*4093 Evidence not sufficient to overcome respondent's original determination of the cost in 1911 and the value at March 1, 1913, of certain stock sold by the petitioner in the taxable year.
*470 This appeal is for the redetermination of deficiencies of $6,259.57 and $95,115.12, asserted by the respondent for the years 1918 and 1919, respectively. The petitioner has abandoned the appeal for 1918. That for 1919 relates to the partial disallowance of petitioner's claim of a loss of $199,999 sustained from the sale in that year for $1, of 2,000 shares of the common stock of the International Mail Equipment Co., which were acquired in 1911 at an alleged cost of $200,000. In his audit of the income-tax return of the petitioner for the year 1919, the respondent allowed a value for the stock of $16.36 a share at date of acquisition and at March 1, 1913. At the hearing he amended his answer and asserted that the stock was without value at either date.
FINDINGS OF FACT.
Petitioner is an individual residing in New York City. In 1910, being at that time in*4094 charge of the machinery of the American Tobacco Co., he was requested by J. B. Duke, the president and principal stockholder of that company, to examine a certain mail box belonging to the International Mail Equipment Co., a partnership, and designed for use in the rural mail service, as to the value of the box and the prospect for sale thereof in quantities. He made the examination; reached the conclusion that the device was a good one; reported to Duke and by direction of the latter and Cunliffe-Owen, the vice president of the British-American Tobacco Co., and acting for them and himself, took an option on the assets of the partnership composed of John A. Harriss and Henry J. Lamar, which included the stock of the Georgia Automatic Mail Box Co. and the foreign patents acquired as below set forth.
The partnership between Harriss and Lamar was formed about the year 1906. It acquired all the stock of the Rural Automatic Mail Box Co. of Georgia, which owned several American patents for rural free delivery mail boxes. It also acquired 23 foreign patents on such boxes on its own account. Harriss contributed between $50,000 and $55,000, and Lamar between $60,000 and $65,000 to the*4095 capital of the partnership. Lamar died in 1909 and Harriss thereafter exercised sole control of the partnership until its assets were sold to the International Mail Equipment Co., which was a corporation formed by the petitioner and his associates.
Harriss and Lamar realized small, if any, financial returns from their mail-box venture. They had orders for and manufactured and installed 10,000 boxes in Canada, for which they received $3 each, and received one or two small orders from New Zealand. On November 30, 1910, subsequent to the death of Lamar and after the opening of negotiations with the petitioner, Harriss obtained a contract from the Canadian postal authorities for 100,000 boxes at $3 each. Among other terms and conditions of the contract it was *471 provided that the boxes should be manufactured in Canada, that each should have three coats of paint and that wages paid in their manufacture should be at the generally accepted and current rates for the labor required. Some changes suggested by the petitioner were made in the mail-box specifications for this contract.
After taking the option to purchase the assets of the partnership, petitioner interviewed*4096 Dr. Coulter, then at the head of the Post Office Department of the Canadian Government, and found him in favor of the purchase of the boxes. Coulter stated that in his opinion his government would eventually take a minimum of a half million and a probable maximum of a million boxes, giving as a basis for such forecast that there were 5,000,000 people living in the rural districts of Canada and that ultimately there would be one box used for each group of five people.
On February 8, 1911, at a conference between Fourth Assistant Postmaster General DeGraw of the United States, Coulter, and petitioner, the two postal authorities expressed their approbation of the mail box, and DeGraw stated that in his opinion it would pay the United States to buy these boxes and give them to the rural residents. However, no sales were made to the United States postal authorities and no promises looking to the purchase of the device were made by the latter.
In February, 1911, petitioner exercised his right under the option to purchase for $20,000, and received an assignment of the patents, the stock of the Georgia corporation, and the contract of Harriss with the Canadian Government.
On February 17, 1911, following*4097 the exercise of the option to purchase the assets of the partnership, Duke, Cunliffe-Owen, and the petitioner formed the International Mail Equipment Co. under the laws of the State of New York, for the purposes of acquiring the patents purchased by the incorporators from the Georgia partnership and manufacturing and marketing the mail boxes and post-office equipment covered by such patents. The authorized capital of such corporation was $1,100,000, of which $1,000,000 was evidenced by shares of common stock of the par value of $100 each and $100,000 by shares of preferred stock of the same par value.
