Trumble v. Commissioner

M. J. TRUMBLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. A. J. GUTZLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. FRANCIS M. TOWNSEND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. TRUMBLE REFINING CO. OF ARIZONA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Trumble v. Commissioner Docket Nos. 8007-8009, 11763, 17492, 26434, 28985, 32151. United States Board of Tax Appeals 14 B.T.A. 348; 1928 BTA LEXIS 2986; November 19, 1928, Promulgated *2986 A composite March 1, 1913, value determined for license contracts. A. L. Weil, Esq., and F. L. A. Graham, C.P.A., for the petitioners. C. H. Curl, Esq., and I. R. Blaisdell, Esq., for the respondent. MILLIKEN *348 In these proceedings, which were consolidated for trial, the petitioners seek redeterminations of the deficiencies which respondent has asserted for the years and in amounts as follows: Petitioner Docket No. Year Deficiency M. J. Trumble [1918] $8.76 [1919] 444.65 [1920] 847.33 28985 [1922] 2,513.68 A. J. Gutzler [1918] 49.98 [1919] 415.98 [1920] 697.91 Francis M. Townsend [1918] 31.58 [1919] 424.41 [1920] 584.31 Trumble Refining Co. of Arizona 11763 [1918] 25,150.19 17492 [1920] 26,604.39 [1921] 28,885.12 26434 [1922] 5,431.85 32151 [1923] 5,431,85 In Docket Nos. 8007, 8008, 8009, and 28985, the petitioners allege error in respondent's action in holding that distributions made to them by the Trumble Refining Co. were ordinary dividends subject to tax. Further allegations of error were made in Docket Nos. 8007, 8008, and 8009, but these*2987 were withdrawn at the hearing of April 22, 1927, and before the proceedings came on for trial on the merits. In *349 Docket No. 28985 it is also alleged that respondent erred in disallowing $600, of a total deduction of $1,200, claimed as expense of operating an automobile for business purposes. In Docket Nos. 11763, 17492, 26434, and 32151, the sole question raised is the value of certain license contracts at March 1, 1913, for the purpose of computing the annual deduction for exhaustion. In an amended answer to the petitions in the last mentioned cases, respondent alleges that he erred in fixing the value of the license contracts, as of March 1, 1913, at $160,000; and that said contracts had no value at March 1, 1913, which could be made the subject of an allowance for exhaustion. FINDINGS OF FACT. Docket Nos. 8007, 8008, 8009, and 28985. M. J. Trumble, A. J. Gutzler, and Francis M. Townsend are citizens of the United States and residents of California. During the years in controversy these petitioners received certain moneys by way of distributions made by the Trumble Refining Co. Respondent has held that said distributions constituted ordinary dividends, *2988 and are so taxable to the petitioner. In his return for 1922, M. J. Trumble, Docket No. 28985, claimed a deduction of $1,200 as the expense of operating an automobile for business purposes. Respondent disallowed one-half the deduction claimed, to wit, $600, on the ground that the automobile was used only "50 per cent of the time" for business purposes. Docket Nos. 11763, 17492, 26434, and 32151. The Trumble Refining Co. of Arizona is an Arizona corporation with its principal office at Los Angeles, Calif. On April 12, 1911, the Trumble Refining Co. and its stockholders, Milon J. Trumble, Francis M. Townsend, A. J. Gutzler, and John H. Randolph, entered into an agreement with the Esperanza Consolidated Oil Co. (name changed in 1912 by court decree to General Petroleum Co.), which had for its purpose the acquisition by the Oil Company of an interest, through the purchase of stock in the Refining Company. Under its terms, the Refining Company sold 200,000 shares of its preferred and 800,000 shares of its common capital stock to the Oil Company for $25,000 cash, and the stockholders sold 200,000 shares of common and 800,000 shares of preferred capital stock of the Refining*2989 Company to the Oil Company for $50,000 cash. The agreement recites that at the date thereof the authorized capital stock of the Refining Company consisted of 1,000,000 shares of preferred and 4,000,000 shares of common, all *350 of the par value of $1 per share, of which there were outstanding 600,000 shares of preferred and 2,400,000 of common. The agreement reads in part as follows: WHEREAS, according to the representations made by the Refining Company, the Stockholders and the Inventor to the Oil Company, the Inventor has invented valuable machines, apparatus and processes for the evaporation and refining of petroleum and other oils and liquids and gas, and patents for the same have been issued, and applications for other patents for the same are now pending, and