Court Opinion

ID: 4630070
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:06:42.893843+00
Date Added: 2024-06-11T07:57:28.645954
License: Public Domain

TRACY V. BUCKWALTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Buckwalter v. CommissionerDocket No. 33957.United States Board of Tax Appeals20 B.T.A. 1005; 1930 BTA LEXIS 1994; September 25, 1930, Promulgated *1994  1.  March 1, 1913, value of certain patents determined for exhaustion purposes.  2.  The petitioner is entitled to deduct exhaustion upon that patent found to have been used in his "trade or business" within the meaning of section 214(a)(8) of the Revenue Acts of 1924 and 1926.  3.  As to those patents owned by the petitioner but not used in his "trade or business" within the meaning of said section, he is not entitled to deduct exhaustion thereon.  4.  Amount of loss sustained by the petitioner because of the destruction of an automobile by fire determined and allowed.  Joseph G. Denny, Jr., Esq., for the petitioner.  B. M. Coon, Esq., for the respondent.  MORRIS*1005  The petitioner seeks a redetermination of deficiencies in income tax of $1,407.49 and $2,047.41 for the years 1924 and 1925, respectively, and he sets forth that the respondent has erred in the following particulars: 1.  In failing to allow a deduction for exhaustion of certain patents in the computation of net income for the years 1924 and 1925, based upon the aggregate March 1, 1913, value of $140,000; and 2.  In failing to permit the deduction in 1924 of a loss arising*1995  from the destruction of an automobile by fire, used by him for experimental purposes, and in connection with his business, upon which said automobile no depreciation had therefore been charged.  *1006  FINDINGS OF FACT.  The petitioner, an individual, for many years prior to 1916, was employed by the Pennsylvania Railroad as an engineer in charge of the designing and development of automotive equipment; that is, vehicles other than locomotives and passenger and freight cars.  His duties while so employed required him, among other things, to discover and provide the most economical and satisfactory vehicles for transportation purposes.  In 1916 he first entered the employ of the Timken Roller Bearing Co. as its chief engineer, upon a straight salary basis, and sometime thereafter, while still retaining the general supervision over engineering, he was promoted to the position of vice president of that company, in which capacity he now serves.  Shortly after his employment the company commenced the payment of an annual bonus to the petitioner in addition to his salary.  During his employment with the Pennsylvania Railroad the petitioner invented a tie truck, an axle bearing, *1996  and a combined coupling and steering mechanism, all of which are covered by Letters Patent No. 981,975, issued January 17, 1911; No. 987,854, issued March 28, 1911; and No. 1,024,675, issued April 30, 1912, the first two of which the petitioner is now, and was on March 1, 1913, the sole owner, and he is now, and was on said date, half owner of the last stated patent, having assigned one-half interest therein to Axel S. Vogt, now deceased, as to all of which his former employer, the Pennsylvania Railroad, was licensee, without the payment of royalty, under a plan by which he, the patentee, would retain the ownership of patents taken out by him on new inventions and developments and execute a license in favor of the company permitting operation on its own lines of the articles covered by said patents.  The tie truck, such as is covered by Patent No. 981,975, is for the transportation of railroad ties to be impregnated with creosote, the truck and the load thereon being inserted into a cylindrical barrel, containing creosote, something over six feet in diameter and one hundred feet in length.  Prior to the invention of said truck, trucks for such service were generally constructed of*1997  wrought iron bars or angle iron.  They were flattened and forced out of shape by the impact of ties falling thereon, so that when the trucks, loaded with ties, were rolled into the creosoting tank the malformation interfered with the free movement thereof into the creosoting plant, resulting in frequent delays.  There were also other imperfections in the old type of truck.  It became apparent that there was a demand for an improved truck, which led to the petitioner's invention and patent of a truck with superior strength and design for durability and *1007  economy of construction, combined with convenience in operation, which was of pressed steel construction with box section bolsters and pressed frame members.  The wheels were mounted within the frame members, utilizing the frame member as a housing, which saved the space occupied by the wheels if mounted elsewhere, increasing thereby the cubical capacity of the truck.  The March 1, 1913, value of this patent was $50,000.  The invention covered by Patent No. 987,854, covering an axle bearing, was later developed.  That provided for the mounting of the axles upon roller bearings, permitting free rolling, so that trucks could*1998  be handled without the use of motive power.  This feature was obtained by mounting the axle directly on the bearings in a housing and by mounting the wheels loosely on the axle.  In addition to the free rolling feature this invention was advantageous in that all parts of the bearing and of the axle and bore of the wheel were brought into a centralized zone, rendering the parts subject to even wear.  