*4008 1. The evidence fails to prove that intangible property consisting of a patent, trade-marks, and secret processes, had value on Januay 28, 1901, when paid in for stock.
2. The evidence does not establish that sums expended for advertising between 1904 and 1915 result in an asset which would justify including the expenditures in invested capital.
*900 This proceeding is to redetermine deficiencies in income and profits taxes of $3,795.37 for the fiscal year ended November 30, 1918, and of $106.22 for the fiscal year ended November 30, 1920. The issues are (1) whether petitioner may include in invested capital an item of $76,007 alleged to represent the cost of patents, trade-marks, trade secrets, etc.; (2) whether it may include in invested capital certain expenditures for advertising previously charged to expenses; (3) whether or not invested capital should be reduced by the amount of income and profits tax paid or accrued on income of preceding years.
FINDINGS OF FACT.
The petitioner is a corporation of New Jersey, with its principal*4009 office at Camden. It was formed June 26, 1901, with an authorized capital stock of $250,000, consisting of 5,000 shares of a par value of $50 each. Its object was to manufacture and market steel pens, and it was the purpose of the incorporators to acquire the property and assets and to carry on the business formerly of the C. Howard Hunt Pen Manufacturing Co. (hereinafter for brevity called the "predecessor corporation"). The predecessor corporation was formed in 1897. At some time prior to June, 1901, the latter went into receivership. All of its property was sold at receiver's sale and purchased by C. Howard Hunt, an individual. The price paid therefor by Hunt was around $69,000.
On June 28, 1901, the board of directors of petitioner adopted the following preambles and resolutions:
Whereas, C. Howard Hunt purchased at the Receiver's Sale the plant, property, machinery, fixtures, assets and business of manufacturing and dealing in metallic pens, penholders, penholder tips, pencils, etc.
And Whereas this Company has been organized for the purpose of acquiring from him the property and assets so purchased, and for the purpose of carrying on the business heretofore*4010 carried on by the C. Howard Hunt Manufacturing Co.
*901 And Whereasthe Board of Directors of this Company have ascertained and adjudged and decreed that the said property so acquired by the said C. Howard Hunt and which he offers to sell and dispose of to this Company is of a fair value of two hundred thousand dollars (Subject to a mortgage of twenty thousand dollars) ($20,000), and that the acquisition of said property, assets, rights, etc., are necessary for the business of the Company, and to carry out the contemplated object of the incorporation, Therefore
Resolved that the C. Howard Hunt Pen Company do purchase from the said C. Howard Hunt all the property, plant, fixtures, machinery, assets, rights and credits of the late C. Howard Hunt Pen Manufacturing Company as acquired by him at said Receiver's sale for the sum of two hundred thousand Dollars ($200,000) payable as follows, One thousand dollars ($1,000) in cash and One hundred and ninety nine thousand Dollars ($199,000) in stock in this Company, said stock to be delivered by the officers of this Company to the said C. Howard Hunt or to such persons as he may name and designate in such amounts as he*4011 may direct, and the shares so issued are hereby declared to be full paid shares, not liable to any further call, and the holders of such stock shall not be liable to any further payment thereon.
Resolved that the Directors issue shares of stock to the said C. Howard Hunt and his nominees in payment of said purchase.
Before this meeting, $1,000 par value of capital stock had been issued for cash. Thereafter, $199,000 par value of stock was issued severally to C. Howard Hunt and a number of other individuals designated by him. There remained unissued $50,000 of stock. The journal of petitioner in use at the time contains, among others, the following entries relating to the issuance of capital stock:
The balance of the subscription $199,000 is paid for with the following Resources and Liabilities:
| Cash - Cash book #1 | $5,070.85 | |
| Real Estate | 45,000.00 | |
| Machinery, Tools and Fixtures | 44,837.45 | |
| Patents, Registered Trade Marks & Secret Processes | 76,000.00 | |
| Mdse | 40,696.72 | |
| Steel | 1,011.48 | |
| Metal | 164.03 | |
| Office Fixtures | 1,000.00 | |
| Office Supplies | 100.00 | |
| Boxes & Labels | 1,077.20 | |
| Factory Supplies | 75.00 | |
| Advertising "A" | 821.47 | |
| Accounts Receivable | 3,145.80 | |
| Subscription | $199,000.00 | |
| Mortgage payable | 20,000.00 | |
| Totals | 219,000.00 | 219,000.00 |
*4012 In 1902 the authorized capital stock was reduced from $250,000 to $100,000; and the outstanding capital stock was reduced from $200,000 to $100,000 by reducing the par value of each share from $50 to *902 $25 and by writing off the books the items listed in the following journal entry:
| JUNE 30/02 | |
| June 30 Capital a/c | Dr. $150,000.00 |
| To Sundries |
The following entries made to reduce the capital stock of the company.
