OPINION.
Smith
: The questions involved in this appeal are: (1) The amount of invested capital to be allowed on certain intangible assets of a partnership paid in to the taxpayer corporation for shares of its capital stock; (2) the amount which may be included in invested capital representing the value of certain intangible-assets, consisting of rights to receive royalties donated to the corporation by one F. A. Anton; (3) the amount to be deducted from gross income for exhaustion of intangibles; and (4) the right of the taxpayer to special consideration under section 328 of the Revenue Act of 1918.
1. Of the intangible assets paid in to the corporation as of January 1, 1918, by the partnership composed of Anton and Stoneback, the Commissioner has allowed invested capital as follows:
For nine-thirtieths of the partnership intangibles purchased by Anton from Schick_$15,741.50
For ten-thirtieths of the partnership intangibles purchased by Anton from Carter_ 17,490. 55
-7- $33,232. 05
For one-half Interest in shop right and royalty in Canadian lateral arm patent purchased by Anton from Carter_ 5, 000.00
38,232.05
Twenty-five per cent of stock outstanding_ 35,000. 00
The taxpayer contends that by this computation the Commissioner has not allowed the inclusion in invested capital of any amount representing Stoneback's one-thirtieth interest and Anton's ten-thirtieths interest in the partnership intangibles; in other words, that the Commissioner has allowed for partnership intangibles only nineteen-thirtieths of the amount that should be allowed, and that the taxpayer is entitled to include in invested capital the value of the eleven-thirtieths interest in the intangibles paid in to the taxpayer corporation for shares of stock by Anton and Stoneback.
The evidence in this appeal shows that Anton acquired Schick's and Carter's interests in the old partnership, which was dissolved on November 8, 1917, at a cost in excess of their pro rata shares of the hook value of the tangibles of the partnership. The book value of the tangibles of the partnership at January 1,1918, was $58,553.92. The value was substantially the same at November 8, 1917, the date upon which Anton acquired Schick's and Carter's interests in the partnership, and at January 1, 1918. Their nineteen-thirtieths interest in the partnership tangibles was, therefore, on that date $37,084.15. Anton paid Schick $31,500 for a nine-thirtieths interest and Carter $40,000, of which $35,000 was for his interest in the partnership assets and $5,000 for his interest in the Canadian patent. Anton paid Schick and Carter $31,500 plus $35,000 cash for their interests in the partnership, a total of $66,500. This amount is $29,415.85 in excess of their pro rata shares of partnership tangibles at January 1, 1918. In addition, Anton agreed to pay all liabilities of the partnership, including the excess-profits tax liability for 1917, which proved to be $7,746. Since Schick and Carter were liable for nineteen-thirtieths of this amount of tax, their nineteen-thirtieths interest in the partnership intangibles at November 8, 1917, was sold for $34,321.95, and, upon the basis of that sale, the total value of such intangibles was $54,192.08. The partnership composed of Anton and Stoneback acquired these intangibles plus the one-half interest of Carter in the Canadian patent, which had a value of $5,000. The total value of the intangibles of the partnership paid in to the corporation by the partnership was, therefore, by this computation, $59,192.08.
The taxpayer claims the right to include in invested capital in respect of these intangibles a greater, amount than has been allowed-by the Commissioner by reason of the fact that the intangibles had a greater cash value. We do not, however, perceive any error committed by the Commissioner upon this point. He has applied the 25 per cent limitation imposed by section 326 (a) (5) of the Revenue Act of 1918, and has permitted the inclusion in invested capital of the greatest amount possible.
2. The taxpayer further claims that it is entitled to an increase in invested capital over the amount allowed by the Commissioner by reason of the fact that on April 8, 1918, Anton, who was entitled to receive royalties from the taxpayer in respect of Anton lateral arms manufactured and sold by it, relinquished the right (provided the value could be included in invested capital), and that the value of the right thus acquired by the corporation was " from $49,700 to $89,850 or a fair average cash value of $65,275." The claim of the taxpayer upon this point is an unusual one. The evidence is to the effect that the taxpayer desired to redeem its preferred stock at a rate of $10,000 per annum and was afraid that the profits from the business might not permit this to be done. Anton therefore waived his right for a season to receive royalties from the corporation. This was a property right of unquestioned value. The amount which would have been paid by the taxpayer to Anton during 1918, if he had not waived his right to receive royalties, was $3,529.50 and the average amount which he would have received during the next few years was in excess of that amount. Although of unquestioned value, may that value be included in invested capital?
Section 331 of the Revenue Act of 1918 provides that in the case of the change of ownership of property, after March 3, 1917, if an interest or control in such property of 50 per cent or more remains in the same persons, or any of them, then the property received from the previous owner shall not, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under Title III of the Revenue Act of 1918 in computing invested capital of such previous owner if the property had not been so transferred, and that, if the previous owner was not a corporation, then the value of the property so transferred shall be taken at its cost at date of acquisition. The evidence does not show that Anton paid anything for this right to receive a royalty. He was an owner of more than 90 per cent of the outstanding stock of the corporation at the date when he waived his right to receive royalties. After the waiver of such right to the corporation, he unquestionably still had more than a 50 per cent interest in the right waived. Section 331 is a complete bar to the claim of the taxpayer upon this point.
