
    351 F. 2d 619
    PARMELEE TRANSPORTATION COMPANY v. THE UNITED STATES
    [No. 69-60.
    Decided October 15, 1965]
    
      
      Laurence F. Casey, attorney of record, for plaintiff. Brown, Wood, Fuller, Ccddwell <& Ivey, of counsel.
    
      David D. Bosenstein, with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant. C. Moxley Featherston, Lyle M. Turner and Philip B. Miller, of counsel.
    Before Cowen, Chief Judge, Laramore, Durfee, Davis and Collins, Judges.
    
   Laramore, Judge,

delivered the opinion of the court:

In this action plaintiff claims refunds of corporate income taxes for the years 1955, 1953, and 1954. The claim is founded on a loss of an intangible asset allegedly sustained in 1955, which loss is sufficiently large to create a net operating loss for that year with carrybacks to 1953 and 1954. At issue are not only the allowability of the claimed deduction but also the proper year and amount of the deduction. Although most of the trial time and much of the argument have focused on the amount of the deduction, this issue cannot be reached unless both deductibility questions are resolved in plaintiff’s favor. We conclude that the loss is deductible, but hold that it may not be deducted in 1955.

The Parmelee Transportation Company is a Delaware corporation which has its principal office in Chicago, Illinois. It was organized in 1929 to acquire a controlling interest in the shares of the Parmelee Company, similarly a Delaware corporation doing business in Chicago. In 1934, the Par-melee Company was liquidated into tbe Parmelee Transportation Company.

From 1853 until its liquidation, the Parmelee Company operated a transfer service among Chicago’s eight railroad terminals. This service has always been an integral part of transcontinental railroad passenger traffic because few of the western railroads share terminals with the eastern railroads and, in almost every case, some transfer, even intra-terminal, is required. The Parmelee Company provided an all-encompassing service. It transferred passengers and their hand baggage as well as checked-through baggage; it also performed certain local services, such as a luggage pickup and delivery service for passengers residing and stopping over in the Chicago area. Because of the specialized nature of this service, the railroads permitted only the Par-melee Company the right, to perform it. With one exception, none of the railroads had any written contract with the company. Notwithstanding the informality of the arrangement, the railroads and the Parmelee Company worked together very closely. Thus, to expedite the transfer service, the railroads provided rent-free office space in the terminals and allowed Parmelee Company agents to board incoming trains at outlying stations to ready passengers for transfer. Likewise to expedite the service, the railroads issued transfer coupons to passengers with their tickets and redeemed these coupons promptly after receipt from the Parmelee Company. Coupon rates were negotiated periodically by the company and representatives of the railroads.

In the 1934 liquidation, the plaintiff, Parmelee Transportation Company, succeeded to the business of its subsidiary. This business continued in unaltered form until 1955. Throughout this period, taxpayer owned and increased its ownership in the stock of large taxicab companies in Chicago, New York City, Minneapolis, and Pittsburgh. Taxpayer also entered the airport transfer and ground transportation business with its wholly-owned subsidiary, Continental Air Transport Co., Inc., and it acquired a substantial stock interest in an insurance company. However, only the railroad transfer service was directly operated by taxpayer in 1955. All the other businesses retained their separate identities, and, .unlike the railroad transfer service, were not known to the public as “Parmelee’’ businesses.. Bj 1955, income from subsidiaries substantially exceeded the parent’s earnings from Chicago operations; the transfer service accounted for about 6 percent of consolidated gross revenue and 12 percent of consolidated net income.

Sometime in 1954, taxpayer approached the Western Pail-roads Passenger Association, which then represented the railroads in transfer negotiations, with a proposed, increase in the transfer coupon rate. Thereafter, it made a different proposal, that the rate would increase in proportion to the decrease in passenger traffic. The Association formed a subcommittee to study the proposals. This group suggested, that the transfer service be put up for competitive bidding. Consequently, bids were submitted by 12 companies which offered to perform the service in whole or in part. Only the Parmelee Transportation Company and Eailroad Transfer-Service, Inc. bids were seriously considered, however. Taxpayer’s bid was for an annual increase over five years starting June 30, 1955, from $1.22 per adult passenger coupon to $1.25. Eailroad Transfer Service, Inc., a company set up by John L. Keeshin for the express purpose of acquiring the transfer business, offered a- $1.20 rate -in the first year, escalating to $1.27 over five years. Eailroad Transfer. also, offered to provide new equipment and to give the railroads-periodic accounting statements.

Not satisfied with competitive bidding, Keeshin approached Hugh W. Cross, a longtime friend and then Chairman of the Interstate Commerce Commission. Cross discussed the transfer service negotiations with the presidents of some of the interested railroads and, in at least one discussion, stressed the merits of the railroad Transfer proposal. S. Rep. No. 1444, 84th Cong., 2d sess. 28, 30-31 (1956.). It is not clear whether Cross interceded simply as a personal favor to an old friend or whether he was influenced by a job offer. Before the Permanent Subcommittee on Investigations of the Senate Committee on Government Operations, both Keeshin and Cross denied the latter allegation which taxpayer made there and in an anti-trust action. Parmelee Transportation Co. v. Keeshin, 186 F. Supp. 533 (N.D. Ill. 1960), aff'd, 292 F. 2d 794 (7th Cir.), cert. denied, 368 U.S. 944 (1961). Likewise, it is not clear whether Cross’ intercession was the deciding factor for the railroads. It is clear, however, that public exposure of the incident and all the natural inferences caused Cross to admit that he had been “indiscreet” and resign from the Commission chairmanship.

On June 13,1955, the railroads informed the taxpayer that after September 30, 1955, its services would no longer be required. The railroads, acting through the Western Railroads Passenger Association, signed a 5-year contract with Railroad Transfer Service, Inc., providing that Railroad Transfer would furnish a complete transfer service. This was exactly the same service which taxpayer and its predecessors had performed since 1853.

After September 30, 1955, taxpayer’s agents were not permitted to enter any railroad terminals. Nor would the railroads cooperate to allow the transfer of checked-through baggage. Thus, although taxpayer attempted briefly to perform transfer functions at no charge, as a practical matter, it was completely excluded from the business. The natural consequence was that about 60 percent of the drivers resigned to go with Railroad Transfer, and the remaining transfer business employees retired or shifted over to Continental Air Transport. By December 31, 1955, the transfer business was in effect being wound up. This was so, even though most of the equipment had not yet been sold and many transfer business employees had not yet relocated. The revenue dried up abruptly on September 30, 1955; the expenses lingered on only because the tangible assets could not be sold overnight, nor could the employees be fairly discharged on the spot.

Before December 31, 1955, the Parmelee Transportation Company balance sheet carried an asset entitled “Intangible Assets” in the amount of $1,322,819.05. This represented the excess book value of the Chicago transfer business over its tangible assets in 1934, the year of the Parmelee Company liquidation into taxpayer. This asset was eliminated from the balance sheet on December 31, 1955. It is this item that taxpayer claims is an allowable ordinary loss deduction in 1955.

Tbe applicable statutory provision is section 165 of the Internal Revenue Code of 1954, which provides in subsection (a):

There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Taxpayer contends that its loss of these intangible assets, or at least of the exclusive arrangements with the railroads, falls within the purview of this section. The defendant answers with extremely thorough and ingenious arguments. We agree with taxpayer that the loss of the intangible assets is deductible and note that, although the loss is of a capital asset, there is ordinary loss treatment for want of a sale or exchange. Internal Revenue Code of 1954, sections 165(f), 1221.

The gist of defendant’s first argument is that the “arrangements with the railroads” were not “property” for purposes of section 1221 of the Internal Revenue Code of 1954. Defendant emphasizes that in 1934, when taxpayer acquired the transfer business from its subsidiary, it had a mere expectancy that the railroads would continue the exclusive arrangements. Unlike franchises, patents or licenses, these arrangements could be granted only by the railroads and were not readily assignable. . The argument continues that although the Parmelee Company transfer business had a going concern value in excess of its tangible assets, this “goodwill” factor could be attributed to name, equipment, location, reputation, drivers, agents, executives with experience, and so forth. The arrangements, defendant contends, although possibly having a value, should not be considered a part of the goodwill because they could be granted only by the railroads and at no cost.

The difficulty with defendant’s argument is that it fails to take account both of the breadth of the concept of “property” within the framework of the tax laws and of the realities of the transfer business. It cannot be convincingly argued that the terminable-at-will arrangements represented but a minor ingredient of the intangible asset value of the Parmelee Company business.. Surely the arrangements constituted substantially the entire intangible asset value and were the sine qua non of the Chicago railroad transfer business. Granted, the arrangements were not technically assignable, and the railroads could terminate for any reason. However, the historical relationship dating back to 1853 made it less likely each year that there would be any termination. There can be no doubt that the arrangements had a substantial value in 1934 and that this value was transferred in the liquidation of the subsidiary into the parent. Defendant’s view of the facts is unduly formalistic. It was of no concern to the railroads whether Parmelee Transportation Company or its subsidiary Parmelee Company performed the services. Thus the arrangements passed as a part of the business to the acquiring parent corporation from the subsidiary and not from the railroads.

