*950 1. Advances made to a corporation by its sole stockholder over a period of years may not be deducted by the latter as a loss of the additional cost of his stock sustained in the year in which he decides to dissolve the corporation, if the stock was actually worthless in years prior to the dissolution.
2. Such a deduction may not be allowed on the theory that the business of the corporation (which consisted of developing patents acquired from the stockholder) and the separate activities of the stockholder in developing later patents relating to the same subject, were parts of a single and individual business enterprise of the stockholder.
3. The Board is unable to determine that any loss was sustained upon the receipt of cash in 1931 by the decedent in settlement of a suit growing out of a contract made in 1910, and providing for the use of his patents and operation of his business for a period of ten years, for insufficiency of the evidence to establish (1) the fair market value of his rights under the contract on March 1, 1913; (2) that any of such value, as it then existed, remained after the termination of the contract in 1920; or (3) that all of his property rights were*951 disposed of in the settlement.
4. An amount due to a taxpayer under a contract fixing the amount to be paid him in settlement of a suit for infringement constitutes income accrued at the time when the contract is entered into rather than when the amount becomes due and payable, if the obligation to pay is unqualified and there is a reasonable expectation that payment will be made in due course.
5. The fact that the Commissioner has taken inconsistent positions in taxing a single item of income in two taxable years does not preclude him from asserting before the Board that it constitutes income in one of those years. So held, where he abandoned his contention as to the other year and consented to entry of a decision of no deficiency for that year.
6. Where a taxpayer makes transfers of his property leaving him with no assets, the transferees are each liable to the extent of the value of the property which they received.
7. The Board will not determine whether the Commissioner has authority to make a jeopardy assessment of a transferee liability.
*1020 The Commissioner determined a deficiency of $78,364.03 in income tax upon the income of G. A. E. Kohler for the year 1931. He also notified Mary E. Kohler and John B. Kohler that he proposed to hold them liable for the deficiency, as transferees of the assets of the estate of G. A. E. Kohler. The issues for decision by the Board in the case of the estate are (1) whether the decedent was entitled to a deduction of $57,530.27 representing a loss sustained in 1931 as the result of advances which he had made to the Suspension Steel Concrete Co.; (2) the correct amount of loss or income for 1931 resulting from the settlement of litigation in that year arising out of a contract which the decedent made in 1910 with the Cutler-Hammer Manufacturing Co.; (3) whether a payment of $232,500 received by the decedent in 1932, in part settlement of a suit for infringement of a patent, constituted taxable income of the year 1931. The additional issue in the transferee proceedings is whether the petitioners are liable as transferees. The Commissioner claims that Mary E. Kohler is liable for the full amount of the deficiency and any increase which may be determined by*953 the Board, and that John B. Kohler is liable to the extent of $26,304.26.
FINDINGS OF FACT.
G. A. E. Kohler, hereinafter referred to as the decedent, died on April 29, 1932, at the age of 68. His wife, Mary E. Kohler, is the administratrix of his estate. The decedent's income tax return for the calendar year 1931 was filed with the collector of internal revenue at Chicago. He kept his books and filed his return upon an accrual method of accounting.
I - Loss - Suspension Steel Concrete Co. - The decedent organized a corporation in 1909 known as the Suspension Steel Concrete Co., hereinafter referred to as Concrete. He assigned to that company a number of patents in exchange for its entire capital stock of $3,500,000. He paid in no other assets or money at that time. He was the sole stockholder of the company at all times. The patents covered methods of constructing concrete and steel framework for buildings by combining round steel tubing with metal lath, wire, and concrete without the necessity of using wooden forms. The decedent had financed the inventor and had assisted him in developing patents. The activities of the corporation were limited to development*954 work and experimentation which resulted in the acquisition of additional patents in 1911, and to granting licenses to contractors for use of the patented method. It had no salaried employees. It had no office other than the decedent's office. It had books of account, but no bank account. The corporation had no income whatsoever from 1914 to 1931. It discontinued development work after 1914 and thereafter its only expenditures were for minor items such as franchise taxes and other fees necessary *1021 to maintain its corporate existence. All of the patents belonging to the corporation expired either in 1928 or prior thereto. The only other assets belonging to the corporation, consisting of tools and furniture, had become obsolte and had been discarded prior to 1931. The expenses of the company during its life amounted to about $66,000, of which $62,000 was expended prior to 1915 and $4,000 was expended thereafter. The evidence does not disclose the nature or purpose of the expenditures made prior to 1915. The expenses were paid from funds provided by the decedent, for which he was given credit on the books of the corporation. The net amount shown by the account at*955 the close of 1930 was $57,530.27. The decedent caused the corporation to be dissolved in 1931. He paid the franchise taxes for that year and the expenses incident to dissolution, which amounted in all to $256.40. He made no charge-off on his books of any amount as a bad debt in connection with this item.