3. The Commissioner has determined that the taxpayer is entitled to deduct from gross income of the year 1918, $3,721.84 for exhaustion of the taxpayer's rights in the United States and Canadian patents on Anton lateral arms. This deduction is based upon a determination by the Commissioner of a value for those rights of $38,232.05. The taxpayer claims that in his determination of the value of such rights the Commissioner has not taken into account the value of Anton's and Stoneback's original eleven-thirtieths interest in them. It is the taxpayer's, contention that the interests of the last two individuals were worth $19,239.60, and that therefore the basis which'should be used for determining the depreciation allow- anee upon such rights in the patents acquired from the previous partnership is $57,471.65.
The taxpayer also contends that it is entitled to deduct an additional $250, representing exhaustion on $2,500, the cash payment made by it on May 9, 1918, for Anton's interest in the shop rights of the Canadian patent. Upon this last point the Commissioner admits error if it be found that the taxpayer is entitled to deduct any amount whatever in respect of the exhaustion of such shop right.
The taxpayer and the Commissioner have assumed that the amount paid by Anton for Schick's and Carter's interests in the partnership which terminated on November 8, 1917, in excess of their pro rata shares of the tangible assets, represents the amount paid for their rights in the United States and Canadian patents. In other words, they have assumed that the only intangible of value possessed by the partnership was its right in the United States patent on Anton lateral arms.
We think that the taxpayer's contention upon this point is not well founded. The Topeka Tent & Awning Co. had been in existence as a partnership for many years and had done a large business with awning manufacturers throughout the United States. The sales of Anton lateral arms prior to 1918 were only about one-third of the total sales of the concern. In its brief the taxpayer claims that the net profits on arms and the total net profits for the years 1910 to 1923, inclusive, were as follows:
The taxpayer did not keep books of account which showed net profits on sales of arms separately from the total net profits, and we can make no finding that the profits on the sales of lateral arms were what they are claimed to have been. But even upon the assumption that the figures presented by the taxpayer are correct, it appears that only about one-half of the net profits of the concern are attributable to such sales. The partnership was doing a profitable business even prior to the date of the issuance of the United States patent on Anton lateral arms. The good will of the partnership was undoubtedly valuable. It is not subject to an exhaustion deduction under the provisions of the Revenue Act of 1918. The Commissioner found that the fair value of the rights in the United States and Canadian patents possessed by the partnership, which was dis solved on November 8, 1917, pins the corporation's one-half interest in the license of the Canadian patent, all of which patent rights became property of the partnership composed of Anton and Stoneback and which were turned in to the corporation, had a value at January 1,1918, of $38,232.05. No evidence has been adduced before us which proves that the cash value was in excess of that amount.
With respect to the computation of the exhaustion allowance based upon a value of $38,232.05, the taxpayer alleges that the correct amount of that exhaustion deduction is $3,823.20. This is based upon the assumption that the patents from which the rights issued had a life of 10 years from January 1, 1918. The facts are, however, that the United States patent had a life of 10 years, 2 months, and 7 days from that date and the Canadian patent an even longer life. No evidence is before us which proves that the Commissioner's computation of the exhaustion allowance with respect to the patent rights acquired from the predecessor partnership is in error.
The Commissioner admits that he made no deduction from gross income of the year 1919 of any amount representing an exhaustion of any part of the $2,500 paid by the taxpayer on May 9, 1918, for Anton's one-half interest in the shop right in the Canadian patent. He also admits that the taxpayer may be entitled to a deduction for the exhaustion of this interest in the patent. The appeal of the taxpayer upon this point is therefore sustained.
4. By the agreement between Anton and the taxpayer, dated April 8, 1918, Anton waived his right to receive a royalty of 50 cents on each lateral arm sold by the taxpayer. Had it not been for this agreement, the taxpayer would have paid Anton royalties of $3,529.50 for the year 1919 and even larger amounts for subsequent years. The taxpayer contends that Anton's right to receive royalties, if the value of the right may not be included in invested capital for the year 1919, is revived and that the taxpayer under its contract with Anton owes him the $3,529.50 in question, and that such amount is a legal deduction from the taxpayer's gross income for the year 1919.
We are of the opinion that there is no merit in this contention. The language of the agreement of April 8,1918, is ambiguous. Even though the corporation be liable to Anton for the payment of any royalties in respect of lateral arms sold during the year 1919, such liability accrued not during the year 1919 but at some later date, when it was determined by the taxing authorities that the claim of the taxpayer with respect to the inclusion in invested capital of the value of the so-called gift to the taxpayer should be denied. Our conclusion is that the taxpayer is not entitled to deduct or exclude from the gross income of 1919 any amount in respect of royalties for that year.
5. The taxpayer claimed that, by reason of abnormalities in income and invested capital for the year 1919, it is entitled to special consideration under the provisions of section 328 of the Revenue Act of 1918. In our opinion, there were abnormalities, both of income and of invested capital, which entitle the taxpayer to such consideration. The taxpayer has not submitted any evidence as to comparatives. By reason of such failure, the determination of the Commissioner under the provisions of section 328 will be final. Appeal of H. T. Cushman Manufacturing Co., 2 B. T. A. 39.
6. The taxpayer has alleged error on the part of the Commissioner in rejecting a claim for credit of $119.63, originally claimed for 1919. It has, however, offered no evidence in support of its claim.