entitled to a refund as to the assets no longer in dispute, subject to the decision on defendant’s counterclaim.
     
      
       Defendant’s valuation in a larger amount than allowed by Internal Revenue as the fair market value of the unbottled inventory is another reason why plaintiff would be entitled to a refund, even if defendant’s present valuation prevails.
     
      
       See generally, 10 Mertens, Federal Income Taxation, § 59.01. (Zimet rev., 1964).
     
      
      Defendant has attacked the negotiations between Old Jack Daniel and Brown-Eorman as being either nonexistent or solely a sham for tax purposes. The trial commissioner viewed and appraised the witnesses and concluded that the negotiations took place as described in the findings. Defendant argues that because tax considerations were important to the parties and both parties had an incentive to overstate inventory value (for Old Jack Daniel stockholders, in order to secure a high sales price for the shares of stock and insure payment; for Brown-Eorman, in order to get a higher basis), the valuation negotiations were necessarily solely tax-oriented. Of course, that conclusion does not necessarily follow from the above premises, and the trial commissioner has concluded that the parties to the sale concluded in good faith that the insurance value was the fair market value of the unbottled whiskey inventory.
     
      
       Although defendant has couched its argument in terms of use of the label, presumably the same argument would be presented if a purchaser used the Jack Daniel name without the Jack Daniel label. The inventory could have had three different values, depending upon whether the purchaser used (in descending order of value) the Jack Daniel label, the Jack Daniel name, or the term “Tennessee Whiskey.” (It is assumed that a bulk purchaser could not be prevented from using the latter term.)i As will be developed more fully later, plaintiff has presented evidence only as to the highest possible value, and defendant has presented no evidence on any of such values.
     
      
       See generally, Patón, Accountants’ HcmAboolc, 517 (3a ed. 1947).
     
      
       Gordon, What is Fair Market Value'!, S Tax L. Rev. 35, 36 (1952).
     
      
       This conclusion is reinforced by defendant’s acceptance of plaintiff’s valuation for the bottled inventory. Defendant’s rationale that plaintiff’s valuation is arbitrary because it includes 100 percent of the profit on the bottle-ripe whistey applies equally to the bottled whiskey and the unbottledi bottle-ripe whiskey.
     
      
       The $20 million figure should he $18 million. The stock was purchased for $18 million, which price reflects the value of assets less liabilities. The later liquidation of Old Jack Daniel and assumption of its liabilities by plaintiff did not add anything to the purchase price.
     
      
       The Court of Appeals stated In a footnote that a similar problem arose in the valuation of the partnership inventory. It did not specifically state so, but it is clear that similar problems would only arise as to the unfinished portion of the inventory, i.e., the cut but unmilled timber, and would not be factors affecting the value of the finished lumber.
     
      
       Plaintiff objected to Brown’s testimony on the ground that he was not qualified to give an expert appraisal of whiskey inventory value. Defendant’s method of developing its valuation was such that it did not require longstanding and intimate knowledge of the whiskey industry. Therefore, such expertise (or lack thereof) is not the deciding factor in considering Brown’s testimony. The deciding factor is the inherent validity (or lack thereof) of defendant’s theory of valuation, and Brown’s testimony must, of necessity, be considered in this light.
     
      
       The contract between Brown-Eorman and Young’s Market gave Young’s Market the right to buy a certain amount of bottle-ripe Early Times under the terms of the barrel purchase contract. However, Early Times was not considered an irreplaceable whiskey.
     
      
       In oral argument Defendant’s able counsel justly called this issue “peanuts” because the classification of the amounts accrued by plaintiff as interest or dividends does not result in there being a great difference in the ultimate tax liability. The reason for this is that the Internal Revenue Code (26 U.S.C. § 243) would grant a parent a deduction for 85 percent of the “dividends” it received from a domestic subsidiary, whereas if it was “interest” the subsidiary would be able to deduct the full amount (26 U.S.C. § 163) and its parent would have to include the full amount in its income (26 U.S.C. § 61). Though in this latter case the parent would lose its dividends received deduction, the two corporations would be better off as a unit. In this case the net saving would be 7.5 percent on each dollar paid by the subsidiary to its parent as interest, i.e., 50 percent of 15 percent (the increased 100 percent deduction made available by Section 243(b) of the Internal Revenue Code of 1954 is only available in tax years ending after 12/31/63). This counterclaim was first tendered as an issue by the Government after the “loan” had been repaid, after the commencement of this suit solely on the issue of fair market value, and after plaintiff’s (and Brown-Forman’s) tax returns passed audit for seven years.
     
      
       “The classic debt Is an unqualified obligation to pay a sum certain at a reasonably close fixed maturity date along -with a fixed percentage in interest payable regardless of the debtor’s income.” 4A Mertens, Federal Income Taxation, Section 26.10 (revised, 1966).
     
