*3979 Intangible assets acquired by petitioner at organization in exchange for its capital stock had a value of at least $18,875, the maximum amount at which they may be included in invested capital.
*1032 This proceeding is for the redetermination of deficiencies in income and profits taxes for the calendar years 1919, 1920, and 1921, amounting to $1,986.58. It is alleged that in computing invested capital the respondent erroneously excluded the value of certain good will, processes, and other intangible assets acquired for stock.
FINDINGS OF FACT.
Petitioner is a New York corporation, with principal offices at 350 Madison Avenue, New York, incorporated in September, 1914, for the chief purpose of producing art work for advertisements.
In May, 1911, the Millergraph Company, a California corporation, was incorporated for the chief purpose of developing a certain process for making color plates for the reproduction of drawings in color. This process was invented by one Miller and is known as the "Miller process." In 1911 it was a new process whereby*3980 black and white drawings were reproduced in colors by means of colored plates prepared without the necessity of requiring the artist to color his drawings. In June, 1912, the Millergraph Company, a New York corporation, was incorporated and took over the business of the California company, acquiring its personal property, its patents, and rights to the "Miller process." The New York company continued to develop the "Miller process" and also developed a process used to reproduce oil paintings known as the "Old Master's process." It spent more than $30,000 in the development of these two processes. No attempt was made to commercialize these processes by the New York company, that company confining its efforts to perfecting the processes.
The stockholders of the New York company organized petitioner for the purpose of securing further capital and commercializing the two processes. Petitioner's capital stock consisted of 250 shares of 6 per cent preferred stock and 505 shares of common stock, all of the par value of $100 a share. The preferred stock and 5 shares of the common stock were sold at par. On or about September 24, 1914, *1033 the remaining 500 shares of the common*3981 stock were issued as part of the purchase price of the business, personal property, good will, book accounts and bills receivable of the Millergraph Company (the New York corporation). The sale included the rights to the "Miller process" and the "Old Master's process." The balance of the purchase price was $10,876.25, which was paid in cash by petitioner. Petitioner also assumed payment of the New York company's current liabilities, amounting to about $2,500.
Petitioner's outstanding capital stock on March 3, 1917, was $75,500.
The Commissioner, in computing petitioner's invested capital for the taxable years 1919, 1920, and 1921, has reduced the amount claimed by petitioner by the amount of $45,000, representing the alleged value of intangibles, and has allowed nothing in invested capital for intangibles acquired at date of organization. Such intangibles had a value when acquired of not less than $18,875.
OPINION.
PHILLIPS: The Commissioner has determined that certain intangibles acquired by petitioner in 1914 had no cash value at the time of their acquisition.
Section 326(a)(4) of the Revenue Act of 1918 defines "invested capital" as meaning "intangible property*3982 bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest."
Twenty-five per cent of petitioner's outstanding capital stock on March 3, 1917, amounted to $18,875. It is this amount which petitioner now claims the right to include in invested capital for intangibles.
There is in the record opinion evidence that the intangibles acquired by the petitioner at organization had a value in excess of the maximum amount at which they may be included in its invested capital. This opinion is supported by the action of persons familiar with the processes acquired, who not only spent $30,000 in development in the four preceding years but also advanced substantial amounts of additional cash at the time petitioner was organized. The only basis for doubt is the testimony that during the first year the new company sustained an operating loss and that in the succeeding year its profits were modest. *3983 Thereafter the profits were substantial. Considering that the predecessor companies had been *1034 engaged in perfecting the process and not in developing its commercial possibilities and that this task was first undertaken by petitioner, some operating loss might reasonably have been expected and, in our opinion, does not serve to overcome the other evidence of value. Rather, the fact that the losses in the first year were small, that there were some profits in the second year and substantial profits thereafter, all tend to confirm the opinion that these processes were valuable.
Decision will be entered under Rule 50.