the Inventor has assigned the same to the Refining Company, and contemplates and intends to assign to the Company further improvements and processes, in any manner relating to the same, which may from time to time hereafter be invented by him; and WHEREAS, it is deemed by the Refining Company to be for the advantage of the Refining Company that the Oil Company shall become a stockholder in the Refining Company, *2990 relying on the representations made to the Refining Company by the Oil Company that the Oil Company will aid and assist the Refining Company in pushing the business of the Refining Company, and will do everything in its power to further the interests of the Refining Company; and WHEREAS, as a further consideration for the sale of the stock agreed to be sold to the Oil Company by the Stockholders at the price and at the times hereinafter provided, it is deemed by the Stockholders to be for the advantage of the Stockholders that the Oil Company shall become a stockholder in the Refining Company, relying on the representations made to the Stockholders by the Oil Company that the Oil Company will aid and assist the Refining Company in pushing the business of the Refining Company and will do everything in its power to further the interests of the Refining Company; and WHEREAS, the Oil Company, relying upon the representations made to it, as hereinabove stated, deems it to be for its advantage to become interested in the Refining Company as a stockholder thereof. During the negotiations which resulted in the aforementioned agreement, the representatives of the Oil Company orally represented*2991 to the representatives of the Refining Company that the Oil Company was entering upon the development of a large acreage of new oil land and into the field of refining crude oil; that it was building a pipe line to deliver 30,000 barrels of oil a day at Los Angeles or in the vicinity thereof; that in its operations a very large use would be made of the apparatuses and processes covered by the patents of the Refining Company, which the Oil Company would use exclusively; and that license agreements for the use of such apparatuses and processes by the individual refining plants would be obtained as such plants were erected. The purchase prices stipulated in the agreement to be paid by the Oil Company to the Refining Company and its stockholders for the capital stock acquired from them were fixed after due consideration of these oral representations and were based largely thereon. Under dates of July 4, 1911, and September 5, 1911, there were issued to Milon J. Trumble, United States Letters Patent Nos. 996,736 and 1,002,474, respectively. The first mentioned patent *351 covered the invention of an evaporator for petroleum oils or other liquids, and the later patent covered*2992 the invention of an apparatus for refining petroleums. In 1911, these patents were assigned by Trumble to the Trumble Refining Co. The following is a brief resume of license agreements entered into by the Trumble Refining Co. with other companies, between September 27, 1910, and June 11, 1913: Date of agreement Licensed under patent No. Term of agreement Royalty 1. Petroleum Development Co Sept. 27, 1910 553,656 Life of Patent $0.03 per bbl. 2. Coalinga National Oil Co July 10, 1911 996,736 Life of Patent .02 per bbl. 996,736 3. John R. Ott Contracting Co Feb. 15, 1912 1,002,474 Life of Patent .05 per bbl. 4. General Petroleum Co. (Sibyl Lease-Taft). Mar. 15, 1912 996,736 10 Years .01 per bbl. 5. Recovery Oil Co Mar. 18, 1912 996,736 2 Years .01 per bbl. 6. General Petroleum Co. (Nevada-Midway). May 15, 1912 996,736 5 Years .01 per bbl. 7. General Petroleum Co. (Olinda) June 26, 1912 996,736 2 Years .01 per bbl. 8. General Petroleum Co. (Brea Canyon). June 26, 1912 996,736 2 Years .01 per bbl. 996,736 9. General Petroleum Co. (Kerto, Taft) Aug. 28, 1912 1,002,474 Life of Patent .01 1/2 per bbl. 10. Santa Maria Oil Fields of California, Ltd. Sept. 28, 1912 996,736 Not stated .02 per bbl. 996,736 Not stated 1 .02 per bbl. 11. Warner Quinlan Asphaltum Co Oct. 26, 1912 1,002,474 Not stated 2 .01 1/2 per bbl. 12. Pacific Crude Oil Co Nov. 30, 1912 996,736 Life of Patent .01 1/4 per bbl. 996,736 Life of Patent 3 .02 1/2 per bbl. 13. American Union Oil & Refining Co Jan. 8, 1913 1,002,474 Life of Patent 4 .01 1/2 per bbl. 14. Santa Maria Oil Fields of California Ltd. Feb. 8, 1913 1,002,474 Not stated .00 1/2 per bbl. 996,736 Life of Patent 15. General Petroleum Co. (Los Angeles). June 11, 1913 1,002,474 Life of Patent .01 1/2 per bbl. 996,736 16. General Petroleum Co. (Mojave) June 11, 1913 1,002,474 Life of Patent .01 1/2 per bbl. In 1915, the Trumble Refining