National Water Main Cleaning Co. v. Commissioner

NATIONAL WATER MAIN CLEANING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. National Water Main Cleaning Co. v. Commissioner Docket No. 12140. United States Board of Tax Appeals 16 B.T.A. 223; 1929 BTA LEXIS 2614; April 26, 1929, Promulgated *2614 1. The power to consent to an extension of time for the determination, assessment, and collection of taxes as provided under the revenue acts is within the ordinary functions of a corporation and need not be expressly conferred upon its general officers, and quaere whether the consent is to be treated or construed as a contract and hedged about with the legal rules governing contracts. 2. The Commissioner is authorized to delegate the power to consent in writing to a subordinate, and, where he authorizes a subordinate to sign his name and treats the consent as his own, the authorization covers not only the mechanical act of signature but also the substantive act of consent. 3. In the absence of evidence that they represented assets appearing in earned surplus at the beginning of the tax year, expenditures for propaganda and educational expense and for legal and patent expenses charged off as current expense in prior years may not be restored for invested capital purposes. 4. An opinion as to the monetary value of a patent, by a witness qualified to judge the effectiveness of the patented device, which opinion involves considerations and confusions which render it*2615 of slight weight, will not be adopted as an expert judgment of value. 5. Where the problem involves a determination whether depreciable patents, comprising part of a taxpayer's assets, had a value on March 1, 1913, in excess of that allowed by the Commissioner, evidence of past and probable earnings of the business, of the cost of business promotion and development and of contacts with possible sources of new business, affecting as it does the progress and value of the entire business enterprise requires some reasonable evidence in addition to demonstrate how and to what extent it reflects patent value. It is not sufficient to show general facts and figures and urge an arbitrary allocation of value. 6. Figures as to earnings prior to March 1, 1913, and evidence as to steps taken at that date to secure new business held insufficient to justify expectation of increased earnings in the future, for the purpose of valuing patents, where experience available on March 1, 1913, of the business as a whole was of widely varying uncertainty and losses had been sustained in some of the prior years, and there was no reasonably sound basis for measuring the probable earnings from future*2616 business. 7. When a taxpayer is not engaged in selling patented articles and its business consists primarily of rendering a particular service, involving personal service and skill in addition to ownership of patents, it is improper to value patents on basis of so-called "field" or "operating" profits, without taking into account expenditures for salaries, advertising, rent, depreciation, etc. 8. Evidence held not to justify special assessment. A. E. James, Esq., and Percy Block, C.P.A., for the petitioner. John D. Foley, Esq., and L. W. Creasson, Esq., for the respondent. STERNHAGEN *224 This proceeding involves deficiences of $10,695.17, $10,928.76, and $13,683.63 income and profits taxes for the years 1918, 1919, and 1920. The petitioner asserts that the following errors were committed by the respondent in making his determinations: (1) In not determining that the deficiencies for 1918 and 1919 are barred from assessment and collection by the statute of limitations; (2) Reducing invested capital for each year by a tentative tax in determining the amount available in each year for the declaration of dividends; (3) *2617 Reducing invested capital for each year by the amount of income and profits taxes paid or payable for the preceding year; (4) Reducing invested capital for each year by fixing too low a valuation upon patents acquired in 1906 for stock or shares; (5) Reducing invested capital for each year by failing to include amounts expended for the development of patents; (6) Failure to allow a sufficient deduction for the exhaustion of patents; and (7) Refusal to grant special assessment under sections 327 and 328 of the Revenue Act of 1918. FINDINGS OF FACT. The petitioner is a Maine corporation, with its principal office at 50 Church Street, New York City. It was organized October 5, 1906, and from that date it has been engaged in the business of cleaning water mains by machines. *225 The material principally used in water mains is cast iron, which has a very long physical life. The formation of blisters and tubercles caused by the water and deposits of mud, sediment and other foreign matter in the interior of the mains obstructs and decreases the flow of water and reduces the life of the water main. Prior to the organization of the petitioner a predecessor company, *2618 known as the Hudson Contracting Co., had developed and filed patent applications covering three devices for the mechanical cleaning of water mains, referred to hereinafter as the Reeser, Whitney, and Greenan devices. The Reeser device consisted of spring steel scrapers mounted on a series of cylinders, designed to be drawn through water mains to remove sediment and incrustation. The cylinders were flexibly connected with each other so that they could easily pass curves or bends in the pipe. The scrapers were removable so that they could be replaced when worn without renewal of the entire machine. Application for a patent on this device was filed October 16, 1903. The Whitney device adds to the Reeser device a piston or driving device which utilizes the pressure in the main to force the machine through. The driving mechanism has a damper to regulate the pressure and permit a sufficient leakage of water to wash away the matter scraped out by the machine. Application for a patent on this device was