*2528 Petitioner, prior to March 1, 1913, delivered certain petents to a corporation with the understanding that he should be paid for the patents in an amount commensurate with their value if, and when, that value was demonstrated by the use of the machines covered by the patents in the business of the corporation. The corporation, in 1921, in accordance with this agreement, and by appropriate action, credited petitioner's account on its books with an amount equal to the debit balance of that account. It being found that petitioner's right to compensation for the patents had on March 1, 1913, a fair market value equal to the amount credited to his account in 1921, it is held that he realized no taxable gain in 1921 from the credit to his account.
*1110 The Commissioner determined a deficiency of $118,666.22 in the petitioner's income-tax liability for the calendar year 1921. The petitioner alleged that the Commissioner erred in including in gross income for 1921, the sum of $201,101.30, which amount was credited to*2529 the petitioner's account on the books of the Martin Cantine Co. on or about October 15, 1921.
FINDINGS OF FACT.
The petitioner is an individual residing at Saugerties, N.Y. Since 1884 he has been engaged in the manufacture of coated and clipped paper. Coated paper is a glossy paper which is used principally for the covers of magazines and catalogues.
In 1888, with his brother, Charles Cantine, he formed a partnership for the manufacture of coated and clipped paper, the brother furnishing the capital, but not engaging actively in the business.
In 1890 a corporation known as the Martin Cantine Co. was incorporated under the laws of New York and took over the business of the partnership. This company is still in existence and doing business. The petitioner has been the president of this company since December 7, 1891. The stock of this corporation has always been closely held. Its affairs have been managed by a board of three trustees elected by the stockholders. Since 1891 the petitioner, James Dederich and Henry Dickhaut have been the three trustees. Aside from an annual meeting of the stockholders and an annual meeting of the trustees following it, there have been*2530 few formal meetings. The trustees were all engaged in the business and were in daily communication with each other and discussed the affairs of the corporation informally about once a week.
Lewis W. Noyes became a salesman for the Martin Cantine Co. about 1892. The petitioner advanced money to him and helped him in other ways. At a time when he was not employed by the Martin Cantine Co., he developed certain machinery for coating paper on both sides in one operation. He secured three letters patent on his invention, No. 765,507, dated July 19, 1904; No. 765,508, dated July 19, 1904; and No. 816,497, dated March 27, 1906. He assigned all three of these patents to Martin Cantine on May 31, 1907, at which time he was not employed by the Martin Cantine Co. In consideration *1111 of the assignment the petitioner paid Noyes some cash and canceled the unpaid portion of the loans which he had theretofore made to Noyes. The amount of the indebtedness canceled, when added to the cash paid, made a total of about $5,000.
Previous to the invention of the Noyes machine, paper had been coated by a machine known as a single coater. By the Noyes process, two single coater machines*2531 were set face to face, and after paper was coated on one side by being passed through the one machine, it was then taken a considerable distance over a drying device, then brought back under the machine which it had just gone through and was run through the second machine, which coated it on the other side, and it was then again dried and reeled.
About 1905 the petitioner began work on the development of a machine which he later patented and on which he received three letters patent, No. 876,241, dated December 31, 1907; No. 858,149, dated June 25, 1907; No. 894,366, dated July 28, 1908. No one connected with the Martin Cantine Co. assisted him in any of his experimental work in connection with his invention of the machines, but employees of the company did assist him in the company's shop in making models of the machines. In perfecting the machines and in securing the patents, the petitioner spent about $5,000. The corporation expended some money in connection with the production of the models. The machine invented by the petitioner coated paper on both sides at the same time. After passing through the Cantine machine, the paper had only to be dried and reeled.
The machines*2532 covered by the Noyes and Cantine patents above mentioned permitted large savings in the cost of producing paper coated on both sides when compared to the cost of producing similar paper with other machines in use from 1904 to about 1922. In 1913 there were no machines similar to the Noyes and Cantine machines being used by other manufacturers of coated paper. At that time the Martin Cantine Co. was the leading manufacturer of such paper.