We think that this construction of the facts and of the meaning of “property” under the Internal Revenue Code of 1954 is not inconsistent with the cases cited by the defendant. In Consolidated Freight Lines v. Commissioner, 101 F. 2d 813 (9th Cir.), cert. denied, 308 U.S. 562 (1939), the taxpayer acquired certificates of convenience and necessity to operate trucks in the Stats of Washington. The cost far exceeded the annual state fee. When the state abolished the licensing system thereby stimulating competition, the taxpayer sought to deduct the purchase price of the then worthless license. In Chase Candy Co. v. United States, 130 Ct. Cl. 102, 126 F. Supp. 521 (1954), the taxpayer paid a substantial premium for the stock of a sugar company which had a large sugar allotment. The taxpayer hoped that the Office of Price Administration would consent to the transfer of this sugar ration. When the rationing system ended, so did the monopoly conditions, and taxpayer sought to deduct the premium. In both cases, the government prevailed. The basis of the court’s holding in Consolidated Freight Lines was that the certificates of convenience and necessity conferred no monopoly privilege. The existence of a monopoly depended solely upon the administration of the licensing law by a state agency. There was nothing the taxpayer could do to prevent the agency from issuing certificates to all applicants or the legislature from-abolishing the system. This court adopted a similar analysis in Chase Candy.

While we recognize the possible analogy between these cases and the present, we think there are fundamental differences. Both those cases involved attempts by taxpayers to assert the existence of a property right in a state-created monopoly. There can be little doubt that no person has a vested interest in a public law which entitles him to insist that it not be changed. See New York Central R.R. Co. v. White, 243 U.S. 188, 198-202 (1917). Taxpayer in this case makes no such assertion, however. It recognizes that it had no “right” to a monopoly, but contends that it had an expectancy in the continuation of the arrangements, a not unreasonable expectancy in the light of its century-long relationship. This is a very different kind of expectancy from that created by a public law. It is the kind of expectancy that comes close to being a property right, and it is considered “property” for tax purposes just as other components of goodwill are “property” and capital assets. Internal Revenue Code of 1954, section 1221.

An equally significant distinction is that in Consolidated Freight Lines and Chase Candy, the aftermath of the abolition of the statutes was competition. Consolidated Freight continued to operate its trucks and Chase Candy continued to produce candy. On the facts before us, by contrast, the Parmelee Transportation Company has been completely excluded from the Chicago transfer business. It would be a very different case indeed if taxpayer were petitioning us for a loss deduction caused by the railroads giving 50 percent of the transfer business to a competitor.

For the proposition that taxpayer had no basis for the arrangements because it acquired them at no cost from the railroads, defendant cites Miller v. United States, 166 Ct. Cl. 247, 331 F. 2d 854 (1964); A. H. Morse Co. v. Commissioner, 208 F. 2d 751 (1st Cir. 1953). Those cases are inapplicable to the facts of the 1934 liquidation. Both involved situations in which rights were clearly not transferable and positive action had to be taken by the grantor of the rights. We have determined that in 1934 the taxpayer simply succeeded to the entire business of its subsidiary without having to first obtain the blessing of the railroads.

As its second defense, defendant argues that even if the arrangements were property, taxpayer has established no basis independent of goodwill. Dodge Bros. v. United States, 118 F. 2d 95 (4th Cir. 1951) and Boe v. Commissioner, 307 F. 2d 339 (9th Cir. 1962), are the suggested authorities. We are not persuaded by this argument. While we agree that the arrangements were a part of the general goodwill or intangible value of the transfer business, and that no specific allocation was made in 1929 or 1934, we reject the notion that goodwill is indivisible.

In Dodge Bros., taxpayer was created by investment bankers for the purpose of acquiring the automobile production business of the Dodge family. The purchase price included a substantial premium for the intangible assets of the business. The new corporation sought a depreciation or amortization deduction for that part of the intangible assets representing the value of the reputation of the “Dodge” 4-cylinder car which had been phased out to meet demand for the 6-cylinder car. The court analyzed the problem by concentrating on the meaning of “depreciable asset.” It concluded the intangible there involved was just one part of a bulk purchase of assets. This bundle, known as “goodwill,” bad no reasonably estimable useful life nor did its components have readily ascertainable values. For these reasons, the court applied the predecessor to section 1.167(a)-3 of Treasury Regulations (1956) which states: “No deduction for depreciation is allowable with respect to goodwill.”

Boe is similar to Dodge. The taxpayer, a doctor, purchased a retiring doctor’s practice. The bulk of the purchase price was allocated to goodwill which included the value of medical service contracts. The court denied the taxpayer a deduction under section 165 of the Internal Revenue Code of 1954 for the losses realized on termination of some of the contracts. The court reasoned that the contracts were part of the goodwill of the practice or business, and that the termination of some was not a proper event for loss recognition because they were gradually replaced by others.

We find neither Dodge nor Boe particularly helpful. The present case is very different from those, because in both, the businesses and the goodwill carried on. The Dodge Company continued to manufacture automobiles and Boe continued to provide medical services. By contrast, the Parmelee Transportation Company ceased to be a meaningful factor in the Chicago railroad transfer service business in 1955. Although the company continued, it did so without a former line of business.

Support is given to this analysis by section 39.23 (e)-3 (a), of Treasury Regulations 118, which was in effect during 1955. The relevant part of that provision states:

§ 39.23 (e)-3 Loss of useful value
(a) When, through some change in business conditions, the usefulness in the business of some or all of the assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he takes such action * * *.

This is a proper interpretation of section 165 of the Internal Revenue Code of 1954. It appears to cover the case of the taxpayer engaged in more than one business and to allow a loss deduction upon the discontinuation of one line.

Of course, we are not saying that a mere decline in value of a component part of goodwill is deductible. We base our decision upon the fact that an identifiable line of business has become' completely worthless.- We acknowledge that perhaps it will be' the rare case whose facts permit this result and' that we would have less difficulty were a subsidiary corporation involved. But we do not think that a difference in organizational form alone should dictate a. different result, where, as here, the loss is very real and complete.'

Taxpayer has cited Webster Investors, Inc. v. Commissioner, 291 F. 2d 192 (2d Cir. 1961), to support its contention that a deduction is allowable without the loss of the entire goodwill. Cf., Strauss v. United States, 199 F. Supp. 845 (W.D. La. 1961); Metropolitan Laundry Co. v. United States, 100 F. Supp. 803 (N.D. Calif. 1951). In Webster the taxpayer sought to deduct a loss realized at the time of the sale of a-brand name. The loss was allowed. This illustrates, that upon the sale, exchange, abandonment, or condemnation of a readily identifiable intangible, a loss is properly allowable. Doubtless a brand name is a more salable commodity than a terminable-at-will contract, but that fact in no way diminishes the 'reality that such arrangements as are before us are analogous to brand names and trademarks and maybe very valuable- though of limited marketability.

Closely related to its argument that no independent basis-can be established for a component of goodwill is defendant’s-third and -principal argument that the taxpayer has not sustained a deductible loss of -goodwill or intangible assets because it remained in business after the- termination of the transfer arrangemexits. At the heart of this contention is the notion that taxpayer has not “sustained” a loss under section 165 of the Internal Revenue Code of 1954. The theory is that taxpayer realized a loss of that part of the goodwill that attached to the railroad transfer operations, but it cannot recognize this loss for tax purposes as long as its -other operations and the general goodwill of the overall business continue. We agree with the defendant that as a general proposition of tax law loss recognition requires a “closed transaction.” As goodwill is typically part of a, going concern, a loss of a part of goodwill will hot be a closed transaction; only the termination or sale of the underlying business will qualify. See Zwetchkenbaum v. Commissioner, 326 F. 2d 477 (1st Cir. 1964); Dodge Bros. v. United States, 118 F. 2d 95 (4th Cir. 1951). See generally, Note, Tax Treatment of Losses Incurred on the Sale or Abandonment of Purchased Goodwill, 62 Yale L. J. 640 (1953). However, there will be cases where the closed transaction rule may be applied to a loss of the goodwill of a, clearly identifiable business at the time that business is terminated or sold. Strauss v. United States, 199 F. Supp. 845 (W.D. La. 1961); Metropolitan Laundry Co. v. United States, 100 F. Supp. 803 (N.D. Calif. 1951); Rev. Rul. 57-503, 1957-2 Cum. Bull. 139. See Anchor Cleaning Service, Inc., 22 T.C. 1029 (1954).

