*2710 The petitioner held to have had no such abnormality in invested capital and income for the years 1918, 1919, and 1920 as would entitle it to special assessment under the provisions of section 328 of the Revenue Act of 1918.
*1204 These are proceedings for the redetermination of deficiencies in income and profits tax for 1918, 1919, and 1920 in the respective amounts of $17,079.95, $13,594.71, and $11,049.62. The point in issue is whether the petitioner had such an abnormality in invested capital and income for the taxable years as entitled it to assessment under the provisions of section 328 of the Revenue Act of 1918.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office in Chicago. It was incorporated in 1905 and issued its capital stock of the par value of $500,000 for certain property, which property was entered upon petitioner's books of account at the following valuations:
| Patents | $478,760.49 |
| Real estate | 15,000.00 |
| Equipment | 4,489.51 |
| Furniture and fixtures | 1,750,00 |
*2711 The correct statutory invested capital and income of the petitioner for the years 1918, 1919, and 1920 were as follows:
| 1918 | 1919 | 1920 | |
| Invested capital | $778,581.24 | $789,179.84 | $785,438.28 |
| Taxable net income | 192,876.47 | 205,603.10 | 214,329.18 |
The total profits-tax liability determined by the Commissioner for the taxable years involved was $56,618.46 for 1918, $37,447.17 for 1919, and $41,147.13 for 1920, and the total tax liability (including income-tax liability) for the same years was $72,392.27, $53,681.05, and $57,340.34, respectively. The tax liability shown by the original returns was $55,312.32 for 1918, $40,086.35 for 1919, and *1205 $46,290.72 for 1920. In the computation of the deficiencies the respondent limited the invested capital in respect of patents to 25 per cent of the amount of the capital stock issued therefor.
Almost all of the business transacted by the petitioner during the taxable years was from the sale of tie-plates (an article of railroad equipment), manufactured for it by certain steel companies from designs in accordance with patents owned or controlled by the petitioner. Petitioner's ony other business (less*2712 than 5 per cent of the entire volume) was the manufacture and sale of signal lights suitable for use at railroad crossings. The methods by which its business was conducted were as follows:
The petitioner solicited from the railroad companies orders for the purchase of its patented tie-plates. This order was turned over to a steel company which manufactured the tie-plates and sent them direct to the railroad company, but sent the bill for same to the petitioner. The petitioner paid the steel company and received the entire purchase price from the railroad company.
During the taxable years petitioner had from 20 to 25 usable patents, a number of which it acquired after the date of its incorporation. Most of the patents thus acquired were not capitalized but their cost was charged to the expense accounts in the petitioner's books of account. No patents have ever been depreciated on the books of account and no depreciation upon patents has been allowed in computing taxable income. The productive assets of the company consist almost exclusively of its patents.
Since 1916 the president of the company has been E. H. Bell, who, in his own right, owned certain tie-plate patents*2713 in which the petitioner had no rights or interests. During the taxable years Bell permitted the petitioner to use his patents, receiving no consideration therefor, and during said years petitioner sold the tie-plates manufactured under said patents to its New York office.
The gross sales of petitioner for the years 1918 to 1920 and the net income were as follows:
| Year | Gross sales | Net income |
| 1918 | $2,594,503.94 | $192,876.40 |
| 1919 | 4,513,072.12 | 205,603.18 |
| 1920 | 6,374,435.05 | 214,329.17 |
Under Patent No. 905,493 granted to E. H. Bell December 1, 1908, the petitioner sold in 1918, 1,713,072 tie-plates for $593,511.06; in 1919, 2,149,147 tie-plates for $765,558.05; in 1920, 2,356,546 tie-plates for $894,113.29.
On Patent No. 1,001,921 granted E. H. Bell August 29, 1911, and Patent No. 1,044,853 granted E. H. Bell November 19, 1912, the *1206 petitioner in 1918 sold 330,332 tie-plates for $14,522.84; in 1919, 502,423 tie-plates for $200,370.02; in 1920, 548,730 tie-plates for $206,670.47.