A deduction for a bad debt was claimed on the decedent's return for 1931 in the amount of $57,786.67, the net amount of the advances which the decedent made to Concrete. The Commissioner allowed a deduction of $256.40, the amount paid in 1931 for franchise taxes and expenses of dissolution. He disallowed the remainder of $57,530.27, with the explanation that this was a loss on an investment which was definitely determinable as worthless prior to 1931.
The decedent's investment of $57,530.27 in Concrete was worthless prior to 1931.
II - Capital gain or loss - Cutler-Hammer Manufacturing Co. settlement. - The decedent was engaged from 1906 to April 30, 1910, in designing, manufacturing, selling, and installing apparatus for the electrical control of large printing presses. The apparatus was marketed under the name of "Kohler System." The devices used were covered by*956 patents owned by the decedent. Installation of the apparatus was done by a tranined staff of engineers and technicians who from time to time developed such improvements and modifications as were necessary to adapt the devices to varying types of printing presses and other machinery. The improvements so developed were also patented. The Kohler System was widely used throughout the United States and foreign countries in 1910. The business was managed by the decedent and his chief engineer. The apparatus was sold through the decedent's own sales organization.
The decedent made a contract on April 13, 1910, with the Cutler-Hammer Manufacturing Co., hereinafter referred to as Cutler-Hammer. The decedent gave Cutler-Hammer, for a period of 10 years, the exclusive right and license to manufacture, sell, and use, and to license others to sell and use, the devices and appliances relating to the control of electric current covered by American and Canadian patents and patent applications then or thereafter owned or controlled *1022 by the decedent. Cutler-Hammer was to operate the business for that period. The decedent agreed to advise Cutler-Hammer in matters of management. *957 He also agreed not to compete and not to sell his interest in the contract or the patents without first offering them to Cutler-Hammer. Cutler-Hammer was given an option to purchase the decedent's interest in the contract, all profits thereunder, and patents covered thereby at any time during the life of the contract for $200,000 in cash. The decedent was to receive a share of the profits for the ten-year period computed as follows: Cutler-Hammer was to manufacture the devices itself and in a separate account under the name of "The Kohler System", it was to charge as "manufacturing cost and general burden" the prices theretofore charged to Kohler for similar devices, plus 20 percent. The account was also to be charged with salaries of all employees engaged in designing, installing, selling, and repairing the devices, the expense of marketing them, and the cost of procuring and protecting patents. The account was to be credited with sales prices to customers of all devices covered by the licenses. The net balance of credits was to be distributed each year equally between Cutler-Hammer and the decedent. The decedent received promissory notes of Cutler-Hammer for $100,000, as an*958 advance payment of profits, without obligation to repay any part thereof if his share of the profits should be less than that amount. The notes were paid prior to 1920.
All inventions or patents acquired from employees engaged in selling, designing, or erecting apparatus were to belong to the decedent subject to the right of Cutler-Hammer to use them during the life of the contract. All rights and interest in all inventions and patents covered by the contract were to be transferred to the decedent when the contract expired. The licenses referred to in the contract included one relating to a magazine reel, covered by an application by an employee named Stone. The patent was issued in 1915. The magazine reel was part of the Kohler System and was manufactured and sold by Cutler-Hammer until 1920, but not thereafter.
Cutler-Hammer immediately undertook operation of the business. It acquired the decedent's drawings, patterns, and personnel. The latter consisted of a sales manager, a draftsman, the chief engineer, and one other engineer. The engineers and draftsman remained in the employ of Cutler-Hammer for three years and others were thereafter employed in their stated. The*959 sales manager remained in its employ for 10 years. Cutler-Hammer continuously manufactured, sold, and installed the apparatus until April 1920. Cutler-Hammer operated the business as a separate branch of its business under the name of "Kohler System Department." After two years, the name was changed to "Printing Equipment Department." The *1023 words "Kohler System" were at all times used on the products as a trade mark.
