*2659 1. March 1, 1913, value of an invention and an application for a patent thereon determined for purposes of depreciation.
2. Individual Towel & Cabinet Service Co.,5 B.T.A. 158">5 B.T.A. 158, and A. E. Starbuck, Administrator, 13, B.T.A. 796, followed.
*41 In these proceedings, duly consolidated for hearing and decision, the petitioner seeks a redetermination of its income and profits-tax liability for the calendar years 1920 and 1921, and its income tax for the years 1922 to 1925, inclusive, for which years the respondent had determined deficiencies as follows:
| 1920 | $6,897.56 |
| 1921 | 5,899.70 |
| 1922 | 2,685.63 |
| 1923 | $3,537.95 |
| 1924 | 2,840.53 |
| 1925 | 3,559.48 |
The following issues are raised by the pleadings:
1. Is the petitioner entitled to include in its invested capital for the years 1920 and 1921, the actual cash value of the invention and application for patent thereon acquired by assignement on November 29, 1911?
2. Is petitioner entitled to a deduction in each year*2660 for the exhaustion of its patent in said invention based on the fair market value of the invention and application for patent thereon, as of March 1, 1913?
3. Is petitioner, in computing the annual deduction for exhaustion, entitled to use as one of the factors, the life of the patent from the date it was issued?
4. What was the value of the invention and application for patent thereon, as of November 29, 1911?
5. What was the value of the invention and application for patent thereon as of March 1, 1913?
6. Is petitioner entitled to additional deductions for bad debts in 1920? This issue was abandoned by the petitioner at the hearing.
7. Is petitioner entitled to have its profits taxes, for the calendar years 1920 and 1921, computed under the provisions of sections 327 and 328 of the Revenue Act of 1918?
FINDINGS OF FACT.
The petitioner corporation was organized under the laws of the State of Illinois in 1902. Since its organization, it has been engaged principally in the manufacture and sale of conveying, transmission, mining and screening machinery.
*42 Prior to 1912 a large part of its business was the manufacture and sale of cast iron carriers, *2661 which were used to support and guide conveyor belts in the transmission of ore, gravel, rock or similar materials. Each carrier consisted of one long cast iron roller and two short ones of the same material, the latter being placed at the ends of the long roller in such a manner that they raised the outside edges of the conveyor belt. The contour of the conveyor belt was formed by the angle at which the cast iron carriers were assembled in the supporting bracket. Each bracket had to be built to conform to the width and contour of the belt on which it was to be used. Similar assemblies were produced by all the manufacturers of conveyor machinery, and at this time the petitioner was a relatively small concern. The line of carriers which the petitioner marketed required some 1,600 patterns to produce 65 varieties. There were many disadvantages, both in the manufacture and sale of this type of carrier, the most obvious of which may be summarized as follows: The carriers had to be built for the specified contour and width of belt. Breakage of one idler roller necessitated the abandonment of the carrier of which it was a part. The cast iron rollers required daily greasing. Broken*2662 rollers caused considerable damage to the conveyor belts, which were the most expensive item in the transmission assembly. Using this type of construction, the limit of the length of a conveyor belt was not to exceed 250 feet from center to center. In the event that a change was desired in the width or contour of the belt, only a small portion of the assembly formerly in use was adaptable to the change.
In the latter part of 1911, Wiley W. Stephens, one of the stockholders in the petitioner, invented the so-called unit carrier for belt conveyors. This invention was a marked improvement over anything theretofore used in the construction and erection of conveyors. In place of the cast iron rollers, steel rollers 6 or 8 inches long were to be mounted on ball or roller bearings in 6-inch brackets. These roller units, which were interchangeable, could be assembled for the required width and contour of the belt to be conveyed. On November 29, 1911, Stephens assigned all his rights in this invention to the petitioner for a consideration of one dollar, and on December 4, 1911, the patent application of said Stephens, dated November 29, 1911, was filed with the United States Patent*2663 Office. No interference proceedings in regard to this application were ever filed, and on February 5, 1918, letters patent for the unit carrier were issued to the petitioner as assignee.
The unit carrier has been continuously manufactured and sold by the petitioner, in substantially the same form as originally designed. At the time of the acquisition of the application for patents on the unit carrier, it was apparent to the officers of the petitioner, who *43 were familiar with conveyor machinery, that the invention would have many distinct advantages over the cast iron type, and that when it was placed upon the market it would readily supplant the old type of carriers. Subsequent events have proven that these assumptions were correct.
The most apparent advantages of the unit carrier over the old type may be summarized as follows: It is constructed entirely of steel, is equipped with ball or roller bearings, thus requiring little if any lubrication, is standard for all sizes and contours of belts, may be manufactured in large quantities and kept in stock, is lighter in weight and is subject to less breakage, both in transportation and in use. From the standpoint of*2664 the user, the unit carrier has flexibility, expansibility, interchangeability and the assurance of prompt delivery. It requires less power, reduces belt wear and makes possible the use of belts up to 1500 feet from center to center.
