The evidence presented also clearly indicates that no ascertainable retail demand existed for Jerseymaid products in 1952. The respondent points to the advertising of the corporation's products as proof of an established trade name and consumer demand. Jerseymaid's milk was widely advertised for several years in the Los Angeles area by at least one of the grocery chains which owned stock therein, and to some extent by the corporation itself. The amount of advertising carried on by the corporation was relatively small as compared with noncaptive dairies. In 1951 its advertising expense amounted to $63,720 as compared with total sales in that year of $14,588,828.61. The record shows that the purpose of this advertising was to familiarize the public with the Jerseymaid name and thus to create consumer acceptance at the retail level. The effect of such advertising was insufficient to stimulate customer requests for Jerseymaid products from stores other than the outlets of the owning grocery chains, and fell short of creating actual consumer demand. Jerseymaid's name was associated by the general public in the Los Angeles area with the five supermarket chains which handled its products on January 12, 1952. Consumer acceptance of the corporation's products was achieved because these supermarket chains marketed them. It is apparent that the reputation of the supermarket, if high, usually would sell a product for the first time. If the quality proved to be acceptable, the purchaser normally would continue to buy it. Mere passive acceptance of a product is not an element of goodwill, for it does nothing to increase profit over the ordinary profit to be expected from investment, whereas demand for a product does tend to create goodwill, for demand is the basis for greater profit than that which is ordinarily to be expected from investment.

The record discloses that the highly profitable arrangement which existed on January 12, 1952, between Jerseymaid and its five significant customers almost certainly would have been destroyed in the event of a sale of its assets to a stranger at that time. The acquisition of Jerseymaid's assets by a new owner would have cost it the exclusive, if not the entire, patronage of its five chainstore customers. No contracts existed in 1952 between Jerseymaid and its five customer-stockholders requiring them to continue buying from the corporation. Theodore Von der Ahe, president of one of the grocery chain stockholders, testified on direct examination that "if the member companies withdrew their support tonight Jerseymaid would not have a single customer in the morning, nor the expectancy of getting any." (Tr. 154.) 14

Representatives of other creameries were continually requesting the

14 Von der Ahe subsequently stated on redirect examination: "had the customers of Jerseymaid withdrawn their support, Jerseymaid would have had no customers at all. It would have just had physical properties and no business." (Tr. 185.)

five owning supermarket chains to carry their products during 1948 through 1952. If the Jerseymaid properties had been sold to a new owner at the time of its liquidation in 1952, the very best it reasonably could have anticipated would have been to become one of several intensely competitive creameries competing to supply one or more of its five formerly exclusive customers. At most, it would have been able to retain only a fraction of its previous market, and the distribution of milk and milk products to even that fraction would have involved additional route overhead and a higher delivery cost than it would have incurred as a captive dairy.

Considerable testimony was presented at the trial by officers of the five grocery chains owning stock in Jerseymaid to the effect that if these supermarket chains were to dispose of the assets of the corporation, they would form their own captive creamery rather than continue to patronize Jerseymaid or another noncaptive distributor. It is apparent from the particular competitive circumstances prevailing in the Los Angeles area in 1952 that each of the five grocery chains which owned stock in Jerseymaid if deprived of their ownership of its properties would have found it more profitable to form their own captive supplier of milk than to continue buying from Jerseymaid. Other supermarket chains in that area owned captive distributors in 1952, not only of dairy products but of other commodities also. The opportunity for enjoying both the wholesaler's and the retailer's margin of profit, plus the protective price "umbrella" resulting from the favorable cost analyses and pricing practices of the California director of agriculture, made ownership of a captive creamery extremely attractive to large grocery chain distributors.

Accordingly, a prospective purchaser of Jerseymaid's assets on January 12, 1952, reasonably could have looked forward to the loss of the greater portion of the patronage of its five principal customers, if not all of it, and the formation by them of a new captive dairy. It is therefore clear from this record that if a new owner had purchased the Jerseymaid assets in 1952, such an acquisition in effect would have cut off its guaranteed market and would have compelled it to "start from scratch" in developing new customers for its dairy products.

Upon acquisition of the Jerseymaid properties, a new owner would have found himself with a noncaptive creamery practically stripped of customers and, because of the highly competitive state of the creamery industry in Los Angeles in 1952, very likely would have been forced to shift to an entirely different kind of creamery operation. If the corporation had lost the patronage of the five large grocery chains owning stock therein, as it almost certainly would have, it would appear to have been practically impossible for it to have obtained other large supermarket chains as customers, for if they did not themselves own captive creameries, they scarcely would have been

interested in marketing a brand previously available only in and closely identified with competing supermarket chains. Instead of selling its products in large volume to supermarket chains, Jerseymaid seemingly would have been compelled to capture a portion of the market held in 1952 by large noncaptive creameries. After the loss of its five virtually guaranteed volume customers to a successor captive, Jerseymaid would have been left in a tight competitive situation: it would have been forced to scramble with the well-known, long-established noncaptive creameries for every sales dollar it could obtain from small chainstores, hundreds of independent grocers, and house-to-house customers.