The decedent became dissatisfied with the way Cutler-Hammer was conducting the business. He believed that Cutler-Hammer was not promoting the Kohler System as fully as it should and was overcharging him for materials. Cutler-Hammer in 1919 executed assignments of some patents covering motor controllers, issued in the names of employees, which the decedent refused to accept because Cutler-Hammer reserved the right to question the validity of the claims of the patents after the expiration of the contract.
Cutler-Hammer continued to manufacture, sell, and install apparatus for driving and controlling printing presses after the contract had expired. Their apparatus differed from the Kohler apparatus in the method of constructing the control panel. Although*960 it performed equivalent work, Cutler-Hammer did not regard it as an infringement of the decedent's patents. Cutler-Hammer retained the personnel theretofore employed by it, except the sales manager, and also retained all charts and blueprints which it had developed. The decedent in 1920 demanded the return to him of the entire organization - personnel, charts, and blueprints. His demand was refused. He took no steps either in 1920 or thereafter to resume operations or to form a manufacturing, engineering, and sales organization of his own. The designs and blueprints in the possession of Cutler-Hammer were necessary for manufacture, the patents were useless without them, and the decedent knew that to develop and train a new organization capable of designing operative control systems to compete with the experienced organization of Cutler-Hammer would take much time and money.
Cutler-Hammer rendered the decedent a statement in February 1921, showing a balance due him in the amount of $28,584.30. The decedent did not receive the amount or report it as income in his income tax return for the year 1920.
The decedent brought suit against the Cutler-Hammer Co. in March 1921 for*961 $390,000, claimed to represent profits due him under the contract of 1910, and for $500,000 claimed as damages for failure to return to him the business, patents, skilled employees, and accumulated engineering data. The suit was settled by an agreement of the parties in 1931 before all of the testimony had been taken. The decedent received in 1931, in settlement of the litigation, $50,000 in cash, cancellation of a debt of $27,099.64 which he owed to Cutler-Hammer, assignment of five United States patents covering feeding mechanisms, and a nonexclusive license to use five other patents covering feeding and tension devices which were not used exclusively on newspaper presses. Cutler-Hammer received an assignment from the petitioner of five Canadian patents covering motor control devices *1024 which had been issued to employees and used by Cutler-Hammer during the life of the contract, a nonexclusive license to manufacture, use, and sell apparatus without royalty during the life of the patents under all patents covered by the agreement of 1910, except those relating to roll changers and tension devices for printing presses, a patent covering a controller interlock, and the*962 Stone patent, and a general release by the decedent of all claims under the contract and in the suit. Thereafter, Cutler-Hammer continued to manufacture and install apparatus for driving and controlling printing presses in the same way as it had been doing since 1920. It did not surrender any of the personnel, engineering records, designs, or blueprints used in that business, except as indicated in this paragraph.
The decedent on his income tax return for 1931 reported as a result of his settlement with Cutler-Hammer, a capital gain of $7,099.64. The Commissioner determined that the proceeds of the settlement were $77,099.64, from which he deducted $28,584.30, the balance due the decedent as shown by the statement of Cutler-Hammer in February 1921. He held that the balance of $48,515.34, represented a profit realized in 1931 from the disposition of patents which had been fully depreciated prior to that year. He therefore added $41,415.70 to the capital gain reported on the return and determined the deficiency accordingly.
III - Income - Westinghouse litigation. - The decedent brought a suit in 1921 against the Cline Electric Manufacturing Co., Westinghouse Electric & *963 Manufacturing Co., and Tribune Co. This suit was for infringement of the Stone patent heretofore referred to. The decedent sought an accounting and treble damages under the Clayton Act. A judgment was entered in his favor, the decision was affirmed by the appellate courts, and the case was referred to a master to take testimony and to determine the amount of the decedent's damages. The testimony indicated that the damages would exceed $550,000. The Westinghouse Electric & Manufacturing Co. entered into negotiations for a settlement before all of the testimony had been taken. The parties agreed in July 1931, to settle the proceedings by the payment of $550,000 to the decedent, for which the decedent was to dismiss the proceedings and execute a general release. The Westinghouse Electric & Manufacturing Co. insisted that the decedent accept the $550,000 in two equal payments, one of which was to be made and was made on July 10, 1931, in the amount of $275,000, and the second was to be made, and was made, on January 2, 1932. The decedent, before he would agree to receive the $550,000 in two payments, insisted upon a provision in the agreement to the effect that if the second payment*964 was not made, then the contract and the accompanying release and documents should become void and the accounting *1025 in the suit should be reinstated and should proceed to a final determination, provided, however, that the decedent could retain the $275,000 paid in 1931 until the entry of a final decree whereupon the amount would be credited or refunded as the amount of the decree might require. The attorneys' fees and court costs paid by the decedent, were as follows: Applicable to the 1931 payment, $43,869.93; applicable to the 1932 payment, $42,500.