When the petitioner received the assignment of the Noyes patents, he delivered the letters patent and the assignment to James Dederich, who received them on behalf of the Martin Cantine Co. and then placed them in the company's safe, where they have since remained under his control. Similarly, when the petitioner received each of the three patents on his own machine, he delivered the letters patent to Dederich. None of the above patents were ever assigned or transferred to the Martin Cantine Co. by any writing at or near the time when they were delivered to the company. But, at or about the time or times when they were delivered to the company, there was an oral understanding between the petitioner on the one hand, and the other two trustees*2533 and Charles Cantine on the other hand, to the effect *1112 that if and when the patents turned out to be valuable to the company, Martin Cantine would be compensated for them in an amount commensurate with the demonstrated value of the patents to the company, at such time as he, the head of the company, could demonstrate their value to the company. From 1890 to 1913 and later, the petitioner took the lead in managing all of the affairs of the company, bought all of its supplies, and sold most of its goods.
At the time the patents were delivered to the company the four individuals above mentioned believed that the patents were valuable, but they did not know how valuable, and Martin Cantine expected to be paid for the patents, but he did not know how much he would get. It was then understood and he expected that he would receive a fair compensation. At that time the stock of the Martin Cantine Co. was owned as follows:
| Stockholder | Shares |
| Martin Cantine | 485 |
| Charles F. Cantine | 485 |
| James Dederich | 10 |
| Henry Dickhaut | 10 |
| William R. Crump | 10 |
Charles F. Cantine died on July 14, 1912. The question of compensating the petitioner for these patents had*2534 several times been discussed informally in meetings where the three trustees and Charles Cantine were present, and at all of these meetings all were agreed that the petitioner should be compensated when the value of the patents and their earning power could be satisfactorily demonstrated.
The capital stock of the Martin Cantine Co. was at some time increased from the amount originally issued. From July 6, 1920, to October 15, 1921, the stock was held as follows:
| Stockholder | Shares |
| Mary P. Cantine, widow of Charles | 6,850 |
| Agnes L. Cantine, daughter of Charles | 6,850 |
| Martin Cantine | 2,850 |
| Holley R. Cantine, son of Martin | 3,050 |
| Frances Cantine, wife of Martin | 3,000 |
| Anna P. Cantine, daughter of Martin | 3,000 |
| Lydia C. French, sister of Martin | 3,000 |
| James Dederich | 100 |
| Kate C. Dederich, wife of James | 300 |
| Henry Dickhaut | 400 |
| William Leslie Crump | 200 |
| J. Irving Crump | 200 |
| Stephen J. Dickhaut | 100 |
| William L. Finger | 50 |
| Lewis F. Fellows | 50 |
| Total | 30,000 |
William Leslie Crump and J. Irving Crump are sons of William R. Crump, a former salesman of the company. Stephen J. Dickhaut is superintendent of the mill and William L. Finger is a bookkeeper, and*2535 Fellows is secretary of the company.
The Martin Cantine Co., about 1904 or 1905, purchased its first machine of the Noyes type from a plant formerly unsuccessfully operated by Noyes. In 1905 it operated two or three of the Noyes *1113 machines. From 1905 until July, 1909, it had three such machines. From that time until February, 1913, it had four. From then on it had five until later years. In 1905 the company had its first Cantine machine in operation and continued to operate one such machine until 1908, when it acquired another. It had two in operation in 1908 and 1909. In 1910 it acquired a third and it operated three machines through 1914. In 1921 it had four Noyes machines and six Cantine machines in operation. The company has always operated several of the old single coater type machines because some paper had to be coated on one side only, but most of its product came from the Noyes and Cantine machines after they were installed. Prior to May 31, 1907, the company had used the Noyes machines without paying anything for such use.