At a meeting of the incorporators held on March 4, 1911, the following letter was presented by the petitioner:
N.Y. CITY, N.Y.
Mch. 3rd. 1911.
INTERNATIONAL MAIL EQUIPMENT CO.,
165 Broadway, N.Y. City
GENTLEMEN: I am the owner of the entire assets of the International Mail Equipment Co., a partnership lately composed of H. J. Lamar, now deceased, and John A. Harriss, having acquired the same from the executors of Mr. *472 Lamar, and from Dr. Harriss, as sole surviving partners, and I have also acquired from Dr. Harriss and the estate of Mr. Lamar their interest*4098 in the mail box business. These assets are the following Patents: to wit:
| British | Patent | #18247 - 1908 - J. S. Lanier |
| French | Patent | #395306 - 9/14/08 - J. A. Harriss |
| Italian | Patent | #97915 - 9/30/08 - J. A. Harriss |
| Swedish | Patent | #27707 - 9/14/08 - J. A. Harriss |
| Swiss | Patent | #45717 - 9/14/08 - J. A. Harriss |
| Spanish | Patent | $44015 - 11/17/08 - J. A. Harriss |
| German | Patent | #214235 - 9/13/08 - J. A. Harriss |
| Luxembourg | Patent | #7990 - 9/14/08 - J. A. Harriss |
| Austrian | Patent | #41277 - 10/15/09 - J. A. Harriss |
| Belgian | Patent | $210628 - 9/14/08 - J. A. Harriss |
| Cuban | Patent | #989 - 8/9/09 - J. A. Harriss |
| New Zealand | Patent | #25112 - 10/20/08 - J. A. Harriss |
| Australian | Patent | #12755 - 10/12/08 - J. A. Harriss |
| Japanese | Patent | #17065 - 9/25/09 - J. A. Harriss |
| Portugese | Patent | #6537 - 1/4/09 - J. A. Harriss |
| Hungarian | Patent | #45250 - 9/14/08 - J. A. Harriss |
| Turkish | Patent | # - 9/19/08 - J. A. Harriss |
| Danish | Patent | #12378 - 7/14/09 - J. A. Harriss |
| Mexican | Patent | #8635 - 12/10/08 - J. A. Harriss |
| Jamaican | Patent | #12893/08 - - J. A. Harriss |
| Norwegian | Patent | #19243 - 9/14/08 - J. A. Harriss |
| Canadian | Patent | #113,610 - 8/18/08 - J. S. Lanier |
| Russian - | Application | |
| Russian date - | #36907 - filed Sept. 10, 1908 J. A. Harriss | |
| U.S. Patent | #635,854 - 10/31/99 - A. L. Henry | |
| U.S. Patent | #660,773 - 10/30/00 - A. L. Henry | |
| U.S. Patent | #661,146 - 11/6/00 - A. L. Henry | |
| Canadian Patent | #114,991 - 11/3/08 - J. A. Harriss |
*4099 All orders for goods to be made under them, and all but 275 of the issued stock of the Rural Automatic Mail Box Co., a Georgia Corporation with an authorized capital stock of $75,000.00, and an issued capital stock of $63,450. - which owns the following patents, to wit: -
| U.S. Patent | #898,486 - 9/15/08 - James Smith Lanier |
| U.S. Patent | #898,847 - 9/15/08 - James Smith Lanier |
| U.S. Patent | #902,848 - 11/3/08 - R.A.M.B. Co. |
| U.S. Patent | #902,718 - 12/1/08 - R.A.M.B. Co. |
I hereby offer to sell and cause to be assigned and transferred, to you, the patents first listed, the orders and the shares of stock, for your entire authorized common stock, $37000. - (this amount to be paid in cash or in your preferred stock at par), and the assumption of the cost and expense of securing and preparing to fill said orders.
