Garden City Feeder Co. v. Commissioner

GARDEN CITY FEEDER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Garden City Feeder Co. v. Commissioner Docket No. 24423. United States Board of Tax Appeals 35 B.T.A. 770; 1937 BTA LEXIS 841; March 30, 1937, Promulgated *841 1. DEPRECIATION. - Value of patent at March 1, 1913, determined from the evidence. 2. INVENTORIES. - Overhead costs, including labor, freight, and manufacturing expenses, from date of taking inventories to end of year, are essential elements of inventory determination. 3. SPECIAL ASSESSMENT. - Petitioner having failed to adduce sufficient evidence to bring itself within the purview of section 327(d), Revenue Act of 1918, it is not entitled to have its profits taxes determined under the provisions of section 328 of that act. Arnold F. Schaetzle, Esq., and H. M. Havner, Esq., for the petitioner. Harold Allen, Esq., and Brooks Fullerton, Esq., for the respondent. HILL *771 This is a proceeding for the redetermination of deficiencies in income and profits taxes and fraud penalties determined by the respondent as follows: Year Deficiency Penalty Overassessment Total [1918] $16,837.03 $11,355.61 $28,192.64 [1919] 2,210.88 13,149.37 15,360.25 [1920] 4,620.17 8,780.90 13,401.07 [1921] 811.35 $192.85 618.50 [1922] 1,371.58 1,556.30 2,927.88 [1923] 254.09 627.52 881.61 Total 25,293.75 36,281.05 192.85 61,381.95 *842 On November 22, 1929, respondent filed an amended answer in which he claimed increased deficiencies and penalties in the total amount of $138,477.06 for the years 1918, 1919, and 1920, and found overassessments in the total amount of $8,982.87 for the years 1922 and 1923. On October 16, 1931, at the hearing in St. Paul, Minnesota, respondent orally made claim for increased deficiencies over those set up in the pleadings at that time, and stated that the amounts claimed would be set forth in writing and filed with the Board at a later date. The presiding Board Member stated that the hearing would not be considered as closed until briefs were filed, at or prior to which time respondent might file his claim for increased deficiencies and penalties. On July 28, 1932, prior to the filing of priefs, respondent filed a second amended answer, claiming increased deficiencies and penalties as follows: Year Deficiency Penalty Overassessment Total deficiency and penalty [1918] $30,890.99 $18,382.59 $49,273.58 [1919] 6,808.99 15,448.43 22,257.42 [1920] 44,241.14 28,591.39 72,832.53 [1921] $4,736.27 [1922] 496.58 1,118.80 1,615.38 [1923] 629.09 815.52 1,444.61 Total 83,066.79 64,356.73 4,736.27 147,423.52 *843 *772 The questions submitted for decision are: (1) What was the fair market value, at March 1, 1913, of a certain patent owned by petitioner? (2) What adjustment should be made in petitioner's inventories for the taxable years? (3) Is petitioner entitled under the provisions of section 327 of the Revenue Act of 1918 to have its profits taxes for the years 1918, 1919, and 1920 determined as provided in section 328 of that act? FINDINGS OF FACT. Petitioner is a corporation organized under the laws of the State of Iowa, having its principal office at Pella. It was incorporated about 1901 under the name of Pella Stacker Co., and in 1912 changed its name to Garden City Feeder Co. Again, in 1925, petitioner changed its name to Pella Securities Co. Prior to January 17, 1912, the capital stock of petitioner was $100,000, consisting of shares of $100 par value each. On that date its capital stock was increased to $200,000, of which $50,000 was 7 percent preferred stock, not entitled to vote. The preferred stock was issued in 1912 and was thereafter retired as follows: December 31, 1915, $25,000; December 14, 1916, $3,000; December 30, 1916, $22,000. On February 11, 1913, the*844 unissued 500 shares of common stock were distributed to the stockholders as a stock dividend. During the years 1918 to 1923, inclusive, proceeds of sales, duplicate payments of invoices, and interest received on loans, aggregating $101,587.50, were not entered on petitioner's books or records, as follows: 1918, $15,000; 1919, $45,000; 1920, $22,500; 1921, $7,500; 1922, $5,000; 1923, $6,587.50. No part of the above amounts was reported to the United States Government until an amended statement of income was filed by petitioner with the collector of internal revenue at Dubuque, Iowa, on December 9, 1924. It is conceded by petitioner that the percentage fraud penalties should attach to additional tax from any source over and above that reported on its original returns for the taxable years. In its Federal income tax returns for the years 1918 to 1923, both inclusive, petitioner fraudulently understated and concealed income in the amounts above stated, with intent to evade tax. Value of Patent. From the time of its organization and for several years thereafter, one A. C. Van Houweling was president of petitioner, and looked after inventions. He was also in charge of*845 operations, and