The decedent in his return for 1931 reported the payment which he received in that year and deducted the fees and costs applicable to that period. The Commissioner, in determining the deficiency, made no change in that item, but he added to the decedent's income for 1931 the net amount of the payment received in 1932 after deducting attorneys' fees and court costs applicable to that payment. The amount which he added was $232,500. He explained that since the decedent reported on the accrual basis the entire amount of the settlement payment, less fees and costs, was income for 1931.
IV - Transferee liability. - *965 The decedent was in poor health in January 1932, and was planning to retire from business. He then followed the advice of his counsel to distribute all of his property to his wife and his sons. He gave his son, John B. Kohler, checks for $26,304.26 in January 1932, and he also at that time forgave a debt due from that son in the amount $413.33. He gave all of the rest of his property to his wife, Mary E. Kohler, at or about that same time. The property given to his wife included $146,853.59 in cash and a business known as Kohler Brothers. Thereafter the decedent had no assets whatsoever.
After the decedent's death $31,289.71 and $1,437.06 were paid on account of his income tax liability for 1931. The Commissioner determined that Mary E. Kohler and John B. Kohler were each liable for the amount of the deficiency for 1931 as transferees of the assets of the estate of the decedent.
OPINION.
MURDOCK: I - Loss - Suspension Steel Concrete Co. - The petitioners do not contend that the $57,530.27 is deductible as a debt ascertained to be worthless and charged off within the taxable year 1931. Although the decedent kept books he made no charge-off on those books in connection*966 with this item. The evidence does not clearly demonstrate whether the advances represented debts, that is, amounts which the decedent intended should be repaid to him by the corporation, or capital contributions. Before they could be deducted there would have to be a disclosure of whether they represented debts or capital contributions. ; . But, if it be assumed that the amount in controversy represented a debt, no more of that *1026 debt is deductible in 1931 than the Commissioner has allowed. A taxpayer may not select the year in which to deduct a debt which to his knowledge has been worthless for some time. . If the amounts paid in prior years were a debt, it was worthless long prior to 1931 and should have been charged of and deducted in some other year or years.
The petitioners claim the deduction as a loss sustained in 1931. Sec. 23(e)(2), Revenue Act of 1928. They say that the advances were capital investments in the corporation and the loss was sustained when the corporation was dissolved in*967 1931. If a stockholder contributes capital to his corporation, the contribution may represent additional cost of his stock which is recoverable as part of the basis, either when the stock is sold or when it becomes worthless. ; , affd., ; certiorari denied, ; . If a stockholder is forced to make advances to a corporation from which he can expect no return, the amount advanced in any year may be deductible as a loss as soon as it is made. The Commissioner has allowed the deduction of $256.40 apparently on this principle. Cf. ; . The advances here in question were made prior to the taxable year 1931. The evidence shows that the stock was absolutely worthless prior to 1931 and all cost of stock paid theretofore was deductible prior to 1931. Consequently, the petitioners have failed to show that the decedent was entitled to the deduction for 1931 as a part of the cost of his stock.
