*4169 The value of a patent paid in for capital stock determined.
*191 This proceeding results from the determination of a deficiency in income tax for the calendar year 1922, in the amount of $172.83.
Petitioner alleges that respondent erred in failing to allow deductions from gross income in 1921 and 1922 for the exhaustion of the value of a patent paid in to petitioner for capital stock.
FINDINGS OF FACT.
Petitioner is an Oklahoma corporation with principal office at Okmulgee, and is engaged in the manufacture and sale of knockdown steel tanks and "Deck" clamps.
*192 Over a period of about five years prior to 1919, John F. A. Deck, an experienced worker in metal tanks, sheet metal and structural iron, conceived and developed the idea of a steel tank constructed of plates having their edges crimped so as to afford joints both rigid and tight and of a clamp to be used in holding the plates together by application on the outside of the tank without drilling holes in the plates. The inventor discussed his ideas with his son, *4170 G. W. Deck, and was assisted by the latter in perfecting the invention. In the fall of 1919, J. K. Adair, a partner of G. W. Deck, was offered and he accepted a one-fourth interest in the invention, upon agreement to share in the expenses of securing and promoting the patent. G. W. Deck also secured a one-fourth interest in the invention. An application for a patent was filed on December 12, 1919, in the name of John F. A. Deck, and he was assured on April 7, 1920, that a patent would issue. 49 was issued under date of May 25, 1920. The knock-down tank thus patented was capable of manufacture in side sheets of uniform size facilitating transportation; it could be quickly erected by unskilled workmen; the capacity of a tank could be increased by the addition of side plates without emptying the tank; tanks could be repeatedly taken down and set up without injury; leaks could be stopped by the addition of clamps without emptying the tank; a side section could be removed to afford access to the interior for cleaning and this method obviated the danger usually incident to cleaning. The clamp was capable of application to the joints without drilling and was quickly*4171 attachable or detachable by unskilled workmen. The clamp proved unsatisfactory due to structural defects and it was subsequently improved. The improvement was patented under date of January 10, 1922.
The decks and Adair made some effort to interest tank manufacturers in the patent but they were not successful and they organized petitioner in April, 1920, with authorized capital stock of $175,000 par value, of which $25,000 par value was held in reserve, $76,000 par value was issued to the decks and Adair for the patent, and $74,000 par value was offered to the public for cash at par in order to afford cash capital for the erection and equipment of a plant. Sales of stock for cash at par amounted as follows:
| In 1920 | $55,400 |
| In 1921 | 25,500 |
| In 1922 | 13,500 |
| Total | 94,400 |
Prospective investors in the stock were informed of the acquisition of the patent for $76,000 par value of stock and they were shown a model of the construction of the tank joints and of the clamp. The Decks and Adair were active in promoting the sale of the stock *193 and they made sales of the Treasury stock to their friend at par for cash.
In 1921, two of the men of experience*4172 who invested in 1920, took additional stock to the amount of $8,000 par value each, or an aggregate of $16,000, paying therefor $16,000 in cash. As an inducement to do so they received $8,000 par value of the stock owned by the Decks and Adair.
Capital stock of petitioner was issued at par for cash as follows;
| Name | Date | Amount | |
| A. E. Merriam | May 5, 1920 | $2,000 | |
| J. C. Findeiss | May 5, 1920 | 2,000 | |
| Richard H. Findeiss | May 5, 1920 | 2,000 | |
| G. R. Atherton | May 5, 1920 | 2,000 | |
| J. L. Cook | May 5, 1920 | 500 | |
| R. L. Stowell | May 5, 1920 | $1,000 | |
| R. L. Stowell | Sept. 14, 1920 | 1,000 | |
| 2,000 | |||
| C. S. Jones | May 5, 1920 | 100 | |
| J. M. Clover | May 29, 1920 | 5,000 | |
| Roy R. Reynolds | May 29, 1920 | 2,500 | |
| A. J. Peters | May 29, 1920 | 1,000 | |
| David E. Schalk | May 29, 1920 | 2,500 | |
| Robert W. Hamilton | May 29, 1920 | 1,000 | |
| J. Harrison | May 29, 1920 | 500 | |