The construction covered by this patent is particularly adapted to creosoting plants.  The March 1, 1913, value of this patent was $30,000.  The invention embodied in  was the result of a review of the experience of about four years prior to 1910 in the use of electric baggage trucks covered by other patents, and the study of plans at the Pennsylvania Station in New York City.  It was apparent from the conditions under which such trucks operated, that is, long halls, congested passage ways with numerous columns and rather short spacing between the supports of the superstructure of the Pennsylvania Station, that a trailer system to be satisfactory must track exactly.  It was also apparent that a trailer system would be necessary in order to handle the large volume of*1999  baggage and mail.  This system was built around a motor truck so that the parts thereof, such as axles, frames, and steering gear, could be utilized, and, in addition, the combined steering mechanism was superimposed on the steering gear of the trailer truck so as to be actuated by a properly located coupling on the motor truck.  The train of trucks was developed by mounting similar actuating mechanism on the opposite end of the trailer truck to handle succeeding trailers so that a train of indefinite length could be used.  The March 1, 1913, value of the petitioner's one-half interest in this patent was $40,000. The general principle of the trailer truck patent has been adopted by other trailer concerns, with the result that said concerns have been compelled to use Timken roller bearings, resulting beneficially to the Timken Roller Bearing Co., of which the petitioner was an employee.  *1008  The petitioner has received no royalties from the Pennsylvania Railroad upon any of his patents.  While in the employ of the railroad the petitioner was free to license his patents to other interests, and he did in fact grant a license upon  and he received therefrom*2000  in excess of $100,000 in royalties in the course of several years.  After his employment with the Timken Co. in 1916 the petitioner was prohibited from exploiting his patents.  In each of his returns for 1924 and 1925 the petitioner claimed $8,235.28 as a deduction for exhaustion of patents, based upon an aggregate March 1, 1913, value of $140,000 for the three patents hereinbefore discussed.  An eight or nine-year-old, seven-passenger Buick touring car, originally costing the petitioner about $1,825, the manufacture of which model had been discontinued, was destroyed by fire at some time during the taxable year 1924, and the petitioner claimed a deduction therefor in his return for said year of $1,825, which the respondent disallowed.  The petitioner had installed special bearings in the steering gear of said car for experimental purposes in connection with his duties as engineer for the Timken Roller Bearing Co. At times he had shop men run up mileage with the car in connection with his said experiments.  The car was used as a family car during all the time of said experimental work and was used by the petitioner himself for driving back and forth to his work.  The salvage*2001  value of the car at the time it burned was $25.  The petitioner has never claimed a deduction in his tax returns for depreciation upon said car.  OPINION.  MORRIS: The first issue is with respect to the respondent's failure to allow a deduction for exhaustion of certain patents in the computation of net income for the years 1924 and 1925.  Section 214(a)(8) of the Revenue Acts of 1924 and 1926 provides that: (a) In computing net income there should be allowed as deductions: * * * (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.  We have found as a fact that the three patents in question had an aggregate March 1, 1913, value of $120,000, upon which exhaustion may be computed provided the petitioner meets the test prescribed in the section aforesaid.  It is the contention of the respondent that the patents were not used in "the trade or business" of the petitioner and, therefore, no *1009  exhaustion should be allowed.  In so far as Patents Nos. 981,975 and 987,854 are concerned, we believe the respondent is entirely correct.  The petitioner was employed by*2002  the Pennsylvania Railroad for a number of years as a salaried employee, during which time he, in the discharge of his duties as such employee, invented the tie truck and axle bearing embodied in those two patents.  Pursuant to his contract of employment with the railroad company, he retained the ownership of those patents and he executed licenses to his employer, without the payment of royalty.  In 1916 the petitioner entered the employ of the Timken Roller Bearing Co. as a salaried employee and, according to his contract of employment with that company, he was expressly prohibited from exploiting his patents.  It does not appear from the record that he has ever, at any time, received royalties upon these two patents or that they were ever licensed to anyone except his employer.  The mere fact that the patents were used by the corporations with which he was employed does not, in our opinion, constitute use in the petitioner's trade or business within the meaning of the statute, and, therefore, with respect to those two patents he is not entitled to deduct exhaustion.  