filed November 18, 1905. The Greenan device provided a means of passing a cable through a pipe line before inserting the cleaning machine in those cases where a water propelled*2619 machine could not be used. Application for a patent on this device was filed February 23, 1906. Prior to the invention of these devices there was no known practical or economical method of cleaning the interior of water mains. The only method of cleaning was to tear up a main throughout its entire length, clean the pipe by hand, and relay the line. Since the cost of such a method was substantially equal to the cost of laying new mains, it was practically prohibitive and was seldom used. The following are the minutes of a special meeting of the stockholders of the Hudson Contracting Co. on October 15, 1906: Minutes of a special meeting of the stockholders of Hudson Contracting Company, held at the principal office of the Company at the offices of the New Jersey Registration & Trust Company, 525 Main Street, East Orange, New Jersey, on the Fifteenth day of October, 1906, at 10 o'clock A.M., pursuant to call. There were present the following stockholders representing the number of shares set opposite their respective names, to wit: Present in Person: Name Number of shares George H. Squire, Jr [3] George F. Whitney [2] Fred A. Smith [5] Present*2620 by Proxy: Name Number of shares E. C. Hartshorne [5] A. L. Pierson [10] R. S. Ransom [10] Mary Belle Crawford [1] Jennie H. Squire [26] Arminda C. Squire [24] Susan W. Whitney [37] M. B. McKnight [20] Charlotte L. Greene [4] Richard T. Greene [1] *226 The Secretary Read the call for the meeting and presented waiver of notice of time, place and objects of this meeting, signed by every stockholder of the Company of record. Dr. Whitney explained and stated that a corporation had been organized under the laws of the State of Maine, known as National Water Main Cleaning Company (hereafter referred to as the "Cleaning Company") with an authorized capital of $1,000,000., divided into 1000 shares of 8% cumulative, preferred, redeemable capital stock, and 9,000 shares of common stock; that said corporation was desirous of purchasing all the assets of this Company, subject to its debts, and to issue in payment therefor all its common stock, provided the stockholders and Directors of this Company would donate to the Trustee or Trustees, for the benefit of the said "Cleaning Company" 3,900 shares of its common capital stock; that if such proposition were made and*2621 accepted there will be 5,100 shares of said common capital stock for distribution among the present stockholders of this Company, or, at the ratio of thirty-four (34) shares for one (1) share. He also exhibited the charter and By-Laws of the said "Cleaning Company" and the objects and purposes of its incorporation, and that it was proposed by said "Cleaning Company" to issue $50,000 of its preferred stock at par, each share of preferred stock to carry two shares of common stock as a bonus; that by means of the sale of the said preferred stock, working capital would be provided for the operations of said Company, and that the stockholders of this Company would be offered an opportunity for subscribing to said preferred stock of said "Cleaning Company." On motion, duly seconded, it was Resolved, that the recommendations of Dr. Whitney be adopted, and that the Board of Directors and officers of the Company be requested to make such proposition to the said "Cleaning Company," and upon its acceptance to execute and deliver, any all such necessary documents, contracts, assignments and other papers that might be necessary to effectuate the same. Upon motion, it was further *2622 Resolved, that upon the transfer of the said assets of this company and the assumption of its liabilities by said "Cleaning Company" this corporation cease to do business and dissolve; and that the Board of Directors take such steps as may be necessary to that end. There being no further business, the meeting was thereupon adjourned. Pursuant to the foregoing the following bill of sale was made: Know all men by these presents, that we Hudson Contracting Company, a corporation organized under the laws of the State of New Jersey, have bargained, sold, assigned and transferred, and do hereby bargain, sell, assign and transfer unto National Water Main Cleaning Company, for and in considerations *227 mentioned in the proposition and acceptance thereof under date October 15, 1906, all and singular the applications for Letters Patent, tools, machinery, appliances and other assets of this Company of whatsoever kind and wheresoever situate; and we do hereby further agree to execute any and all other and further necessary deeds, conveyances or bills of sale which may from time to time be necessary to further effectuate this transfer, at the sole cost and expense, however, *2623 of the said National Water Main Cleaning Company. In Witness Whereof, we have caused these presents to be signed by our President and our corporate seal to be hereunto affixed this 26th day of October, one thousand nine hundred and six. GEORGE F. WHITNEY. This transfer was carried out. The petitioner acquired the patent applications for the three devices above referred to, a small amount of cash, and some equipment. The petitioner issued 9,000 shares of its common stock, having a par value of $100 each, pursuant to the contract. Five thousand one hundred of the 9,000 shares so issued were delivered to the stockholders of the Hudson Contracting Co. and 3,900 shares were delivered to Richard T. Greene and George H. Squire as trustees. Thereafter Greene and Squire issued to purchasers of preferred stock one share of common stock for each share of preferred stock purchased. The balance they retained subject to the order of the board of directors of the National Water Main Cleaning Co., and thereafter it was sold as the needs of the company dictated. The entry on the books of the petitioner recording this