The petitioners*968 advance one other theory to support their claim for the deduction. They point out that the decedent conducted experiments and invented an improved method of construction somewhat like the method covered by the patents belonging to Concrete but using square tubing with certain interlocking devices, as a result of which he received patents in 1926 and 1931. He did not assign these patents to Concrete. The petitioners claimk that the advances to Concrete were thus merely a part of the work being done by the decedent to develop a method of construction, and, since he abandoned the enterprise in 1931, he is entitled to deduct as a loss for that year the amount which he had advanced to Concrete. However, if the promotion and development of the method be regarded as a single business enterprise, as the petitioners now urge, they are no better off. Some of the amounts were paid for taxes and other items, which on this theory of the case would be deductible as expenses in the year in which paid. The advances to Concrete were apparently related entirely to the patents owned by Concrete. As development expenses of those patents, they probably would have to be deductible during the life*969 of the patents. ; . *1027 The decedent did not abandon in 1931 his patents for the improved method. Consequently, if the enterprise be regarded as a single enterprise, there is still no sufficient reason for deducting the advances to Concrete from 1931 income.
II - Capital gain or loss - Cutler-Hammer Mfg. Co. settlement. - The claims of the parties on this issue are rather complicated and no good purpose would be served in setting them forth in detail. The most extreme contention of the petitioners is that the decedent did not realize any profit in 1931, but, on the contrary, sustained a very large loss at that time. Their theory is that on March 1, 1913, he had a business which was worth $200,000, the $100,000 which he received in 1910 and $28,584.30 which was available to him in 1921 represented income under the contract, no part of which should be reported in 1931, $5,200.90 of the amount received in 1931 represented additional income and should be reported in that year, and the balance of $43,314.40 was all that he received*970 in 1931 for his business. Consequently, he sustained a loss of $156,685.60 which is deductible for 1931. The respondent, on the other hand, contends that he erred in reducing the amount of $77,099.64 received in 1931 by $28,584.30, the profits which the decedent refused to receive in 1921.
There are a number of reasons why the contentions of the petitioner can not be sustained. In the first place the evidence does not show that the decedent's interest in the Kohler System business, including patents, personnel, drawings, and everything pertaining thereto, was worth $200,000 on March 1, 1913. Although there is evidence to indicate that this business was a valuable one, nevertheless no reasonable estimate of its actual value to the decedent on March 1, 1913, can be intelligently made from this record. The option price of $200,000, mentioned in the agreement, can not fairly be taken as evidence that the value of the business was $200,000 on March 1, 1913. That contract was entered into prior to March 1, 1913, and the option was never exercised. Unaccpeted offers and unexercised options, particularly where they are in effect over a long period of time, may not be reliable evidence*971 of value. ; ; . There is other evidence to indicate that the business was not worth $200,000 on March 1, 1913.
Furthermore, a large percentage of the value was attributable, apparently, to patents which were exhausting year by year. The decedent during the life of the contract could have taken deductions for depreciation on any patent or other property used in the business which was depreciating or becoming obsolete. Likewise, if the contract itself had value on March 1, 1913, he could have taken deductions for the exhaustion of that contract during the period of its *1028 life. It is impossible to determine from this record what portion, if any, of the value on March 1, 1913, of the decedent's property, was left at the termination of the contract after proper adjustments as of that date for exhaustion, and wear and tear, including obsolescence. A fair inference to be drawn from the record in this proceeding is that the appliances required rather frequent modifications, adaptations, and improvements to meet*972 the ever changing demands of the printers. This, in turn, indicates that much of the value of the business as it existed on March 1, 1913, had become obsolete prior to April 1920. Any new devices or improvements developed during the contract would, of course, have no basis for gain or loss to the decedent, since they cost him nothing. If they had any cost to Cutler-Hammer, their cost was deducted before the decedent's share of the profits had been determined. That was equivalent to deducting all costs of the business as expenses, whereas the only costs which might form a basis would be such as had been capitalized, instead of deducted as expenses. Thus, not only is it impossible to determine the amount of the basis which remained, but it is impossible to determine whether any of the basis reaminned as of the date of the termination of the contract in April 1920. Cf. .
Although the Commissioner makes no point of it, it is apparent that the decedent received or retained in the settlement some very valuable patents and rights in addition to the $50,000 and the forgiveness of the indebtedness. For example, he received the Stone*973 patent, on which he later was able to collect $550,000. That patent had been applied for in 1910. Thus, there seems to be reason for not using all of the basis, even if we knew it, to offset the cash which was received.
