APPEAL from the Appellate Court for the First District; heard
in that court on appeal from the Circuit Court of Cook County;
the Hon. GEORGE N. LEIGHTON, Judge, presiding.
MR. JUSTICE WARD DELIVERED THE OPINION OF THE COURT:
Rehearing denied January 26, 1973.
Herbert Sher brought an action in the circuit court of Cook County to rescind a contract executed in June 1966, under which he had purchased North Shore Speed and Auto, Inc. (hereafter, North Shore), a solely-owned corporation engaged in the business of selling automotive speed equipment. The contract price was $47,000 plus approximately $9,000 to cover prepaid advertising and inventory. The plaintiff, who had conducted the business for several months after the sale, also sought actual and punitive damages, alleging that he had been induced to enter into the contract by fraudulent misrepresentations of the defendant Stephen H. Robin.
The defendant, the former sole owner and president of North Shore, counterclaimed for moneys he had paid for advertising contracted for by North Shore after the plaintiff had become its sole owner and officer.
Following a bench trial, the court entered judgment for the defendant on the plaintiff's action for rescission and damages, and also entered a judgment for $6,555.13 for the defendant on his counterclaim.
The appellate court reversed both judgments. (Sher v. Robin, 131 Ill. App.2d 404.) It reversed the judgment for the defendant on the plaintiff's fraud action on the ground that it was against the manifest weight of the evidence. The court considered that the evidence established that the defendant had misrepresented the gross margin of profit of the business in a financial statement furnished the plaintiff during the sale negotiations. The court reversed the defendant's judgment on his counterclaim, judging, it would appear, that he had been a volunteer in paying the claims against North Shore.
We granted leave to appeal.
The financial statement given to the plaintiff, which purported to reflect the operations of the business from April 1, 1965, to March 31, 1966, indicated a gross margin of profit of approximately 40%. Gross margin of profit is the ratio between gross profit and gross sales, gross profit being defined as gross sales less the gross cost of goods sold. The "cost of goods sold," according to the statement, was $110,211.24, gross sales were indicated to be $186,125.26, and the gross profit was $75,914.02. At trial and thereafter the defendant has maintained that these figures were accurate and that North Shore's gross margin or profit was in fact around 40%.
The appellate court held that the evidence established that the cost of goods sold was higher than had been represented and that therefore the gross margin of profit was lower than had been indicated. The court grounded its reversal of the trial court on several factors. It found that the testimony of the defendant that the gross margin of profit was in fact 40% was unsatisfactory and that his testimony had been impeached by an earlier inconsistent statement. It noted the opinion of an accountant appointed by the trial court that the gross margin of profit was lower than 40%; and it observed that the Federal corporate income tax return which had been signed by the defendant, and which reflected the same period as the financial statement, indicated a substantially lower gross margin of profit. The corporate return had been filed in September, 1966, approximately three months after the sale of the business.
The tax return indicated the same figure as the financial statement for gross sales ($186,125.26) but the cost of goods was stated to be $134,820.89, approximately $24,000 greater than the $110,211.74 shown on the financial statement. The resulting gross margin of profit was, according to the return, 27.56%, or approximately 12.5% less than the 40% represented by the defendant as the true gross margin. The net income of the corporation before taxes according to the corporate return was $286.15, or 15/100 of 1% of sales, while the net income of the corporation before taxes according to the financial statement was $24,895, or 13% of sales.
The defendant argues that the higher cost of goods sold reflected on the corporate return should not of itself be viewed as showing that the gross margin of profit and net income were lower than represented on the financial statement, since the record contains evidence which would contradict this conclusion. The additional $24,000 shown for cost of goods sold on the corporate return, the defendant says, actually reflected money paid as an officer's (the defendant's) salary and an extraordinary burglary loss.
The defendant acknowledged in oral argument that classification of this additional $24,000 under "cost of goods sold" on the return was not accurate, but he denies that this inaccurate classifying establishes that the "cost of goods sold" item appearing in the financial statement was false. If the additional $24,000 reported under "cost of goods sold" on the return are moneys attributable to an extraordinary burglary loss and additional officer's salary, then, the defendant says, there was no misrepresentation of either the cost of goods sold or the income from the business available to the owner. He points out that North Shore was a small corporation with a single owner and officer. The income available to the sole owner and officer of a small corporation is from the salary he pays himself and from the earnings of the business after other expenses. Money taken as a salary is a deductible corporate expense, so that an election to take out all business earnings as salary reduces the income of the corporation but has no substantial effect, apart from Federal tax factors not relevant here, on the actual income from the business available to the sole owner and officer.
On the financial statement, officer's salary was listed as approximately $13,000, the net income of the corporation before taxes as approximately $24,000, and the net income of the corporation after taxes as about $19,000. Thus, the moneys available to the sole owner and officer were represented to be about $32,000 after Federal taxes and $37,000 before Federal taxes. There was no indication on the financial statement that the defendant had withdrawn additional amounts as salary. But the defendant argues that the question is whether the financial statement accurately represented that there were $32,000 to $37,000 in earnings available to the owner, not whether amounts listed as net corporate profit had been in fact withdrawn as salary. This is so, he says, because under the sales agreement, the plaintiff was to acquire only the corporate shell, so to speak, and the defendant would retain all corporate earnings to the date of sale, whether in the form of corporate income or officer's salary.
We need not address ourselves to this argument, for we judge that on another basis the appellate court correctly held that the trial court's ruling was ...