Defendant would have us reject the reasoning of these-cases, or at least distinguish them. We do neither. We think that a corporation engaged in different businesses or-operations may have goodwill build up around each individual business. When such a business is terminated, the goodwill may vanish almost entirely with very little carrying over to the “parent” or “brother-sister” operations. Such is the case here. We do not accept defendant’s version-of the facts which stresses that the goodwill of taxpayer’s Chicago transfer service division attaches to all operations of' the taxpayer. Although the .service in 1955 constituted a small facet of the taxpayer’s overall operations, it.was the-only division known to the public as “Parmelee.” It was not common knowledge to denizens of-the railroad transfer service that they could enjoy Parmelee Transportation Company-hospitality in taxicabs and airport-limousines in Chicago and' other cities. Quite clearly this reputation component of' goodwill vanished in 1955 along with the arrangements. There are, of course, other components of goodwill. These-too were rendered useless in 1955. To be sure, some of the-drivers moved over to the airport transportation subsidiary- and all of the executives stayed on, but as a practical matter,, the valuable components of goodwill, the “Parmelee” reputation and the arrangements, were gone, We conclude that, the other components that carried over to Parmelee Transportation Company were de minimis. In short, we are of the opinion that the arrangements with the railroads constó-tuted substantially the entire goodwill or intangible asset value of the railroad transfer business.

Anticipating this view, defendant contends that 1955 is not the proper year because the railroad transfer activities were not permanently discontinued. It is true that taxpayer attempted to perform a kind of token service after 1955. This was, however, an empty gesture, for without the arrangements taxpayer did not have the wherewithal to remain in business. Nor did taxpayer have any reasonable hope of recapturing the lost business. Defendant refers us to Chicago v. Atchison, T.&S.F.R.R. Co., 136 F. Supp. 476 (N.D. Ill. 1955), rev’d, 240 F. 2d 930 (7th Cir. 1957), aff'd, 357 U.S. 77 (1958), in which taxpayer intervened. In this litigation, the railroads and the successor transfer service sought to have a Chicago licensing ordinance invalidated. Railway Transfer Service, Inc. had not applied for a license fearing it would be denied. The Supreme Court ultimately held the ordinance invalid as a restraint upon an area of interstate commerce over which the Interstate Commerce Commission had exclusive jurisdiction; but in 1955, the City of Chicago was successful. The short answer to defendant’s contention is, even though the City of Chicago prevailed in 1955, there was no certainty that taxpayer would regain the service. Indeed, it seems very unlikely that the railroads would even consider application by the taxpayer after going through litigation.

Dick & Bros. Brewing Co. v. United States, 67 Ct. Cl. 505 (1929), does not compel us to hold there is no loss in 1955. There a brewer remained in business after Prohibition in 1919 to produce “near beer.” This court held that the brewer had not sustained a deductible loss in the value of its goodwill in 1919 because it remained in business with some goodwill carrying over. There was lacking the necessary “identifiable event” of loss. See United States v. S. S. White Dental Co., 274 U.S. 398 (1927). In the present case, we expressly find that taxpayer was excluded from the railroad transfer business in 1955 and that the goodwill of that business disappeared with no intangible of value carrying over to taxpayer’s other businesses. In Dick & Bros. Brewing Co., the taxpayer continued in the liquid refreshment business and the goodwill clearly had some carryover value, albeit depreciated.

Strauss v. United States, 199 F. Supp. 845 (W.D. La. 1961), Metropolitan Laundry Co. v. United States, 100 F. Supp. 803 (N.D. Calif. 1951), Anchor Cleaning Service, Inc., 22 T.C. 1029 (1954), and Rev. Rul. 57-503, 1957-2 Cum. Bull. 139, illustrate how important the facts will he in this area of law. We have sought to set out the contours of section 165 of the Internal Revenue Code of 1954 as it applies to intangibles and to view the facts in this context, and it is our view that in this case loss treatment is justified. The courts and the Service in the cited authorities likewise appear to have reached reasonable results. We stress, though, that it will be the rare case in which the loss of an intangible, clearly a part of the goodwill of a business, or the entire goodwill of a business, can be deducted before the going concern is sold or abandoned. The burden will be on the taxpayer to establish that the loss qualifies as an identifiable event or a closed transaction under section 165 of the Internal Revenue Code of 1954.

In its fourth defense, defendant assumes the claimed deduction to be allowable, but asserts that it may not be deducted in 1955. Defendant reasons that since a loss is deductible only if “sustained during the taxable year and not compensated for by insurance or otherwise” (Int. Rev. Code of 1954, section 165 (a)), there can be no deduction if there exists a reasonable prospect of recovery. This is a proper construction of the statutory rule as developed by many cases. United States v. S. S. White Dental Co., 61 Ct. Cl. 143 (1925), aff'd, 274 U.S. 398 (1937); Lewellyn v. Elec. Reduction Co., 275 U.S. 243 (1927); Juniper Inv. Co. v. United States, 168 Ct. Cl. 160, 338 F. 2d 356 (1964); Minneapolis, St. P. & S. S. Marie R.R. Co. v. United States, 164 Ct. Cl. 226 (1964); Wyman v. United States, 143 Ct. Cl. 846, 166 F. Supp. 766 (1958); Marks v. United States, 102 Ct. Cl. 508, 58 F. Supp. 182 (1944); Pacific Fruit Exchange v. United States, 88 Ct. Cl. 300, 26 F. Supp. 228 (1939); Montgomery v. United States, 87 Ct. Cl. 218, 23 F. Supp. 130 (1938), cert. denied, 307 U.S. 632 (1939); Jacob Ruppert v. United States, 86 Ct. Cl. 396, 22 F. Supp. 428 (1938), cert. denied, 305 U.S. 680 (1939); Birdsboro Steel Foundry Co. v. United States, 78 Ct. Cl. 100, 3 F. Supp. 640 (1933); Scofield’s Estate v. Commissioner, 266 F. 2d 154 (6th Cir. 1959).

Applying this rule to the facts of this case, we find that taxpayer has not sustained the burden of establishing that as-of the close of 1955 it had no reasonable prospect of recovering the amount of its loss. Taxpayer evidently concedes in. its brief that it did have a “reasonable expectation of recovery” in its antitrust suit against the railroads, Railroad Transfer Service, Inc., Keeshin and Cross. We do not find" this concession determinative, however. We have reviewed' the evidence concerning the antitrust suit, including the claim,, answer, and the opinions, to determine what a “reasonable-man” in 1955' would have determined the prospects of recovery to be. This is an objective test looking to the probabilities of the outcome of litigation as of 1955. While we-offer no detailed opinion as to the merits of the taxpayer’s antitrust claim or of a common law equity claim, we find that the taxpayer did have a reasonable prospect of recovering-something. In arriving at this conclusion, we stress that the-mere existence of a “possible” claim or pending litigation will not'alone warrant postponing loss recognition. There are-many reasons for initiating lawsuits. In this case, taxpayer’s-antitrust claim for treble damages exceeded 19 million dollars. Where the stakes are so high, a suit may be “100% justified”' even though the probability of recovery is minuscule. In-short, although we offer no litmus paper test of “reasonable prospect of recovery,” we note that the inquiry should be directed to the probability of recovery as opposed to the-mere possibility. Analyzing the rule in percentage terms, we would consider a 40 to 50 percent or better chance of recovery as being “reasonable”. A lawsuit might well be justified’, by a 10 percent chance.

Bather than ask us to construe the facts to find no reasonable prospect of recovery in 1955, taxpayer asserts that the-law prior to i960 would allow a deduction, notwithstanding that there existed a valid-claim. The nub of this argument may be found in section 1.165-1 (d) (4) of Treasury Regulations (1960). That provision states that losses antedating-January 16, 1960 may be treated “in accordance with the rules then applicable, or * * * in accordance with the- provisions' of this paragraph.” Section 1.165-1 (d) (2) (i) was added to the regulations in 1960. In other words, taxpayer argues that to give meaning to the exercise by the Commissioner of his section 1805(b)- power to make regulations-.apply prospectively only, we must conclude that the law prior to 1960 was different. We cannot accept this interpretation.

As early as 1927, the Supreme Court, in affirming a decision of this court, set out the proper rule for determining the year of loss where there exists a claim for reimbursement. United States v. S. S. White Dental Co., 274 U.S. 398 (1927). There, a taxpayer claimed a loss deduction for the year 1918 during which the German Government had seized the assets of a subsidiary. In fact, taxpayer did receive 'some reparation in 1924. The Court focused on the year 1918 and observed that taxpayer had but a remote hope of eventual recovery in that year. It found the necessary closed transaction in the seizure, and viewed as irrelevant the fact of the later recoupment. Taxpayer misconstrues this part of the Supreme Court’s analysis.

Consistent with the Supreme Court’s analysis, this court and others have applied a test of. “reasonable prospect of recovery.” See White Dental and accompanying cases, supra. Thus, in Scofield’s Estate v. Commissioner, 266 F. 2d 154 (6th Cir. 1959), the court held that losses .caused by the. misconduct of trustees before 1935 were deductible by the fiduciary in 1948, the year that all litigation terminated. In that case, the government argued that the loss should bave been deducted in the earlier, barred year. With respect to litigation after the claimed year of loss, the court said at 266 F. 2d 154, 159:

Normally where a taxpayer is in good faith willing to go to the trouble and expense of instituting suit to recoup a * * * [section 165(a)] type loss, there is as a matter of fact sufficient chance of at least part-recovery to justify that taxpayer in deferring the claim of a loss deduction under * * * [section 165(a)] until the litigation in question is concluded. This is not to suggest that in some cases the facts and circumstances will not show such litigation to be specious, speculative, or wholly without merit and that the taxpayer hence was not reasonable in waiting to claim the loss as a deduction.

