*2586 PATENT VALUES. - The March 1, 1913, value of certain patents acquired for stock determined for the purpose of deductions for exhaustion.
*455 In this proceeding the petitioner seeks a redetermination of income and profits taxes for the years 1918 and 1919. For the year 1918 the Commissioner assessed a total tax of $10,733.67 and thereafter allowed an abatement of $1,772.41, leaving a proposed tax liability of $8,961.26. Of this amount petitioner seeks a reduction to the extent of $4,474.55, representing an original deficiency of $6,246.96 less the abatement of $1,772.41. For the year 1919 the Commissioner found a deficiency of $3,107.01.
FINDINGS OF FACT.
The petitioner is a corporation organized March 25, 1909, under the laws of the State of California, with an authorized capital stock of the par value of $49,990, consisting of 4,999 shares of common stock of the par value of $10 a share. Petitioner was organized by E. F. O'Brien, S. A. Crook, and C. L. Bair. One thousand shares of capital stock were issued*2587 to each of the three individuals and there was turned in to the corporation by Bair certain patents issued in his name. Most of the remaining stock was sold for cash to J. W. Tiscornia during 1909 and 1910.
On March 1, 1913, petitioner was the owner of the following patents:
| Patent No. | Date of application | Date of issue | Patentee |
| 866,416 | July 2, 1906 | Sept. 17, 1907 | C. L. Bair |
| 967,305 | Apr. 3, 1907 | Aug. 16, 1910 | Do. |
| 1,010,110 | May 26, 1910 | Nov. 28, 1911 | Do. |
*456 These patents were issued on what was known as a vehicle-top bow-holder. This device was attached to the motor cars with folding tops and had as its object a means of permitting the bows of the top to drop back into the holder and be held separate from each other so firmly as to prevent chafing or rattling. This object was accomplished by having a fixed vertical arm rigidly attached to the side of the vehicle and to which was attached a movable arm by a hinge at the bottom, on which movable arm were a series of sockets to separately embrace and support the bows of the vehicle top. The movable arm when closed was attached to the top of the fixed arm by a locking lever.
Prior*2588 to March 1, 1913, there were at least 40 patents issued on vehicle-top bow-holders, some of which dated as far back as the year 1892. Some of these patents contained specifications disclosing devices which performed functions very similar to those performed by the patentee's inventions. However, the petitioner owned the basic patent on bow-holders of the type where the bow separators were attached to the movable arm.
As at March 1, 1913, the automobile manufacturing business was at a stage of very rapid development, as indicated by the following schedule of motor vehicle production.
| Schedule of motor vehicle production | |||
| Year | Commercial | Passenger | Ford |
| 1900 | 5,000 | ||
| 1901 | 7,000 | ||
| 1902 | 9,000 | ||
| 1903 | 11,235 | 708 | |
| 1904 | 411 | 22,419 | 1,000 |
| 1905 | 450 | 24,550 | 1,695 |
| 1906 | 500 | 33,500 | 1,599 |
| 1907 | 700 | 43,300 | 8,423 |
| 1908 | 1,500 | 63,500 | 5,986 |
| 1909 | 3,255 | 127,731 | 12,292 |
| 1910 | 6,000 | 181,000 | 19,293 |
| 1911 | 10,655 | 199,319 | 40,402 |
| 1912 | 22,000 | 356,000 | 78,611 |
| 1913 | 23,500 | 461,500 | 182,809 |
| 1914 | 25,375 | 543,679 | 260,720 |
| 1915 | 74,000 | 818,618 | 355,276 |
| 1916 | 92,130 | 1,525,578 | 577,036 |
| 1917 | 128,157 | 1,740,792 | 802,771 |
| 1918 | 227,250 | 926,388 | 402,908 |
| 1919 | 316,364 | 1,657,652 | 777,694 |
| 1920 | 322,039 | 1,883,158 | |
*2589 By 1913 the petitioner had induced some 55 automobile manufacturing concerns to use the Bair Bow-holder as a part of the standard factory equipment.