transaction shows a debit to "Plant and Patents" of $900,000 and*2624 a corresponding Credit to "Common Capital Stock." Patent No. 929,110, covering the Reeser device, was granted July 27, 1909. Patent No. 944,710, covering the Whitney device, was granted December 28, 1909. Patent No. 934,520, covering the Greenan device, was granted September 21, 1909. At that time these machines were the only practical and economical means for cleaning mains. The cost of cleaning with these machines was between 3 and 10 per cent of the cost of relaying the pipe. During the early years of the petitioner's operations city engineers, water committees, councilmen and others concerned were skeptical about the cleaning of mains and it was necessary for petitioner to conduct a campaign of education as to the need for its services. The campaign consisted of attendance at conventions, reading papers before such conventions, practical demonstrations in the field by cleaning sections of mains, and constant interviews with water-works officials wherever the opportunity offered. The efforts of several men were confined exclusively to this work while others devoted a portion of their time thereto. *228 The amount expended for this purpose is not definitely*2625 ascertainable, but is not less than $32,684.26, distributed over the period from 1907 to 1910 as follows: [1907] $14,976.96 [1908] 6,867.33 [1909] 5,439.51 [1910] 5,400.46 These amounts were not capitalized but were charged off the books each year. The respondent did not include them in petitioner's invested capital for 1918, 1919, or 1920. During the first several years of petitioner's operation it kept a force of trained men in its employ. These men were idle a large part of the time due to the general unfamiliarity of the public with the services rendered by petitioner and the consequent difficulty of securing cleaning contracts. When superintendents were not actually engaged on pipe-cleaning contracts they were often delegated to solicit work in the territory in which they happened to be located at the particular time. In 1914 the petitioner started paying dividends on its preferred stock and in 1915 upon its common stock. The operating profits and the net profits (or net loss) for the fiscal years ended on the dates indicated are: Year ended Operating profits Net profit or loss Oct. 31, 1907 $13,428.20 1 $21,314.17 Oct. 31, 1908 17,879.22 1 5,233.54 Oct. 31, 1909 41,220.87 18,542.85 Oct. 31, 1910 12,455.47 1 14,931.69 Dec. 31, 1911 (14 months) 30,638.31 6,249.22 Dec. 31, 1912 29,392.92 6,906.09 Dec. 31, 1913 25,586.51 3,936.32 Dec. 31, 1914 $55,903.49 $33,092.09 Dec. 31, 1915 50,939.60 25,887.73 Dec. 31, 1916 32,498.46 8,557.62 Dec. 31, 1917 35,711.95 9,880.15 Dec. 31, 1918 64,513.10 33,091.83 Dec. 31, 1919 74,019.93 21,769.11 Dec. 31, 1920 96,245.98 30,720.07 *2626 In arriving at the foregoing net profits for the period from 1910 to 1920, inclusive, there were included in the deductions taken certain items denominated "Patent Cost Written Off" and "Depreciation of Patents." The amounts of these items and the amount of net profits before deducting the same are as follows: Year Patent deductions Net profits before deductions [1910] Patent cost written off $338.68 1 $14,593.01 [1911] do 1,596.53 7,845.75 [1912] do 1,751.31 8,657.40 [1913] do 1,677.68 5,614.00 [1914] do 1,561.20 34,653.29 [1915] do 1,450.63 27,338.36 [1916] do 1,328.00 9,885.62 [1917] do 607.59 10,487.74 [1918] do 1,170.14 34,261.97 [1919] Depreciation of patents 19,783.80 41,552.91 [1920] do 19,783.80 50,503.87 *229 In 1906 and 1907 the following payments were charged to expense and not capitalized: To - Explanation Amount $213.00 C. A. O. Rosell Legal expenses and fees for drawing up and 70.00 putting in patent applications. 225.00 Do Prosecution of foreign patents, drawings, 1,030.00 tracing, etc. Kenyon & Kenyon Retainer to patent attorneys 250.00 Richard T. Greene Expenses incurred in incorporating company 597.45 *2627 The respondent included none of these amounts in petitioner's invested capital for 1918, 1919, or 1920. In addition to the patents on the three devices above mentioned the petitioner acquired further patents as follows: Patent No. Date of application Date of patent 920,455 Dec. 14, 1906 May 4, 1909 13,032 (reissue) Aug. 3, 1909 Nov. 2, 1909 914,824 1 Dec. 14, 1906 Mar. 9, 1908 906,595 do Dec. 15, 1909 940,098 1 Feb. 29, 1908 Nov. 16, 1909 952,130 1 May 18, 1909 Mar. 15, 1910 953,666 Apr. 30, 1909 Mar. 29, 1910 971,042 1 June 30, 1908 Sept. 27, 1910 1,006,260 1 May 18, 1909 Oct. 17, 1911 1,006,261 1 Apr. 13, 1911 Oct. 17, 1911 1,033,587 1 Apr. 15, 1910 July 23, 1912 1,035,994 1 Nov. 11, 1909 Aug. 20, 1912 1,036,114 1 Apr. 15, 1910 Do. 1,089,641 1 Sept. 18, 1911 Mar. 10, 1914 1,145,916 July 15, 1910 July 13, 1915 1,181,310 1 Feb. 12, 1912 May 2, 1916 1,193,005 Jan. 13, 1915 Aug. 1, 1916 In 1912 petitioner purchased Patent No. 748,206 for $4,986.50 This patent was issued December 29, 1903. *2628 This covered a device for removing incrustation which was too hard for the Whitney device to remove. It is serviceable only under exceptional circumstances and has been used by petitioner only in cleaning mains in Salt Lake City, Utah. The Reeser, Whitney and Greenan devices constituted 90 to 95 per cent of the value of all petitioner's patents. Patent No. 906,595, for inserting the cleaning device in the main, was the only other patent which had any practical value, and it has been used by petitioner in all its operations. Prior to March 1, 1913, petitioner was three times involved in patent litigation. In two instances it brought suit against other companies and on January 10, 1911, and August 15, 1912, respectively, decrees were entered enjoining the defendants from further infringement of petitioner's devices. Petitioner also brought suit against the Louisville Water Co. of Louisville, Ky., which undertook to clean mains. After negotiations the suit was dismissed on petitioner's motion and petitioner