*3416 1. INVESTED CAPITAL - ADVERTISING. - Where a corporation spent large sums in advertising over a long series of years and charged same to expense, and now seeks to restore said expenditures to capital and the portions thereof properly allocable to building up future business, and to current business can not be segregated, held, that no part thereof should be allowed as invested capital.
*991 These consolidated proceedings seek a redetermination of deficiencies in income and profits taxes for the fiscal year ended April 30, 1921, in the sum of $27,254.37, and for the period from May 1, 1921, to December 31, 1921, in the sum of $16,878.90. It is averred that the respondent erred (a) in excluding from petitioner's invested capital certain expenditures made in prior years for the purpose of advertising the trade name "Glyco-Thymoline"; (b) in denying petitioner relief in assessing its profits tax under sections 327 and 328 of the Revenue Acts of 1918 and 1921.
Before the hearing, the Board in accordance with Rule 62 of the Rules of Practice entered*3417 an order that the hearing be limited in the first instance to the error assigned with reference to the exclusion of expenditures for advertising. Accordingly the hearing was so limited and the only question for decision is as above indicated.
FINDINGS OF FACT.
Prior to 1895 Oscar Kress and Samuel Owen composed a partnership in New York City engaged in the manufacture and sale of Glyco-Thymoline, an antiseptic liquid, and Birmingham's Nasal Douche. Kress died and Samuel Owen became the owner of the entire business by purchasing Kress' interest therein from his executors.
In 1895 the petitioner corporation was organized under the laws of the State of New York with its principal office and place of business in New York City. Its authorized capital stock was $100,000, of which $10,000 was issued for cash and the remaining $90,000 was issued in consideration of the transfer to petitioner of all the property of the partnership of Kress & Owen, including the right to manufacture and sell "Glyco-Thymoline" and "Birmingham's Nasal Douche."
Shortly after the organization of the petitioner and the acquisition by it of the property and rights above indicated, an extensive advertising*3418 *992 campaign was determined upon by its board of directors, not only for the purpose of creating a present sales demand, but also to establish a permanent reputation and value to the trade name "Glyco-Thymoline."
"Glyco-Thymoline" is an alkali and antiseptic for the treatment of inflamed mucous membranes generally. It was first used for the treatment of nasal catarrh, but its use has been extended to dental work, and general mucous membrane inflammation. The method of advertising adopted by petitioner was to advertise in medical, dental and nursing journals; sending out detail men to call on doctors and dentists at their offices; to deliver samples and to explain the merits of "Glyco-Thymoline" to them. Circulars were printed and distributed widely containing testimonials from physicians and dentists. The detail men who called on the profession were usually physicians themselves, they were not salesmen, but merely did missionary work to introduce and popularize the product. This campaign was carried on in the United States, Mexico, Canada, England, Argentina, and Chile. From 1896 to and including 1921, petitioner expended $2,582,067.06 for advertising, and its sales*3419 were $10,294,784.78.
Included in the cost of advertising were the salaries and expenses of the detail men, postage, transportation, samples, electrotypes and other similar items. All of this was charged to expense account, no portion thereof was capitalized and from time to time was charged off to profit and loss. A statement of sales, operating expense, advertising and development expense, net profits, dividends and assets, follows:
| Fiscal year | Annual sales | Operating expenses | Advertising and |
| ending Apr. 30 | development expend- | ||
| iture | |||
| 1896 | $20,275.07 | $9,255.02 | $16,624.81 |
| 1897 | 27,773.57 | 14,375.42 | 15,761.22 |
| 1898-99 | 84,995.42 | 45,716.02 | 36,040.59 |
| 1900 | 82,294.12 | 40,498.48 | 37,004.98 |
| 1901 | 110,968.46 | 55,080.58 | 47,914.94 |
| 1902 | 165,970.85 | 70,792.20 | 71,361.37 |
| 1903 | 227,472.50 | 93,747.94 | 95,837.25 |
| 1904 | 301,476.72 | 124,199.80 | 116,517.99 |
| 1905 | 353,924.69 | 147,225.47 | 128,161.80 |
| 1906 | 404,714.87 | 165,762.23 | 160,042.90 |
| 1907 | 459,714.79 | 215,044.41 | 133,959.01 |
| 1908 | 467,000.87 | 234,397.25 | 182,131.75 |
| 1909 | 455,572.09 | 208,012.80 | 150,662.23 |
| 1910 | 484,507.55 | 223,580.84 | 166,192.24 |
| 1911 | 512,759.22 | 235,385.54 | 140,547.43 |
| 1912 | 517,202.72 | 246,802.60 | 155,238.43 |
| 1913 | 537,814.91 | 264,211.39 | 161,511.43 |
| 1914 | 530,183.10 | 256,492.97 | 149,846.55 |
| 1915 | 501,173.57 | 264,348.97 | 122,898.83 |
| 1916 | 528,017.52 | 310,978.00 | 134,842.79 |
| 1917 | 610,417.60 | 426,583.35 | 96,925.20 |
| 1918 | 645,560.91 | 484,003.39 | 68,573.08 |
| 1919 | 816,351.78 | 635,798.62 | 58,229.60 |
| 1920 | 761,551.93 | 565,231.63 | 66,158.83 |
| 1921 | 686,089.95 | 557,171.08 | 69,083.81 |
| Fiscal year | Net income after | Dividends paid | Net assets exclusive |
| ending Apr. 30 | deducting advertising | of formula, beginning | |
| and development | of year | ||