was on full time salary. Van Houweling obtained various patents, which were issued in his name, and then assigned them to petitioner for a nominal consideration. The expenses of obtaining the patents were paid by petitioner. *773 At March 1, 1913, and during the taxable years, petitioner was the owner of United States Patent No. 985,478, relating to a band cutter and feeder, for use on threshing machines. The patent was applied for on April 3, 1905, and was issued on February 28, 1911. In 1904 petitioner began manufacturing the feeder described in the patent. The Van Houweling patent of 1911 was petitioner's principal patent. All other patents owned by petitioner at March 1, 1913, were of negligible value. A great many patents have been issued for self-feeders. Petitioner's patent was not a basic patent. Using prior known elements, it was only for an improvement in the art. Its principal feature was a combination of retarder comb and tilting tooth, both of which were known to the prior art. The Crandall and Krause patent embodied a retarder comb and tilting tooth arranged in a manner different from that of the Van Houweling patent. The adjustment*846 of the tilting tooth in the latter patent was horizontally toward and from the cylinder, while in the former patent it was up and down. The J. I. Case Manufacturing Co. had built feeders for threshing machines since about 1890 or 1895. Prior to 1917 it manufactured its type A feeder. It type B feeder was built in accordance with the Crandall and Krause patent, issued in 1914. The type B feeder was developed in 1917, and went into general production in 1919. Type B feeders were manufactured in the years 1917 to 1923 as follows: 1917, 26; 1918, 12; 1919, 4,239; 1920, 5,975; 1921, 4,455; 1922, 1,445; 1923, 4,575. The retarder comb and tilting finger features of the Crandall and Krause patent, which were embodied in the type B feeder above mentioned, were continued until after the beginning of an infringement suit brought against the J. I. Case Manufacturing Co. by petitioner in 1923. The use of the tilting finger was abandoned by locking it in a midway position. Its absence was thereafter without practical effect. The first decree in the above mentioned infringement suit found no infringement. The final result of the litigation was: (1) The decree was vacated; (2) the*847 bill was dismissed; (3) petitioner paid the costs; and (4) granted a free license to the Case Co. to manufacture under its patent. Petitioner did not recover any damages from the J. I. Case Manufacturing Co., although the latter company had manufactured more than 20,000 feeders using a combination of retarder comb and tilting tooth. The Minneapolis Threshing Machine Co., a corporation doing $4,000,000 of business in 1912, after investigating discontinued the manufacture of its own feeder about 1913 or 1914. In 1909 it had *774 begun to sell the Garden City feeder, because this feeder aided in selling its threshers. The warranty had much to do with it, but the main feature was the retarder comb and tilting finger, which prevented bundles of grain going into the cylinder crosswise. The Minneapolis Co. paid $4,300 for Garden City feeders in 1910; $4,800 in 1911; $24,000 in 1912; and $32,000 in 1913. The International Harvester Co., about 1913, was solicited to buy Garden City feeders, but decided not to do so because its engineers believed other feeders to be superior. From about 1907 to 1909 this company sold threshing machines equipped with Maytag (Ruth) and Parsons*848 feeders, and after that also sold Hart and Heineke feeders. In 1913 some of its requirements were met by the purchase of Maytag (Ruth) feeders. In 1906 the Rumely Co. had a license to manufacture feeders under the Ruth patent, and in 1913 was manufacturing that type of feeder at the rate of 2,000 per annum. Other feeders were being manufactured in 1913, known as the Avery, Altman-Taylor, Emerson and Brandon, International Harvester, Nichols and Shepard, Huber, Langdon, Hawkeye, Advance, Wood Brothers, Hart, and Bartholemew. The Heineke Manufacturing Co. made and sold 617 and 528 feeders in 1912 and 1913, respectively, under the Langdon and Heineke patents. In 1913 the manufacturers of threshing machines largely built their own feeders. More than 50 types of feeders were being manufactured in 1911. In 1911 and 1912 there were about 100,000 to 110,000 threshing machines in use in the United States, and 10,000 to 12,000 were being sold annually. The average selling price of the Garden City feeder to the trade was $150 to $175 each during the prewar years, and the average profit was $20 to $25 each. It was higher during the war years, and thereafter dropped again. *849 From 1904 to 1913, inclusive, petitioner manufactured feeders as follows: 1904, 47; 1905, 261; 1906, 536; 1907, 767; 1908, 1,093; 1909, 927; 1910, 1,003; 1911, 1,053; 1912, 1,313; 1913, 1,840. Petitioner's books showed net tangible assets and adjusted taxable net