Whitelite Electric Co. v. Commissioner

WHITELITE ELECTRIC CO., PETITIONER, v.. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Whitelite Electric Co. v. Commissioner Docket No. 28472. United States Board of Tax Appeals 18 B.T.A. 934; 1930 BTA LEXIS 2570; January 27, 1930, Promulgated *2570 The Commissioner correctly included depreciated cost of certain patents in his determination of the basic cost of a mixed body of assets sold in the taxable years by an affiliated group of which the petitioner was the parent corporation. Sharon Graham, Esq., for the petitioner. John D. Foley, Esq., for the respondent. LANSDON *934 The respondent has asserted a deficiency in income tax for the year 1923 in the amount of $5,605.77. For his cause of action the *935 petitioner alleges that the Commissioner has overstated the income realized from the sale of certain capital assets in the taxable year. FINDINGS OF FACT. The petitioner is a New York corporation, with its principal office at Mount Vernon. From about 1915 to 1923 it was engaged in the manufacture and sale of electric light bulbs. During its early years it operated under a license from the General Electric Co., which authorized an annual quota of lamps in the amount of $75,000. Its business increased and in 1917 Nathan Wise, owner of all its capital stock, acquired all the capital stock of the Tungsten Lamp Co., a New Jersey corporation, which was licensed by the General*2571 Electric Co. to produce lamps of an annual value of $75,000. From 1917 to 1923 the petitioner and the Tungsten Lamp Co. were affiliated for Federal income-tax purposes and reported income on the basis of a consolidated return filed by the petitioner as the parent corporation. The petitioner and the Tungsten Lamp Co. each owned a number of patents covering the processes for manufacturing electric light bulbs. Such patents and many others owned by different parties were attacked in the courts by the General Electric Co. on the ground that they were violations of its basic patents covering the same processes. By 1923 so many court decisions favorable to the claims of the General Electric Co. had been secured that the patents owned by the petitioner and the Tungsten Lamp Co. had no value, and resulting from the same situation the licenses of the General Electric Co. had greatly appreciated in value. Among the assets of the Tungsten Lamp Co. which were taken into the balance sheets of the affiliated group in 1917 were 12 basic patents which it is agreed had cost that company $75,000. In 1923, the taxable year here involved, the affiliated group sold its licenses and patents, together*2572 with all its good will, machinery, materials, and stock in trade, to the Nilco Lamp Works and received therefor the amount of $177,584. The patents owned by the Tungsten Lamp Co. at the date of the purchase of the stock thereof by the only stockholder of the petitioner had been acquired at a cost of $75,000. The licenses to manufacture lamps were acquired by the petitioner and the Tungsten Lamp Co. without cost. No deduction from gross income on account of depreciation of patents was taken in any of the consolidated returns filed prior to January 1, 1923. In its income-tax return for 1923 the affiliated group deducted the amount of $75,000 from the sales price of its assets as cost of the patents owned by the Tungsten Lamp Co., and reported a profit from such transaction in the amount of $65,619.14. Upon audit of *936 such return the Commissioner found that at date of the sale to the Nilco Lamp Works the Tungsten patents had sustained depreciation in the amount of $46,804.96, and that the depreciated cost of the patents in 1923 was $28,195.04. He added the sustained depreciation to gross income for the taxable year, deducted therefrom the depreciated cost, and determined*2573 the deficiency here in controversy. OPINION. LANSDON: None of the facts material to the sole issue here are in dispute. The parties agree that the patents in question cost the Tungsten Lamp Co. $75,000, and that such patents, standing alone, had no value in 1923. In computing its gross income in the taxable year the petitioner included the amount of $75,000 in its basis for computing profit on the sale of its assets as the cost of such patents. The Commissioner accepted this amount as original cost, but computed accrued depreciation in the amount of $46,804.96, which he added to gross income. The amount of accrued depreciation of the patents at January 1, 1923, standing alone, is not in dispute. The petitioner contends, however, that the patents and the licenses to manufacture had merged into each other at date of sale and that the depreciation of the patents had been balanced by an equal appreciation of the licenses which it is agreed were acquired without cost. In conformity with this theory, the affiliated group took no depreciation of patents as a deduction from its gross income prior to 1923, and now contends that the Commissioner erroneously reduced the basic cost*2574 of the assets sold in the taxable year by the amount of the depreciation sustained by the patents considered as a single item of depreciable property. We are not impressed with the petitioner's argument on this point. In a very similar situation we held that depreciation of a patent may not be offset by appreciation of good will resulting from its use. . The established rule as to any single depreciable asset is that depreciation is a fact to be proved by evidence. ; ; . It is equally well established that for the purpose of determining the basic cost of capital assets sold after years of use, due allowance must be made for sustained depreciation, even though no deductions were taken therefor in tax returns for prior years, and the sustained depreciation may not be offset by appreciation. ; *2575 ; . *937 It is true that failure to take depreciation in the years in which it is sustained does not preclude assertion to claim therefor on appeal to this Board. ; ; . These cases, however, establish no rule applicable to the instant proceeding, since the petitioner here is not seeking to correct its returns and redetermine its taxes for any one of the several years in which it failed to take depreciation to which it was then entitled, but in effect is proposing to deduct the cumulated depreciation sustained in previous years from its gross income in a single year. For such procedure there is no basis in the law. ; . Decision will be entered for the respondent.