We think this dictum proposes too rigid a test. Again, we emphasize that a suit by a taxpayer will not operate as a presumption; at the most it raises an inference which leads to an evaluation of the probabilities. The Service, however, evidently felt that Scofield’s Estate either changed prior law or at least modified it. Rev. Rul. 59-388, 159-2 Cum. Bull. 76. The modified regulations resulted. T.D. 6445, 160-1 Cum. Bull. 93. Section 1.165-1 (d) (2) contains nothing inconsistent with the reasoning of White Dental. Section 1.165-1 (d) (2) (ii) adds a refinement which perhaps the Service had not before applied, but it is an approach dictated by the case law. In short, we find nothing in the modified regulation to warrant a “prospective only” application, unless the Service in its review of cases had not been applying White Dental principles. So we regard section 1.165-1 (d) (4) as neutral and section 1.165-1 (d) (2) as simply conforming the regulations to the White Dental decision.

In summary, we hold that the loss, though allowable, is not deductible in 1955, because taxpayer has not shown that on December 31, 1955 it did not have a reasonable prospect of recovery in the antitrust suit which was not finally adjudicated until 1961. As to what constitutes the loss, we have concluded that the entire intangible assets of the Chicago transfer business vanished in 1955. That is equivalent to the value of the arrangements with the railroads which were the sine qua non of the business.

We reserve judgment on the amount of the loss and have accordingly made no specific finding. We have, however, reviewed the full record to compare the valuation techniques used by the witnesses, and we think the approach of plaintiff’s witnesses is the better. Defendant’s witnesses relied too heavily on depression earnings, on the one hand, and overvalued tangible assets, on the other. Both steps were calculated to reduce the value of the intangibles. Plaintiff’s witnesses looked to an average of predepression and depression earnings. Their only error is that they should have weighted the more recent depression earnings more heavily than the boom years. See Central Trust Co. v. United States, 158 Ct. Cl. 504, 305 F. 2d 393 (1962). Some weighting was accomplished by using a low price-earnings multiple, but a downward adjustment in base period earnings is needed to arrive at a realistic intangible asset value.

The plaintiff’s petition is dismissed.

FINDINGS OP PACT

The court, having considered the evidence, the report of Trial Commissioner William E. Day, and the briefs and argument of counsel, makes findings of fact as follows:

1. Parmelee Transportation Company, the plaintiff herein, a corporation organized under the laws of the State of Delaware, has its principal office and place of business at Chicago, Illinois.

2. The plaintiff, by this action, sues to recover an alleged overpayment of Federal income taxes by reason of its claimed loss of goodwill in September 1955 when its passenger and baggage transfer business at Chicago, Illinois, under a longtime arrangement between it and the railroad companies having terminals there, was taken away from it by such railroads.

3. The plaintiff is a successor to the firm of Frank Par-melee and Company, which had its beginning over a hundred years ago and which was engaged in transporting passengers and baggage to and between railroad stations in Chicago, Illinois.

4. Plaintiff was incorporated under Delaware laws on April 12,1929, and its initial capitalization consisted of 10,000 shares of $100 par value 6 percent cumulative convertible preferred stock and 250,000 shares of no par value common stock. On April 23, 1929, plaintiff’s directors voted to acquire from J. A. Sisto & Co. (herein Sisto) an option to acquire 19,300 shares of common stock of The Parmelee Company (plaintiff’s predecessor company), then owned by C. A. McCulloch, at $100 per share, and they also voted to acquire options to purchase a 26 percent interest in the Chicago Yellow Cab Company and a 68 percent interest in the stock of Yellow Taxi Corporation, New York.

5. On or about April 29,1929, plaintiff, in exercise of said option, consummated the acquisition of the 19,300 shares of common stock of The Parmelee Company by payment of $1,-'930,000 cash, which funds, together with funds used for purchases by plaintiff of securities of other transportation corporations, had been secured through the sale of the following securities of plaintiff for cash to Sisto: $5,000,000 principal amount of debentures, preferred stock having a par value of $1,000,000, and 240,000 shares of common stock. Subsequent to September 30, 1929, plaintiff acquired the 700 remaining outstanding shares of stock of The Parmelee Company at a cost of $64,540.

,6. For the calendar years 1929 through 1933, plaintiff filed consolidated income tax returns which included the income and expenses of The Parmelee Company as well as those of other affiliated subsidiaries. For the calendar years 1934 through 1955, plaintiff filed separate income tax returns reflecting only its own income and expenses.' For the calendar .years 1956-1957, plaintiff filed consolidated income tax returns covering its own income and expenses and those of its affiliated subsidiaries.

7. The Parmelee Company was incorporated under Delaware laws on July 7, 1919, and at that time acquired the transfer business, described below, from the Frank Parmelee Company, which had been incorporated on January 11, 1895, and which had carried on such business uninterruptedly until transfer thereof to The Parmelee Company. The Parmelee Company was liquidated, and its entire tangible and intangible assets were transferred to plaintiff on or about May 31,1934. This date becomes important, in later findings, as it is the date on which the plaintiff’s basis for arriving at a fair market value of an intangible asset is to be measured.

8. During the period from 1911 to 1934, and for many years prior thereto, the city of Chicago was served by 21 railroads using 8 railroad terminals, which were known as: Dearborn Station, Central Station, Grand Central Station, XaSalle Street (or South Street) Station, Chicago Union Station, Chicago North Western Station, Chicago North Shore Station, and- Chicago South Shore Station.

9. Throughout its existence, The Parmelee Company’s principal business was the transfer of railroad passengers, 'who required transportation, from their incoming Chicago "terminal to the station from which they were to leave Chicago. The Parmelee Company also transferred checked-through and hand baggage of such passengers between such-stations; passengers remaining over in Chicago were transferred from their respective incoming stations to prescribed downtown Chicago locations.

10. The service provided by the -plaintiff and its predecessors in transporting railroad passengers and baggage between Chicago railroad stations was accomplished pursuant-to letters of understanding (not in evidence) with the railroads or with committees or organizations representing them. One railroad, the New York, Chicago & St. Louis Railway, entered into a contract (not in evidence) with the plaintiff for the service. In substance, the understanding between the plaintiff (and its predecessors) and the railroads was terminable at will by either party. From 1858 until 1955, this, service was performed by no others than the plaintiff company and/or its predecessors.

11. The passenger-baggage transfer business of the plaintiff (and its predecessor companies) was a continuation of a. service begun by Frank Parmelee in 1853 and which service the railroads had been required to furnish to incoming passengers who were continuing their journey from Chicago, through a different railroad terminal from the terminal used by their incoming trains. The railroads provided their Chicago passengers with a transfer coupon to be presented to-Parmelee (and its successors) for its transfer service which Parmelee (and its successors) accepted and presented to, and received reimbursement from, the railroads issuing the coupon. This transfer coupon entitled the holder to an inter-station transfer of his entire checked-through baggage as-well as the holder’s own transportation between stations. By using Chicago railroads which had a common terminal,, it was possible for passengers to enter and to leave Chicago from the same terminal. However, even those passengers-would be given Parmelee transfer coupons upon purchase of' their railroad tickets. These services and the revenues derived therefor from the railroad were recorded in Parmelee’s (and its successors’) accounts as the “depot operation.”

12. To assist passengers in transferring between stations,, the railroads permitted Parmelee agents to board incoming-trains at outlying stations and to ask the passengers whether they needed transfers in Chicago so that upon arrival there, their transfer between stations, by Parmelee, could be handled more expeditiously. The railroads provided office space, without rental, in their terminals for Parmelee passenger and baggage agents except for charges for lights or alterations.

13. The charge (coupon rate) for passenger and baggage transfer was from time to time negotiated by.plaintiff, or its predecessor companies, and the committees of the railroad passenger associations representing the Chicago terminal railroads. The history of such changes in the basic (adult passenger) coupon rate was as follows:

14. The Parmelee Company and, following its liquidation, plaintiff, also furnished a local baggage transfer service under which a passenger holding a railroad ticket could have his baggage picked up at his residence in Chicago (or suburbs thereof), taken to the station, where it would be checked on his ticket, and' sent direct to the passenger’s destination. The passenger paid The Parmelee Company for transfer to such station and for local transfer in the city of his destination ; the amount received for the latter services was remitted to the railroad by The Parmelee Company.

Upon request of a railroad, The Parmelee Company would also deliver checked baggage to a passenger’s destination in the Chicago area, receiving payment for such service from the railroad. Receipts from this service were classified in The Parmelee Company’s books as the “local operations.” The Parmelee'Company billed the railroads for these charges, presented passenger transfer coupons at the close of each month, and, as a general rule, received payment from the railroads within 30 days.