income, exclusive of depreciation on patents, for the years 1908 to 1912 as follows: Year Net tangible assets Net income [1908] $72,255.85 $24,879.12 [1909] 116,311.14 16,414.51 [1910] 129,401.02 18,456.72 [1911] $121,775.28 $22,358.72 [1912] 208,666.37 19,173.18 The fair market value of petitioner's Patent No. 985,478 at March 1, 1913, was $25,000. *775 Adjustments to Inventories. Petitioner, during the years 1917 to 1920, inclusive, took a physical inventory of its stocks before the close of each year, generally in September. The inventory was taken under the direction of the shop foreman, who acted under the direction and supervision of petitioner's general manager. The inventory was recorded in shop books at the time the count was made. Upon completion of the inventory count, the shop books were turned over to the shop foreman, who then delivered them to the general*850 manager. Thereafter, the shop foreman had nothing further to do with the matter of inventories. A summary book was prepared, which purported to reflect the physical count, and petitioner's books of account agreed with the entries appearing in the summary book. The inventories as entered in the summary book were, as to many items, substantially reduced from the physical count as shown in the shop books. A revenue agent in the year 1925 made an investigation of petitioner's books of account for the years 1918 to 1923, inclusive. At that time the revenue agent requested access to petitioner's inventory records, but was informed that the petitioner had no data whatever in regard to the inventories which had been taken for the years 1917 to 1921, inclusive. It was not until the hearing of this proceeding in June 1929 that respondent discovered that the inventory records or shop books had not been destroyed, at which time said books were first produced. As late as June 30, 1925, petitioner's inventories were inaccurate and unreliable. Petitioner did not have any cost records for the years here involved, and did not know what the actual inventory costs were. Overhead costs, *851 such as labor, freight, and manufacturing expenses, from the date of the taking of the physical inventories to the end of each year, which were essential elements of inventory determination, were charged to expense and omitted from petitioner's inventories appearing in shop and summary books. The understatements in the inventories and the correct closing inventories for the years 1917 to 1920, inclusive (the year 1917 being included for the purpose of determining the correct opening inventory for the year 1918), are as follows: December 31, 1917 Increase due to error in classification of items Freight omitted Labor and manufacturing expenses after inventory date to end of year Total understatement of inventory December 31, 1918 Finished castings 49,999 1bs. at 7?? Finished cold rolled shafting 10,000 1bs. at 7.20 Finished malleables 21,000 1bs. at 9.00 Finished crank shafts 20,000 1bs. at 7.20 Finished galvanized sheets 20,000 1bs. at 8 1/2?? Finished flat iron 50,000 1bs. at 6.35 Total finished 170,999 Unfinished flat iron 40,000 1bs. at 3.85 Unfinished castings 30,000 1bs. at 3 3/4?? Unfinished cold rolled shafting 20,000 1bs. at 4.67 Unfinished galvanized sheets 40,000 1bs. at 6 1/2?? Upper pans black 20,000 1bs. at 6?? Total unfinished 150,000 1bs. Bolts Regular feeder knives Rubber belting Total miscellaneous Total understatement of material Freight Labor and manufacturing expense after inventory date to end of year Total understatement of inventory Inventory per tax return Correct inventory December 31, 1918 December 31, 1919 Finished malleables 20,000 1bs. at 8 3/4?? Finished gray iron castings 100,000 1bs. at 7?? Finished band and flat iron 80,000 lbs. at Finished angle iron 100,000 1bs. at 5?? Finished galvanized sheets 100,000 1bs. at 7 3/4?? Finished lower feed pans Total finished 400,000 lbs. Unfinished malleables 20,000 1bs. at 7?? Unfinished feeder heads 130,000 1bs. at 6 1/2?? Unfinished carriers, humpbacks, iron frames, and windlasses 30,000 lbs. at 6 1/2?? Total unfinished 180,000 1bs. Carrier raddles Machine bolts 4 1/2" 4 ply rubber belting Carriage bolts 3" 3 ply rubber belting Total miscellaneous Total understatement of material Freight Labor and manufacturing expense after inventory date to end of year Total understatement of inventory Inventory per tax return Correct inventory December 31, 1919 December 31, 1920 Finished malleables 50,000 1/4 1bs. at 7.67 1/2 Finished galvanized sheets 140,000 1bs. at 7.75 Finished flat iron 100,000 1bs. at 5?? Finished angle iron 100,000 1bs. at 5?? Finished castings 100,001 1bs. at 7 3/4 Total finished 490,001 lbs. Unfinished galvanized sheets 150,000 1bs. at 5.70 Unfinished flat iron 100,000 1bs. at 2.40 Unfinished pig iron 320,000 1bs. at $40 a ton Feeder raddles & slats Total unfinished 570,000 1bs. Gas pipe Rubber belting Bolts Steel chains Total miscellaneous Raw materials to invoice price Total understatement