thereafter performed the work of cleaning the mains of that city. There were no other infringements known to petitioner. *230 The footage of pipe cleaned, the*2629 contract price received by petitioner for work performed by it, the cost of performing the work, and the "field profit" for the years from 1907 to 1913, inclusive, are as follows: Year Footage Price Cost Field profit [1907] 186,240 $34,827.03 $22,580.38 $12,246.65 [1908] 240,658 44,566.54 24,153.41 20,413.13 [1909] 637,516 74,233.64 35,454.16 1 39,229.48 [1910] 397,494 53,321.07 40,490.26 1 15,172.64 [1911] 399,452 43,747.09 19,236.92 1 28,560.17 [1912] 481,414 70,993.84 41,600.92 29,392.92 [1913] 288,963 60,696.11 37,720.70 25,586.51 The balance sheets of the petitioner on November 1, 1906, and October 31, 1907, are as follows: Nov. 1, 1906 Oct. 31, 1907 ASSETS Current assets: Cash $24,500.00 $1,016.10 Petty cash 23.55 Inventory - Printing and stationery 125.00 Advances - D. H. Buell 250.00 W. M. A. Frazier 319.27 H. A. Greenan 34.92 B. B. Hodgman 540.00 M. P. Moisan 22.92 F. A. Smith 66.81 Geo. F. Whitney 1,148.11 Total advances 2,382.03 Accounts receivable - Home Water Co 7,156.96 Jersey City Water Department 997.59 Wheeling Water Department 1,809.60 Total accounts receivable 9,964.15 Total current assets 24,500.00 13,510.83 Fixed assets: Office furniture 510.84 Plant and patents 900,000.00 900,000.00 Material and equipment 3,864.16 Total fixed assets 900,000.00 904,375.00 Total assets 924,500.00 917,885.83 LIABILITIES Capital stock: Common capital stock 900,000.00 900,000.00 Preferred capital stock 24,500.00 100,000.00 Less preferred stock unissued 62,200.00 24,500.00 37,800.00 Total capital stock issued and outstanding 924,500.00 937,800.00 Deficit 21,314.17 Donated capital (sale of common stock) 1,400.00 Total 924,500.00 917,885.83 *2630 The balance sheets of the petitioner on December 31, 1912, and December 31, 1913, are as follows: Dec. 31, 1912 Dec. 31, 1913 ASSETS Cash account $3,628.07 $4,830.38 Cash account - petty 6.57 10.46 Advances to officers and employees 2,870.78 3,225.63 Contract accounts receivable 6,541.01 5,410.68 Material and equipment 23,386.53 25,673.55 Unused material on work 310.00 Office furniture 431.58 388.42 Bills receivable 1,000.00 1,050.00 Advances on contracts 244.23 Patents cost - cash expenditures 15,761.80 15,099.14 Plant and patents (acquired by stock) 900,000.00 900,000.00 Trustee - common stock 4,860.00 4,860.00 Total assets 958,730.57 960,858.26 LIABILITIES Bills payable 500.00 Loan account 1,500.00 3,250.00 Commission accrued 108.64 Accounts payable 4,968.81 1,483.76 Dividend payable 1,752.00 Accrued interest 69.78 Total liabilities 8,720.81 4,912.18 NET WORTH Preferred stock 100,000.00 100,000.00 Common stock 900,000.00 900,000.00 1,000.000.00 1,000,000.00 Less preferred stock unissued 56,200.00 54,200.00 Total capital stock issued and outstanding 943,800.00 945,800.00 Plus surplus 6,209.7 10,146.08 Net worth 950.009.76 955,946.08 Total 958,730.57 960,858.26 *2631 *231 For both invested capital purposes and as a value on March 1, 1913, the Commissioner has allowed a value for patents of $38,591.04. For depreciation on patents the Commissioner allowed $3,363.36 for 1919 and $3,372.18 for 1920. The fair market value on March 1, 1913, of petitioner's patents was $38,591.04. The Commissioner of Internal Revenue reduced invested capital for 1918 by an amount of $8,377.81 for dividends paid in that year as follows: July 4, 1918 $ 10,697.37 July 16, 1918 514.00 September 16, 1918 8,514.00 November 1, 1918 1,832.00 The Commissioner of Internal Revenue reduced petitioner's invested capital for 1919 by $1,941.08 for dividends paid as follows: May 1, 1919 $1,832 July 10, 1919 8,789 August 4, 1919 8,839 October 10, 1919 8,839 November 1, 1919 1,832 In making the adjustment to determine the amount of earnings available for these dividends, the Commissioner deducted from the available earnings a tentative tax for 1919 in the amount of $12,850.57. *232 The Commissioner reduced petitioner's invested capital for 1920 by $1,475.81 for dividends paid as follows: May 1, 1920 $1,736 July 10, 1920 8,839 August 4, 1920 8,839 October 10, 1920 8,839 November 1, 1920 1,736 *2632 In making the adjustment to determine the amount of earnings available for these dividends the Commissioner deducted from the available earnings a tentative tax for 1920 of $17,308.75. The Commissioner reduced petitioner's invested capital for 1918 by $197.59, for 1919 by $6,658.27, and for 1920 by $5,457.09 for income and profits taxes due and payable for the respective years immediately preceding. The petitioner's return for 1918 was filed in the office of the Collector of Internal Revenue for the Second District of New York on or about June 20, 1919. On or about February 6, 1924, the president and secretary of the petitioner signed the following instrument, there was impressed thereon the seal of the petitioner, and it was filed with the Commissioner of Internal Revenue: FEB. 6, 1924 (Date) IT:E:SM JWF:A-11863 INCOME AND PROFITS TAX WAIVER In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, National Water Main Cleaning Co., of New York, New York, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under*2633 any return made by or on behalf of the said corporation for the years 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned. NATIONAL WATER MAIN CLEANING CO. GEO. H. SQUIRE, Jr., Pres., Taxpayer. By D. H. BLAIR, Commissioner W. T. S. Attest C. INGLEE, Sec'y. *233 If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed. *2634 Upon this instrument is the imprint of a rubber stamp denoting that it was received in the special assessment section of the Bureau of Internal Revenue on February 8, 1924. On or about October 5, 1925, the vice president and secretary of the petitioner signed the following instrument, there was impressed thereon the seal of the petitioner, and it was filed with the Commissioner of Internal Revenue: IT:E:SM MN-A-11863 