The record also indicates that a large part of the success of the business would have to be attributed to the personal services and abilities of the men conducting it, particularly the engineers. These were items in which the decedent could have no property interest and on which he would have no basis for gain or loss. If the engineers, upon the termination of the contract of 1920, preferred to stay with Cutler-Hammer, the decedent could not compel them to come with him, and their failure to come with him could not give rise to a deductible loss. The contract of April 1910 contained no provision which required Cutler-Hammer to return to the decedent upon the termination of the contract any personnel, charts, designs, or blueprints.
If it were not for the action of the Commissioner, we would have some doubt whether the $77,099.64 received in 1931 was received for anything which had a basis for gain or loss in the hands of the decedent. However, the Commissioner*974 determined the deficiency and *1029 made his claim for an increased deficiency on the theory that a part or all of the payments received in 1931 represented amounts realized by the decedent from the disposition of the business which he owned on March 1, 1913, a capital asset. Consequently, if any basis were shown, it could be deducted from the amount realized. The burden was upon the petitioners to show error in the determination of the Commissioner. They have failed to show that the amount which the Commissioner has included in income in connection with this transaction was larger than or different from the correct amount. Also there is no sufficient reason to disturb the Commissioner's method of taxing the gain as a capital gain.
The Commissioner claims an increased deficiency on the ground that the amount of $28,584.30 should also be added to the decedent's income for 1931. That was the amount which was shown to be due the decedent on the statement rendered by Cutler-Hammer in February 1921. The decedent did not receive that amount in 1921 nor did he report it on his income tax return. However, the evidence fails to show that it should not have been included in*975 his income for 1921 or some other year prior to 1931. The Commissioner has neither pleaded nor proved estoppel, and we are unable to say from this record that any larger amount should be included in the decedent's income for 1931 in connection with the Cutler-hammer settlement than was included by the Commissioner in determining the deficiency.
III - Income - Westinghouse litigation. - The Commissioner has determined that all of the income from the settlement agreement with the Westinghouse Electric & Manufacturing Co. and the other companies was income which should have been accrued for 1931. The decedent kept his books upon an accrual basis. The amount which he was to receive was fixed in July 1931. It was to be paid absolutely, that is, there was no condition precedent to its payment. It is true that the decedent inserted in the agreement a condition that, if the second payment was not made, then the whole agreement would be called off. But Westinghouse had agreed without qualification to pay it. The petitioners make no contention that the amount recovered was not income within the definition stated in *976 . Cf. . Income accrues when the amount of it and the right to it are fixed, provided the right is not contingent, and provided that there is a reasonable expectation that payment will be made in due course. ; ; ; ; . No good reason appears why the amount should not have been accrued for 1931 or why it did not represent income for 1931 to one who kept books and *1030 reported his income on an accrual basis. The determination of the Commissioner on this point is approved.
The petitioners contend that the amount received in 1932 should not be included in income for 1931 because the Commissioner has taken inconsistent positions in regard to this income. It is true that the Commissioner determined deficiencies for the period from January 1, 1932, until*977 the date of the decedent's death on the basis of including these same payments in income for that period. He did that so that if he was wrong in including it all for 1931 he could protect himself. However, at the hearing in this case he agreed that decision should be entered in the proceeding, relating to the short period in 1932, holding that there was no deficiency for that period. He thus elected to stand upon his contention in this proceeding that all of the payment was income for 1931. The equitable grounds underlying the doctrines of abandonment and vexatious litigation do not favor these petitioners, who now have the advantage of a decision of no tax liability in 1932 and seek to escape tax altogether. There appears to be no merit in this contention. Cf. ; ; ; ; .
IV - Transferee liability. - The transfers which the decedent made to his wife and his son left him with no assets. There is evidence*978 that at the time of the transfers a suit was pending against him in which judgment was finally entered against his estate. There is also evidence that counsel were advising him to transfer his property to avoid the effect of that judgment, which was anticipated in January 1932. The wife and the son are each liable as transferees to the extent of the value of the property which they received. ; ; ; affd., ; ; ; ; .
The petitioners point out that the Commissioner assessed the full amount of the deficiency as a jeopardy assessment against the estate on January 11, 1935, and against Mary E. and John B. Kohler as transferees on January 28, 1935. They contend that he was without authority to make a jeopardy assessment of a transferee liability. But that question need receive*979 no consideration by the Board because the Board has nothing to do with the assessment and collection of the taxes. It exhausts its authority when it determines the amount of the deficiency and the liability of the transferees in this proceeding.
Decisions will be entered under Rule 50.