of material Freight Labor and manufacturing expense after inventory date to end of year Total understatement of inventory Inventory per tax return Correct inventory December 31, 1920 *852 December 31, 1917 $154.42 6,924.85 21,293.10 28,372.37 December 31, 1918 $3,499.93 1,120.00 1,800.20 1,440.00 1,700.00 3,175.00 $12,735.13 $1,540.00 1,125.00 934.00 2,860.56 1,200.00 7,659.56 $1,000.00 2,500.00 5,000.00 8,500.00 28,894.69 5,641.34 13,936.17 48,472.20 294,591.65 343,063.85 December 31, 1919 $1,752.01 7,000.00 3,993.75 5,000.00 7,450.00 101.22 $25,296.98 $1,400.00 8,450.00 1,950.00 11,800.00 $3,348.00 4,077.96 50.00 7,475.96 (2,817.66) (10.00) (2,827.66) 4,648.30 $41,745.28 11,263.95 17,382.38 70,391.61 316,958.51 387,350.12 December 31, 1920 $3,837.50 10,850.00 5,000.00 5,000.00 7,750.09 32,437.59 8,550.00 2,400.00 5,600.00 471.34 17,021.34 1,004.00 5,000.00 6,000.00 5,208.92 17,212.92 19,816.70 86,488.55 19,272.78 46,931.62 152,692.95 328,520.45 481,213.40 *777 Special Assessment of Profits Taxes. Respondent, in his second amended answer filed herein on July 28, 1932, set*853 forth petitioner's income, invested capital, and tax liability for the years indicated, as follows: [1920] Invested Capital $391,695.00 $443,282.97 $466,304.85 Taxable Net Income 136,734.21 156,254.14 220,034.98 Total Tax 73,882.94 48,795.44 76,974.33 Percentages Total tax to net income 54% 31% 35% Total tax to invested capital 19% 11% 17% Net income to invested capital 35% 35% 47% *778 The capital stock outstanding during each of the taxable years was $150,000 par value of common stock. During the taxable years above referred to, petitioner borrowed varying amounts of money as follows: [1920] Average daily borrowings $188,931.50 $237,945.21 $332,698.62 Percentage of borrowed capital to invested capital 48% 54% 71% OPINION. HILL: This proceeding was first heard at St. Paul, Minnesota, in June 1929, and the adjourned hearing was concluded at the same place on October 16, 1931. Thereafter, on motion of the respondent, the St. Paul record was suppressed and a new hearing or trial de novo was had at Washington, commenced on June 27 and concluded*854 on July 1, 1932. The Board's report, based solely on the record of the Washington hearing, is published at . The case was taken on review to the United States Circuit Court of Appeals for the Eighth Circuit, which reversed the Board's decision and remanded the cause for further proceedings, . On September 20, 1935, petitioner filed a motion requesting the Board to redetermine the issues, under the Circuit Court's mandate, solely on the record made at St. Paul. Respondent opposed this motion, and the motion was denied by order of the Board dated August 3, 1936. In its brief, petitioner assigns the Board's action as error, and argues the point at length. Respondent later withdrew opposition to petitioner's motion, and the Board, upon reconsideration of the matter, vacated its prior order of August 3, 1936, and granted petitioner's motion, as well as a similar motion of the respondent. Hence, further discussion of the question thus raised by petitioner has become unnecessary here, since our decision will be based solely on the record of the St. Paul hearing. Respondent has determined fraud penalties, and in respect thereof*855 has the burden of proof. However, petitioner has conceded that the percentage fraud penalty should attach to the additional tax from any source over and above that reported on its original returns for the taxable years. The record also clearly establishes fraud with intent to evade tax, and we have so found. Accordingly, the amounts of the fraud penalties will be recomputed as provided in section 250(b) of the Revenue Acts of 1918 and 1921, on the basis of deficiencies finally redetermined hereunder. Respondent alleged understatements of income for the taxable years arising from the manipulation of a so-called "Kitty Fund." *779 The parties have since stipulated the amount of understatement of income on that account for each taxable year, which amounts are set forth in our findings of fact above, and will be reflected in the final recomputations of tax liability. Other issues raised by the parties have been abandoned or otherwise eliminated, leaving for consideration here only three questions, which concern (a) the value of a certain patent at March 1, 1913, for purposes of depreciation or exhaustion; (b) adjustments to inventories; and (c) special assessment of profits*856 taxes for the years 1918, 1919, and 1920. Value of Patent at March 1, 1913. Petitioner contends that a March 1, 1913, value for its United States Patent No. 985,478 should be determined at from $350,000 to $500,000, and annual depreciation deductions thereon allowed in each of the taxable years based upon a remaining life of 15 years from the basic date. Respondent concedes the allowance of depreciation deductions on a patent value not in excess of $25,000. At the hearing voluminous testimony