| Unsubscribed Stock | $50,000.00 |
| Real Estate | 38.00 |
| Steel andMetal | 1,500.00 |
| Patents, Trademarks, etc | 76,007.00 |
| Factory Equipment | 18.00 |
| Boxes and Labels | 2,000.00 |
| Advertising | 4,257.63 |
| Factory Expense | 100.00 |
| Expense | 1,337.00 |
| Interest | 800.00 |
| Wages | 8,900.00 |
| Traveling a/c | 3,000.00 |
| Discount | 100.00 |
| Coal a/c | 300.00 |
| Postage | 1,000.00 |
| Expense & Freight | 357.57 |
| Legal a/c | 284.80 |
| Total | 150,000.00 |
The purpose of the reduction was to improve the petitioner's credit standing.
Among the property of the predecessor corporation acquired by petitioner were ten trade-marks for pens and a patent covering a box for holding pens. At the time the business was started by the predecessor corporation, the pen industry*4013 in the United States was not developed to such extent that proper machinery and skilled workmen could be obtained here. This industry started in Birmingham, England. The corporation sent its president, C. H. Hunt, to England where he engaged twelve experts in pen making to come to the United States and serve as foremen in the new plant; and he also bought and imported the necessary tools and machinery. The corporation paid the traveling expenses of these men and their families to this country and also expended sums for tools and machinery. The total amount thus expended does not appear, except that it was more than $7,000. The predecessor corporation was the first company to make the round-point pens and their manufacture involved some adaptations in the machinery. It had no patents covering the pens or machinery, but it endeavored to keep secret its manufacturing processes. The trade-marks, processes and patent, were carried on the books of the predecessor corporation at the value of $100,000. As appears in the above tabulations, this property was *903 entered on petitioner's books at $76,000, and this amount was written off when the capital stock was reduced in 1902.
*4014 The predecessor corporation operated at a loss throughout its existence. The results of operations of petitioner during the first five years, for annual periods ending on the dates shown, were as follows:
| Gain | Loss | |
| Dec. 31, 1902 | $16,929.77 | |
| Nov. 30, 1903 | 36,405.82 | |
| Nov. 30, 1904 | $4,269.33 | |
| Nov. 30, 1905 | 2,237.57 | |
| Nov. 30, 1906 | 1,398.80 |
In 1904, upon the recommendation of accountants who audited its books, the petitioner inaugurated the practice of trating all advertising expenses as "deferred charges" and debited them to a special account called "introductory account." These expenditures were then charged off to "expenses" over a five-year period at the rate of 20 per cent a year. Among the items going into the "introductory account" were the cost of circulars, newspaper and periodical advertisements, samples, and about two-thirds of the expense of salesmen. The salesmen were used also as advertisers in canvassing and introducing the goods. While 20 per cent of the advertising cost was being charged to "expense," new charges were being made to the "introductory account' each year, so that the balance was not being reduced. The practice was*4015 abandoned at the close of 1915. At that time the balance in the "introductory account" was $42,113.42.
Following is a statement of the total charges and credits to the introductory account and the gain or loss in each of the years of the period under consideration, being for fiscal years ending November 30:
| Introductory account | ||||
| Debits | Credits | Gain | Loss | |
| 1904 | $31,265.64 | $1,250.88 | $4,269.33 | |
| 1905 | 15,350.14 | 9,626.01 | 2,237.57 | |
| 1906 | 14,158.96 | 15,168.00 | $1,398.80 | |
| 1907 | 19,819.08 | 15,778.37 | 7,927.79 | |
| 1908 | 14,245.09 | 16,778.63 | 543.48 | |
| 1909 | 17,795.19 | 16,583.77 | 7,963.21 | |
| 1910 | 20,731.68 | 17,171.90 | 7,413.14 | |
| 1911 | 12,652.85 | 17,046.89 | 1,606.131912 | |
| 15,343.74 | 16,366.02 | 1,702.32 | ||
| 1913 | 18,884.62 | 18,782.34 | 6,710.74 | |
| 1914 | 17,392.72 | 17,906.97 | 683.70 | |
| 1915 | 25,945.13 | 19,011.64 | 6,418.82 | |
| 223,584.84 | 181,471.42 |
When this account was established in 1904, the market for petitioner's products had not been developed and petitioner has never considered it fully developed.
