*3700 Value of patent acquired in consideration of stock of a corporation determined both for invested capital, and exhaustion purposes.
*821 This proceeding is for the redetermination of deficiencies in income and excess profit taxes as follows:
| Year. | Deficiency. |
| 1920 | $452.40 |
| 1921 (net loss carried to 1922) | 4,211.82 |
| 1922 | 105.13 |
| Total | 557.53 |
Petitioner assigns two errors, substantially as follows:
(1) In disallowing $4,700 representing depreciated cost of certain machinery which became obsolete and was discarded in 1920.
(2) In allowing only $10,000 as the value for invested capital purposes for 1920 and 1921 and depreciation purposes in 1920, 1921, and 1922, of certain patents acquired by the company in 1915 in exchange for its capital stock in the amount of $15,150.10 par value.
FINDINGS OF FACT.
The petitioner is an Illinois corporation organized in 1915 with an authorized capital stock of $25,000. Its main office is in Chicago and its business is the manufacture of expansion anchors.
Three men, Charles N. Ackerman, *3701 William A. Stein, and John L. Johnson, were interested in and promoters of a manufacturing plant and they organized the petitioner corporation. Ackerman was the inventor and patentee of a machine designed for the making of petitioner's expansion anchor. those three men had one of those machines made, at a cost to them of $8,300. Prior to the organization of the corporation they had used said machine enough to test its efficiency. They also had some tools, furniture and other small assets.
In June, 1915, the petitioner corporation was chartered and soon thereafter Ackerman, Stein and Johnson transferred and assigned all right, title and interest in said patent, machine and some other assets to the corporation, in consideration of the issuance to them of the entire capital stock of the corporation, Ackerman taking 125 shares, Johnson 63 shares and Stein 62 shares. The assets were set up on petitioner's books as follows:
| Shop equipment | $8,470.43 |
| Patents | 15,000.00 |
| Patterns and drawings | 565.13 |
| Merchandise | 500.00 |
| Screws, etc | 28.25 |
| Lead | 25.00 |
| Miscellaneous | $10.00 |
| Organization expense | 79.25 |
| Accounts receivable | 321.98 |
| 25,000.04 |
Soon after the organization*3702 of the corporation the stockholders who constituted the board of directors found themselves in need of operating funds and, in order to raise such funds, the three men agreed to and did donate back into the treasury for sale 50 shares *822 of stock. Forth-seven of those shares were sold to different individuals in amounts ranging from one share to fifteen shares, at par and for cash.
The corporation operated from 1915 up to and including 1918 with the machine bought at date of organization. It was learned, however, that sufficient production could not be obtained with that machine and another was installed late in 1918 and the old machine was set aside. It was, however, during 1919, kept in reserve to the end that in the event the new machine broke down or failed to work efficiently, the old machine could be used, and it was used to a small extent in 1919. In 1920 it was discarded and it had no salvage value. It was estimated that the normal life of that machine should be 10 years.
In 1919 and 1920, petitioner, for each year, took 25 per cent depreciation on that machine, as well as on some other machinery. The Commissioner disallowed such depreciation above 10 per*3703 cent, at least for the year 1920. The Commissioner also placed a valuation both for exhaustion and invested capital purposes of $10,000 on patents, instead of $15,150.10 as claimed by petitioner.
OPINION.
LOVE: In this proceeding deficiencies were determined for the years 1920 and 1922, and a net loss determined for 1921.
The Board has no jurisdiction over the determination for 1921, except in so far as such determination may affect the deficiency for 1922.
Petitioner claims a value of its patent, when acquired, of $15,000 (in its petition the value is placed as $15,150.10). The Commissioner valued the patent in his computation of the deficiency, both for invested capital purposes and exhaustion, at $10,000. The rate of depreciation is not in dispute. At the hearing the respondent alleged that error had been committed by him in the valuation of the patent; that in fact it had no value and should not have been given any value in his computations of tax liability; he also denied that the machine had any value and moved for a decision increasing the deficiency.
By reason of the fact that petitioner paid for the assets acquired by it with its stock, its entire issue, *3704 and by reason of the fact that no evidence was presented of the value, in money, of any separate item of such assets or as a whole, our only recourse to ascertain the value of such assets is to determine the cash value of such stock. At the date of issuance of the stock it was all issued to the three individuals who did own and who assigned to the corporation those assets. There was at that time no test made of the market value *823 of that stock, as none of it was offered for sale. Very soon thereafter (and there is nothing in the record to indicate that any change had taken place) 50 shares of that stock were returned to the treasury for the purpose of sale for cash, and 47 shares were sold to the public at par. For the purpose of this discussion we shall treat the situation as though all of the 50 shares had been sold at par. Petitioner urges that the sale of that stock at par proves that the original issue was worth par. The fallacy of that proposition becomes apparent, when we realize the fact that after the original issue, the corporation possessed only the assets conveyed to it by the three promoters After that stock was sold to the public, the corporation possessed*3705 all those same assets plus $5,000 in cash with no greater amount of stock outstanding. The purchasers of that stock certainly had that fact in mind. The 50 shares so offered to the public was one-fifth of the entire issue, hence the value of the original issue was only 80 per cent of par.
While the respondent has denied that the machine had any value, he did admit that it cost $8,300. We have found nothing in the record to indicate that the value of that machine was less than cost.
There is no controversy over the value, as shown by the books, of the other items of assets. As the total value of all those assets, as indicated by the sale of stock, was 80 per cent of the par value of stock, the 20 per cent difference must be allocated to the patent, and instead of its value being $15,000 as shown upon the books, we find its value to have been $10,000 at date of acquisition.
For invested capital purposes, the Commissioner, for 1920, used a valuation on machinery and equipment (including the machine above referred to) of $8,583.85, and allowed depreciation on that value at 25 per cent rate.
The 1919 computation is not before us. Counsel for petitioner states in his brief*3706 that 25 per cent exhaustion was taken in 1919. Up to January 1, 1919, the machine had been in use approximately 3 1/2 years. If 10 per cent depreciation was taken prior to 1919, and 25 per cent was taken in that year, then very little more than 25 per cent remained to be taken in 1920. Moreover, the record, together with statements made by counsel for petitioner, indicate that 25 per cent exhaustion was taken on a valuation of more than $8,300 for 1919 and 1920. In view of that situation, it may be that the whole allowable amount of exhaustion on that machine has been allowed.
The value of the patent at date of acquisition was $10,000. The value of the machine at date of acquisition was $8,300. Up to January 1, 1919, the rate of depreciation on the machine is not disclosed by evidence. The depreciated value of the machine on January 1, 1920, should be allowed as obsolescence in 1920.
*824 The rate of exhaustion on the patent is not in dispute. In the event a recomputation based on this opinion should result in an increase of deficency, then the motion of the respondent is granted; otherwise the same is overruled.
Judgment will be entered on 15 days" notice,*3707 under Rule 50.