The unit carrier was the cause of the petitioner's increase in business in 1912 and in subsequent years.
Being a patented article, the petitioner had a monopoly both on this type of carrier and on all replacement parts. The sales resulting from the unit carrier advanced the petitioner to one of the largest in its competitive field.
There have been no sales of the petitioner's stock, outside of the families of the original stockholders and to a few of its employees.
The petitioner never had any offer to purchase the invention on the unit carrier, in 1911 and 1912 or around March 1, 1913.
The petitioner's net sales and net earnings, for the years 1902 to 1919, both inclusive, were as follows:
| Year | Net sales | Net earnings |
| 1902 | $102,293.07 | $10,182.61 |
| 1903 | 133,059.70 | 13,716.76 |
| 1904 | 120,790.69 | 1,740.55 |
| 1905 | 176,992.64 | 15,484.75 |
| 1906 | 278,632.24 | 33,015.35 |
| 1907 | 433,262.04 | 52,340.81 |
| 1908 | 326,427.03 | 17,607.46 |
| 1909 | 429,703.48 | 32,651.68 |
| 1910 | 535,434.42 | 36,253.37 |
| 1911 | $534,973.36 | $31,602.70 |
| 1912 | 649,597.28 | 73,300.38 |
| 1913 | 803,516.00 | 90,622.41 |
| 1914 | 782,623.99 | 55,570.85 |
| 1915 | 772,994.61 | 127,717.27 |
| 1916 | 1,336,881.72 | 317,316.90 |
| 1917 | 2,284,375.55 | 467,700.08 |
| 1918 | 2,162,208.29 | 445,658.31 |
| 1919 | 1,798,332.99 | 278,677.34 |
*2665 The dividends paid by the petitioner during the years 1902 to 1927, both inclusive, were as follows:
| Date | Cash dividend paid |
| 1902-1905 | None. |
| 1906 | $2,850.00 |
| 1907 | 3,325.00 |
| 1908 | None. |
| 1909 | 11,760.00 |
| 1910 | 12,000.00 |
| 1911 | 12,000.00 |
| 1912 | 12,000.00 |
| 1913 | 16,000.00 |
| 1914 | $18,000.00 |
| 1915 | 36,000.00 |
| 1916 | 80,000.00 |
| 1917 | 177,637.59 |
| 1918 | 150,000.00 |
| 1919 | 300,000.00 |
| 1920 | 150,000.00 |
| 1921 | 150,000.00 |
| 1922 | 160,000.00 |
| 1923 | $160,000.00 |
| 1924 | 172,258.75 |
| 1925 | 188,020.00 |
| 1926 | 187,620.00 |
| 1927 | 140,595.00 |
| Total | 2,140,066.34 |
*44 The petitioner's net tangibles, for the years 1902 to 1919, both inclusive, were as follows:
| Year | Total tangible assets | Total liabilities and reserves | Net tangibles |
| 1902 | $47,500.00 | $47,500.00 | |
| 1903 | 77,724.44 | $20,041.83 | 57,682.61 |
| 1904 | 114,493.04 | 43,093.67 | 71,399.37 |
| 1905 | 98,852.83 | 25,712.91 | 73,139.92 |
| 1906 | 138,455.00 | 49,830.33 | 88,624.67 |
| 1907 | 185,189.80 | 66,399.78 | 118,790.02 |
| 1908 | 316,269.74 | 70,963.91 | 245,305.83 |
| 1909 | 321,830.63 | 58,917.34 | 262,913.29 |
| 1910 | 404,363.15 | 120,558.18 | 283,804.97 |
| 1911 | $499,092.41 | $191,034.07 | $308,058.34 |
| 1912 | 521,261.40 | 193,600.36 | 327,661.04 |
| 1913 | 569,095.93 | 174,945.96 | 394,149.97 |
| 1914 | 616,587.37 | 143,331.25 | 473,256.12 |
| 1915 | 687,054.99 | 172,773.20 | 514,281.79 |
| 1916 | 832,386.34 | 224,411.22 | 607,975.12 |
| 1917 | 1,084,425.70 | 236,684.45 | 847,741.25 |
| 1918 | 1,403,328.73 | 278,442.87 | 1,124,885.86 |
| 1919 | 1,624,529.22 | 384,091.53 | 1,240,437.69 |
*2666 The total capital paid in to the corporation was as follows:
| January 1, 1902 | $47,500 |
| February 28, 1907 | 2,500 |
| January 30, 1907 | 75,000 |
| Total | 125,000 |
In 1907 the capital stock was increased to $200,000 by a stock dividend of $75,000. In 1916 the petitioner had outstanding capital stock of $200,000 and a surplus of $600,000. It desired to increase its capital stock to $1,000,000, and in order to do so, good will was set up on the books at $200,000 and a stock dividend of 400 per cent was declared. No value was ever set up on the books of the petitioner for the unit carrier invention. The value of $200,000 was placed on good will, in 1916, in order to increase the capitalization to $1,000,000, for the purpose of obtaining the highest commercial rating.
