*2002 A petitioner must prove by competent evidence the pertinent and vital facts essential to a decision favorable to his contentions. A decision can not be based on assumption and speculation.
*1182 This proceeding is for the redetermination of corporation taxes for the years 1924, 1925, and 1926, amounting to $6,970.62, $14,378.12, and $14,729.98, respectively.
The petitioner alleges that the respondent erred in refusing to allow the deduction of amounts representing depreciation of certain patents.
FINDINGS OF FACT.
The parties stipulated the facts as follows, such stipulation being subject to the right of either party to supplement "the facts stipulated by further or additional testimony at the hearing."
The petitioner is a corporation organized under the laws of the State of Delaware with principal offices at 1706 Dime Bank Building, Detroit, Michigan. The date of incorporation was July 11, 1924.
The authorized capital stock of the petitioner, Wood Corporation of Delaware, was 10,000 shares of common stock*2003 of a par value of $100.00 per share. The authorized capital was $1,000,000.00.
Prior to the year 1924 Garfield A. Wood was the original owner, as patentee, of the following letters patent which were issued and which expired upon the dates set opposite the respective patent numbers, to wit:
| No. of patent | Date of issue | Date of expiration |
| 1165825 | Dec. 28, 1915 | Dec. 28, 1932 |
| 1271968 | July 9, 1918 | July 9, 1935 |
| 1271969 | do | Do. |
| 1271971 | do | Do. |
| 1271972 | do | Do. |
| 1271973 | do | Do. |
| 1271974 | do | Do. |
| 1271975 | do | Do. |
| 1271976 | July 9, 1918 | July 9, 1935 |
| 1271977 | do | Do. |
| 1271978 | do | Do. |
| 1223462 | Apr. 21, 1917 | Apr. 21, 1934 |
| 1476478 | Dec. 11, 1923 | |
| 1292204 | July 9, 1918 | |
| 1271970 | do | July 9, 1935 |
*1183 The cost of said patents to said Garfield A. Wood was nominal. At the dates of their issue it was believed by their owners that the patents were of substantial value and it was then anticipated that said patents would earn substantial sums in royalties, and thereafter said patents did prove valuable. The attached agreement dated January 4, 1927 was duly executed and has been fulfilled to date and it is assumed that it will continue to be fulfilled*2004 hereafter as the parties thereto are solvent and successful. The royalties described in said agreement were earned and paid.
During July, 1924 the petitioner corporation issued $631,000.00 worth of its common stock to Garfield A. Wood and $270,000.00 of its common stock to Merlin M. Wood, wife of Garfield Wood. After said exchange, said Garfield Wood and his wife were in control of said corporation. The petitioner, in July, 1924, entered said patents on its books of account as assets of a value of $901,000.00 owned by it.
At the time of said exchange the petitioner corporation owned no assets of any substantial value except said patents. All of the capital stock of petitioner corporation then issued, in the amount of $901,000.00, except qualifying shares, was issued to Garfield A. Wood in the amount of $631,000.00 and $270,000.00 to Merlin M. Wood. No other issue of said capital stock and no sales of said capital stock were made during 1924. Said stock was not listed nor offered for sale in 1924, 1925 or 1926.
The petitioner deducted from its income for the calendar year 1924 the sum of $54,020.46 on account of depreciation of the said patents appearing in the above*2005 schedule. The petitioner deducted for the calendar year 1925 on account of depreciation of the above described patents the sum of $108,040.92. Petitioner deducted from its income for the calendar year 1926 the sum of $108,040.92 on account of depreciation of the above described patents appearing in the above schedule. The amounts of depreciation deducted by the petitioner for the calendar years 1924, 1925 and 1926 are mathematically correct if petitioner is entitled to depreciation on a valuation of $901,000.00 for said patents.
The amount of depreciation deducted by the petitioner for the calendar years 1924, 1925 and 1926 was disallowed by the Commissioner of Internal Revenue as stated in his Notice of Deficiency dated April 24, 1928.
The agreement, dated January 4, 1927, referred to in the facts stipulated is a contract entered into on said date by the petitioner and the Wood Hydraulic Hoist & Body Company, by the terms of which the petitioner licensed the Wood Hydraulic Hoist & Body Company to use the patents hereinbefore described in consideration of the payment by the licensee of the sum of $140,000 per annum. This agreement recited that the licensor was then the owner*2006 by *1184 assignment of the patents hereinbefore described; that the petitioner, by resolutions adopted by its board of directors, had, at various times, between July 29, 1924, and the date of the contract, authorized the licensee to use said patents and to manufacture and market devices covered by said patents for a consideration at the rate of $140,000 per annum; that the board of directors of the petitioner and the said Wood Hydraulic Hoist & Body Company desired to enter into formal agreement, confirming the past use of the patents and providing for the future use thereof. The agreement, after such recital, provides as follows:
FIRST: The terms, conditions and consideration upon which said patents have been heretofore used are hereby confirmed and approved and the party of the first part, the Licensor, hereby expressly authorizes and grants to the party of the second part, the Licensee, the exclusive use of all of said patents hereinabove described from the First day of January, 1927 until the Twenty-eighth day of December, 1932, (that being the date of expiration of said ) upon payment to the Licensor by the Licensee for said use at the*2007 rate of One Hundred Forty Thousand ($140,000.00) Dollars per year; the use of said patents and any of them by the Licensee hereunder being subject to License Agreement between Garfield A. Wood and Grant Waldref dated October 10th, 1918, of all patents therein described and subject also to the interest of the said Grant Waldref in , issued December 28th, 1915.