15. The Parmelee Company also transferred between stations, for cash fares, persons wishing to accompany a passenger transferring under a railroad coupon between two Chica.go stations.

,16. On May 31, 1934, and also throughout the year 1955, the plaintiff owned substantial interests, increasing to 100 percent ownership, in various subsidiary companies, including the following:

National Transportation Co., Inc., the largest taxicab operation in New York City;
Yellow Taxi Company of Minneapolis;
Yellow Taxi Company of Pittsburgh;
Continental Air Transport Co., Inc., which provides ground transportation of airline travelers in the Chicago area;
Airlines Transportation Company, which provides a similar service in the Pittsburgh, Pennsylvania, area; and
Parmelee Motor Fuel Company, which provides fuel and lubricating oil for vehicles of the plaintiff and its subsidiary companies, as well as to two other fleet operators in the New York and Pittsburgh areas.

'The plaintiff also had substantial stock ownership in the -Chicago Yellow Cab Company, Inc., and in General Fire & •Casualty Company, an insurance firm.

17. For the period July 1, 1926, through May 31, 1934, The Parmelee Company’s receipts from passenger and baggage transfers and related sources, its expenses therein accrued on its books, its net transfer income per books, its net transfer income per books as adjusted to an income tax basis by eliminating nondeductible credits to reserves and other items, discussed in later findings, and its adjusted transfer income after deduction of applicable income taxes, are shown in the attached Appendix 1.

18. The Schedule L or Schedule M adjustments, shown in Appendix 1, represented credits to reserves maintained in its books from time to time by The Parmelee Company for various purposes, e.g., claims, advertising, pensions, and workmen’s compensation. For the periods reflected in Appendix 1, the amounts credited to such reserves exceeded The Parmelee Company’s actual expenditures for such purposes, as shown in Appendix 1. The amounts so credited to reserves but not expended were not allowable income tax deductions and were so treated in Schedule D or Schedule M of the income tax returns filed by The Parmelee Company or by plaintiff. Similar treatment was accorded to depreciation taken on The Parmelee Company’s books or'plaintiff’s books in excess of depreciation allowable for tax purposes. The excess amounts in such reserves were transferred to surplus in 1932. A similar transfer to surplus had been made during the fiscal year ended June 30, 1928.

19.For the taxable years 1929-1933, plaintiff filed consolidated Federal income tax returns showing consolidated taxable income or consolidated losses from operations of its several subsidiaries, including The Parmelee Company, as follows:

20. Appendix 2 is a table showing (a) assets of The Par-melee Company used in its transfer business (grouped in principal categories), (b) other assets of The Parmelee Company, and (c) The Parmelee Company’s liabilities, per books, at the dates shown.

21. During the periods shown below, The Parmelee Company paid the following dividends:

The 1932 payments included a distribution of capital to the extent of $550,000, which reduced plaintiff’s basis for The Parmelee Company stock to $1,444,540; and the distributions, during the period ended June 30, 1928, reduced capital by $178,600. - As a result of such dividends, and related dispositions of investment assets, The Parmelee Company’s capital stock and earned surplus. accounts decreased from $1,685,233 as of June 30,1926, to $181,462 as of December 31, 1933.

22. On or about May 31, 1934, The Parmelee Company’s entire business and assets, tangible and intangible, were transferred to plaintiff by bill of sale in complete liquidation of The Parmelee Company, a transaction in which gain or loss was subject to recognition for income tax purposes under the provisions of the Eevenue Act of 1934. The liquidation was reported in plaintiff’s 1934 tax return, as follows:

23. During the taxable year 1934, plaintiff received gross income of $395,620.84, and its allowable deductions (disregarding an erroneously claimed $2,000 capital loss deduction) totaled $482,748.63. In its 1934 return, plaintiff reported a net loss of $89,127.79. Its adjusted basis for The Parmelee Company stock was $1,444,540. The tangible assets received from The Parmelee Company were recorded on plaintiff’s books at the adjusted basis thereof to The Parmelee Company as of the date of liquidation. Plaintiff recorded on its December 31, 1934, balance sheet, filed with said return, as an asset received in such liquidation, “goodwill” in the amount of $1,323,819.05.

24. The Parmelee Company’s transfer to plaintiff of its assets, its business, and its contracts or arrangements with the Chicago railroads caused no interruption or change in the transfer services described in earlier findings, such services being carried on by plaintiff after May 31, 1934, without interruption (except for a strike in 1950) until termination thereof in 1955. Consent of the railroads to plaintiff’s assumption and operation of the transfer business was neither sought nor needed by plaintiff in May of 1934 because the 1934 sale and liquidation simply changed the Parmelee. “family” corporate form.

25. The following table shows plaintiff’s pretax net income-from the railroad passenger and baggage transfer business-from May 31,1934, through September 30, 1955:

26. During 1954, plaintiff proposed an increase in the coupon rate to the railroads, then acting through the Western-Railroads Passenger Association. A subcommittee recommended that the transfer service be given to the lowest bidder. Plaintiff and Railroad Transfer Service, Inc., a company set up by John L..Keeshin for the express purpose-of acquiring the transfer business, submitted the only two» bids that were seriously considered. Plaintiff offered to perform the service for $1.22 per coupon in 1955, escalating-to $1.25 over five years. Railroad Transfer offered $1.20 in 1955, escalating to $1.27 over the same period. It also, promised to use new equipment and to present periodic accounting statements. However, Railroad Transfer did not limit itself to competitive bidding. Thus, Keeshin requested Hugh W. Cross, a long-time friend and then Chairman of the Interstate Commerce Commission, to intercede for Railroad Transfer. Cross discussed the transfer service negotiations with the presidents of some of the railroad-members of the association. It is clear that on at least one occasion he advocated the Railroad Transfer proposal. S. Rep. No. 1444, 84th Cong., 2d Sess. 28, 30-81 (1956). Plaintiff accused Cross of being influenced by the offer of a lucrative position in the newly formed transfer service company both before the Permanent Subcommittee of Investigations of the Senate Committee on Government Operations and also in an antitrust action. Parmelee Transportation Co. v. Keeshin, 186 F. Supp. 533 (N.D. Ill. 1960), aff'd, 292 F. 2d 794 (7th Cir.), cert. denied, 368 U.S. 944 (1961). Neither Keeshin nor Cross admitted improper influence. Cross simply admitted that he had been “indiscreet,” and the Senate investigation terminated upon his prompt resignation from the Commission.

On June 13, 1955, the Association advised plaintiff that its services would no longer be required after September 30, 1955. The railroads awarded a 5-year contract to Railroad Transfer, which, starting October 1, 1955 and continuously thereafter, performed the service of transferring passengers and baggage between railroad stations in Chicago. This was the same service which had been previously performed by plaintiff and its predecessor companies.

27. After September 30, 1955, plaintiff attempted to continue its service for passengers who applied for a Parmelee transfer at the Chicago railroad stations, but its employees: were not permitted to operate on the station premises, and they were excluded from offices and facilities previously furnished to them by the railroads. Plaintiff’s agents used the public street near the Illinois Central Station, and plaintiff’s agents were also on duty on Canal Street, which, is city-owned property, at the North Western Station. At these stations, plaintiff accepted coupons for transfer of any passengers presenting them but it did not present such coupons to the railroads for payment and it collected nothing from either the railroads or passengers for such service. This service continued for roughly 3 to 5 months after September 30, 1965. Plaintiff also provided cash-fare transfers for passengers and handled local transfers of baggage to the stations but, lacking the cooperation of the railroads, could not handle checked-through baggage transfers.

28. About 60 percent of the plaintiff’s drivers left plaintiff’s employment and were employed by Eailroad Transfer Service, Inc. Others were transferred to plaintiff’s subsidiary, Continental Air Transport Co., Inc. Some of plaintiff’s employees were pensioned, but no employee was discharged. The plaintiff provided a token transfer service for cash fares during 1956 and even into 1957, but, as a practical matter, plaintiff was completely excluded from the transfer business as of September 30, 1955.

29. As of December 31, 1955, an asset carried on plaintiff’s balance sheet as “goodwill,” in the amount of $1,322,819.05, was eliminated from the balance sheet and charged against earned surplus. In plaintiff’s Annual Report to Stockholders for the year 1955, the following statement appeared as Note A to the financial statements:

On October 1, 1955, the transfer service for passengers and baggage between railway stations in Chicago, a service which had been provided for many years by Parmelee Transportation Company, was awarded to another company by the Chicago terminal railroads. In the two preceding years, this transfer service accounted for less than 6% of consolidated gross revenue and less than 12% of consolidated net income.