| J. Harrison | July 7, 1920 | 500 | |
| 1,000 | |||
| A. L. Funk | June 3, 1920 | 2,000 | |
| O. A. Carr | June 10, 1920 | 1,000 | |
| R. S. Peters | June 10, 1920 | 500 | |
| C. A. Mechling | June 11, 1920 | 1,000 | |
| C. A. Mechling | Sept. 28, 1920 | 1,000 | |
| C. A. Mechling | July 12, 1921 | 8,000 | |
| 10,000 | |||
| F. B. Berlin | June 26, 1920 | 2,500 | |
| F. B. Berlin | July 12, 1921 | 8,000 | |
| 10,500 | |||
| C. E. Murdock | July 7, 1920 | 500 | |
| E. H. Short | July 7, 1920 | 1,000 | |
| L. D. Gwynne | July 7, 1920 | 500 | |
| Robert G. Miller | July 7, 1920 | 2,500 | |
| M. C. French | July 13, 1920 | 1,000 | |
| T. A. Hunt | July 13, 1920 | 2,500 | |
| H. C. Gilger | July 19, 1920 | 2,000 | |
| C. C. Gilger | July 19, 1920 | 100 | |
| Frederick A. Gilger | July 19, 1920 | 100 | |
| Dr. P. H. Mayginess | July 31, 1920 | $500 | |
| W. H. Cottrell | July 31, 1920 | 200 | |
| W. T. Foley | July 31, 1920 | 2,500 | |
| J. A. Brasford | Aug. 4, 1920 | 200 | |
| Mrs. J. A. McCutcheon | Aug. 11, 1920 | 600 | |
| W. L. McKalip | Aug. 12, 1920 | $500 | |
| W. L. McKalip | Oct. 18, 1920 | 500 | |
| 1,000 | |||
| Frank King | Aug. 12, 1920 | 500 | |
| Frank King | Sept. 28, 1920 | 500 | |
| 1,000 | |||
| Mayme Sunderworth | Aug. 31, 1920 | 200 | |
| Dalton Rain | Aug. 31, 1920 | 500 | |
| W. R. Thixton | Sept. 28, 1920 | 500 | |
| J. K. Gardner | Sept. 28, 1920 | 2,500 | |
| J. K. Gardner | Nov. 3, 1920 | 2,000 | |
| 4,500 | |||
| D. W. Grier | Oct 6, 1920 | 500 | |
| Whyte Dickey | Oct. 6, 1920 | 500 | |
| Inez F. Porter | Oct. 6, 1920 | 500 | |
| C. S. Jones | Oct. 6, 1920 | 400 | |
| Tom King | Oct. 18, 1920 | 1,000 | |
| L. R. Davis | Oct. 18, 1920 | 1,000 | |
| W. H. Mandeville | Mar. 18, 1921 | 1,000 | |
| C. M. Frankel | Nov. 29, 1921 | 500 | |
| L. E. Cookerly | Dec. 17, 1921 | 1,000 | |
| F. W. Dye | Dec. 23, 1921 | 5,000 | |
| A. W. Leonard | Jan. 5, 1922 | 7,500 | |
| W. F. Gentner | Jan. 17, 1922 | 1,000 | |
| John M. Hall | Jan. 21, 1922 | 1,000 | |
| Nannie M. Messimer | June 20, 1922 | 3,000 | |
| C. H. Messimer | June 20, 1922 | 1,000 | |
| Total | 94,400 |
*4173 A factory site of about 3 1/2 acres, located at Okmulgee, Okla., was donated to petitioner and utilized. The years 1920 and 1921 were devoted to the erection and equipment of the plant. No sales of the product were made until late in 1921. A net loss before providing for the exhaustion of the patent was suffered in 1921. In the return for 1922, petitioner claimed a deduction amounting to $4,470.59 for exhaustion of the value of the patent.
The stockholders became dissatisfied with the management of the Decks and Adair, and in 1924 new officers of petitioner were elected and a new manager was appointed. Petitioner has never paid a dividend.
The value of the patent when paid in for capital stock of petitioner was $30,000.
*194 OPINION.
TRUSSELL: In its income-tax return for the calendar year 1922, petitioner deducted from gross income $4,470.59 as a reasonable allowance for the exhaustion of the value of a patent which it claimed to be allowable under the provisions of section 234(a)(7) of the Revenue Act of 1921. Respondent disallowed the deduction for the sole reason that petitioner has failed to prove the value or cost of the patent. The only issue is this*4174 question of fact.
Petitioner was organized for the sole purpose of taking over the patent here under consideration and of manufacturing and selling the products which were protected under the patent. The patent covered improvements in "Knock-down Tanks" and what was afterward known as the "Deck" clamp. The advantages of the improvements and devices are detailed in the findings of fact and need not be repeated here. It is in evidence and uncontroverted that the product of petitioner would have advantages over that of competitors and under proper management would find a ready demand. We think that the record leaves no doubt that the patent had value and we believe that the amount of the value is determinable upon the evidence before us.
Ordinarily sales of stock are not proof of the value of the assets behind the stock, but in the instant case the investments in the stock of petitioner had a direct relation to the value of the patent and many of the investors, if not all of them, certainly did place a value on the patent.