Co. sold its patents to W. Meischke-Smith for $1,000,000 cash, the company reserving to itself, however, all rights under the above listed license agreements and all royalties which might thereafter accrue under those agreements. The Petroleum Development Co. has been merged with the Chancellor-Canfield Midway Oil Co., a subsidiary of the Atchison, Topeka & Santa Fe Ry. Co. The Income Tax Unit of the Bureau of Internal Revenue has determined the net oil reserves of the Chancellor-Canfield Midway Oil Co. as of March 1, 1913, to have been 55,519,171 barrels. At March 1, 1913, the General Petroleum Co. held in fee, under lease and under contract, 23,694.04 acres of land in California, and held under lease 24,493.68 acres in the Republic of Mexico. These lands were being developed as rapidly as possible, and on the date stated there were 160 producing wells on the California lands, 6 more wells were being brought in, and 26 additional wells were being drilled. From the Midway Fields to Los Angeles there had been*2994 constructed *352 158 miles of pipe lines. Construction of a spur at Mojave, Calif., of a refinery at Kerville, in the Midway Field, and of a refinery with a capacity of approximately 20,000 barrels per day at Vernon, had been completed, and a 20,000-barrel refinery was in course of construction at Mojave. The company owned four 10,000-ton ships, and had arranged through Andrew Weir, who held a large interest in the company and was also a large shipowner in England, for charters of other ships. The company had approximately 202,000 barrels of oil in storage, and was producing about 8,500 barrels per day from its own wells and handling an additional 7,000 barrels per day under purchase contracts. In 1923 the Income Tax Unit of the Bureau of Internal Revenue determined that at July 11, 1916, the net oil reserves in the lands held by the General Petroleum Co. on March 1, 1913, amounted to 32,896,058 barrels. In arriving at the net reserves the Income Tax Unit deducted royalty oils of 37,789,004 barrels. Between March 1, 1913, and July 11, 1916, there were extracted from these same lands 13,314,841 barrels of oil. The following is a statement of the total capacity, based*2995 upon the patented facilities in use and in course of construction at March 1, 1913, of each of the licensees' plants, from March 1, 1913, to the termination of their respective agreements, the number of barrels of oil actually treated by each of the licensees between March 1, 1913, and January 1, 1928, and the royalties earned between those same dates: Total capacity Oil actually treated Royalties earned Barrels Barrels 1. Petroleum Development Co 50,640,875 3,601,622 $61,605.77 2. Coalinga National Oil 10,357 207.13 3. John R. Ott Contracting Co 4. General Petroleum Co. (Sibyl Lease, Taft) 730,000 244,990 2,449.90 5. Recovery Oil Co 61,000 610.00 6. General Petroleum Co. (Nevada-Midway) 1,825,000 200,515 2,005.15 7. General Petroleum Co. (.olinda) 1,368,750 588,458 5,884.58 8. General Petroleum Co. (Brea Canyon) 79,006 790.06 9. General Petroleum Co. (Kerto, Taft) 5,884,000 253,041 3,874.59 10. Santa Maria Oil Fields of California, Ltd 11,680,000 1,097,638 25,614.80 11. Warner Quinlan Asphaltum Co 11,315,000 1,366,990 25,137.34 12. Pacific Crude Oil Co 28,297,000 13. American Union Oil & Refining Co 5,657,500 9,632 292.60 14. Santa Maria Oil Fields of California, Ltd 15. General Petroleum Co. (Los Angeles) 109,500,000 129,045,113 1,935,676.69 16. General Petroleum Co. (Mojave) 54,750,000 21,294,225 226,231,23 Totals 281,648,625 157,852,587 2,290,379.84 *2996 The agreements with the General Petroleum Co. of August 28, 1912; with the Santa Maria Oil Fields of California, Ltd., of September 28, 1912; with the Pacific Crude Oil Co. of November 30, 1912; with the American Union Oil & Refining Co. of January 8, 1913; and with the General Petroleum Co. of June 11, 1913, being the agreements numbered above 9, 10, 12, 13, 15, and 16, provide *353 that the licensees shall use the patented apparatus of the Trumble Refining Co. to the exclusion of all other methods and processes for treating oils. In February, 1913, Francis M. Townsend, president of the Trumble Refining Co., sold 1,000 shares of the common capital stock of that company for $500 to A. L. Weil, a director of the company and general counsel of the General Petroleum Co. At March 1, 1913, the outstanding capital stock of the Trumble Refining Co. was 800,000 shares of preferred and 3,200,000 shares of common, all of the par value of $1 per share. Respondent has fixed the value of these license agreements, as of March 1, 1913, at $160,000 and, in computing net income of the Trumble Refining Co. for the years on