Plaintiff’s gross revenue, expenses and operating profit or loss from passenger and baggage transfers for the following calendar years, were:

30. In February 1956, plaintiff instituted an action in the United States District Court at Chicago, Illinois, against John L. Keeshin, Kailroad Transfer Service, Inc., the 6 railroads represented on the committee chosen by the 21 Chicago terminal lines to negotiate a new interstation transfer service arrangement, the presidents of 4 of these 6 railroads, and Hugh W. Cross, for defendants’ violations of the Sherman Anti-Trust Act, alleging, inter alia, in support of its claim for treble damages of $19,200,000, that, as a result of such violations, plaintiff’s goodwill and the value of plaintiff’s business as a going concern in carrying on the Chicago transfer business, and the business reputation associated with the name “Parmelee” had been substantially and permanently damaged, injured, and destroyed. Parmelee Transportation Co. v. Keeshin, 186 F. Supp. 533 (N.D. Ill. 1960), aff'd, 292 F. 2d 794 (7th Cir.), cert. denied, 368 U.S. 944 (1961).

The District Court denied defendant’s motion to dismiss the complaint for failure to state a cause of action on September 19, 1956. Parmelee Transportation Co. v. Keeshin, 144 F. Supp. 480 (N.D. Ill. 1956). After lengthy discovery proceedings, the case was tried and submitted to a jury on the narrow issue of “public injury.” On June 30, 1960, after a jury verdict of no public injury, tbe District Court entered judgment for the defendants. Parmelee Transportation Co. v. Keeshin, 186 F. Supp. 533 (N.D. Ill. 1960). On June 30, 1961, the Seventh Circuit in a 2-to-1 decision affirmed the decision of the District Court. 292 F. 2d 794. The Supreme Court, on December 11, 1961, denied certiorari, the Chief Justice and Justices Black and Douglas being of the opinion that certiorari should be granted. 368 U.S. 944, rehearing denied, 368 U.S. 972. In the case of In Re McConnell, 370 U.S. 230, 231 (1962), the Supreme Court (by Justice Black), commenting on the ruling of the District Court in the antitrust case, stated that it was “an erroneous holding since we have held that the right of recovery of a plaintiff in a treble damage antitrust case does not depend at all on proving an economic injury to the public.”

31. Beginning about 1936, plaintiff, under contract, began to furnish a transfer service from points in the city of Chicago to the Chicago Municipal (Midway) Airport, first with American Airlines and later with, several additional airlines serving the city’s airport; and, in connection therewith, plaintiff acquired permits from the city of Chicago for the use of passenger vehicle driveways and parking stations at the airport, which plaintiff held until 1948. Plaintiff’s revenue from such service increased from $76,256.25 in 1940 to $222,537.25 in 1947. During said period, plaintiff had contracts with Northwest Airlines, American Airlines, and Delta Airlines, under which it furnished ground transportation for passengers using such airlines to and from the airport. In securing these contracts, plaintiff stressed the ability and experience of its personnel, and that it had benefited from knowledge accumulated in its transfer operation in Chicago.

32. On July 23, 1945, plaintiff caused Continental Air Transport Co., Inc. (herein Continental) to be organized as a wholly owned subsidiary, provided its initial capital, and later transferred thereto the automotive equipment previously used by plaintiff in the airport operation. Plaintiff’s principal officers became officers of Continental. During 1947, Continental applied to the Illinois Commerce Commission for a certificate of authority to furnish the ground transportation service to and from the airport, then carried on by plaintiff. In supporting such application, officers of plaintiff testified before the Commission that plaintiff would furnish $250,000 of capital to Continental, and cited plaintiff’s reserves and experience, its long-standing operation of the railroad transfer service, plus the availability to Continental of plaintiff’s automotive maintenance and insurance services and garage facilities.

33. In July 1947, the Illinois Commerce Commission issued a certificate authorizing Continental to furnish transportation to and from the Chicago airports. In its opinion, the Commission noted that Continental was a subsidiary of plaintiff, that since 1853 plaintiff and its predecessors had been rendering a transfer service for the Chicago railroads, and that it had current assets of $5,000,000. Concurrently, Continental entered into agreements with the city of Chicago, permitting it to use the airport facilities for which it paid compensation to the city. Continental has derived substantial revenue from the airport transfer service since 1948. Flight passenger traffic through, the Chicago Municipal (Midway) Airport has shown consistent increases through the years. Plaintiff has not engaged in the airport transportation business since 1948.

34. Archibald B. Hossack, who testified as an expert for plaintiff, is presently Chairman of the Executive Committee (and was formerly President and Chairman of the Board) of American Appraisal Company, organized in 1896, a “reputable, nationally-known and recognized appraisal” company. He has been employed by the American Appraisal Company for some 48 years, holds a civil engineering degree from Worcester Polytechnic Institute, and is a registered professional engineer in the State of New York. He has appraised, valued, and testified as an expert concerning land, buildings, machinery and equipment, patents, franchises, trademarks, and other intangibles. He has testified as an expert in 25 or 30 cases, appearing before the Tax Court, the United States Court of Claims, and other courts, in many of which he testified as an expert for the Government. He submitted a list of 18 companies whose stock or assets he had valued for various purposes. These valuations covered both tangible and intangible assets of such companies and were relied upon in connection with mergers, sales, liquidations, insurance, and income, estate and gift taxes.

35. Mr. Hossack had been familiar with and, from time to time since 1906, had used the transfer service performed by plaintiff and its predecessors. He was aware that the service was not furnished on a long-term contractual basis, but was furnished on a year-to-year arrangement. He was not aware of any comparable transfer service having been rendered by any other organization in other metropolitan areas of the country. He was, however, aware that railroad passenger traffic decreased substantially after the depression began in 1929, and he assumed that in the years following 1934 the volume of passenger traffic would not return to the predepression level of the 1920’s.

36. Mr. Hossack rendered an opinion as to the fair market value at May 31,1934, of the exclusive arrangement held by The Parmelee Company with or from the Chicago terminal railroads for the transfer of passengers and baggage between the Chicago railroad stations. In forming said opinion, he considered (a) the balance sheets, including operating assets of The Parmelee Company as of said date, as shown in Appendix 2; (b) The Parmelee Company’s annual profit and loss for the 7 years’, 11 months’ period beginning July 1,1926, and ending May 31,1934, as shown on Appendix 1 hereof, both before and after elimination of credits to reserves shown thereon; and (c) certain analyses, more fully described in later findings, prepared by David D. Glunt, a supervisor of special studies and services for the American Appraisal Company since 1946.

37. Mr. Glunt submitted a projection of revenue from the transfer business for the 7 months ended December 31, 1934, and the calendar years 1935-1936, based upon the increase which occurred in the number of passengers carried during the first 5 months of 1934 and those carried during the same period in 1933, but after giving effect to the reduction in the coupon rate from 85 cents to 75 cents, which took effect on March 1, 1934. His examination of The Parmelee Company’s records disclosed a projected 37.8 percent increase over the number of passengers actually carried during the same period in 1933.

38. In forming his opinion, Mr. Hossack did not know, and he gave no consideration to, the actual earnings realized by plaintiff in the transfer business for periods after May 31, 1934, but he assumed prospective annual gross revenue of $1,000,000. Since for the 7 years’, 11 months’ period beginning July 1, 1926, and ending May 31, 1934, the actual expenses of the transfer business after elimination of credits to reserves, as shown in Appendix 1, averaged 75.1 percent of gross revenue, so that the average net profit from the transfer business, before taxes, was 24.9 percent for such period, Hossack assumed a prospective (pretax) net profit of 25 percent from such revenue. Mr. Hossack regarded an annual pretax net income of $250,000 from the transfer business under plaintiff’s operation as a conservative estimate since, even in the depression years, the decrease in The Parmelee Company’s net income was relatively less than the decrease in its gross revenue, which indicated, in his opinion, that the company had learned to economize and had held expenses to a better level than experienced in the early depression years, 1930-1931. His recollection was clear that during the first 5 months of 1934, the country had witnessed a substantial upturn in revenue of general business. He felt that his recollection of this fact was corroborated by statistics transcribed from Moody’s Industrial Manual showing that (a) total building contracts in 37 states increased 120.5 percent during the first 5 months of 1934 over the same period in 1933, (b) production of steel ingots (gross tons) increased 108.6 percent, (c) automobile production (United States and Canada — passenger cars and trucks) increased 91.4 percent, and passenger revenue of the principal railroads serving Chicago increased 12.7 percent during the first 5 months of 1934 over the comparable period in 1933.