It was necessary to acquire cash capital for the erection and equipment of the plant. Prospective investors were afforded an opportunity to investigate*4175 the patent rights, were shown models of the tank construction and of the "Deck" clamp, and they were informed that $76,000 par value of the capital stock had been issued for the patent and $74,000 par value of stock would be sold at par for cash. Under these conditions within the few months remaining after organization in 1920, an aggregate of $55,400 was invested in the stock of petitioner. The record contains the testimony of five of the original investors who are still stockholders, and every one of them invested cash for stock of petitioner at par after an investigation of the patent and of the proposed products of petitioner. They were all of the opinion that the patent was worth at least the par value of the stock issued for it. They have made it plain that their investments were inspired by a belief in the opportunity to make money and were not made out of friendship for the promoters. They are all still of opinion that the patent is valuable and capable of yielding a good profit under capable management. Let us see *195 what the qualifications and the investments of these men were. Charles A. Mechling has been in business for 28 years having started at the age*4176 of 19 in a machine shop. After acquiring the necessary shop experience, his duties required him to repair machinery in the oil fields. He is the inventor and the part owner of a device used in the oil fields known as the "Mechling line clamp" which has been commercially very successful. He also invented a high-pressure ball gate valve. He has an extensive acquaintance in the mid-continent field and has had full opportunity to observe the use of oil tanks. He invested $2,000 in the stock of petitioner in 1920. In July, 1921, he invested an additional $8,000, receiving a bonus of $4,000 par value of stock of petitioner owned by the Decks and Adair. Several years later, in 1924, he became president of petitioner when the change in the management took place. F. B. Berlin has been in constant contact with the oil business since 1913, his experience including work in the oil fields and the superintendence of oil leases. He is the owner of an interest in the Mechling line clamp. He invested $2,500 in the stock of petitioner in June, 1920. In July, 1921, he invested $8,000 additional and received as a bonus $4,000 par value of the stock of petitioner owned by the Decks and Adair. *4177 R. L. Stowell, whose experience began in 1913, has been dealing in oil leases and land investments on his own account since 1918, but prior thereto he was in charge of the Tulsa office of a petroleum company, where his duties called him frequently to the oil fields. He made two investments in the stock of petitioner in 1920, aggregating $2,000. W. H. Mandeville was occupied in the oil fields for many years looking after oil production. In 1920 and 1921, he was assistant superintendent of an oil-refining company. His experience included the purchase of tanks for use in the oil business. He invested $1,000 in the stock of petitioner in 1921. J. A. McCutcheon has been for the past eight years production superintendent for an oil company any prior thereto was an assistant superintendent of production. His experience included many years' use of tanks. He invested $600 in the stock of petitioner in 1920.
We are satisfied these practical, experienced men were capable of discerning value in improvements in oil tanks and of forming opinions of the value well worthy of consideration.
Mechling testified that in 1920 he considered the patent to be worth at least $76,000 and he is*4178 still of that opinion. Berlin testified that he was satisfied in 1920 that the patent had a value of at least $76,000 and he still considers it worth that value. Stowell testified that in his opinion the patent had a value of $76,000 in 1920 and it is worth that value now. Mandeville testified that he *196 was satisfied at the time he bought the stock of petitioner that the patent was worth at least $76,000 and he is still of that opinion. McCutcheon testified that it was his opinion when he invested in stock of petitioner that the patent had a value of at least $76,000.
Another witness, Frank J. Hinderliter, the owner of ten patents and a manufacturer of drilling and fishing tools used in oil wells, testified to the advantages of the product of petitioner over that of competitors and he stated in his opinion the patent had a value around $100,000. He is not a stockholder of petitioner.
G. W. Deck and J. W. Adair testified that the sales of petitioner's stock were made to their friends who were actuated by a willingness to help them and to take a speculative chance, and that the stock of petitioner which they received in 1920 in exchange for the patent had no market*4179 value so that they were right in not reporting taxable income from the transaction in 1920. The stock which they gave to Mechling and Berlin in 1921 was an inducement offered to obtain additional capital and the active support of these two men of influence and ability. At the time of the change of management of petitioner they offered to sell their stock but the offer was not accepted. They are still stockholders. We find in the actions of these promoters much that is indicative of opinions on their part that the patent had considerable value and are unable to attach much weight to their testimony.
In our opinion, the transaction in 1921 whereby Mechling and Berlin acquired additional stock is convincing evidence that the patent had a considerable value, but that that value was less than the amount of the par of the stock, and upon weighing all the testimony and considering all the circumstances as shown by the record, we have arrived at the conclusion that this patent had when acquired by the petitioner a cash value of $30,000, and have so found.
It follows that an annual deduction of one-seventeenth of such value on account of exhaustion of the patent monopoly should be*4180 allowed.
Respondent has deducted from net income of 1922 a net loss for 1921 determined without an allowance for the exhaustion during 1921 of the value of the patent. Adjustment should be made in accordance with this opinion.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.