B-17219 C-26538 INCOME AND PROFITS TAX WAIVER For Taxable Years Ended Prior to January 1, 1922 OCT. 5, 1925. In pursuance of the provisions of existing Internal Revenue Laws National Water Main Cleaning Company, a taxpayer of New York, N.Y., and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1918 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said*2635 taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board. NATIONAL WATER MAIN CLEANING CO. Taxpayer By BURT B. HODGMAN, V. Pres. D. H. BLAIR Commissioner W. T. S. CLINTON INGLEE, Sec'y. If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed. Upon this instrument is the imprint of a rubber stamp denoting that it was received in the special assessment section on October 17, 1925. The petitioner's return for 1919 was filed in the office of the Collector of Internal Revenue for the Second District of New York on or about March 15, 1920. *234 On or about October 5, 1925, the vice president*2636 and secretary of the petitioner signed an instrument identical with the instrument of October 5, set forth above, except that it purports to cover the year 1919 instead of 1918. There was impressed thereon the seal of the company and it was filed with the Commissioner. Upon this instrument is the imprint of a rubber stamp denoting that it was received in the special assessment section of the Bureau of Internal Revenue on October 17, 1925. The name of D. H. Blair was signed by W. T. Sherwood under written authority from Commissioner Blair to sign his name "to all waivers which have been or may hereafter the submitted in connection with assessments for 1918 [or 1919] and prior years." It was the practice in the Bureau of Internal Revenue to forward such instruments immediately upon their receipt to the office of W. T. Sherwood for signature, whereupon they would be at once signed. The duties of the president of the petitioner are set forth in the by-laws as follows: The president shall be elected annually by the board of directors, as provided in Section 13 of the by-laws. He shall preside at all meetings of the stockholders and directors; shall have general superintendence*2637 and direction of all the other officers of the company and shall see that all orders and resolutions of the Board are carried into effect. He shall execute all deeds, mortgages, bonds and other documents authorized by the Board requiring a seal, under the seal of the Company; shall keep said seal in safe custody and when authorized by the stockholders or the Board, affix it to any instrument requiring the same, and the seal when so affixed shall be attested by the signature of the secretary or treasurer. He shall be custodian of all bonds given to the company by its officers and agents. He shall, from time to time, and whenever requested, report to the Board all matters within his knowledge which the interests of the Company may require to be brought to their notice, perform such other duties as may be required of him by law, these by-laws and by the Board, and, in general have all the powers and duties vested in the office of president of a corporation. The duties of the vice president as prescribed in the by-laws are as follows: The vice-president shall be elected annually by the Board of Directors, as provided in Section 13 of the by-laws, and shall be vested with all*2638 the powers and shall perform all the duties of the president in the absence or disability of the latter. The following are the provisions of the by-laws relating to the secretary: The Secretary shall be elected annually by the Board of Directors are provided in Section 1o of these By-Laws. He shall give or cause to be given notice of all meetings of the stockholders and of the Board of Directors, and all other notices required by law or these By-Laws, and in case of his absence or refusal or neglect so to do, then such notice may be served by any stockholder thereunto directed by the President or Vice-President, any two Directors, or *235 any five stockholders. He shall keep true records of all meetings of the Board and perform such other duties as may be prescribed by the Board of Directors, or President, under whose supervision he shall be. He shall be sworn to the faithful performance of his duties. The by-laws prescribe the following duties of the directors of the petitioner: The immediate government and direction of the affairs of the Company shall be vested in a Board of Directors elected annually as provided in Section 19. The Directors shall be and remain*2639 stockholders. In addition to the powers and authorities expressly conferred upon them, all the powers of the Company except as otherwise provided by law or by these by-laws, are vested in the Board of Directors. Without prejudice to the general powers conferred by the last preceding clause and the other powers conferred by these by-laws, the Board shall have the following powers, namely: a. From time to time to make and change rules and regulations, not inconsistent with law or these by-laws, for the management of the Company's business and affairs. b. To lease, purchase or otherwise acquire in any lawful manner for and in the name of the Company, any and all real estate and other property, rights or privileges whatsoever deemed necessary or convenient for the prosecution of its business, and which the Company is authorized to acquire, at such price or consideration and generally on such terms and conditions as they think fit, and at their discretion to pay therefor, either wholly or partly in money, stocks, bonds, debentures or other securities of the Company. c. To sell or dispose of any real or personal estate, property, rights or privileges belonging to the Company*2640 whenever in their opinion its interests would be thereby promoted; and pursuant to the vote of the holders of a majority of the stock issued and outstanding, to sell, assign, transfer or otherwise dispose of the whole property of this Company. d. To create, issue and make