Court Opinion

ID: 4603122
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:31:17.476428+00
Date Added: 2024-06-11T07:52:47.682167
License: Public Domain

NIAGARA SEARCHLIGHT CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Niagara Searchlight Co. v. CommissionerDocket No. 9505.United States Board of Tax Appeals10 B.T.A. 922; 1928 BTA LEXIS 4000; February 21, 1928, Promulgated *4000  1.  Commissioner's disallowance of depreciation on patents, is, in the absence of proof as to their cost or use within the taxable year, approved.  2.  Petitioner received 545 shares, par value $100, of Niagara Sales Corporation stock for which it paid $25,000 in cash and assigned to that corporation the right to sell the products which petitioner manufactured.  The Commissioner determined that petitioner derived a profit of $29,500 from the transaction.  On the evidence it is held that the stock of the Niagara Sales Corporation had no fair market value, at the time of its receipt by petitioner, in excess of $25,000, the amount of cash paid therefor by petitioner, and that the petitioner derived no taxable gain from the transaction.  3.  Commissioner's determination that petitioner and Niagara Sales Corporation were not affiliated is approved.  R. Max Eaton for the petitioner.  Shelby S. Faulkner, Esq., for the respondent.  LOVE *922  This proceeding is for the redetermination of a deficiency of $5,340.70 in income and profits tax for the calendar year 1920.  The petitioner alleges that the Commissioner in determining the deficiency erred*4001  in the following particulars: 1.  In disallowing as a deduction from gross income the amount of $742.82 on account of depreciation on patents acquired subsequent to March 1, 1913.  2.  In determining that petitioner derived a profit of $29,500 from the purchase of 545 shares of stock of the Niagara Sales Corporation and in increasing taxable income for 1920 by that amount.  *923  3.  In determining that petitioner and the Niagara Sales Corporation were not, during the year 1920, affiliated.  FINDINGS OF FACT.  The petitioner is a New York corporation with its principal place of business at Niagara Falls.  It was during the year 1920 engaged in the manufacture and sale of electric flashlights.  Prior to 1920 and subsequent to March 1, 1913, petitioner acquired certain patents by assignment from Eaton, who was its president in 1920 and subsequent years. Patent No. 994094 granted unto Eaton on May 30, 1911, was assigned by him to petitioner on April 13, 1914.  Patent No. 1094839 was, upon Eaton's assignment of his rights under a petition for a patent, issued to petitioner on April 1, 1914.  A Canadian patent No. 159767 was issued to the petitioner on December 29, 1914, Eaton*4002  first having assigned his rights in and to the same to petitioner herein.  Other patents were issued to petitioner, upon assignment, at different times.  In 1920, an officer of the petitioner organized a corporation, The Niagara Sales Corporation, to act as a selling agent for the petitioner's products.  The Niagara Sales Corporation was capitalized for $100,000, having 1,000 shares of $100 par value nonassessable stock.  Its stock subscribers, except the petitioner, were all employees of the corporation and no stock was ever sold to or held by anyone else.  Stock of the Niagara Sales Corporation was issued as follows, being the original issue: SharesAmount paidNiagara Searchlight Corporation545$25,000, and an assignment of right to sell its products.P. C. Smalley (manager)100No consideration.S. Carl Kapff (secretary)50$5,000.Nelson Clark (salesman)35$3,500.L. R. Middleman (salesman)5Subscribed but not paid for.Kapff and Clark were influenced to buy their stock by reason of the fact that they were employees and felt more secure in their positions.  Smalley paid no consideration for his stock.  The money for*4003  his stock was advanced by petitioner so that he would be instrumental in getting Kapff and Clark to buy.  Petitioner paid $25,000 in cash and also assigned to the Niagara Sales Corporation the right to sell its products and received therefor 545 shares of stock.  The assignment was made in order to comply with the law of New York that the stock received be fully paid up and nonassessable.  On many occasions petitioner attempted to dispose of the stock of the Niagara Sales Corporation and found no market for it whatever.  *924  The Niagara Sales Corporation had no assets other than the amount paid in for its stock and it has since ceased to function as it was a failure from its inception.  Upon audit of petitioner's return for 1920, the Commissioner disallowed as a deduction the amount of $742.82 for depreciation on patents and he determined that the 545 shares of stock of the Niagara Sales Corporation had a market value of $54,500 and that the petitioner had realized a profit of $29,500 since the assignment was given for stock in this amount.  Accordingly, petitioner's taxable income was increased by that amount.  OPINION.  LOVE: At various times subsequent to March 1, 1913, the*4004  petitioner acquired certain patents.  The record does not disclose whether the patents so acquired were paid for in stock or cash and if in stock, the value of the stock at the time of acquisition.  Nor does the record disclose whether during the taxable year in question the patents were in use.  Consequently, on the record made, we must approve the Commissioner's action in disallowing any deduction for depreciation thereon.  The next question for consideration is whether petitioner realized the amount of $29,500 or any amount as profit from the transaction whereby it acquired 545 shares of stock of the Niagara Sales Corporation in exchange for $25,000 in cash and an assignment of the right to sell its products.  Upon a careful examination of all of the evidence adduced, we are convinced that the 545 shares of stock acquired by petitioner were issued solely in consideration of the amount of $25,000 in cash.  The assignment of the right to sell its products was, we believe, of no consequence in determining a gain, because, as far as we can determine, such right had no value.  We are further convinced by the evidence that the stock of the Niagara Sales Corporation did not have*4005  a fair market value of $100 per share or any value in excess of $45.87 per share, being the amount paid therefor by petitioner, considering that 545 shares were purchased for $25,000.  Accordingly, the Commissioner's action in increasing petitioner's taxable income for 1920 by the amount of $29,500 is reversed.  No evidence was offered with respect to petitioner's allegation that it was affiliated with the Niagara Sales Corporation, and there is nothing in the record which warrants us in disturbing the Commissioner's determination is regard thereto.  It is, therefore approved.  Judgment will be entered on 15 days' notice, under Rule 50.