*1409 The Board is not absolutely bound by the opinion as to value given by a single witness for the petitioner, but must weigh that opinion in the light of all of the evidence and the experience and general knowledge of the Board on the subject of inquiry. If, so tested, the opinion does not appear to be reliable, the determination of the Commissioner will not be disturbed.
*1208 OPINION.
MURDOCK: The Commissioner determined a deficiency of $3,449.94 in the petitioner's tax liability for the year 1927. His only adjustment was to disallow depreciation on patents in the amount of $25,555.12 because the patents on which depreciation was claimed were paid for in stock, and the value of the stock was not shown. The only error assigned is the action of the Commissioner in disallowing depreciation on patents.
The petitioner was incorporated under the laws of Delaware, on February 21, 1914. Its principal place of business is at Ambler, Pennsylvania, and it filed its income-tax return for 1927 with the collector of internal*1410 revenue at Philadelphia, Pennsylvania. It was incorporated for the purpose of exploiting an invention of a method of preparing steel automobile bodies and other metal surfaces for painting by first treating the metal with a certain solution. The inventor was George D. Feidt. The organizer, and later the president of the petitioner, was J. H. Gravell. In 1913 Gravell was assistant to the superintendent of painting in the paint shop of a *1209 firm located near Philadelphia which was engaged at that time in the manufacture of steel bodies for the Hupp Motor Company. Steel bodies for motor cars came into use in about the year 1912. The manufactures of these bodies encountered serious difficulties in preparing the metal for painting. Various methods of cleaning and preparing the metal surface were tried, but despite all that was done the paint very soon came loose in places, due to the fact that the metal rusted under the paint. In 1912 and 1913 many steel bodies were returned to the manufacturer on account of this defect.
Feidt was a wholesale druggist in Philadelphia. He had furnished some material to the firm by which Gravell was employed. As a result of this connection*1411 he learned of the difficulty which his customer was having. In the fall of 1913 he invented the method of preparing steel for painting on which letters patent were subsequently issued. On February 4, 1914, he filed in the United States Patent Office application for letters patent on his method. This application was given Serial No. 816,537. On February 6, 1914, he assigned his whole right, title and interest in and to his application for patent No. 816,537 and to any patent that might issue thereon, to Percy C. Feger of Philadelphia. The assignment recited a consideration of $1 and other good and valuable considerations. On March 18, 1914, Feger made a similar assignment of the application to the petitioner. The stated consideration for this assignment was 9,000 shares of the common stock and 150 shares of the preferred stock of the petitioner, and other good and valuable considerations. On September 8, 1914,
On September 14, 1914, six days after the issuance of the above mentioned patent, Feidt filed an application for a patent on a cleaning compound for metals. It was assigned Serial No. 861,550. On September 17, 1914, Feidt*1412 assigned his whole right, title and interest in this application, and any patent that might issue thereon, to the petitioner for a recited consideration $1of and other good and valuable considerations. On December 1, 1914,
The authorized capitalization of the petitioner was $500,000, consisting of 9,000 shares of common stock of the par value of $50 a share, and 1,000 shares of preferred stock of the same par value; $42,500 par value of preferred stock was retained in the treasury; $2,500 par value of preferred stock was sold for cash; and all of the rest of the stock, consisting of $5,000 par value of the preferred *1210 stock and all of the common stock in the amount of $450,000 par value, was issued at or shortly after the time of the incorporation of the petitioner for an invention covered by an application for patent.
The parties agree that since the property thus acquired was the only asset of the corporation, *1413 the value of the stock issued for it representing the cost of the property to the corporation is measured by the fair market value of the property on or about February 25, 1914. Cf.