Very truly yours,
R. L. PATTERSON.After discussion and consideration of the offer made, and by the affirmative vote of all present the following preamble and resolutions were adopted:
Whereas, R. L. Patterson, Esq., has offered to sell and cause to be transferred and assigned to this company certain U.S. & foreign patents for mail boxes listed in*4100 his proposal prefixed to the records of the minutes of this *473 meeting and all but two hundred & seventy five shares of the issued capital stock of the Rural Automatic Mail Box Co. a Georgia Corporation, and all orders for articles made under said patent for the entire common stock of this company and $37000.00 in cash or preferred stock of this Company at par and the assumption by this company of the cost and expense of obtaining and preparing to fill said orders and,
Whereas, it appears that said patents, shares of stock and orders have an actual value to the amount of the consideration demanded therefor and that it is to the best interest of this Company to accept said offer, be it
Resolved, that said offer as set forth in said proposition be, and hereby is approved and it is recommended that the Board of Directors of this Company accept the said proposition and cause the issuance of the entire common stock of this Company and its Preferred Stock, to the extent of $37000.00 par value and the assumption of said cost and expense as full consideration and payment for the said Patents, orders and shares of stock.
It being reported that Dr. John A. Harriss at the request*4101 of the incorporators of this company, had purchased from Andrew L. Henry of Indianapolis, Indiana, for this Company the entire Capital Stock of the American Metal Co., an Indiana corporation, and the following U.S. Patents, to wit:
| U.S. Patent | #660,329 - 10/23/00 - Andrew L. Henry |
| U.S. Patent | #677,763 - 7/ 2/01 - Andrew L. Henry |
| U.S. Patent | #725,080 - 4/14/03 - Andrew L. Henry |
for $8000.00 and was desirous of causing said patents and shares of stock to be transferred and assigned to this Company upon being reimbursed the said sum of $8000. - and his expenses in making said purchase, be it,
Resolved, that it is recommended that the Board of Directors of this Company reimburse him said sum and said expenses upon his causing said shares of stock and said patents to be assigned and transferred to this Company.
Of the preferred stock, 630 shares were purchased for cash at par by petitioner. The remaining 370 shares, together with all except 667 of the 10,000 shares of common stock, were given by the corporation in exchange for all the patents and other assets which had been purchased by petitioner from the partnership on behalf of himself and his associates. *4102 Among these assets was the contract with the Canadian Government for the 100,000 mail boxes heretofore mentioned. The stock was issued to the several interested parties as follows:
| Shares of stock issued | ||
| Name | Common | Preferred |
| Dr. John A. Harriss | 3,333 | |
| J. B. Duke | 2,000 | 334 |
| H. Cunliffe-Owen | 2,000 | 333 |
| Rufus L. Patterson | 2,000 | 333 |
The unissued 667 shares of common were held for issue as might be thereafter directed by the petitioner. Some of these were issued as qualifying shares to enable prospective members of the board of *474 directors to hold that office, and some were given to employees of the corporation. None of the major stockholders were made directors.
The boxes contracted for by Dr. Harriss were mostly delivered in 1911, and all before the close of 1912. In 1912-13 the Canadian Government considered and decided upon the introduction of the parcel post. This service required larger mail boxes than those already purchased. The International Mail Equipment Co. was encouraged to submit plans for a suitable box. It did so, and on February 28, 1914, the postal authorities of the Dominion entered into a contract with it for*4103 100,000 of these boxes, to be delivered as required by the department, but all within three years and paid for at the rate of $4.25 each. They were delivered and paid for during the year 1914.
The cost of manufacturing the $3 boxes and fixtures was slightly less than $1.15 each; that of the parcel-post boxes was $1.57 each.
The net earnings, dividends, etc., of the corporation were as follows:
| Year | Net earnings | Dividends on | Dividends on |
| preferred stock | common stock | ||
| Per cent | Per cent | ||
| 1911 | $128,972.93 | 3 1/2 | 5 |
| 1912 | 6,185.33 (loss) | 7 | 6 |
| 1913 | 7,641.52 (loss) | ||
| 1914 | 220,684.98 | 14 | 20 |
| 1915 | 422.67 (loss) | 3 1/2 | |
| 1916 | 3,290.86 | ||
| 1917 | 3,406.22 (loss) | ||
| Totals | 335,293.03 | 28 | 31 |
| Totals for the years | |||
| 1911-1914 | 335,831.06 net | 24 1/2 | 31 |
| Average | |||
| per year | 83,957.77 net | 6 1/8 | 7 3/4 |
During the years 1912 and 1913 the business of the corporation was practically inoperative, due to the contemplated adoption of parcel-post service.
