1932 BTA LEXIS 1409 | B.T.A. | 1932
Lead Opinion
OPINION.
The Commissioner determined a deficiency of $3,449.94 in the petitioner’s tax liability for the year 192T. His only adjustment was to disallow depreciation on patents in the amount of $25,555.12 because the patents on which depreciation was claimed were paid for in stock, and the value of the stock was not shown. The only error assigned is the action of the Commissioner in disallowing depreciation on patents.
The petitioner was incorporated under the laws of Delaware, on February 21, 1914. Its principal place of business is at Ambler, Pennsylvania, and it filed its income-tax return for 1927 with the collector of internal revenue at Philadelphia, Pennsylvania. It was incorporated for the purpose of exploiting an invention of a method of preparing steel automobile bodies and other metal surfaces for painting by first treating the metal with a certain solution. The inventor was George D. Feidt. The organizer, and later the president of the petitioner, was J. H. Gravell. In 1913 Gravell was assistant to the superintendent of painting in the paint shop of a
Feidt was a wholesale druggist in Philadelphia. He had furnished some material to the firm by which Gravell was employed. As a result of this connection he learned of the difficulty which his customer was having. In the fall of 1913 he invented the method of preparing steel for painting on which letters patent were subsequently issued. On February 4, 1914, he filed in the United States Patent Office application for letters patent on his method. This application was given Serial No. 816,537. On February 6, 1914, -he assigned his whole right, title and interest in and to his application for patent No. 816,537 and to any patent that might issue thereon, to Percy C. Feger of Philadelphia. The assignment recited a consideration of $1 and other good and valuable considerations. On March 18, 1914, Feger made a similar assignment of the application to the petitioner. The stated consideration for this assignment was 9,000 shares of the common stock and 150 shares of the preferred stock of the petitioner, and other good and valuable considerations. On September 8, 1914, Patent No. 1,109,670 was granted as a result of this application.
On September 14, 1914, six days after the issuance of the above mentioned patent, Feidt filed an application for a patent on a cleaning compound for metals. It was assigned Serial No. 861,550. On September 17,1914, Feidt assigned his whole right, title and interest in this application, and any patent that might issue thereon, to the petitioner for a recited. consideration of $1 and other good and valuable considerations. On December 1, 1914, Patent No. 1,119,781 was issued as a result of this application. The patented compound for cleaning metals, Patent No. 1,119,781, was somewhat similar to the solution described in the patented method of preparing steel for painting, Patent No. 1,109,670.
The authorized capitalization of the petitioner was $500,000, consisting of 9,000 shares of common stock of the par value of $50 a share, and 1,000 shares of preferred stock of the same par value; $42,500 par value of preferred stock was retained in the treasury: $2,500 par value of preferred stock was sold for cash; and all of the rest of the stock, consisting of $5,000 par value of the preferred
The parties agree that since the property thus acquired was the only asset of the corporation, the value of the stock issued for it representing the cost of the property to the corporation is measured by the fair market value of the property on or about February 25, 1914. Cf. Hershey Manufacturing Co., 14 B. T. A. 867; affd., 43 Fed. (2d) 298. The petitioner therefore attempted to prove this value by calling one witness, Feger, and having him state that in his opinion the property was then worth at least $450,000. The petitioner relied upon certain decisions of the Court of Appeals of the Third Circuit in which the Board was reversed for failing to follow the opinions of witnesses where the record contained no contrary opinions, e. g., Boggs & Buhl, Inc., v. Commissioner, 34 Fed. (2d) 859. This case may go on appeal to that court. The decision of the case rests entirely upon whether or not we are absolutely bound by the opinion of this one witness. The petitioner concedes this and makes no contention that there is any other method of valuation upon which it relies. This corporation of course had no past history which would indicate a value based on earnings. We have not been told when the $2,500 par value of preferred stock was sold nor how much was received for it. But even if we knew these facts we could not determine from them the value of the common stock which the petitioner claims formed the larger part of the consideration. We know that the stock was to be issued to Feger or his nominees, but we do not know who received it, except that Feger, at the time of the hearing, held only three shares of common and none of the preferred. It might be very helpful to know who received the stock and the circumstances under which it was received. We do not know that Feidt ever became a stockholder. A statement of profit and loss introduced by the petitioner shows royalties. These were not explained. Perhaps Feidt disposed of his rights on a royalty basis. It might be helpful to know about that.
The witness, Percy C. Feger, had been engaged in the general practice of law in Philadelphia since 1905. He first learned of the invention from Gravell, who consulted him as to how to market it and for whom he made an investigation of the matter. He had had little previous experience with inventions. His investigation included an afternoon visit to the shop where Gravell was employed. There he saw some steel automobile bodies being treated by the method invented by Feidt, and tried his hand at swabbing and drying some of the bodies. He also experimented with some small sheets of steel at his home. He had some correspondence with manufacturers of automobiles and obtained some information on the num
Feger’s opinion was not predicated upon any sale or offer to sell, and he was so inadequately examined as to the facts upon which he relied and the reasoning which he employed in arriving at his conclusion as to value that we are unable to see exactly what his method was. His only explanation was as follows:
WeU, I considered the number of steel bodies that were manufactured from the beginning in 1912 and the enormous increase of the number of those bodies over the years. I did not foresee the enormous increase in automotive transportation that we have witnessed. I tools the profit that we could make at $2.50 a gallon, a net profit of 20 cents a body, and I figured that we would do at least 300,000 bodies a year, because that was the production of steel bodies in 1912, and it increased 100,000 in 1913, and I thought there would be, certainly, that normal rate of increase, of say one-third, or if not one-third at least 100,000. On the basis of that, that gave me $60,000 a year; and in seventeen years, a man would certainly contemplate, in buying the patent, he was going to make a profit, and he would take in over a million dollars. So I think I was very conservative when I put in a value which, since that time, we have earned in one year.
He assumed that the corporation would make a profit of 60 cents on each gallon of material, and that only three automobile bodies would be processed from each gallon. Yet he testified that a gallon
Some value was inherent in this invention, but certain serious difficulties which would have to be surmounted by anyone who might attempt to exploit it were also inherent in the invention and apparent from the very beginning. Feger and his associates, whoever they y^erej were perhaps justified in their hope that Feidt’s invention would
Judgment will be entered for the respondent.