The witness, Percy C. Feger, had been engaged in the general practice of law in Philadelphia since 1905. He first learned of the invention from Gravell, who consulted him as to how to market it and for whom he made an investigation of the matter. He had had little previous experience with inventions. His investigation included an afternoon visit to the shop where Gravell was employed. There he saw some*1415 steel automobile, bodies being treated by the method invented by Feidt, and tried his hand at swabbing and drying some of the bodies. He also experimented with some small sheets of steel at his home. He had some correspondence with manufacturers of automobiles and obtained some information on the number *1211 of steel bodies manufactured up to February, 1914. He knew that at least several hundred of these bodies had been treated by the petitioner's process with satisfactory results. If he knew any other fact of importance at that time, we have not heard of it. He organized the petitioner for his client and has ever since been associated with it as director, secretary-treasurer, and general counsel. We do not know who the other original directors were. A large part of his time has been devoted to the affairs of the corporation. He has handled most of its business dealings with customers. He anticipated in February, 1914, that the corporation would have some hard years at the beginning and would have trouble from infringements, due to the simplicity of its process and the difficulty of detecting infringements in paint shops all over the country. The company found many*1416 cases of infringement and its total profits for the first eight years of its existence, without deduction for exhaustion of patents, amounted to less than $150,000. If deductions had been taken at the rate now contended for, the corporation would have suffered a loss of over $50,000 for this period. The profits have been very substantial since 1922, but prior to that time the corporation had acquired other value patents and new markets not anticipated in 1914. The original process, which was a very simple and inexpensive one to use, was still in use in the taxable year 1927, at which time practically every automobile manufactured in the United States was being subjected to this process.
Feger's opinion was not predicated upon any sale or offer to sell, and he was so inadequately examined as to the facts upon which he relied and the reasoning which he employed in arriving at his conclusion as to value that we are unable to see exactly what his method was. His only explanation was as follows:
Well, I considered the number of steel bodies that were manufactured from the beginning in 1912 and the enormous increase of the number of those bodies over the years. I did not foresee*1417 the enormous increase in automotive transportation that we have witnessed. I took the profit that we could make at $2.50 a gallon, a net profit of 20 cents a body, and I figured that we would do at least 300,000 bodies a year, because that was the production of steel bodies in 1912, and it increased 100,000 in 1913, and I thought there would be, certainly, that normal rate of increase, of say one-third, or if not one-third at least 100,000. On the basis of that, that gave me $60,000 a year; and in seventeen years, a man would certainly contemplate, in buying the patent, he was going to make a profit, and he would take in over a million dollars. So I think I was very conservative when I put in a value which, since that time, we have earned in one year.
He assumed that the corporation would make a profit of 60 cents on each gallon of material and that only three automobile bodies would be processed from each gallon. Yet he testified that a gallon *1212 of material would always be sufficient to process three bodies and, depending upon the degree of care used, might be sufficient to process any number up to six. There is no testimony to indicate that in February, 1914, anyone*1418 could reasonably have anticipated that the material would be sold for $2.50 a gallon or that the corporation would derive therefrom a profit of 60 cents a gallon. The witness further assumed, without stating any particular reason, that 300,000 bodies would be processed each year with the new material. Our own experience and general knowledge of the subject tells us that a prospective purchaser would not have made many of the assumptions which the witness makes. We do not believe, for example, that he would have invested any substantial amount in the application for a patent without first assuring himself that the alleged invention was patentable, did not interfere with any previous patent, and that a patent would probably issue. See Robbs Patent Essentials, 1922, p. 258. There is no testimony to show what he could have learned in this connection in February, 1914. The witness was not shown to be qualified to judge the probabilities of patentability. Cf.
Some value was inherent in this invention, but certain serious difficulties which would have to be surmounted by anyone who might attempt to exploit it were also inherent in the invention and apparent from the very beginning. Feger and his associates, whoever they were, were perhaps justified in their hope that Feidt's invention would *1213 ultimately prove successful and result in large earnings, that it had a potential value; but we are concerned only with market value in February, 1914. We may not be unduly influenced by the subsequent grant of the patent or by the success which the company ultimately achieved. Cf.
Judgment will be entered for the respondent.