Court Opinion

ID: 4497450
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:26.140153+00
Date Added: 2024-06-11T14:54:14.943864
License: Public Domain

*594OPINION.
Smiti-i:
(1) The first question presented is whether the patent rights paid in to a -corporation in 1912 in exchange for $15,000 special ” capital stock had a cash value in 1912, which cash value was lost in 1919. The evidence indicates that the value of the patent rights was problematical. The inventor had received an offer for a controlling interest in the patents in 1910 or 1911 of $25.000 and had rejected it. The rights were turned in to the corporation under an agreement whereby 50 per centum of the capital stock was to be issued for the rights and designated as “ special ” capital stock, and 50 per centum of any increase in the number of shares of capital stock outstanding should be received by the inventor as a part of the consideration for those patent rights. Section 10 of the taxpayer’s certificate of incorporation provided in part:
10. * * * The said One Hundred and Fifty shares of stock, or so much thereof as may be issued, shall always be so kept and identified upon the records of the company that the same may be separated from the other stock of the company no matter into whose hands it may pass. Whenever the said company shall finally abandon the manufacture and sale of the articles covered' by the aforesaid patents such abandonment shall be tantamount to the payment to the then holders of the issued portion of said one hundred and fifty shares of stock the par value thereof, provided that the said stock be worth more than par, and shall effect á retirement and cancellation of said shares provided that the said stock be worth not more than par. * * *
It is apparent from the foregoing that the patent rights were pot to be a charge against the entire capital stock of the corporation *595but only against certain shares of stock that were to be specially issued therefor. The taxpayer found that the manufacture of the patented articles was unprofitable and could not be made profitable, and very shortly after incorporation the manufacture of them was discontinued. The special stock, however, was not immediately returned to the inventor. In 1918, the special stock was replaced by shares of capital stock which had the same status as the shares of stock not specifically issued for the patents. We are of the opinion that the evidence does not warrant a finding that the patent rights had any cash value in 1912, and we are furthermore of the opinion that the taxpayer sustained no loss in 1919 as a result of any discovery that the patent rights were worthless.
(2) The taxpayer took its inventories of new cars, tractors, and implements on the basis of cost or market, whichever was lower. Its inventory of used cars was taken on the basis of market.values which were uniformly less than the “trade-in” values. In the absence of evidence that the inventories of used cars were taken at more than the market the taxpayer’s determinations of such market values are approved. At the hearing of this case a witness for the taxpayer was asked as to how all the inventories of accessories and items were taken. His answer was:
A. Well, accessories; .there are always new accessories coming out, and the ones that we have become obsolete and out of date, and we cannot sell them always when the new things come out, and naturally we have to consider that we have some of these which are shop worn, especially tires and tubes and things of that sort, but especially tires, as there are different sizes, different sizes of wheels; the wheels are being changed every year by the automobile business, different sizes coming out, and this makes quite a difference in the size of the tire, so that naturally the tires that we have on hand become obsolete and deteriorate.
Q. How did you price your inventory on accessories and miscellaneous items?
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A. We take the regular inventory price less' the discount, we would discount the cost, then we would go over the whole inventory, make a summary of all of the different items that we thought were right, and take a depreciation for this amount. In this instance, we arrived at about 10 per cent, which really will not cover it.
We are not convinced from this testimony that the accessories inventory was taken upon the basis of cost or market, whichever is lower. Manifestly, obsolete goods which had no sale value should not have been included in the inventory. A deduction from total inventory based upon an estimate of the decrease in value of the total inventory by reason of the inclusion therein of obsolete and shopworn goods does not necessarily result in bringing the inventory to cost or market, whichever is lower. Upon the record béfore us, we think that the Commissioner was justified in adding to the ac-*596eessories inventory at the close of the years 1918, 1919, and 1920, $2,129.76, $1,886.26, and $3,687.97, respectively, on account of such depreciation made by the taxpayer. Appeal of Farmers’ Hardware Co., 2 B. T. A. 90; Appeal of Pleasant Valley Ranch Co., 2 B. T. A. 335; Appeal of Alexander Reid & Co., 2 B. T. A. 425; Appeal of J. Van Lindley Orchard Co., 2 B. T. A. 1084.

Order of redetermination will be entered on 15 days’ notice, under Rule 50.