mortgages, bonds, deeds of trust, trust agreements and negotiable or transferable instruments and securities, secured by mortgage or otherwise, and to do every other act and thing necessary to effectuate the same. e. To determine from time to time whether and to what extent and at what times and placed and under what conditions and regulations the accounts and books of the Company, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right of inspecting any account or book or document of the Company, except as conferred by statute or authorized by the Directors, or by a resolution of the stockholders. f. To appoint and at their discretion remove or suspend such officers, agents or servants, not otherwise elected or appointed, including a General Manager and a Cashier of the Corporation, permanently or temporarily, as they think fit, and to prescribe their*2641 duties and determine their salaries or emoluments, and to require security in such instances and in such amounts as they think fit. g. To confer by resolution upon any appointed officer of the Company, the power to choose, remove or suspend such officers, agents or servants. h. To appoint any person or corporation to accept and hold in trust for the Company any property belonging to the Company, or in which it is interested, or for any other purpose, and to execute and do all such deeds and things as may be requisite in relation to any such trust. *236 i. To determine, except as otherwise provided by these by-laws, who shall be authorized on the Company's behalf to sign bills, notes, receipts, acceptances, indorsements, checks, releases, contracts and documents. j. To delegate any of the powers of the Board in the course of the current business of the company to any standing or special committee, or to any officer or agent, and to appoint any persons to be agents of the company, with such powers (including the power to sub-delegate) and upon such terms as they see fit. k. By resolution to remove, for cause, any director, and with or without cause any other*2642 officer of the company, during his term of office. the passage of such resolution shall, ipso facto, create a vacancy in the office in question, to be filled as provided in section 35 of the By-laws. The board of directors of the petitioner consisted of seven members. No special committee was ever appointed under subparagraph "j" of those provisions of the by-laws relating to the board of directors. The secretary of the petitioner customarily affixed the corporate seal to such documents as required a seal. The notice of deficiency which forms the basis of this proceeding was mailed to petitioner under date of December 22, 1925. OPINION. STERNHAGEN: The petitioner contends that the deficiencies for 1918 and 1919 are barred by the statute of limitations because more than five years elapsed after the filing of the returns before the Commissioner's determination of deficiency. Petitioner argues that the consents or waivers introduced by respondent do not extend the period because they were signed without authority and do not bind petitioner and because they were not signed by the Commissioner himself and do not represent his consent as required by statute. *2643 The petitioner's repudiation of the consents is based on the idea that the restrictions upon corporate officers to bind the corporation in contract are applicable to their power to consent as provided under the revenue acts. In support of this it cites numerous decisions illustrating the extent of express authority and of apparent or implied authority of corporate officers in matters of contract. The statute very simply provides for an extension of time by "consent" and it is not necessary to consider whether such consent is to be treated or construed as a contract or hedged about with the legal rules governing contracts. Loewer Realty Co. v. Anderson, 31 Fed.(2d) 268. Being within the ordinary functions of the corporation, the power to consent under this general taxing statute was not required to be expressly conferred upon its general officers. But were it so required, we think the by-laws in evidence give the authority to the president and in his absence or disability to the vice president. Furthermore, if, as in contract, implied authority to bind the *237 corporation adversely could only be founded upon a benefit derived or some bilateral effect, *2644 there would seem to be ample foundation in the right given to petitioner to claim refund or credit conditioned upon the execution of such a waiver or consent. We are also of opinion that the Commissioner was authorized to delegate the power to consent in writing to a subordinate, and that the written authorization in evidence was sufficient for that purpose. Petitioner argues that the authorization to sign the Commissioner's name covered only the mechanical act of signature and not the substantive act of consent. We think this view is strained beyond reason. The Commissioner treats the consent as his own and we see no reason to believe that he reserved the distinction between the mental act of consent and the written execution, or between a "waiver" and a "consent." Greylock Mills v. Commissioner, 31 Fed.(2d) 655. We are of opinion that the period of limitations as extended had not expired when the notices of deficiency were mailed and that the deficiencies are not barred. Joy Floral Co.,7 B.T.A. 800; *2645 Lawrence Trust Co.,8 B.T.A. 984; Farmers Feed Co.,10 B.T.A. 1069; Chicago Railway Equipment Co.,13 B.T.A. 471; Bradford Co.,14 B.T.A. 339; Wells Brothers Co.,16 B.T.A. 79. The reduction of invested capital by the amount of a tentative tax was improper. L. S. Ayers & Co.,1 B.T.A. 1135; Blair Lumber Co. v. Ragley, 30 Fed.(2d) 683; Commissioner v. Pittsburgh Knife & Forage Co., 30 Fed.