appeal, has allowed an annual deduction for exhaustion of the*2997 agreements based upon that value. OPINION. MILLIKEN: The issues raised in Docket Nos. 8007, 8008, 8009, and 28985 will be disposed of first. These petitioners complain of respondent's action in including in net income of the years in controversy as ordinary dividends subject to the tax, the entire amounts received in those years as distributions from the Trumble Refining Co. of Arizona. It is contended that a portion, if not all, of such distributions were in fact liquidating dividends or a return of capital not subject to tax. The allegations of the petitions are specifically denied by the respondent in his answers. No evidence was offered by the petitioners in support of those allegations. Under the circumstances, we may not disturb the action of the respondent of which petitioners complain. In the case of M. J. Trumble, Docket No. 28985, it is further alleged that respondent erred in disallowing $600 of a total deduction of $1,200 claimed in the return for 1922, as expense of operating an automobile for business purposes. No evidence was offered by the petitioner in support of the material averments of his petition. We are unable, therefore, to find error in respondent's*2998 action. In the appeals of the Trumble Refining Co. of Arizona, Docket Nos. 11763, 17492, 26434, and 32151, the sole question raised is the value of certain license contracts at March 1, 1913, for the purpose of computing the annual deduction for exhaustion. The petitioner claims a total value for these contracts at March 1, 1913, of $1,400,000. The respondent has computed the annual deductions for exhaustion upon the basis of a March 1, 1913, value for the contracts of $160,000. In an amended answer, respondent alleges error in the value previously determined by him, and asserts that they were without any *354 value at the basic date which might be made the subject of an allowance for exhaustion. We are not certain of the position of the respondent in this proceeding. At the hearing, counsel filed an amended answer alleging error in allowing a March 1, 1913, value for the contracts of $160,000 and that the contracts had no value as of March 1, 1913, which was or is subject to exhaustion allowances under the Revenue Acts of 1918 and 1921. We will proceed upon the understanding that only a question of fact is involved, i.e., the March 1, 1913, value of the contracts*2999 in question. Counsel for respondent in brief filed does not contest the legal right to an exhaustion allowance if the contracts did in fact have an ascertainable value on March 1, 1913, or the long line of Board decisions wherein allowances have been claimed before and allowed by us. Petitioner has offered proof of the value claimed for the contracts along three lines: First, evidence as to a certain transaction which occurred in February 1913, in which 1,000 shares of its common capital stock was exchanged between two individuals for a cash consideration; secondly, evidence of existing circumstances and conditions at March 1, 1913, as the basis of prognosticating the future earnings under these agreements; and, thirdly, the actual results obtained under these contracts to the beginning of the present year. The stock transaction referred to is that in which Francis M. Townsend, president of petitioner company, sold to A. L. Weil, a director of petitioner and general counsel of the General Petroleum Co., in February 1913, 1,000 shares of petitioner's common capital stock for $500 cash. The petitioner relies upon this transaction as establishing a value of 50 cents per share*3000 for the entire 3,200,000 shares of common stock outstanding at March 1, 1913, and then reasons that "If the common stock had a value of 50 cents a share, the preferred shares were necessarily worth par [$800,000], and therefore the value of the outstanding stock at the time of the sale, which was just prior to March 1, 1913, was $2,400,000." From this sum, the petitioner deducts $1,000,000, the selling price of the patents in 1915, leaving $1,400,000 which it claims represents the March 1, 1913, value of the rights under the license contracts. The obstacles to accepting this line of reasoning or method of valuation are insurmountable, for the reasoning or method lacks the support of proven facts and takes too much for granted. The stock involved in this transaction was but one thirty-second of 1 per cent of the common stock, and only one-fortieth of 1 per cent of all the stock, outstanding at the basic date. To conclude that the selling price of this negligible quantity of stock fixes the fair market value of all the stock, both common and preferred, notwithstanding