Appeal of Keller Mechanical Engineering Corp. , 6 B.T.A. 990 ( 1927 )

OPINION.

Gkeen :

Specifically, the issue on appeal is the March 1, 1913, value of United States letters patent Nos. 877,436 and 956,769, issued under dates of January 21, 1908, and March 30, 1910, respectively, and owned by the petitioner on the basic date, covering a belt-driven duplicating machine and a motor-driven duplicating machine, and the deduction to which the petitioner is entitled under the provisions of section 234(a) (7) of the Revenue Act of 1918 for exhaustion of these patents. The petitioner claims a fair market value for these patents at March 1,1913, of $300,000, and a deduction for exhaustion in the amount of $23,061.54, based upon the claimed value. The Commissioner denies that these patents had a fair market value at March 1, 1913, which may be made the subject of an allowance for exhaustion over the remaining life thereof.

The issue raised by this appeal is identical with the one which came before the Board in an appeal by this petitioner, Docket Ño. 2087, relating to the years 1918 and 1919, which is reported in 1 B. T. A. 1183. By stipulation of the parties, all of the evidence, documentary and oral, which was had in the trial of the earlier appeal, was placed in evidence for the purposes of the present appeal. Such new evidence as was adduced may be said to be confined to the deposition, with accompanying exhibits, of Edward N. Anderson, petitioner’s auditor and office manager, relating to the sales and earnings, which are set out in tabulated form in the findings of fact, and the accounts carried on petitioner’s books.

After a careful consideration of the evidence, we can not escape the conclusion which the Board reached in its .opinion in the earlier appeal — that the two patents in question, immediately upon their issue and on March 1, 1913, had a very considerable capital value. For 17 years prior to March 1,1913, the petitioner had been engaged in manufacturing dies, die-sinking and mold-cutting machines, and stamped and perforated work. It had also manufactured and sold reducing machines and dies made by the reducing process, which constituted a chief part of its operations. Its officers were intimately acquainted with the die-using industries and their particular needs. Among others, the die-using industries included automobile manufacturers, locomotive and car works, railroad shops, drop forgers, navy yards, munitions factories, Government arsenals, mints, malleable steel foundries, rubber manufacturers, and manufacturers of miscellaneous cutlery, surgical instruments, marine hardware, harvester machinery, jewelry, plumbing supplies, toys, electrical parts and insulating materials. Experience had taught the petitioner that only a small part of the demands of the die-using industries could be met by the reducing machine. The latter was particularly appropriate and useful for ornamental and other kinds of fine work, but in the case of the greater number and more important of the die-using industries the reducing machine was not adaptable to their needs. The petitioner knew that the demand of the latter industries was for a machine which would cut dies from a master of the same size. The principle involved in the reducing machine was the cutting from a nr iter three to four times the size of the die desired. This machine was too large, expensive, and' necessitated the use of powerful cutting tools.

It was with visions of supplying the needs of the greater number and more important of the die-using industries that the petitioner, prior to 1908, undertook to perfect and construct a machine which would cut dies from a master of the same size. By 1908 it had succeeded in perfecting such a machine, a so-called duplicating machine, to the point where it was enabled to secure a patent. This was a belt-driven machine. In 1910 it secured a patent on a motor-driven machine. Four or five of these machines were manufactured and sold prior to 1913, but little had been done toward marketing them prior to that year, as the petitioner desired to make certain improvements before offering them as a completed and perfected machine.

At March 1, 1913, the petitioner was ready to manufacture and furnish the perfected duplicating machine to the die-using industries. The sales of duplicating machines from the basic date, on to 1922 are set out in the findings .of fact.

The inability of the Board to reach a conclusion as to the March 1, 1913, value of these patents in its opinion in the earlier appeal was due to the deficiency in the evidence as to the earnings which could fairly be allocated to the duplicating machines covered by these patents. Though it submitted evidence as to the earnings of the period July 1, 1913, to December 31, 1922, the petitioner failed to show a proper segregation of these earnings as between the three types of machines sold. This situation does not exist in the present appeal. The facts relating to sales and profits set out in the findings of fact make possible a fair and equitable segregation of the earnings, and when considered together with all the other evidence, enable us to reach a conclusion as to the fair market value of the patents in question at March 1, 1913.

The use of subsequent earnings for the determination of an asset value, at any basic date, is justified, if from past experience and facts definitely known at the time, such earnings might reasonably have been anticipated. Appeal of J. J. Gray, Jr., 2 B. T. A. 672. Considering the circumstances which existed at March 1,1913, as we have previously outlined them, we think the petitioner was in a most favorable position to anticipate the future earnings of these patents; and, therefore, the earnings subsequent to the basic date may be considered in reaching a conclusion as to the value of the patents.

After a careful consideration of all the evidence before us, we have reached the conclusion that the fair value of the two'patents in question at March 1,1913, was $218,000.

At March .1, 1913, patent No. 877,436 had a remaining life of 11 years 10 months and 20 days, and patent No. 956,769 had a remaining life of 14 years 1 month and 1 day. The average remaining life of the two patents at March 1, 1913, was 12 years 11 months and 25 days. The petitioner is entitled to a deduction for the year under consideration, on account of exhaustion of the March 1, 1913, value of its patents, in the sum of $16,787.17.

Judgment will be entered on 15 days’ notice, in accordance with Bule 50.