The petitioner from time to time withdrew funds from the Martin Cantine Co. on open account. On December 31, 1915, his account*2536 showed a small credit balance. From time to time thereafter, his salary, dividends on his stock, and similar items, if any, were credited to his account and he made withdrawals from the company which were debited to this account. For the period from December 31, 1915, to September 30, 1921, inclusive, the following table shows the net debits and credits for the various years in the two accounts of Martin Cantine as disclosed by the books of the Martin Cantine Co.
| Regular account | Stock account | |||
| Period | Net debits | Net credits | Net debits | Net credits |
| July 1, 1915 to Dec. 31, 1915 | $235.87 | |||
| Year 1916 | $28,659.22 | |||
| Year 1917 | 1,703.82 | $57,366.83 | ||
| Year 1918 | 3,102.38 | $7,708.50 | ||
| Year 1919 | 67,594.08 | 9,378.00 | ||
| Year 1920 | 24,222.30 | 10,532.00 | ||
| Jan. 1, 1921, to Sept. 30, 1921 | 43,516.32 | 12,068.52 | ||
| Totals | 165,695.74 | 3,338.25 | 67,898.83 | 29,155.02 |
| 3,338.25 | 29,155.02 | |||
| Net debits | 162,357.49 | 38,743.81 |
On September 30, 1921, these two accounts showed a total net debit of $201,101.30. The above account, called stock account, differed in no particular material hereto from the regular account, but was kept separate from the regular*2537 account for reasons not material hereto.
The following is a part of the minutes of a special meeting of the board of trustees of the Martin Cantine Co. held on the 15th day of October, 1921.
Mr. Martin Cantine thereupon called the attention of the Trustees to his accounts as they existed on the books of the Company on September 30th, 1921, *1114 and recalled and recited the tacit understanding existing with the majority stockholders to the effect that from time to time as circumstances permitted he was to be further compensated for the valuable processes, formulae, patents, contracts, trade-marks, and the financial and trade goodwill he had created, affected and turned over to and for the company, aside from his regular duties during the period from 1904 to 1912 inclusive.
He further stated that the reason for the condition of his accounts was his needs and it had been suggested from time to time as heretofore in 1915 by the principal stockholders besides himself, that he further draw monies as he needed them from time to time, and in conclusion stated he now desired to have his account fairly considered and adjusted. A full discussion was then held in which all those*2538 present joined and it was moved by Mr. Dederich and seconded by Mr. Dickhaut that the balances at the debit balances as existing on Mr. Cantine's accounts as of September 30th, 1921, be charged to Surplus Account on the books of the company.
Motion carried - Mr. Martin Cantine though present not voting.
The president then called the attention of the Trustees to the adjourned annual meeting of the stockholders to be held on November 7th, 1921.
The meeting then adjourned after the reading of the minutes and with the directions that the minutes be read and submitted at the meeting of the stockholders on November 7th, 1921 for their confirmation and ratification.
The following is a part of the minutes of an annual meeting of the stockholders of the Martin Cantine Co. held on November 7, 1921:
The minutes of the last annual meeting of the stockholders and of all the meetings of the Board of Trustees held since the last annual meeting were then read and after discussion Henry Dickhaut moved and James Dederich seconded, that the minutes of all the meetings and the acts therein set forth of the Trustees be ratified and confirmed by the stockholders. Motion carried.
The following*2539 is a copy of the journal entry in the books of the Martin Cantine Co. dated October 15, 1921:
| 97 Surplus Dr | $201,101.30 | |
| 8a To Martin Cantine, personal | $162,357.49 | |
| 8b To Martin Cantine, stocks | 38,743.81 |
The amount of $201,101.30 never passed through an expense account of the company, and it was not deducted on the company's income-tax return for 1921. The books of the company never showed any liability of the company to the petitioner for payment for the patents. The petitioner's account on the books of the company appeared as an account receivable and was used as such by the company in computing its invested capital for income-tax purposes.
The petitioner secured certain trade-marks or trade brands for the company's products, originated and developed valuable processes and formulae used by the company, made valuable contracts for it, was responsible for a large amount of its good will and used his credit to aid the company financially. The Martin Cantine Co. has been a leader in the coated-paper industry for a number of years, has a valuable good will and valuable trade names.
*1115 The petitioner reported his income for the calendar year*2540 1921 on the basis of cash receipts and disbursements.