Jerseymaid was poorly equipped to penetrate the noncaptive milk market in the metropolitan Los Angeles area during 1952. Such an undertaking would have been costly to the corporation. Its entire enterprise was designed to minimize processing, delivery, and marketing costs rather than to satisfy retail customers. Its fleet of custombuilt delivery trucks (25- to 30-foot "semis," hauled by a tractor) were about twice the size of the average store delivery truck and would have been extremely cumbersome and inefficient for the house-tohouse and corner grocery markets. As a noncaptive, Jerseymaid's low per-unit cost of production, attributable to its high volume captive operation, inevitably would have increased sharply. The established noncaptives in the Los Angeles area incurred considerably higher operating costs than Jerseymaid during 1948 through 1952. No salesmen or sales managers were needed by the corporation as a captive, but such personnel would have been necessary if it had changed to a noncaptive distributor. During the period August 1, 1947, to January 12, 1952, Jerseymaid deliveries were made in volume, the delivery points were comparatively few, and the whole delivery system became "almost an automatic procedure." But, as a noncaptive, its deliveries to numerous small grocery stores and house-to-house customers would have been radically different. Not only were its trucks not adaptable to noncaptive operations, but its drivers were unfamiliar with house-to-house delivery techniques.

A purchaser of the corporation properties in 1952 obviously would have been pitting an inexperienced management and staff, saleswise, against the experienced survivors of noncaptive competition and, in its effort to capture a portion of the noncaptive market, in most cases would have been attempting to break up an established relationship between a prospective customer and his previous supplier. And because of the California milk control laws, no price incentive would have been available to Jerseymaid in its endeavor to penetrate the noncaptive market.

It does not then appear that a prospective purchaser of the Jerseymaid assets on January 12, 1952, viewing the prospect of losing the

corporation's five principal customers and the strong possibility of being compelled at considerable expense to capture a part of the noncaptive market for survival, would have been willing to pay more than fair market value for the fixed tangible assets thereof.

The respondent relies strongly upon the expert testimony of an agricultural economist who gave his opinion that Jerseymaid possessed goodwill worth $537,500 because of its reputation, established trade name, the recognized quality of its product, a well-organized operational labor force, and favorable relationships with its customers and suppliers. The respondent's determination of transferable goodwill in the amount of $537,500 at the time of liquidation was based upon the assumption that a prospective purchaser of the corporation's assets reasonably could have anticipated the unimpaired continuation of its previous sales level as a captive operation. This assumption has been shown by the record to be patently false. The captive arrangement under which Jerseymaid conducted its operations doubtless would have constituted a formidable deterrent to the payment of a premium in excess of fair market value for its properties by an informed purchaser thereof.

Even if some goodwill attached to Jerseymaid in January 1952and in a purely economic sense it may well have existed by virtue of its recognized trade name and qualitative reputation-it realistically cannot be held from this record that this intangible was of a salable nature. Of what value to a buyer of Jerseymaid would its trade name and reputation have had as giving him "a reasonable expectancy of preference in the race of competition" 15 where the sellers of the business remove from the market place more than 86 percent of its established customers? We are unable to conceive of the recognition for tax purposes of the transfer of goodwill in a situation where the disposition of the business itself would "kill the goose that laid the golden egg." We accordingly hold that Jerseymaid did not own recognizable goodwill for tax purposes on January 12, 1952, and no such asset was received by its stockholders at the time of its liquidation.

Issue 2. Value of Automotive Equipment.

FINDINGS OF FACT.

Jerseymaid Milk Products Co., Inc., owned approximately 88 items of automotive equipment on January 12, 1952, which were distributed in liquidation to its stockholders on that date. This equipment consisted largely of truck tractors and van-style "semis" used for milk and frozen food deliveries, general hauling tractors, tanker "semis," bobtail trucks, and egg delivery trucks. A substantial portion of the equip

15 In re Brown, 242 N.Y. 1, 150 N.E. 581.

ment was custom-built, particularly the milk delivery "semis." The average age of these pieces of automotive equipment was approximately 6 years. The total cost of Jerseymaid's automotive equipment was $379,125.46, accumulated depreciation thereon as of January 12, 1952, amounted to $218,257.01, and the book value thereof on that date was $160,868.45.

On January 5, 1952, the assets of the corporation (with the exception of its herd of dairy cattle) were appraised by a firm of valuation engineers. Jerseymaid's automotive equipment was appraised as having a fair market value on that date of $384,052.

Jerseymaid Milk Products Co., the successor partnership, entered $384,052 on its books as the cost of its automotive equipment, and the same amount was reported by petitioners on their income tax returns as the fair market value of the partnership's automotive equipment at the time of acquisition, January 12, 1952.

The respondent has determined that the fair market value of petitioners' automotive equipment on January 12, 1952, was $326,000. The fair market value of the automotive equipment distributed to petitioners on January 12, 1952, was $326,000 on the date of distribution.

OPINION.

To sustain their position that the fair market value of the automotive equipment received from Jerseymaid at the time of its liquidation amounted to $384,052,16 petitioners rely upon the appraisal of its assets on January 5, 1952, by a valuation engineer and his testimony at the trial. He testified that his method of appraising the automotive equipment was first to determine the current replacement cost of each item and then adjust this amount by the actual depreciation realized on the Jerseymaid equipment. The resulting figure was listed in his valuation report as "sound value" which, according to his testimony, represented the fair market value of the equipment as part of a going business, viz, a wholesale dairy. He explained that much of this equipment was extremely scarce in 1952 and, due to the Korean War, was difficult if not impossible to replace.

Because of the fact that a substantial portion of Jerseymaid's equipment was custom-built and was extremely difficult to obtain at any price in 1952 due to the exigencies of the Korean War and doubtless would have brought a premium price from a purchaser of the Jerseymaid enterprise or another captive dairy conducting the same type of operation and needing the same type of equipment, we are persuaded that its automotive equipment was worth considerably more on January 12, 1952, than its book value ($160,868.45) on that date.

On brief, petitioners concede error in the appraisal of a 1941 Plymouth coupe which was purchased in 1941 for $971 and appraised at $1,018 on January 5, 1952.