39. Mr. Hossack recognized that much of plaintiff’s equipment had been fully depreciated, and he assumed that with the increasing volume of passenger transfers, worn-out equipment would have to be replaced with new equipment and that additional equipment would be needed, requiring working capital of about $200,000, compared with $75,000 of working capital as of May 31, 1934, to handle a $1,000,000 volume of transfers — much of such working capital would come from accumulated earnings. At the prevailing 13% percent rate, income taxes on $250,000 would be $34,375, leaving after-tax net income of $215,625. Mr. Hossack estimated that the liquid and tangible assets should earn an 8 percent return. On an estimated real net worth (as opposed to book value) of $200,000, he computed a return of $16,000. This left $199,625 of earnings to be capitalized in order to arrive at the value of the arrangement with the railroads. In Mr. Hossack’s opinion, the arrangement was conservatively and fairly worth 5 times earnings (20 percent rate of return) or $1,000,000 on May 31, 1934. This meant that, assuming an annual earnings level of $250,000, the party acquiring the transfer business for $1,000,000 would recover his investment within 10 years plus 15 percent simple interest. While Mr. Hossack assumed that a willing purchaser would pay $1,000,000, plus an amount equivalent to book net worth, or $75,000, for the entire transfer assets and business, he did not make, and could not make, a separate valuation of the equipment or other tangible assets owned by The Parmelee Company on May 31, 1934. In forming his opinion, he recognized that the “Parmelee” name was still favorably known, and that Parmelee’s organization included experienced people, but he concluded that these were not worth much without the agreement with the railroads, and that the real value of the business was in its long standing arrangement with the railroads.

40. Dr. Herbert B. Dorau is an economist who, immediately prior to the trial of this case, had retired as Professor of Public Utilities and Transportation in the Graduate School of Business of New York University and as Chairman of the Department of Public Utilities and Transportation in the New York University School of Commerce. He graduated from Lawrence College, Appleton, Wisconsin, and he received a master’s degree in economics, majoring in transportation, from the University of Wisconsin. He has taught courses or has lectured on transportation, public utilities, and finance at Northwestern University and at the University of Michigan; he has acted as consultant to the New York Board of Utility Commissioners, the Department of Marine and Aviation of the City of New York, and as adviser to the Port Protection Committee of the Port of New York Authority which is concerned with comparative transportation rates, facilities, and practices; he has testified before state railroad and utilities commissions in some 30 states, as well as before many Federal agencies, including the Securities and Exchange Commission, the Federal Power Commission, the Interstate Commerce Commission, the Civil Aeronautics Board, and in state and Federal courts; and he has appeared, by invitation, before various professional societies including the American Bar Association, the Controllers’ Institute of America, the American Institute of Appraisers, the American Gas Association, the Technical Valuation Society, and the National Accounting Conference in the Electrical and Gas Utilities Industry. In his teaching, research, and other work, he has been substantially concerned with the cost of capital and capitalization rates, particularly applicable to the transportation and public utilities industry. He was familiar with the operation of the transfer business as carried on by The Parmelee Company for the period 1929-1934.

41. Dr. Dorau rendered an opinion on the fair market value of the contract or arrangement held by The Parmelee Company on May 31, 1934, for transfer of passengers and baggage between Chicago stations, by starting with the premise that the value of income-producing property is the present worth of the expected succession of future incomes. Thus, he first formed an opinion as to the rate at which the income of The Parmelee Company’s transfer business would have been capitalized by a prospective purchaser thereof as of May 31, 1934; and preliminary thereto, he sought a full range of market evidences as to the capitalization rate at which that kind of income would have been capitalized, recognizing that the rate would be influenced by the degree of risk, hazard and uncertainty (he was aware that The Parmelee Company’s agreement with the railroads was only a year-to-year arrangement) for which a purchaser would have required a premium over and above the basic money rates.

42. Dr. Dorau’s determination of the capitalization rate fairly applicable to The Parmelee Company’s business by a willing purchaser involved the following steps:

(a) He determined the prevailing primary contractual money rate during 1934 and, where possible, for the first 5 months thereof. The average yield of various investments during the first 5 months of 1934 was as follows: United States long-term bonds, 3.10 percent; Moody’s Industrial bonds series, 4.52 percent; Moody’s Electrical Utilities bonds series, 4.50 percent; Moody’s Railroad bonds series, 4.96 percent; Moody’s Public Utilities bonds series, 5.40 percent; Moody’s Industrial High-Grade Preferred Stock series, 4.98 percent; and the Moody’s Medium Grade Preferred Stock series, an average yield of 7.70 percent for such 5 months.

(b) Dr. Dorau determined that the price-earnings ratio for five public transportation companies, which he regarded as most nearly comparable to the Parmelee Company’s transfer business, was 7.2 times (13.89 percent capitalization rate or rate of return). These companies and the respective price-earnings ratios, indicated by annual earnings and average 1934 fourth-quarter market prices, were as follows: Capital Transit Company (Washington, D.C.), 6.7 times (14.91 percent); Cincinnati Street Railway Company, 8.0 times (12.50 percent); Greyhound Corporation, 8.5 times (11.71 percent); Third Avenue Railway Company (New York), 5.4 times (18.45 percent); and Twin Cities Rapid Transit Company, 8.4 times (11.86 percent).

(c) Dr. Dorau then determined the relationship between the average capitalization rates of such transportation enterprises with capitalization rates of highly regarded electric utilities. The capitalization rate of eight transportation companies (including the above five) for the period 1947-58 was 1.557 times that of the electric utilities. The capitalization rate for the seven largest electric utilities whose securities had been publicly quoted for a substantial period of time was 9.23 percent (a price-earnings ratio of 10.8 times) in 1934. Assuming that the 1.557 percent was a sufficiently long and stabilized relationship, he applied this factor (which represented the average multiple by which the price-earnings capitalization rate of transportation companies exceeded that of electric utilities) to the 9.23 percent, the average 1934 capitalization rate of the utilities, which produced a 14.37 percent (a price-earnings ratio of 7.0 times) capitalization rate for companies in the transportation business..

As a test check, Dr. Dorau determined that the capitalization rate for the seven large and long-established electric utilities from 1924 to 1961 was 1.899 times the average yield of public utility bonds for the same period; and by multiplying the prevailing average yield for such utility bonds during May and June 1934, which was 5.26 percent, by 1.899, he arrived at a capitalization rate of 9.99 percent (a price-earnings ratio of 10.0 times) as a normalized figure for the common stock of such utilities. By multiplying 9.99 percent by 1.557, he obtained a capitalization rate of 15.55 percent (a price-earnings ratio of 6.4 percent), or roughly 15 percent, which, in Dr. Dorau’s judgment, represented the rate of return which an investor would have expected at that time.

(d) Dr. Dorau did not feel that this 15 percent capitalization rate could appropriately be used in valuing the transfer business. He thought some additional discount should be recognized to take account of “market pressure” or other -costs which would be incurred in the bulk sale of securities rand also of the fact that the economy was extremely depressed with no sudden recovery foreseeable. This additional discount he estimated at 20 percent of the capitalization rate; in other words, Dr. Dorau concluded that a reasonable investor would have demanded a higher rate of return from the transfer business assets than from transportation industry assets in general. Thus, he divided the (15 percent capitalization rate by the reciprocal of the additional discount, or 80 percent (15 is 80 percent of 18.7), to find 18.7 as a reasonable capitalization rate (a price-earnings ratio of 5.3 times) to be applied to the transfer business earnings as of May 31, 1934, under conditions prevailing at that time.

(e) Dr. Dorau applied this 18.7 capitalization rate to the average after-tax net income of $219,341 from the transfer business (computed on an income tax basis) for the period of 95 months preceding May 31, 1934 (see Appendix 1); that is, he multiplied $219,341 by 5.35, the reciprocal of 18.7, to arrive at $1,173,474 as the value of the entire flow of income from such business as of May 31, 1934. From this result, he deducted $108,863 as representing the net tangible assets of The Parmelee Company, per books, as of the close of 1933, leaving $1,064,611 as representing, in Dr. Dorau’s opinion, the fair market value of the exclusive arrangement enjoyed by The Parmelee Company with the railroads for transfer of passengers and baggage between Chicago stations as of May 31, 1934.

43. Frank S. Goodyear, a principal assistant in the Court Defense Branch of the Internal Revenue Service, has been employed in said Branch since 1948 and by the Internal Revenue Service since 1920. He is a graduate accountant and has also graduated from law school, holding bachelor and master of law degrees. The functions of the Court Defense Branch are to assist the Department of Justice in cases involving engineering and valuation issues and “[staff members] to serve as expert witnesses in court * * * in support of Government’s position * * *. * * *” Treas. Reg. § 1113.825, 26 Fed. Reg. 6372, 6384. Mr. Goodyear bas testified in court in a number of cases, particularly concerning stock valuations. He rendered an opinion as to tbe fair market value of the entire “goodwill or intangible assets” of The Parmelee Company as of May 31, 1934, based upon data obtained from the consolidated income tax returns filed by plaintiff for the years 1929-1933, plus certain reconstructions of income for the period May 1, 1929, to December 31, 1929, and for the calendar year 1931, but giving entire weight to The Parmelee Company’s earnings for 1933 and the first 5 months of 1934. To the average annual (after-tax) earnings for these 17 months, he added 25 percent for probable improvement in future years; and applied to the resulting annual earnings of $60,508 a factor of 8.75 which, he concluded, indicated a fair market value of $529,445 for The Parmelee Company. In thus valuing the stock of The Parmelee Company as of May 31, 1934, he gave consideration to the following 16 factors, all but one of which, in his opinion, were negative:

(1) Nature of business and history of The Parmelee Company; (2) earning capacity; (3) dividends paid; (4) book values; (5) The Parmelee Company stock was wholly owned by plaintiff; (6) the stock of The Parmelee Company was not listed on any exchange and there were no known sales; (7) there were no listed stocks of corporations engaged in the same or similar line of business which could be compared with The Parmelee Company; (8) the agreement with the railroads was terminable at the will of either party; (9) The Parmelee Company had liquidated an unusually large amount of assets during 1932; (10) its rental real estate business had been disposed of in 1932; (11) its capital structure had changed in 1932; (12) it distributed capital of $550,-000 in 1932; (13) its net asset value had been reduced on December 31, 1932, by approximately 75 percent; (14) its parent company had sustained consolidated net losses for 1930 to 1933, inclusive; (15) the trends of railroad passenger revenues of first-class railroads in the United States; and (16) the general industrial and economic conditions as of May 31, 1934.