The following schedule shows respectively the net tangible assets, the net operating profit, and the gross sales of the Martin Cantine Co. for the years 1904 to 1912, inclusive:
| Year | Net tangible assets | Net operating profit | Gross sales |
| 1904 | $181,925.87 | $25,179.41 | $451,756.87 |
| 1905 | 213,102.26 | 34,433.08 | 590,936.34 |
| 1906 | 232,330.73 | 69,037.28 | 684,300.47 |
| 1907 | 257,146.04 | 89,287.91 | 791,399.96 |
| 1908 | 336,581.31 | 67,465.80 | 906,083.17 |
| 1909 | $389,120.82 | $102,651.47 | $1,268,832.63 |
| 1910 | 476,117.61 | 126,131.71 | 1,632,567.66 |
| 1911 | 580,834.02 | 103,547.11 | 1,475,035.03 |
| 1912 | 651,512.94 | 144,540.87 | 1,721,574.16 |
The following table shows the gross income and net income of the Martin Cantine Co. from 1913 to 1920:
| Year | Gross income | Net income |
| 1913 | $1,770,843.39 | $168,348.07 |
| 1914 | 1,717,428.24 | 95,691.39 |
| 1915 | 1,765,825.34 | 60,690.61 |
| 1916 | 1,021,906.91 | 298,203.19 |
| 1917 | $2,795,144.80 | $228,705.66 |
| 1918 | 3,094,156.09 | 221,153.63 |
| 1919 | 3,763,881.76 | 397,472.77 |
| 1920 | 6,145,514.29 | 561,370.63 |
The fair market value on March 1, 1913, of the six patents above mentioned was $600,000.
*2541 The fair market value on March 1, 1913, of petitioner's right to compensation for the assignment of the Noyes and Cantine patents was at least $201,101.30.
The Commissioner included $201,101.30 in the petitioner's taxable income for 1921, representing the amount credited to his account on the books of the Martin Cantine Co. on October 15, 1921.
OPINION.
ARUNDELL: The first and principal contention of the petitioner is that he realized no taxable gain through the credit of $201,101.30 to his account because this sum did not exceed the March 1, 1913, value of his agreement with the corporation whereby he was to be compensated for patents assigned to it.
The facts may be briefly restated as follows: Prior to March 1, 1913, petitioner delivered to the Martin Cantine Co. certain patents, some of which he had obtained by assignment from the patentee and others were patents issued to him. The delivery was made with the understanding that he was to be compensated for them at such time as their value was demonstrated. Thereafter petitioner withdrew from the corporation amounts in excess of his salary and dividends and on September 30, 1921, the debit balance of his account*2542 stood at $201,101.30. By rdesolution of the corporate trustees in October, *1116 which was confirmed by the stockholders, petitioner's account was cleared by charging said debit balance to the corporate surplus account.
Counsel for the respondent argues that the $201,101.30 was received by petitioner as compensation for services and for other intangibles in addition to the patents. The minutes of the meeting of the trustees on October 15, 1921, referred to certain intangibles which petitioner had created and turned in to the company, but the testimony of all three of the trustees is quite specific that the $201,101.30 was understood and intended by all the parties to be compensation for the patents turned in by the petitioner. We are satisfied from the evidence that the credit was in fulfillment of the agreement to pay petitioner for the patents.
The conversion into cash or other property after March 1, 1913, of property acquired before that date results in taxable income to the extent that the amount realized exceeds cost or March 1, 1913, value, whichever is greater. *2543 ; ; ; afld., . In this case petitioner's property was his contract with the Martin Cantine Co., under which he was to be paid for the patents. His cost was the cost of the patents, which was about $10,000. The question to be determined then is the March 1, 1913, value of the contract.