the utter lack of proof in that direction, requires the indulgence in assumptions as to diverse factors affecting*3001 *355 the marketability of 4,000,000 shares of stock and the rights of pre ferred shareholders, which we are unwilling to make. The method requires the further assumptions, wholly without proof of facts upon which to premise them, that the March 1, 1913, value of the patents was neither greater nor less than the selling price in 1915, and that the petitioner, though apparently manufacturing all of the patented apparatus for its licensees, had no assets of value other than the patents and license contracts. Further, it is a matter of common knowledge that the selling price or fair market value of the capital stock of a corporation frequently bears no relation to, and is not a reliable index of, the intrinsic value of the assets behind it; and, for aught that we may know, this case offers no departure from such a situation. Other methods of valuing the rights under the license agreements as of March 1, 1913, are suggested by the petitioner, but, like the first, they depend too greatly upon the most optimistic speculation and their bases lack the essential support of proven facts. One of these is based upon the total number of barrels of oil which the licensees, with the facilities*3002 in use or in course of construction at March 1, 1913, would be able to treat between that date and the tetmination of their respective agreements, that is, 281,648,625 barrels. The petitioner deducts from this number 25 per cent thereof to take care of probable losses from casualties, strikes, fires, and the risks of operation, and by prorating the remainder, 211,236,469 barrels, among the 16 agreements and applying the applicable royalty rates, it determines that the anticipated future earnings, at March 1, 1913, were $3,208,222.03. This sum is then discounted to its present value, at March 1, 1913, by the application of Hoskold's formula, the petitioner finally arriving at a value of $2,175,078.29. This method is offered to us with the suggestion that "It is well known that refinery units are expensive to erect, and it cannot be presumed that parties will actually build plants that are larger than they have an economic use for." Nevertheless, the record shows that the plants of the 16 licensees were capable of treating a total of 281,648,625 barrels between March 1, 1913, and the termination of their agreements, but that they actually treated up to January 1, 1928, only 9 months*3003 prior to the expiration of the patents and termination of all agreements, only 157,852,587 barrels, just 56 per cent of their possible capacity; and, if we leave out of the reckoning the two plants of the General Petroleum Co. at Los Angeles and Mojave, which were not completed until after the basic date, we find that as against a total rated capacity for the 14 plants of the other licensees, of 117,398,625 barrels, those plants, with but 9 months remaining for their agreements *356 to run, actually treated only 7,513,249 barrels, just approximately 7 per cent of possible production. It does not appear that this wide difference between possible production and actual production is entirely due to the result of conditions which arose after March 1, 1913, and which could not have been foreseen at that date. In the case of the Pacific Crude Oil Co., the possible production with the facilities at hand at March 1, 1913, to the termination of its license agreement, amounted to 28,297,000 barrels, but the record shows that not a single barrel of oil was treated by this company to the beginning of 1928, although it was obligated under its agreement to use the petitioners' patented*3004 apparatus for the treatment of oil to the exclusion of all other methods and processes. The American Union Oil Co. had facilities at March 1, 1913, capable of treating, from then to the termination of its agreement, 5,657,500 barrels of oil, but up to the beginning of 1928 it had actually treated only 9,632 barrels of oil, approximately one-sixth of 1 per cent of possible production, though it too was obligated to use the petitioner's patented apparatus for treating oil exclusively. Hardly less striking is the case of the Petroleum Development Co., with facilities at March 1, 1913, capable of treating, to the termination of its agreement, 50,640,875 barrels, though up to the beginning of the present year it has actually treated only 3,601,622 barrels, approximately 7 per cent of possible production. The Pacific Crude Oil Co., without production of a single barrel of oil during its agreement, could not have been treating, or have been in a position to treat oil with petitioner's