44. Mr. Goodyear then revalued The Parmelee Company’s tangible assets as of May 31, 1934, by reducing the value of debentures issued by plaintiff and held by The Parmelee Company from $125,000 to $37,500, and by writing up the book value of equipment and other fixed assets by adding thereto a salvage value of $64,155. These adjustments indicated a fair market value of $177,442 for tangible assets as of May 31, 1934; and by deducting said amount from his appraisal of $529,445 as the fair market value of the entire company, he computed a fair market value of $352,003 for all intangible assets of The Parmelee Company on said date. He refused to determine the fair market value of The Parmelee Company’s contract with the railroads. The factor of 8.75, used by Mr. Goodyear, was arrived at by first taking the average price-earnings capitalization rate of 20 listed railroad companies for the years 1929 to 1933 from the Standard and Poor’s 20 Railroad Stock Index, which was found to be 12.30 percent; he then discounted this rate by 30 percent to arrive at a capitalization rate of 8.75, because the railroads enjoyed stability of earnings and had larger fixed assets than did The Parmelee Company.

45. William M. Hammond was first employed by the Chicago & Alton Eailroad and then, from 1915 to 1934, by the Illinois Commerce Commission, mainly as chief accountant, where he had considerable experience as a hearing officer in rate proceedings involving transportation and other public utilities. Since 1934, he has been a consultant in matters involving reorganizations of utilities, and has valued the stock or properties of various utilities. He testified as an expert in proceedings for the reorganization of Chicago Rapid Transit Company and Midland Utilities Company, in the suit brought by Pennroad Corporation against the Pennsylvania Railroad, and in an antitrust suit by the United States against the Pullman Company. He has also advised the Securities and Exchange Commission and the National Association of Eailroad Commissioners with respect to standardization of accounting systems.

46. Mr. Hammond rendered an opinion as to the fair market value of the goodwill of The Parmelee Company as of May 31,1934, based upon an examination of (a) The Parme-lee Company’s tax returns for the years 1924 to 1934, (b) plaintiff’s claim for refund, (c) a report prepared by Frank S. Goodyear, (d) certain unidentified opinions of this court, and (e) data in Poor’s and Moody’s financial manuals. He was familiar with and had used the Parmelee transfer service. He proceeded to fix a value for The Parmelee Company, as a whole, and then fixed a value for the net tangible assets, the difference being taken to represent the'goodwill and other intangibles of the company. He added $122,016 to the book value of tangible assets because of certain statements in a report filed by plaintiff with the Securities and Exchange Commission, and he reduced the value of certain debentures issued by plaintiff and held by The Par-melee Company by $87,500 to arrive at a net tangible asset value of $235,303.

47. Mr. Hammond fixed a value of $480,830 for The Par-melee Company, as a whole, and fixed the value of its goodwill or intangibles at $245,527 as of May 31, 1934, by the following process:

(a)He projected post-1934 earnings of The Parmelee Company by weighting the earnings for 1930 through May 31,1934 (as disclosed by income tax returns), as follows:

(b) He added 10 percent to reflect possible growth to arrive at projected annual transfer net income of $68,690.

(c) He multiplied the above amount by 7 to arrive at a value of $480,830 for the entire Company. He found that the price-earnings capitalization rate of railroad stocks for 4934 was 12.28, and although the reciprocal thereof is more than 8, he considered that a less favorable reciprocal of 7 was justified because of the uncertain tenure of The Parmelee Company’s franchise with the railroads.

48. Mr. Hammond said that The Parmelee Company’s intangibles consisted of the name, favorable reputation and contract with the railroads, and its trained organization. He would not determine the fair market value of the franchise from the railroads. He admitted that without such a franchise, there would be no transfer business, and that the value of the name was principally in connection with the transfer service contract or franchise.

49. On or about March 14,1956, plaintiff filed its Federal income tax return for the taxable year 1955, reporting a tax liability of $181,982.63 which was paid in installments during 1955 aggregating $16,724 (based upon a declaration of estimated tax) and by payments of $82,629.32 on March 16,1956, and $82,629.31 on June 14, 1956. The 1955 tax liability, so reported by plaintiff, was computed without any deduction for the loss of $1,322,819 herein claimed as an allowable deduction for such year.

50. On or about March 14, 1955, plaintiff filed its Federal income tax return for the taxable year 1954, reporting a tax liability of $249,762.71 and, in respect thereof, paid taxes as follows: March 14, 1955, $124,881.36; June 14, 1955, $124,881.35; and December 14,1955, $17,467.24, or a total of $267,229.95.

51. On or about March 15,1954, plaintiff filed its Federal income tax return for the taxable year 1953, reporting a tax liability of $146,702.86, and a subsequent audit indicated a deficiency of $875.14 plus interest of $57.26, making a total tax liability of $147,635.26, which was paid as follows: March 15, 1954, $66,016.29; June 15, 1954, $66,016.29; September 13,1954, $7,335.14; December 13,1954, $7,335.14; and July 22,1955, $932.40.

52. The following table shows for the taxable years involved—

Column 1 — Plaintiff’s transfer business gross income;
Column 2 — Cost of transfer operations;
Column 3 — Dividends from domestic corporations qualifying for deduction or credit, as the case may be, under section 243 of the Internal Nevenue Code of 1954 or section 26(b) of the Internal Kevenue Code of 1939; and
Column 4 — Plaintiff’s taxable income or net income, as the case may be, before allowance of (i) any deduction for the loss claimed herein, (ii) any net operating loss or net operating loss deduction attributable thereto, and (iii) any deduction or credit in respect of the dividends:

53. On or about August 4, 1958, plaintiff filed claims for refund of the aforesaid taxes paid for 1955 and 1953, and for $52,847.54 of the tax paid for 1954, plus interest on each of such amounts.

54. On January 4,1960, plaintiff received notice, by registered mail, of the disallowance in full of each of its claims for refund.

conclusion OK LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and the petition is dismissed. 
      
       Although a substantial portion of this opinion relates to the Issue of whether the claimed loss is deductible under the tax laws, we stress that this is dicta only and will have no collateral estoppel effect in any other forum. Thus, defendant’s inability to appeal this judgment will not preclude its reasserting the deductibility defense in a refund suit for a later year. See Electrical Corp. v. Thomas Co., 307 U.S. 241 (1939) (distinguishable from the present case because it involves an equity decree) ; Restatement, Judgments §§ 68, 70 (1942) ; Scott, Collateral Estoppel hy Judgment, 56 Harv. L. Rev. 1, 10-15, 17-18 (1942) (comments by Professor Scott, Reporter of the Restatement, on the collateral estoppel effect of decisions of fact and law) ; Developments — Res Judicata, 65 Harv. L. Rev. 818, 845-46 (1952). But see, 51 Harv. L. Rev. 751 (1938).
     
      
       under section 165(b) of tbe 1954 Internal Revenue Code, tbe amount of tbe loss Is tbe difference between tbe adjusted basis and tbe amount realized, or zero in tbe case of abandonment or condemnation without compensation. Internal Revenue Code of 1954, §§ 1001, 1011, 1012. The defendant argues that the part of intangible assets allocable to the arrangements with tbe railroads has no basis, but agrees that if It does, it is the fair market value at tbe time of tbe liquidation of tbe Parmelee Company.
     
      
       This is not to say that taxpayers are not entitled to loss deductions when abolition of, a statute causes a property right to become worthless. Thus, in Elston Co. v. United States, 86 Ct. Cl. 136, 21 F. Supp. 267 (1937), this court held that a brewery could deduct the lost value of saloon licenses which it had purchased prior to passage of the Prohibition Act of 1919 and the 18th Amendment. The facts there showed that licenses were freely transferable and commanded a very high value because of their limited availability. They were recognized as property by banks, other creditors, and by trustees in bankruptcy. Without doubt, these rights became worthless with Prohibition. Note though that Elston, supra, would have been an altogether different case had the Prohibition laws not been involved, but rather had the City of Chicago issued two or three times the numbef of licenses — or abolished the licensing system.
     
      
       In this and in,ali other tables or appendices, the figures shown in.parentheses indicate a loss.
     