SECOND: Party of the first part, the Licensor, further hereby grants and gives unto the said party of the second part, the Licensee, the exclusive option (subject only to the said contract between Garfield A. Wood to Grant Waldref dated October 10th, 1918), to use from and after December 28th, 1932, each and all of the said above described patents not having expired on or previous to said date and to manufacture and market devices covered by said patents and each of them until the expiration of the period for which each of said United States Patents were granted, at such consideration to be paid by the Licensee to the Licensor as the parties hereto may agree upon. In the event that the parties hereto are not able to agree upon the amount of the consideration to be paid by the Licensee to the*2008 Licensor for the use of said patents expiring after December 28th, 1932, then and in that event, the amount of such annual consideration and the manner of payment shall be determined by a Board of Arbitration, consisting of one appraiser appointed by the Licensor, one appraiser appointed by the Licensee and the other appraiser appointed by the two appraisers first so selected. The decision of a majority of said Board of Appraisers shall be final.
THIRD: IT IS MUTUALLY AGREED that the conditions, provisions and requirements of this instrument shall inure to the benefit of and shall be binding upon the parties hereto, their successors and assigns.
In July, 1924, the patents had a value of at least $901,000.
OPINION.
VAN FOSSAN: In its tax returns petitioner claims deductions for the depreciation or exhaustion of certain patents. Respondent disallowed *1185 these deductions and restored the same to income on the ground that taxpayer was not entitled to a higher cost or value for depreciation than was available to the individual owner of the patents prior to incorporation, control of 80 per cent or more of the stock remaining in the same parties.
The statutory provisions*2009 of the Revenue Acts of 1924 and 1926 pertinent to the discussion are as follows:
Section 204(c), which reads in part:
The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property * * *.
Section 204(a), which provides:
The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that * * *.
Section 204(a)(8), which reads:
If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, *2010 increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made; * * *.
And section 203(b)(4), referred to in section 204(a)(8):
No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
The term "control" as used in section 203(b)(4) is defined in section 203(i) as meaning the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.
Petitioner contends that it does not fall within section 204(a)(8) and that it is entitled to use as a basis for depreciation a cost of $901,000.
In this case a stipulation of facts was filed*2011 which reserved the right of either party to submit additional testimony at the hearing. *1186 The only additional testimony related to the value of the patents in July, 1924, on which date we have found as a fact that the patents had a value of at least $901,000.
Practically speaking, therefore, we have before us as a basis of our consideration of the case only the stipulation. From this stipulation we find that "prior to the year 1924" Wood was the owner of certain patents which had cost him only a nominal amount. There is no evidence as to the ownership of the patents in July, 1924, the date of the organization of petitioner corporation. During July, 1924, the petitioner corporation issued to Wood common stock of a par value of $631,000 and to his wife common stock of a par value of $270,000. It is not stipulated, nor does it anywhere appear, that the stock was issued in payment for the patents. The stipulation proceeds as follows, "after said exchange said Garfield Wood and his wife were in control of said corporation." If it be assumed that the word "exchange" imports that the patents were exchanged for the stock, it should be observed that the word "exchange" seems*2012 to apply equally to all stock, both that issued to Wood and that issued to his wife.
Although the stipulation fails to indicate specifically that Mrs. Wood owned any share in the patents, and does not explain why the stock was issued to her or whether she held it in her own right or merely as a nominee of Wood, from a later stipulation that "at the time of said exchange the petitioner corporation owned no assets of any substantial value except said patents," it would seem to follow that Mrs. Wood, to whom more than one-fourth of the outstanding stock was issued, must have owned an interest in the patents which she transferred in exchange for her stock. If this be the fact, then the respondent's position that the same parties were in control after incorporation as before, and that the case falls under section 204(a)(8), is unassailable. If Mrs. Wood held as a nominee of Wood, the same conclusion would obtain.
In our opinion the evidence is so meager as to make impossible the formation of a conclusion as to the precise situation. The adequate presentation of the pertinent facts is the burden assumed by the petitioner in this case. A decision favorable to its contentions can*2013 not rest on assumption or speculation. It must rest on facts.
We have no alternative but to hold that petitioner has not proved respondent's determination to be in error.
Judgment will be entered for the respondent.