patented apparatus at March 1, 1913; while the American Union Oil Co. and the Petroleum Development Co., with facilities of a rated capacity of approximately 1,200 barrels and 11,000 barrels per day, respectively, *3005 have had an approximate average daily production of but 3 and 770 barrels, respectively; and there is not a bit of evidence that the facilities of the last two mentioned companies were being used to any great extent at March 1, 1913, or that there was any prospect, at that date, of any greater use in the future. Another method suggested by petitioner is based upon the quantity of oil being handled by the General Petroleum Co. at March 1, 1913, as the result of production from its own wells and oil acquired under purchase contracts, and the net oil reserves of the Chancellor-Canfield Midway Oil Co. with which the Petroleum Development Co. was merged, though the time of the merger does not appear in the record. At March 1, 1913, the General Petroleum Company was producing about 8,500 barrels of oil per day from its own wells and was handling an additional 7,000 barrels per day under purchase contracts. At the same date, the net oil reserves of the *357 Chancellor-Canfield Midway Oil Co. amounted to 55,519,171 barrels. Based on these facts, the petitioner suggests that an estimate at March 1, 1913, of the total amount of oil which the General Petroleum Co. and the Petroleum*3006 Development Co. would treat until the expiration of their agreements would have been 143,210,421 barrels. To this quantity the petitioner applies a royalty rate of 1 1/2 cents per barrel, and thereby determines that the expected future royalties from these companies amounted to $2,148,156.31. This sum is then discounted to its present value, at March 1, 1913, by the application of Hoskold's formula, the petitioner finally arriving at a value of $1,456,385.53. There are several objections to the suggested method. There was placed in evidence a resume of the 12 contracts under which the General Petroleum Co. was purchasing oil at March 1, 1913. Of these 12 contracts, 6 expired during 1913, 3 expired during 1914, 1 expired in 1916, the term of another is not shown, and 1, the contract with the Ohio Valley Construction Co., does not expire until June 16, 1930. Whether there have been renewals of the contracts which have expired, or what the prospects for such renewals were at March 1, 1913, does not appear in the record. The contract with the Ohio Valley Construction Co. calls for the purchase of 500,000 barrels of oil and all production thereafter to the termination of the*3007 contract. There is no evidence as to the probable amount of oil which the General Petroleum Co. would acquire under this contract. The estimate of the total quantity of oil which would be treated by the General Petroleum Co. and the Petroleum Development Co. includes 55,519,171 barrels for the Petroleum Development Co., which represent the net oil reserves of the Chancellor-Canfield Midway Oil Co. at March 1, 1913. There is no evidence whether the merger of the Petroleum Development Co. with the Chancellor-Canfield Midway Oil Co. took place before or after March 1, 1913, or, if after, whether such a merger was contemplated at that date. Further, there is nothing to show that there was any probability, at March 1, 1913, that the entire oil reserves of the Chancellor-Canfield Midway Oil Co. would be extracted and treated prior to the expiration of the license agreement. With the foregoing observations we reject the several methods of valuation suggested by the petitioner. There is much, however, in the evidence which convinces us that the license contracts had a considerable value at March 1, 1913. Both the president of the General Petroleum Co. and the president of petitioner, *3008 who represented their respective companies in the negotiations, testified that the General Petroleum Co., then known *358 as the Esperanza Consolidated Oil Co., as an inducement to the petitioner to enter into the agreement of April 12, 1911, by which for a nominal cash consideration the Petroleum Company acquired a one-third interest in the petitioner, represented to the petitioner that it was entering upon the development of a large acreage of new oil land, that it was building a pipe line to deliver 30,000 barrels of oil per day at Los Angeles, that it proposed to use the patented apparatus of the petitioner exclusively for the treatment of this oil, and that license agreements for the use of such patented apparatus by its individual refining plants would be obtained as such plants were erected. The agreement itself supports the testimony of these two witnesses that the cash consideration