The operations of the petitioner from date of organization to March 1, 1913, are shown as follows:
| Schedule of earnings for 1909-1912, and January and February, 1913 | |||||
| Year | Number of sets | Gross sales | Cost of sales and other expenses | Net profit | Profit per set |
| 1909 | 858 | $2,612.46 | $7,080.93 | ($4,468.47) | ($5.21) red |
| 1910 | 4,683 | 9,650.69 | 18,623.66 | (8,972.97) | (1.91) red |
| 1911 | 21,526 | 32,387.19 | 33,172.45 | (785.26) | (.03) red |
| 1912 | 51,544 | -9,502.38 | 52,977.53 | 16,524.85 | .32 |
| 1913 (Jan. and Feb.) | 12,310 | 12,453.25 | 10,238.26 | 2,214.99 | .18 |
*457 Operations for 1913 and subsequent years are shown as follows:
| Year | Gross sales top holders | Top holder sets sold | Profit as adjusted by Commissioner |
| 1913 | $84,240.42 | 56,388 | $13,289.95 |
| 1914 | 92,030.97 | 74,878 | 24,643.40 |
| 1915 | 216,384.69 | 252,920 | 86,367.80 |
| 1916 | 323,535.43 | 509,475 | 99,269.48 |
| 1917 | 440,660.21 | 566,678 | 42,771.03 |
| 1918 | 271,227.34 | 306,842 | 38,914.70 |
| 1919 | 891,823.80 | 881,605 | 154,096.06 |
| 1920 | 1,103,214.92 | 854,078 | 237,028.86 |
*2590 These schedules show that petitioner supplied bow-holders to 13.55 per cent in 1911, and 18.58 per cent in 1912, of all the passenger cars manufactured during those years. At March 1, 1913, the net tangible assets of the petitioner were approximately $38,000. The value of petitioner's patents at March 1, 1913, was $160,000, and the petitioner is entitled to a deduction of one-fifteenth of that amount for each of the years in question.
OPINION.
TRUSSELL: The sole question to be determined in this appeal is the value of the patents owned by the petitioner on March 1, 1913. In support of petitioner's claim for value it introduced various witnesses who testified as to the superiority of the device manufactured under the petitioner's patents as compared with other devices then in existence. Two of these witnesses placed a value of some $500,000 on these patents. The first witness, Borgun, determined his value from estimated annual earnings of $149,344. The other witness, Milnor, presented a long series of curves and estimates of future probability from the year 1913 to the year 1927, inclusive, in which he estimated the probable increase of sales of open cars, the probable*2591 increase in the inhabitants of the United States, the probable increase *458 in sale of bow-holders, and the probable profits to be realized from the sale.
We have examined with great care the computations and estimates of future probability thus presented, but do not believe that the witnesses placed sufficient weight in the probability that the patents might become obsolete before they expired, due to the rapid improvements in the automobile industry, nor did they give sufficient weight to the competition which might arise from the sale of devices which would perform similar functions to those manufactured by the petitioner. This would result in smaller profits than those estimated by the witnesses. The record of the petitioner has shown that these estimated profits have not been realized. From the data submitted it appears that the approximate profits made by the petitioner for the years 1913 to 1920 were as follows:
| 1913 | 23 cents per set |
| 1914 | 32 cents per set |
| 1915 | 34 cents per set |
| 1916 | 20 cents per set |
| 1917 | 08 cents per set |
| 1918 | 13 cents per set |
| 1919 | 19 cents per set |
| 1920 | 28 cents per set |
Subsequent events have also shown that the device*2592 during the last few years has been placed upon comparatively few vehicles, due to the large increase in the production of closed cars and various improvements or changes in open-car construction which made such a device unnecessary. We believe, also, that all of the profits realized from the manufacture and sale of this article are not entirely attributable to the patents themselves. Had the petitioner manufactured these devices without patents in competition with other concerns, it is very probable that it could have realized substantial profits therefrom. This fact was indicated in the testimony of Milnor, who stated that the profits he estimated per set were only slightly in excess of what could have been obtained with the keenest kind of competition against other patented devices. Accordingly, we are of the opinion that the value of the petitioner's patents at March 1, 1913, was $160,000, and that such value is exhaustible over a period of 15 years from March 1, 1913.
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by SMITH, LOVE, and LITTLETON.