We entertain a different view, however, with respect to , because it appears that the petitioner*2003  did grant a license thereon to others than his employer and that he had received therefrom in excess of $100,000 in royalties in the course of several years.  We, therefore, are of the opinion that he is entitled to a deduction for exhaustion of this patent based upon the March 1, 1913, value of his one-half interest therein.  The second issue relates to the failure of the respondent to permit a deduction in 1924 of a loss arising from the destruction of an automobile by fire.  Section 214(a)(6) of the Revenue Act of 1924 permits the deduction of: (6) Losses sustained during the taxable year of property not connected with the trade or business * * * if arising from fires, * * * and if not compensated for by insurance or otherwise.  * * * The petitioner testified that he assigned a value of $800 to this car when it was destroyed and that that value was based upon the fact that a similar car, although not as old, sold for $1,000 a few years previously.  The petitioner was asked what a car of this type would have brought in a secondhand market, and he said that although he had made no investigation his estimate would be somewhere around $600.  But, even this figure strikes us as*2004  somewhat optimistic.  At least we are not willing to accept it as a proper statement of the market value.  It is true that he might have found a dealer in automobiles who would have been willing to have allowed him considerably more as a "trade-in value" upon the purchase of *1010  a new car, but, we believe, considering all the facts and circumstances, that $250 is a liberal statement of what such a car would have brought upon resale in the open market.  Deducting the salvage value of $25 from that value, the petitioner is entitled to deduct a loss of $225 in the computation of net income for 1924.  Reviewed by the Board.  Decision will be entered under Rule 50.SMITH SMITH, dissenting: I dissent from so much of the opinion in this case as denies to the taxpayer any deduction for the exhaustion of Patents Nos. 981,975 and 987,854 upon the ground that they were not "used in the trade or business" of the petitioner.  The respondent disallowed the deduction of any amounts for exhaustion of the patents "for the reason that no valuation or cost of said patents has been furnished" as stated in the deficiency notice.  The petitioner testified upon this point as*2005  follows: Now, the inference might be drawn as to why I have not made any effort to sell these patents personally.  Some effort was made shortly after I went with Timken.  I thought it would be an excellent time now to capitalize on some of these patents I had developed while I was in the employ of the Pennsylvania Railroad, but I soon ran up against this proposition.  One of the executives of a large truck company whom I approached in connection with the use of a patent not confined to the bearings which he could use very well on his motor trucks, and he stated something on this order; he says: "You must not think for an instant that you can come in here and expect to exact a royalty from me on account of the use of a radiator patent, when I am paying your company, who is employing you, twenty five dollars for each truck for bearings." Well, I recognized that was an extremely forceful argument, and after giving it due consideration over a considerable period of time, and talking it over with our other executives, I found that it was impracticable - utterly impracticable for me to attempt to capitalize these patents, but rather that I should use them to extend the Timken Company's*2006  business.  We have not made any direct contracts with customers, but they have been led to understand that any use that they wish to make of patents covered by my patents could be made, as long as they used Timken bearings in their product.  I am quite convinced that except for that condition, I would be in a position to realize quite handsomely on these various patents and would have well reached the figures that have been brought out in today's hearing.  Q.  Have you indirectly profited from the utilization of these patented inventions by other companies?  A.  Yes, I have indirectly profited, in addition to a salary the company pays me, they have been in the habit for some ten years or thereabouts of granting a bonus at the termination of the year, which is a substantial percentage of the salary, which I am given to understand covers all of the intangible things, such as the use of patents, entertainment, membership in clubs that I do not use personally, but which I keep up for the entertainment of customers.  * * * What was petitioner's trade or business in 1924 and 1925?  Clearly, he was engaged as an officer of the Timken Roller Bearing Co.  He *1011  had made a name*2007  for himself as an inventor and was valuable to his employer by reason of the patents which he controlled.  His position and at least a portion of his compensation was directly attributable to these patents.  If the petitioner had been engaged in no business in 1924 and 1925, but had simply received royalties upon his inventions, I think he would be entitled to a deduction for the exhaustion of them.  His income was in part derived from them.  I can not see how it was any less derived from them when employed in the manner in which the petitioner was employed.  LOVE and SEAWELL agree with this dissent.