stipulated therein was not the sole consideration, for it makes specific reference to represenatations made by the parties to each other; and the subsequent actions of the Petroleum Company, which are entirely in line with these representations, corroborates the testimony of these witnesses. *3009 There can be little doubt that out of these representations there arose obligations on the part of the General Petroleum Co. and rights to the petitioner which were just as binding and enforceable as though they had been specified in detail in the agreement, and not the least of these was the obligation of the Petroleum Company to use the apparatus covered by petitioner's patents exclusively in the treatment of crude oil. At March 1, 1913, the General Petroleum Co. held in fee simple, by lease and by contract, 23,694.04 acres of oil lands in California, and 24,493.68 acres of such lands in the Republic of Mexico. All of these lands were being developed as rapidly as it was possible to do so. Already 160 producing wells had been brought in on the California lands, 6 more were being brought in, and 26 additional wells were being drilled, but all of this represented the development of only 900 acres of its lands. From these producing wells alone, the company was realizing an average daily production of 8,500 barrels of crude oil. In addition to this daily production, the company had approximately 202,000 barrels of oil in storage, and was handling under purchase contracts approximately*3010 7,000 barrels of oil per day. An investigation of its lands by the Income Tax Unit led to the determination that the company's oil reserves at July 11, 1916, in lands which it held at March 1, 1913, was 32,986,058 barrels, but in arriving at this figure there were deducted royalty oils of 3,789,004 barrels. Between March 1, 1913, and July 11, 1916, there were extracted from these same lands 13,314,841 barrels of oil. Thus, at March 1, 1913, the General Petroleum Co. was in possession of oil reserves amounting to 49,999,903 barrels, which it was then bringing to the surface at the *359 rate of 8,500 barrels per day; but it had already adopted the policy of rapid development of its other lands, a policy which was being carried into effect at the date stated. As a matter of fact, the average daily production between March 1, 1913, and July 1, 1916, amounted to approximately 14,000 barrels. The company already had in operation five plants, the patented facilities of which were capable of treating to the termination of the agreements approximately 10,000,000 barrels of oil. The pipe line had been completed to los Angeles, where, and at Mojave, refineries were under construction. *3011 Both of these refineries were located in accordance with petitioner's recommendations, were designed by the petitioner, and were being constructed under petitioner's supervision. The combined facilities of these two refineries when completed were capable of treating, during the life of the license agreements, approximately 164,000,000 barrels of oil, and there were actually treated in those plants up to the beginning of 1928, when the agreements had approximately nine months to run, 157,852,587 barrels of oil, which yielded to petitioner royalties of $2,161,907.92. There is little of evidence as concerns existing conditions at March 1, 1913, in the case of the other licensees. As to them we know nothing more than the possible production of their facilities from March 1, 1913, to the termination of their agreements, the actual production up to the beginning of the present year, and the royalties paid to petitioner by those licensees. The facts given to us are not readily adaptable to the application of any mathematical formula as a means of checking the reasonableness of our own judgment. Recognizing all the facts in existence or in contemplation on March 1, 1913, we have*3012 sought to determine what a willing buyer and willing seller, without any compulsion to act in the matter but purely in their own mercenary interests, would fix upon as a fair price for these agreements at the date stated. We have disregarded none of the evidence, but have given all of it due consideration, and have reached the conclusion that these license agreements had a fair market value at March 1, 1913, of $850,000. Since the average life of these agreements, at March 1, 1913, was 11 years, 8 months, 20 days, the petitioner is entitled to a deduction for exhaustion for each of the years in controversy, in the amount of $72,511.90. Judgment will be entered under Rule 50. Footnotes 1. For grade D Asphaltum. ↩ 2. For asphaltum oils for road-making purposes. ↩ 3. For 4 refined cuts. ↩ 4. For 2 refined cuts. ↩