(2d) 522. The reduction of invested capital by the amount of taxes for prior years is correct. Revenue Act of 1926, section 1207; Russel Wheel & Foundry Co.,3 B.T.A. 1168. In respondent's determination of invested capital, $38,591.04 has been included as the value of patents and applications paid in for stock or shares. Petitioner admits that the evidence does not establish any greater value at the time of acquisition, and respondent is on this issue sustained. The petitioner seeks the following additions to invested capital, apparently by way of increased earned surplus at the beginning of the taxable years: General propaganda and educational expense paid and charged off from 1907 to 1910 $ 32,684.26 Patent expense paid to Rosell and charged off in 1907 1,538.00 Patent expense paid to Kenyon & Kenyon and charged off in 1907 250.00 Organization expense paid to Greene and charged off in 1907 597.45 35,069.71 *2646 The evidence does not establish that these amounts were part of petitioner's earned surplus at the beginning of the years in question, *238 and the respondent's determination is in this respect sustained. The so-called propaganda and educational expense was entirely charged off prior to 1910 as current expense. It can not be said as a matter of law, based upon the present opinions of petitioner's officers who testified, that such charge-off was entirely improper and that no part of such expenditures should have been made from current earnings. Like advertising, they are in the twilight zone of accounting and the description of their purpose as "propaganda" or "educational" is not sufficient to justify the Board in saying 20 years after the entry that it was incorrect and that it represented a capital investment; to say nothing of the assumption that such an expenditure of 1907 and those for legal and patent services continue in 1918 and 1919 to represent an asset appearing in earned surplus either as patents or as something more intangible like good will. See *2647 Richmond Hosiery Mills v. Commissioner,6 B.T.A. 1247; affd., 29 Fed.(2d) 262; certiorari denied, 279 U.S. 844; 49 Sup.Ct. 265; Northwestern Yeast Co.,5 B.T.A. 232; Kress & Owen Co.,12 B.T.A. 991. The next item in controversy is the deduction to which petitioner is entitled in each of the years in question under section 234(a)(7), representing a reasonable allowance for exhaustion of patents. The issue is confined to the value on March 1, 1913, of petitioner's patents, to be used as the basis of the computation of the allowance. The other factors of computation are not in dispute. The Commissioner, having, as heretofore stated, used for the purpose of determining invested capital the figure of $38,591.04 as the value of patents and patent applications paid in for stock or shares, has also determined this to be the value of petitioner's patents on March 1, 1913, and has on such basis determined the reasonable allowance for exhaustion to be $3,348.66 for 1918, $3,363.36 for 1919, and $3,372.18 for 1920. The petitioner attacks this as inadequate and has offered evidence intended to prove*2648 that the value on March 1, 1913, of its three basic patents issued in 1909 was $225,000; of the Muller patent issued in 1903 and purchased in 1912 for $4,986.50 was $5,000; and of its remaining patents owned on that date was $20,000; and that the respective annual exhaustion allowances are $16,446.70, $636.61, and $1,330.96, or an aggregate of something over $18,000. For the purpose of proving the value as claimed on March 1, 1913, petitioner has given evidence to show the history of its business and its progress prior to and since March 1, 1913. From this it is clear that the Reeser, Whitney and Greenan patents of 1909 were important assets. It is also clear that this business and its earnings required in addition to its patents, a capable management and organization to conduct its promotion, exploitation, development and operation, and skilled officers and employees to supervise and carry on its *239 operations with the necessary equipment. Neither the patents alone nor the organization and equipment alone may be treated as separately responsible for the progress of the enterprise. It is not possible to infer from the evidence, and perhaps could not be satisfactorily*2649 established by any means, in what measure or upon what basis a segregation could be made of the values of the several factors. The insurmountable difficulty of the problem lies in the mystery of business success. Petitioner, recognizing the difficulty, says only that the value of $250,000 claimed for patents is amply justified by the evidence. In determining value on March 1, 1913, it is obviously unsound to treat subsequent data as if they were known at that time. Ithaca Trust Co. v. United States,279 U.S. 151. At any date the future can only affect value to the extent that it is reasonably and sensibly in contemplation. Human experience rarely follows with exactness its own expectations. We must determine "what it fairly may be believed that a purchaser in fair market conditions would have given for [the patents] in fact - not what [we] may think a purchaser would have been wise to give." New York v. Sage,239 U.S. 57, 61. To take subsequent earnings as disclosing prior value would ignore the obvious factor of risk inherent in commercial values. The hypothetical willing seller and buyer, who are by judicial decree always dickering*2650 for price in the light of all the facts, can not be credited with knowing what the future will yield. Otherwise the owner with a successful future would ordinarily not sell, and without it could find no buyer; and thus the entire hypothesis of a voluntary transaction is destroyed and we are left without the prescribed judicial standard. It is the inability to know the future which gives play to the judgment of risk, and this in turn contributes an element of the value arrived at. The evidence to be considered consists of the historical facts prior to March 1, 1913, and reasonable prognostications on that date. James Couzens,11 B.T.A. 1040; Van Kannel Revolving Door Co.,11 B.T.A. 1209; Oahu Sugar Co., Ltd.,13 B.T.A. 404; Cuyahoga Mortgage Co.,14 B.T.A. 