      
      
        “The essential difference between a stockholder and a creditor is that the stockholder’s intention is to embark upon the corporate adventure, taking the risks of loss attendant upon it, so that he may enjoy the chances of profit. The creditor, on the other hand, does not intend to take such risks so far as they may be avoided, but merely to lend his capital to others who do intend to take them.” United States v. Title Guarantee & Trust Co., 133 F. 2d 990, 993 (6th Cir., 1943). The creditor “* * * seeks a definite obligation, payable in any event.” Commissioner v. Meridian & Thirteenth Realty Co., 132 F. 2d 182, 186 (7th Cir., 1942).
     
      
       The substance, not the form, of the advances will determine whether they are to be considered as loans or as capital contributions. Crown Iron Works Co. v. Commissioner, 245 F. 2d 357, 359 (8th Cir., 1957); Jaeger Auto Finance Co. v. Nelson, 191 F. Supp. 693, 697 (E.D. Wis., 1961); Gilbert v. Commissioner, 262 F. 2d 512, 513 (2d Cir., 1959), cert. den. 359 U.S. 1002 (1959).
     
      
       The tests the courts have used in this area have been commented upon in great detail. jSee Goldstein, Corporate Indebtedness to Shareholders: “Thin Capitalisation’’ and Belated Problems, 16 Tax L. Rev. 1 (1960-61) ; 4A Mertens, supra, n. 16, sections 26.10A-10C and eases cited therein. It is interesting to note that in Mr. Goldstein’s opinion, “Section 163 [of the Internal Revenue Code of 1954] should * * * be amended to disallow the interest deduction to a corporation on any indebtedness held by a corporation which owns 80 percent of the value of its stock.” Goldstein, supra, at 76. This, however, has not been done to date.
     
      
      “Debt is still debt despite subordination.” Kraft Foods Co., supra, 232 F. 2d at 125-126; also see John Wanamaker Philadelphia v. Commissioner, 139 F. 2d 644, 647 (3rd Cir., 1943), (“* * * the most significant characteristic of a creditor-debtor relationship [is] the right to share with general creditors in the assets in the event of dissolution or liquidation * * *.”). Here we have what can be described as an involuntary subordination. The only way the purchase of Old Jack Daniel could be made was to have the New Jack Daniel stock act as security for the purchase money notes, with the note running from New Jack Daniel to Brown-Forman being subordinated to them.
     
      
       Also see Kraft Foods Co., supra, 232 F. 2d at 125; Royalty Service Corp. v. United States, 178 F. Supp. 216, 220 (D. Mont., 1959) (the absence of subordination is a strong factor in the taxpayer’s favor); Commissioner v. O.P.P. Holding Corp., 76 F. 2d 11, 12 (2d Cir., 1935) (subordination is not fatal).
     
      
      
         “* * • congress evidently meant the significant factor to be whether the funds were advanced with reasonable expectations of repayment regardless of the success of the venture or were placed at the risk of the business * * Gilbert v. Commissioner, 248 F. 2d 399, 406 (2d Cir., 1957); Gilbert v. Commission, supra, n. 17.
     
      
      
        Earle v. W. J. Jones & Son, 200 F. 2d 846, 851 (9th Cir., 1952).
     
      
       178 Ct. Cl. 353, 371 F. 2d 842 (1967).
     
      
       The record did not establish that New Jack Daniel would or would not have been able to borrow $3.5 million from an unrelated lender on the same terms as those granted by Brown-Eorman. we have found (Finding 74) that “[n]o consideration was given to the possibility of having plaintiff borrow a portion of the required $5.5 million from someone other than Brown-Forman, because Brown-Forman’s lcm7cers wanted all of the outside debt consolidated in the Brown-Forman debt structure with them.” This finding justifies giving little weight, if any, to the outside source factor. (Emphasis supplied.)
     
      
       It is to be noted that the note given by the corporation to Boyte was subordinated to the rights of all of the corporation’s other creditors. Oak Motors, supra, at 522.
     
      
      An original proof gallon (O.P.G.) is a proof gallon gauged at the time whiskey is placed in the barrel for aging. A proof gallon is a gallon of 100 proof liquid, or, in other words, a liquid gallon containing 50% ethyl alcohol by volume. (26 C.P.R. § 186.11)
     
      
       Prior to August 31, 1956, Old Jack Daniel was a self-insurer of 15% of the value of its whiskey, as computed under the Market Value Clause. On that date, 100% insurance coverage was obtained.
     
      
      The foregoing items marked with an asterisk which total $3,614,388.78 constitute cash or its equivalent.
     