Under Patent No. 1,219,224 granted E. H. Bell March 13, 1917, the petitioner in 1918 sold 561,810 tie-plates for $118,617.15; in 1919, 1,663,659 tie-plates for*2714 $318,054.86; in 1920, 6,924,836 tie-plates for $1,590,296.16. Bell at this time owned only a few shares of stock in the company and was under no obligation to allow the company to use his patents. He had, however, been given a contract in 1916, under which he was permitted to acquire $25,000 par value of the capital stock as soon as the dividends thereon amounted to $25,000.
The three officers of the petitioner devoted all their time to its business and were largely instrumental in securing sales of these tie-plates. Their salaries were less than those paid by the great majority of similar concerns, and petitioner, contrary to the general practice, did not increase the salaries of its officers during the war period. On the contrary, it paid them less than in 1916. The salaries and commissions paid to officers for the years 1916, 1918, 1919, and 1920 were as follows:
| 1916 | $39,276.09 |
| 1918 | 26,419.28 |
| 1919 | 27,465.00 |
| 1920 | 25,938.56 |
The tax liability of the petitioner for 1917 was determined upon the basis of section 210 of the Revenue Act of 1917.
OPINION.
SMITH: Section 327 of the Revenue Act of 1918 provides in part:
That in the following cases*2715 the tax shall be determined as provided in section 328:
* * *
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
*1207 The evidence in this proceeding indicates that the petitioner owned*2716 numerous patents during the taxable years which were not reflected in its invested capital in any manner. The cost of the same had been charged to expenses in prior years. The amount thus expended is not shown by the record. The evidence also shows that a part of its sales during the taxable years were predicated upon patents which were owned by Bell, the president, but which the petitioner was permitted to use in its business without any charge therefor. The fair market value of these patents is not shown nor is it shown that the petitioner could not have acquired them at a reasonable price had it elected to do so. Although it may be admitted that the use of these patents in the petitioner's business without cost to it created some abnormality in invested capital, the extent of the abnormality is not shown.
The basis for special assessment is:
* * * That the tax if determined without benefit of this section [section 328] would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproporation between the tax computed without benefit of this section and the tax computed by*2717 reference to the representative corporations specified in section 328. * * *
There is no evidence in the instant proceeding that the profits tax determined by the respondent works any exceptional hardship upon the petitioner. The amount of the excess-profits tax determined by the respondent for 1918 was 29.35 per cent of the net income; for 1919, 18.21 per cent; for 1920, 19.19 per cent. The excess-profits tax thus determined by the respondent was only the tax determined in the lowest bracket fixed by the statute. We are not informed as to what excess-profits taxes were paid by representative corporations. Possibly some corporations relying upon patents for their principal source of income paid a lower excess-profits tax than the amount determined by the respondent; possibly others paid a much higher rate. Whether any relief could be given to the petitioner by comparing it with other corporations is not certain. It is common knowledge, however, that many corporations paid excess-profits taxes up to 50 per cent of their net income during the taxable years involved and the statute in section 328(b) indicates that in any case where the excess-profits tax is less than 50 per centum*2718 of the net income of the taxpayer the installments shall, in the first instance, be computed upon the basis of such tax. If any implication may be drawn from this provision it is that corporations whose excess-profits tax is less than 50 per centum of the net income shall not, in the first instance, be entitled to have their profits tax computed under the provisions of section 328. We think that before a corporation may claim the benefits of section 328 it must prove such a gross abnormality of invested *1208 capital or income as warrants the determination of the tax by comparison with representative corporations. The whole picture presented by the instant proceeding indicates only a low rate of excessprofits tax and we think such abnormalities of invested capital and income as have been shown raise no prima facie presumption that the computation of the tax liability under section 301 of the statute works any exceptional hardship upon the petitioner.
Judgment will be entered for the respondent.