1. Petitioner called a sanitary engineer to give an opinion of value in answer to a hypothetical question. The witness demonstrated qualifications to judge the effectiveness of petitioner's patented devices and cleaning methods. But his opinion as to monetary value of the patent on March 1, 1913, involved considerations and confusions which render it of slight*2651 weight. Clearly it lacks such authority as entitles it to be adopted by the Board as an expert judgment of value, and we give it only such weight as part of the entire evidence *240 as the witness's qualifications justify. Van Kannel Revolving Door Co.,11 B.T.A. 1209. It is necessary to have it understood that the problem here is not to determine the value of the business as a whole, such as would be involved in valuing all its capital stock, or the value of the intangible assets as a whole, including such assets as good will, in order to value its statutory invested capital. The business will go on after these patents expire, and hence it would be clearly unsound to impute to the patents the entire earning power of the business or to insist that earnings are all attributable to patent value. The problem is to ascertain from the evidence whether a greater value existed on March 1, 1913, as to depreciable patents than the $38,591.04 determined by respondent. Thus the evidence of past and probable earnings of the business, of cost of business promotion and development and of contacts with possible sources of new business, affecting as it does the progress*2652 and value of the entire enterprise, requires some reasonable evidence in addition to demonstrate how and to what extent it reflects patent value. The respondent does not dispute the primary facts and has allocated $38,591.04 to patents. It is not sufficient therefore for petitioner to show the general facts and figures and urge an arbitrary allocation of value. It must establish by a preponderance that respondent's valuation of these specific assets, separated from other tangible or intangible assets, is too low, and submit enough evidence to enable the Board reasonably to determine, either directly or by inference, the value to be substituted for it. This we think it has failed to do and, strictly considered, this failure alone would be fatal to petitioner's contention. But we nevertheless examine the evidence freely to ascertain whether there is any substantial support for the value claimed or for any value greater than respondent's determination. The evidence of annual profits is used by petitioner to show an upward trend justifying a projected curve of steadily increasing earnings. We are not impressed that this is sound. The experience available on March 1, 1913, of*2653 the business as a whole was of widely varying uncertainty, the losses of which were substantially greater than the gains. No dividends could be or had been paid, and, outside of the arbitrary valuation of patents, the balance sheet showed as its most important asset, material and equipment of $23,386. But suppose we omit reference to the losses of 1907, 1908, and 1910, and attribute them say to the infancy and establishment of the enterprise, and look at 1911 and 1912 as indicative of its stability. We find the following figures in evidence: Year Field profits 1 Operating profit Net profit before Net profit patent deduction [1911] $28,560.17 2 $30,638.31 $7,845.75 2 $6,249.22 [1912] 29,392.92 29,392.92 8,657.40 6,906.09 *241 From this it would be highly speculative to infer that net profits would be more than those of 1912. The fact that petitioner was, on March 1, 1913, "in touch with" numerous municipalities by correspondence with the hope of securing new business can not be translated into an assurance of increased earnings. However clearly it may have enhanced the*2654 expectation of future business, there was no reasonably sound basis for measuring probable earnings. We think that it is improper to value the patents by reference to the so-called "field" or "operating" profits alone before taking into account salaries, advertising, various administration expenses, rent or depreciation. The petitioner's business was primarily one of service in cleaning water mains. It was not selling patented articles. Personal service and skill in performance were essential, in addition to the ownership of the patents. To attribute the "field profits" to the patents alone would be contrary to this obvious fact. After a full consideration of all the evidence, we are unable to conclude that the value of March 1, 1913, of all petitioner's patents was greater than the $38,591.04 determined by respondent, and we have therefore found the value to be as so determined. This should be used as the base of the computation to which the average life of all patents should be applied. Union Metal Manufacturing Co.,4 B.T.A. 287. The remaining claim of petitioner is that it is within section 327, Revenue Act of 1918, and that its tax should therefore*2655 be computed by the comparative method provided in section 328. This is based upon the alleged uncertainty of value of the patents, the fact that there were some tangibles acquired at organization so as to constitute a "mixed aggregate of tangibles and intangibles paid in for stock," the propaganda, education and development expense which should not have been charged off, and the small ratio of capital to income required for its specialized service. We are of opinion that all these circumstances taken together as they appear from the evidence are not in substance sufficient to bring the case within section 327. The determination of respondent is sustained in all respects except that current earnings should not be reduced by a tentative tax. Judgment will be entered under Rule 50. Footnotes 1. Loss. ↩ 1. Loss. ↩ 1. Protective or unsuccessful patents solely, which were never used in the petitioner's practical operations. ↩ 1. Includes rents and royalties. ↩ 1. Includes rents and royalties. ↩ 2. 14 months. ↩