Sneath Glass Co. v. Commissioner

OPINION.

Smith:

This appeal is from deficiencies in income and profits taxes for the years 1917, 1918, and 1919, and presents for determination the questions: (1) Whether the taxpayer is entitled to include in invested capital the depreciated cost of patents assigned to it on January 22, 1917; (2) whether it is entitled to deduct from gross income for each of the taxable years mentioned any amount representing depreciation on such patents; (3) whether it is entitled to include in invested capital the depreciated cost of molds and patterns, the cost of which was charged to expense when acquired; and (4) whether it is entitled to deduct from gross income depreciation in respect of such cost.

The pertinent facts with respect to the acquisition of patents are set forth in the findings of fact. The taxpayer was and is engaged in the manufacture of various articles of glassware. In 1914 or 1915 it started in the manufacture of glassware for kitchen cabinets. In the development of this line of manufacture, A. C. Crimmel, who was the principal stockholder, general manager, and a director of the taxpayer, took out certain patents on a glass sugar bin, distributing cap, and bracket. In 1916 or the early part of 1917 “it was talked over among the directors that the Sneath Glass Co. should own these patents, because if anything would happen I would leave the company, take my patents along, and it (the business) would go to somebody else. When the last patents were issued (April 22, 1916), I decided to give the patents to the Sneath Glass Co.” (Testimony of A. C. Crimmel.)

The patents were assigned to the taxpayer on January 22, 1917, under an agreement, the next to the last paragraph of which is quoted in the findings of fact.

At a meeting of the stockholders of the corporation on January 22, 1917, an increase in the capital stock from $200,000 to $400,000 was voted, and it was provided that the shares of stock representing the $200,000 increase should be issued and delivered to the stockholders, the number of shares to be issued to each being equal to the number of shares then held by such stockholder. No notation was made in the books of the corporation or in the minutes of the stockholders’ meetings which would indicate in any way that the additional shares of stock were issued by reason of the acquisition of patents.

In the light of the facts stated above, the Commissioner holds that the evidence does not warrant a conclusion that the patents were paid in to the corporation for shares of stock. It is his contention that the patents were assigned to the corporation under an agreement by which the corporation obligated itself to pay to Crim-mel a reasonable amount for the use thereof.

On behalf of the taxpayer, it is contended that the patents had great value and that they were in reality paid in to the corporation for shares of stock authorized to be issued on January 22, 1917, or that the patents were paid in to the surplus account, thereby creating a surplus of $200,000, which should be added to invested capital.

In our opinion the evidence does not show that the patents were paid in to the Sneath Glass Co., at January 22, 1917, for shares of stock in that company. Not only is there no book record which would indicate that fact, but the contract which was entered into between the taxpayer and Crimmel argues against such a contention. Apparently the directors of the company desired that the company should own the patents, and Crimmel, 'who was the principal stockholder and who controlled the policies of the corporation, was willing to assign them to it upon condition that it would agree to pay him such an amount for the use of the patents as the board of directors of the corporation should determine was fair and equitable.

It is argued on behalf of the taxpayer that this contract was without force or effect, so far as Crimmel was concerned, and that the promise of compensation to him was only illusory. We do not think that this view is tenable. Crimmel practically controlled the affairs of the corporation. The agreement was a sufficient consideration for the assignment of the patents. The fact that the taxpayer paid nothing under the agreement or that Crimmel waived his claim to receive compensation does not alter the essential character of the agreement.

The alternative proposition of the taxpayer is that if the patents were not paid in to the corporation for shares of its capital stock they were, nevertheless, paid in; that they had great value; and that the corporation is entitled to a paid-in surplus in respect to such value. The evidence with respect to the value of the patents is the value of the shares of stock of the corporation after the issuance of the $200,000 capital stock on January 22, 1917, The taxpayer submits that the fact that the taxpayer filed a Federal capital stock tax return in July, 1917, showing that the fair value of the 4,000 shares then outstanding was $400,000, and the further fact that the estate-tax division of the Bureau of Internal Bevenue found that the value of 96 shares of the capital stock in October, 1917, was $9,600, are proof that the value after January 22, 1917, was $100 per share. It also submits that the fact that the Commissioner found that the invested capital of the corporation for 1917 was only $185,455.60 is proof that the value of the assets of the corporation at December 31, 1916, was .not in excess of $200,000. It is therefore argued that the value of the assets was increased to the extent of $200,000 by the assignment at January 22, 1917, of the patents above referred to.

We are of the opinion that the evidence does not establish the fact that the patents assigned to the corporation under the agreement of January 22, 1917, had a value to the corporation of $200,000. The fact that the Commissioner found that the taxpayer was entitled to an invested capital for 1917 of $185,455.60 is not conclusive as to the value of the capital stock of the corporation at January 1, 1917. From the findings of fact, it will be noted that the year 1916 was the most prosperous year that the corporation ever had (at least to 1920), the net income for the year being $111,751.09, or practically twice as much as it had been in 1913 or in 1915. The testimony of Crimmel was to the effect that the sugar bin was still manufactured out of tin in 1916. Therefore it must be assumed that the profits of the year 1916 were not in large part attributable to the manufacture of glass sugar bins.

Whatever may have been the facts with respect to the value of the patents if they had been assigned outright to the taxpayer, we do not think that the evidence establishes that they had a value to the corporation under the agreement of January 22, 1917. The profits of the years 1917, 1918, and 1919 were apparently due in part to the fact that the taxpayer was never required to pay anything for the use of the patents during those years. This fact could not have been foreseen by the taxpayer at January 22, 1917.

The second contention of the taxpayer is that it should be entitled to deduct from gross income for the years 1918 and 1919 a reasonable amount representing depreciation of the cost to the taxpayer of the patents in question. We are of the opinion, however, that the evidence does not establish that they cost the taxpayer anything and, accordingly, that it has not established its claim to a deduction for depreciation in respect of them.

The taxpayer contends that prior to 1917 it had expended $18,-032.76 for the manufacture or purchase of molds and patterns, and that no part of this amount was included by the Commissioner in invested capital for the years 1917, 1918, and 1919. The evidence shows that some of these molds and patterns last from a day or two to five years; that the corporation has always charged to expense the cost of the manufacture or purchase of them; and that no capital account has ever been maintained in respect of them.

We are of the opinion that it was entirely proper for the taxpayer'to charge these items as expenses when the molds and patterns were acquired. Conservative accounting would warrant such action. The Commissioner has never raised any question as to the correctness of such treatment. We are therefore of the opinion that the taxpayer is not entitled to include in invested capital any amount representing the estimated cost of the molds and patterns acquired in past years, and that it is not entitled to any deduction from gross income tor the years 1917, 1918, and 1919, in respect of depreciation upon the estimated cost of them.

On consideration by the Board, Sternhagen dissents.