OPINION.
Marquette:
The taxpayer originally claimed that the amounts received under the contract as royalties were a return of capital. Tliis claim lie now abandons and admits that it constitutes taxable income.
Two questions are raised for decision, first, whether the taxpayer is entitled to deduct a reasonable allowance for exhaustion of the patents, he not haying claimed such deduction in his original return; and, second, the March 1, 1913, value of the patents. The first point has been passed upon by this Board in Appeal of Union Metal Manufacturing Co., 1 B. T. A. 395, and upon the authority of that decision the determination of the Commissioner disallowing the deduction for the depreciation of the patents is disapproved.
The remaining point is the value of the patents as of March 1, 1913. The Commissioner fixed the value at $81,264.66, and the taxpayer claims a value of $121,722.08. The factors we have to consider are that the average annual return from the patents prior to the designated date was $12,189.70, and the remaining life of the patents was 13 years. The taxpayer arrives at its valuation by multiplying the average annual earnings by the remaining life in years of the patents and determining the present worth of this amount at 4 per cent. The Commissioner in his brief admits a value of $86,979.98, by the use of Hoskold's formula, providing for interest on present worth and sinking fund at the rate of 8 per cent and 4 per cent, respectively. There can not be much question, when the amount of the return is certain, that the method employed by the taxpayer would shoAV value as nearly as it can be ascertained, but we think an element is overlooked in this formula. The risk involved and the uncertainty of the return must be taken into consideration, and the present worth of the expected return over a period of years does not present the full picture. This element of risk and un-certaintjr could be taken care of by increasing the percentage in computing present worth, but such action would be more or less arbitrary. We are of opinion that the patents should be valued by providing for a sinking fund and a reasonable return upon the present worth, considering the nature of the property, and, for this purpose, that the patents should be valued by allowing 4 per cent compounded annually as a sinking fund. The rate to be allowed on present worth should be commensurate with the risk. The Commissioner has used 8 per cent for this purpose, and we are of opinion that this percentage is as liberal as we care to be. We find that the estimated future royalties for the 13 years of the remaining life of the patents amount to $158,466.10. We find the value of the patents as of March 1, 1913, to be $86,979.98.
AkuNdell not participating.