The mail boxes of both kinds, as well as the supports, etc., were galvanized steel and petitioner estimated their average useful life at about five years and that replacements would be necessary*4104 about every fifth year.
During the World War, petitioner visited Canada in connection with the corporation's business, but realizing the impossibility of securing orders under then existing conditions, made no inquiries of those in authority. He was there just after the Armistice and again in 1919. In the latter year, Harriss reported to him that it would probably be some years before the Canadian Government would institute rural free delivery to any extent and require its people to buy boxes. The petitioner thereupon sold his 2,000 shares of common stock in the Mail Equipment Corporation to his stock *475 brokers in New York City for $1. The sale was absolute and bona fide and divested him of all title and right therein.
The value of the common stock of the International Mail Equipment Co. at March 1, 1913, was $16.36 per share.
OPINION.
LANSDON: The controversy here is over an alleged loss resulting from the sale of capital assets. The property sold was 2,000 shares of the common stock of the International Mail Equipment Co. which the petitioner acquired in 1911 in exchange for his one-third interest in certain corporate stock, American and foreign patents, *4105 and a contract with the Canadian Government, all of which had been purchased from prior owners for $20,000. The petitioner sold the 2,000 shares of stock so acquired in 1919 for $1, and claims a deduction from his gross income of $199,999, as loss sustained in such year. As the basis for his contention he alleges that the stock in question was acquired in 1911 at a cost of $200,000 and that it had value in that amount at March 1, 1913. The sale in the taxable year, admittedly made for the purpose of realizing a loss sustained by the shrinkage of the value of the stock, was in good faith, and the loss, if proved, would be deductible from gross income for that year.
A loss sustained in the sale of capital assets acquired before March 1, 1913, is measurable by the difference between cost or value at March 1, 1913, whichever is lower, and sales price, and is limited to the actual loss from the investment. ; . To prevail here, therefore, the petitioner must prove the cost of the property acquired in 1911 and its fair market value or price at March 1, 1913.
*4106 The stock in question was closely held and so far as the record discloses, there were no sales other than to incorporators on or about either of the basic dates. It was not listed on any stock exchange and so there are no market quotations. In the absence of any sales and of a market established thereby, we must resort to other sources for evidences of value. To this end the petitioner has adduced proof of the cost of the assets to prior owners, the earnings of the corporation from date of organization to 1915, the nature of its contract with and prospect for sales of its product to the Canadian Government, and the opinion of a New York stockbroker.
We are not impressed by the evidence of cost to prior owners. The petitioner failed to produce any evidence of the actual cash value of the patents, contract and corporation stock acquired in 1911, other than the option price. The earning power of the corporation may be regarded as in some degree a measure of the value of its stock. The International Mail Equipment Co. had substantial earnings in one *476 year prior to March 1, 1913, and in one subsequent year. Some dividends were paid on both preferred and common stock*4107 in at least three different years. The evidence of value based on earnings is not persuasive. The corporation had a very small investment in tangible property. It operated no plant of its own. It was dependent for its business and income on contracts with the Canadian and other foreign governments. At date of incorporation it acquired a single contract. At March 1, 1913, it had completed the delivery of its product under that contract and had secured no further orders from any government. It was then engaged in an effort, later successful, to modify its patent mail box to meet the requirements of the Canadian parcel post, but further business and profits were contingent and prospective only. In these circumstances the amount of earnings proved is far less than enough to satisfy us that the common stock of the corporation was worth $100 per share, or $1,000,000, either, when issued or at March 1, 1913.
After a careful study of the entire record we are unable to agree with the respondent in his contention that the stock here in question cost the petitioner nothing. There was cost in 1911 and there was value at March 1, 1913. The petitioner has not proved a cost of $100 per*4108 share or a value of that amount at March 1, 1913. We affirm the original determination of deficiency.
The petitioner having abandoned his allegation of error in respect of the asserted deficiency for 1918, the respondent is approved as to that issue.
Judgment will be entered on 10 days' notice, under Rule 50.
MILLIKEN not participating.