The increase in earnings, commencing in the year 1912, is attributable, either directly or indirectly, to the unit carrier invention.
The invention on the unit carrier and application for a patent thereon had a value of at least $500,000 on November 29, 1911, the date of its assignment to the petitioner, and a similar value on March 1, 1913, and at least that value on February 5, 1918.
The respondent*2667 determined that for the year 1920 the petitioner's net income was $369,303.19, that its invested capital for that year was $929,142.56, its excess-profits tax, $95,089.29, and its total tax, $121,664.83.
For the year 1921 the Commissioner determined the petitioner's net income to be $162,904.70, its invested capital, $1,024,933.36, its profits tax to be $15,582.01, and its total tax to be $29,780.76.
OPINION.
GREEN: Issues 1 and 4, as set out above, relate to the petitioner's invested capital and involve the question of the value, on November *45 29, 1911 (the date of its acquisition by the petitioner), of the invention and application for patent thereon, and the further question of whether such value may be included in the petitioner's invested capital. We have found the value of the invention and application to have been $500,000, on the date of its acquisition by the petitioner. This Board, has, however, consistently held that intangible property paid in to a corporation, without consideration, may not be included in paid-in surplus. See *2668 ; ; . It is, accordingly, held that the petitioner may not include in its invested capital, by reason of the acquisition of this invention and the application for patent thereof, any amount in excess of its cost.
Issues numbered 2 and 5, relate to the annual deduction, if any, to which the petitioner is entitled, by reason of the exhaustion of the patent. The petitioner, in some of its income-tax returns, placed on the invention and application for patent thereon a value of $339,000 as of March 1, 1913. In its petition, it alleged the value thereof to be in excess of $500,000. Subsequently, leave to amend to conform to the proof having been granted, it alleged such value to be in excess of $750,000. The witnesses testified to values ranging from $600,000 to $1,000,000. The respondent, in his brief, concedes the value thereof, as of March 1, to have been $373,697.56. We have found as a fact that the valuation of the invention and application for patent thereon, as of March 1, 1913, was $500,000, which valuation we arrived at after a careful*2669 consideration of all of the facts and circumstances and the opinions of the witnesses.
In , we held that the petitioner therein was entitled to an annual deduction for exhaustion of his patent, computed upon the basis of the March 1, 1913, value of the invention and application for patent thereon, and a 17-year life of such patent, starting with the actual date of the issuance of such patent. The rule there announced has been consistently adhered to. See , and . The petitioner's deduction for exhaustion of its patent should be computed in the same manner.
The fifth issue relates to additional deductions for bad debts, in the year 1920. This issue was abandoned by the petitioner.
The seventh and last issue relates to the right of the petitioner to have its profits taxes for the calendar years 1920 and 1921 computed under the provisions of sections 327 and 328 of the Revenue Act of 1918. The respondent's motion to confine the issues to those prescribed in subdivisions (a) and (b) of Rule 62 of*2670 the Board's rules of practice, was granted. Our consideration of this issue is, accordingly, *46 limited to the question of whether or not there existed abnormal conditions affecting the petitioner's capital or income, within the meaning of section 327(d) of the Revenue Act of 1918. Petitioner does not discuss this issue in its brief. It is apparent, however, that the petitioner is the owner of a patent having a value, on the date of acquisition, of $500,000, which it acquired without cost to it. No amount has or can be included in invested capital, by reason of this asset. It is clear that a very substantial portion of the petitioner's earnings during the taxable years here involved is attributable directly to its ownership of this patent. These conditions, viewed in the light of the petitioner's invested capital, which the respondent fixed for the year 1920 at the amount of $929,142.56, and for the year 1921 at the amount of $1,024,933.36, indicate clearly to us an abnormal condition affecting the petitioner's capital. We, therefore, find that an abnormal condition affecting the petitioner's capital, within the provisions of section 327(d) of the Revenue Act of 1918, *2671 exists as to both years, and it is, accordingly, held that the petitioner is entitled to have its profits taxes computed as provided in section 328 of the Revenue Act of 1918.
Reviewed by the Board.
Further proceedings will be had under paragraph (c) or (d) of Rule 62.
SMITH, STERNHAGEN, and MURDOCK dissent.