The evidence established a March 1, 1913, value of the patents of $600,000. We have reached the conclusion that this amounts was their value upon consideration of the testimony of witnesses who at March 1, 1913, were either in the paper-coating business or in the business of manufacturing paper-coating machinery. They were familiar with the machines manufactured under the Noyes and Cantine patents and knew of the superiority of those machines over others then in use. The petitioner, of course, did not own the patents at March 1, 1913, but it was upon the worth of those patents, not only at that date but before and after it, that his compensation was to be based. The petitioner himself, who has been in the paper business*2544 since 1884, testified that in his opinion the value of the contract right was equal to that of the patents. His valuation of the patents was somewhat higher than the amount we have found. Two other witnesses gave it as their opinion that the value of the contract was somewhat less than that of the patents. Upon objection of counsel for the respondent as to their qualifications, these two witnesses were not permitted to express their opinions as to the value of the contract. The difficulty of producing evidence of the exact value of the contract is obvious. Here we have a contract which plainly is out of the ordinary run of contracts and of a kind which *1117 is not customarily dealt in as is other property, for example, real estate, patents, or leases. There probably are no experts in the valuation of such property. If there are any sales of property of this kind they are few and far between. We can not expect a degree of proof beyond what is reasonably possible. The further we leave March 1, 1913, behind, the more difficult it is to get competent evidence as to that date, even in cases where all the factors going into such value were in existence on that date. To*2545 say that no one is competent to testify to the value due to the uncertain factors of the future and that, consequently, we will find no value, is to shirk a duty that we believe Congress expects us to perform and which is necessary if the law is to be reasonably carried out. In reaching our conclusion that the contract had a March 1, 1913, value of not less than $201,101.30, we have taken into consideration the value of the patents themselves, for, as pointed out above, it was upon their value that the amount to be paid petitioner was dependent. We have also considered the earnings of the corporation both before and after March 1, 1913. It is a rather striking fact that from 1904 (when the first Noyes machine was installed) to 1912 the Cantine Co.'s net operating profit increased from $25,000 to $144,000, or nearly six times, and its net tangible assets increased only about three and one-half times in the same period. From 1913 to 1920 the company's net income increased over three times. Net income in 1920 was more than twenty-two times the net operating profit in 1904. Considering all the facts before us, we conclude that the petitioner's contract with Martin Cantine Co. was*2546 worth on March 1, 1913, not less than the amount for which his account was credited in 1921, and that he realized no taxable gain on the transaction here involved.
Alternative claims of petitioner are: (a) That if the amount credited to his account was for additional compensation for services as claimed by the respondent, then the corporation's act was null and void because of want of authority and the credit could not be treated as income, and (b) that in any event only the amount of $31,447.80 actually paid to him in 1921 was income in that year.
In view of our disposition of the principal issue, these alternative claims do not require decision.
Reviewed by the Board.
Decision will be entered under Rule 50.
STERNHAGEN, concurring: While I am willing to go along with the 1913 valuation of petitioner's contract right to compensation at no less than the amount claimed, I can not accept the valuation of *1118 the patents at $600,000. But, right or wrong, there is no necessity for fixing the precise value of the patents, so long as their value is probably sufficient to support the value claimed for petitioner's right. The Board should*2547 not go beyond the necessity of the case.
MCMAHON agrees with this opinion.
MURDOCK, dissenting: I can not agree with the decision in this case, which holds that the contract, as distinguished from the patents, had a value on March 1, 1913, of not less than $201,101.30. In my opinion there is no satisfactory evidence as to the petitioner's prospects on March 1, 1913, in regard to the amount which he would ultimately receive and the time when he would receive it. Placing myself back at March 1, 1913, and considering all of the evidence which was presented to me, I am at a loss to say what was the value of the petitioner's contract on that date. It does not appear that the petitioner could have called for a settlement under his contract on that date nor does it appear on what date thereafter he at that time could have expected a settlement. The amount which he could have expected is equally uncertain, but even if I were to make some guess as to the amount which he would ultimately receive, I have no basis on which to discount that amount to arrive at its value on March 1, 1913.
Although it is not essential to the decision of this case to find that the*2548 patents had a value on March 1, 1913, of $600,000, nevertheless, I want to point out that I do not agree that the evidence shows this amount to have been the fair market value of the patents on that date. The petitioner stated, that in his opinion, the value of the patents was between $900,000 and $1,000,000 at March 1, 1913, but the evidence failed to disclose that he had any basis for this statement. Another witness placed the value of the patents at $772,000, but his testimony discloses that his opinion was entitled to no weight whatever. Another witness explained why, in his opinion, the patents were worth $600,000, and his testimony is far more convincing than that of any other of the witnesses in this regard. However, in valuing the patents, he attributed to the patents, earnings which, in my opinion, were attributable in part at least to other factors, such as efficient management, good will, valuable trade-marks or trade brands, valuable processes and formulae, and valuable contracts used by the company.