*904 OPINION.
LOVE: Petitioner seeks to increase its invested capital by including therein $76,000, alleged to represent the value of patents, trademarks, *4016 and secret processes acquired for capital stock issued at the time of its organization in 1901. The first limitation prescribed by the Revenue Act upon the inclusion in invested capital of intangible property paid in for stock is that the amount shall not exceed "the actual cash value of such property at the time paid in." Revenue Act of 1918, section 236(a)(4). The petitioner must establish such value. It is shown that it acquired about ten trade-marks for pens, and a patent for a box for holding pens. It is further shown that the predecessor corporation imported special machinery from England and brought over some expert workmen and that it developed its own processes of manufacture. What the processes were or in what respect they were peculiarly valuable, does not appear. We apprehend that no intangible value attached to the machinery and workmen that can be identified and appraised. It does appear that the petitioner was the first company to make round-point pens, but it is not shown that they were covered by patents or that petitioner had a monopoly therein.
In exchange for all the property of the predecessor corporation petitioner gave $1,000 in cash and $199,000 par*4017 value of its capital stock to C. Howard Hunt, who had purchased it at the receiver's sale for $69,000. Most of this stock was distributed by him among twenty-eight other individuals. What he received for it is not disclosed, so that there is no evidence of the value of the stock based on sales which may be used as a criterion of the value of the property transferred. The petitioner's counsel argues that the stock was sold by Hunt to the other individuals at par, but the record does not bear him out in this. There was general testimony to the effect that petitioner never issued any stock except at the par value thereof, but the only evidence of particular sales of stock by petitioner relates to $1,000 of stock issued to the three incorporators and the $199,000 of stock issued to Hunt.
The predecessor corporation operated at a loss. During the first two years of petitioner's existence there were large losses, in the third and fourth years there were small gains, in the fifth year a small loss. Petitioner undertook to attribute this poor showing to lack of attention to the sales department and poor management of an executive officer, who resigned in the latter part of 1901, or*4018 early in 1902. But this explanation does not help us to determine the value of the intangible property. The secretary of the petitioner testified that, along about 1904 or 1905, he offered to pay the company the book value "of their buildings, machinery, stock, and evertything else, *905 if they would give me the name." Just what this offer embraces is not clear, but it may be noted that at the time it was made the item of trade-marks, patents and processes had previously been charged off the books in the reduction of capital stock made in 1902. In a careful examination of the record, we can not find sufficient evidence from which we can determine that the patents, trade-marks and processes had a value when paid in to petitioner on June 28, 1901.
The next issue relates to petitioner's claim to have included in invested capital $223,584.84 spent between 1904 and 1915 for advertising, this sum previously having been charged to expense in the manner described in the findings.
The principle upon which such expenditures may be regarded as capital charges is that they resulted in the acquisition of an asset from which petitioner continued to derive benefits for a substantial*4019 period of time beyond the year in which they were made. If the advertising done in one year created a market which continued to exist over a long period of time, it quite obviously would be improper to charge the entire cost to that year. See ; ; . In the present case, however, there is no proof that petitioner acquired anything in the way of a subsisting asset. All we have in evidence is the amount of money spent, testimony that the market was considered as not developed in 1904, and never has been fully developed, and statements of gain or loss which seem to bear no relation to the amounts spent for advertising. We may not presume that the mere expenditure of the money necessarily was productive of something of value to the petitioner. The respondent's disallowance of these expenditures in invested capital is, therefore, approved.
The remaining issue relates to the reduction of invested capital by the amount of income and profits taxes paid or accrued during the year*4020 on income of the preceding year or years. No evidence was offered by petitioner on this issue. The question raised, however, has already been decided adversely to the petitioner's position in .
Judgment will be entered for the respondent.