| expenditures | |||
| 1896 | $5,538.59 | $10,000.00 | |
| 1897 | 2,363.07 | 4,461.41 | |
| 2,098.34 | |||
| 1898-99 | 3,238.81 | 4,216.51 | |
| 1900 | 4,790.66 | 5,337.13 | |
| 1901 | 7,972.94 | 6,207.19 | |
| 1902 | 23,817.28 | $16,000.00 | 18,098.75 |
| 1903 | 37,887.31 | 26,000.00 | 25,916.03 |
| 1904 | 60,758.93 | 42,000.00 | 37,803.34 |
| 1905 | 78,537.42 | 54,000.00 | 56,562.27 |
| 1906 | 78,909.64 | 65,000.00 | 80,952.24 |
| 1907 | 110,711.37 | 80,000.00 | 94,826.83 |
| 1908 | 50,471.87 | 76,000.00 | 125,538.20 |
| 1909 | 96,897.06 | 60,000.00 | 100,010.07 |
| 1910 | 94,734.47 | 93,000.00 | 136,907.13 |
| 1911 | 137,826.25 | 109,000.00 | 138,641.60 |
| 1912 | 115,161.69 | 100,000.00 | 167,467.85 |
| 1913 | 112,092.09 | 100,000.00 | 182,629.54 |
| 1914 | 123,843.58 | 110,000.00 | 194,721.83 |
| 1915 | 113,925.77 | 100,000.00 | 208,565.21 |
| 1916 | 82,196.73 | 97,000.00 | 222,490.98 |
| 1917 | 86,909.05 | 63,000.00 | 207,687.71 |
| 1918 | 92,984.44 | 55,000.00 | 231,596.76 |
| 1919 | 122,323.56 | 100,000.00 | 269,581.29 |
| 1920 | 130,163.47 | 108,000.00 | 291,904.76 |
| 1921 | 59,835.06 | 75,000.00 | 319,068.23 |
*993 The peak of the*3421 advertising campaign was reached in 1908, and since then the annual expenditure therefor has decreased. All of the advertising expense was for the benefit of "Glyco-Thymoline," the nasal douche being merely an appliance used to apply it.
OPINION.
MILLIKEN: The petitioner seeks in these proceedings to capitalize a part of the advertising costs during a series of years, which it charged to expense, or cost of sales. It is the theory of the petitioner that part of the cost of advertising was for the purpose of current sales and properly chargeable to current expense, but that the remainder was expended for the purpose of building up a tradename and good will for its product "Glyco-Thymoline," which would give it a permanent value and this should be allowed as invested capital. Throughout the history of the petitioner these advertising and promotion expenses were uniformly charged against cost of sales, and no attempt whatever was made to segregate the one class of expenditure from the other, nor was such attempt made in the evidence.
The amount of advertising expense which petitioner seeks to take into invested capital is arrived at in a theoretical manner as follows: the*3422 peak of the advertising campaign was reached in 1908 and from that time until 1921 only normal advertising for current sales purposes was indulged in. During this period the sales were $7,588,202.85 and advertising expenses were $1,540,708.45, which gives a percentage of advertising expenditure to sales of 20.3 per cent.
Using this ratio to the period from 1895 to 1908, when the sales were $2,706,581.93 and advertising expenditures were $1,041,358.61, it will be found that there would have been a normal advertising expenditure of but $549,436.14. The excess expenditure of $491,922.47 petitioner asks be considered as invested capital. The basis for the claim is founded upon guess work and surmise, with no concrete evidence to test the accuracy or to support its correctness and presents a situation such as the Board declined to follow in .
In a number of other cases the Board has refused to consider advertising expenditures as invested capital where the taxpayers themselves had charged them to current expenses and no proof of segregation was introduced. In *3423 , it was said:
The Board is satisfied that the advertising campaign carried on from 1908 to 1914 had for its major purpose the establishing of the trade-mark "Wunderhose" in such a way in the minds of the public purchasing this grade of hose *994 that benefits to the petitioner would flow therefrom beyond the year when the expenditures were made, but we are not convinced that the entire amount was a capital expenditure when made nor are we satisfied that it resulted in the acquisition of an asset which was yet in existence to the extent claimed in the years on appeal. It may be that in such cases as this upon a proper showing, some portion of the total amount expended for advertising could be capitalized, but when we look to all of the facts and circumstances disclosed by the record in this proceeding any attempt to make an allocation as between expense and capital would be a mere guess unsupported by any sound reason. The action of the Commissioner in eliminating this item from invested capital must, therefore, be sustained.
Cf. *3424 ; ; and .
In the cases cited by petitioner it was clear that the expenditures were capital expenditures and the only question involved was whether they could be restored to invested capital after having been charged to expense. They do not apply here because it is the character of the expenditure that is in dispute, and not the right to restore it to invested capital. Cf. .
We are convinced that a part of the expenditures made during the years prior to 1909 did result in the profitable business enjoyed in years subsequent thereto and reaching into the years before us and as a result may be regarded as a capital investment rather than a deductible expense for the year in which incurred or paid. But what part of the expenditures set forth in the findings of fact may be so treated, we are unable to determine.
Reviewed by the Board.
Further proceeding will be had under Rule 62(b).