was adduced by both parties bearing on the question of patent value. Petitioner introduced six expert witnesses who expressed opinions fixing the value of the patent in amounts ranging from $350,000 to $600,000 at the basic date. Respondent offered four witnesses, one of whom testified that in his opinion the maximum value was $25,000, another thought the value was not greater than $15,000, and two expressed the view that the patent was of doubtful or very little value. Value of property at a given date can seldom, if ever, be determined with mathematical accuracy, in the absence of an established current market embracing a concourse of buyers and sellers. It is a matter of*857 opinion and evidence. . We are not bound to adopt the opinion of an expert witness, particularly where it is in conflict with other facts disclosed. Such testimony must be viewed in the light of all the evidence of record. ; ; ; certiorari denied, ; ; ; certiorari denied, ; . The values expressed in the opinions of petitioner's witnesses in the present case are not only out of line with the other evidence, but to a material extent were based upon an erroneous assumption of factors which do not exist here, or were arrived at without knowledge of the true facts involved. Such opinions are entitled to but little, *780 if any, weight and can not be accepted as compelling*858 evidence of value. Cf. ; affd., ; ; . Petitioner's patent was not a broad basic patent, conferring a monopoly of commercial importance. It covered, at most, only an improvement to the existing art, of very narrow application. Its principal feature consisted of the particular arrangement of a retarder comb and tilting finger, for use in a threshing feeder. Both of these devices were known to the prior art, and later were used without infringement in machines manufactured under other patents. In 1923 petitioner brought an infringement suit against the J. I. Case Manufacturing Co., and notwithstanding that company had theretofore manufactured and sold more than 20,000 feeders under the Crandall and Krause patent, using a combination of retarder comb and tilting tooth, the results of the litigation were that the first decree entered finding no infringement was set aside and petitioner's bill dismissed; petitioner did not recover any damages, but paid the costs and granted a*859 free license to the Case Co. to manufacture under its patent. These facts, in our opinion, tend to support the views expressed by respondent's witnesses, and to negative the idea that the patent had the high value attributed to it by petitioner's witnesses. Other factors disclosed by the record, such as the value computed on a royalty basis, or a value determined by capitalizing the net earnings in excess of a reasonable allocation to tangibles, which we deem it unnecessary to discuss in detail here, all lead to the same conclusion. From a careful consideration of all the evidence before us, we have found that petitioner's patent had a fair market value at March 1, 1913, of $25,000. The proof, we think, does not justify a higher valuation for the patent at the basic date. Adjustments to Inventories. Petitioner took inventory in each of the taxable years, during the slack season, usually in September. A physical count was made under the direction of the shop foreman and recorded in shop books. Summary books were prepared from the shop books, and the total inventory computed and recorded in the former. The results were transferred to petitioner's books of account, *860 which agreed with the entries in the summary books, but the summary books did not reflect the true physical count as shown by the shop books. The entries in the summary books as to many items were substantially less than those recorded in the shop books, the reduction in some instances *781 amounting to 50 percent. Petitioner had no system of cost accounting, and could not accurately determine the cost of many items. In 1925 a revenue agent investigated petitioners' books, and requested access to its inventory records. He was told that the original records had been destroyed, and that no data were available as to inventories for the taxable years. At the hearing in 1929 respondent discovered that the original inventory records or shop books had not been destroyed, and they were then produced for the first time. In addition to the omission from the inventories of materials on hand as shown by the physical count recorded in the shop books, petitioner charged to expense and omitted from the valuation of its inventories such items of cost as labor, freight, and manufacturing expenses from the date of taking the inventories to the end of the year. The record clearly*861 and convincingly establishes, we think, that petitioner fraudulently manipulated its inventories so as to understate income with intent to evade tax. In its brief petitioner concedes that it omitted "portions from the inventory of stock on hand" and agrees that the omitted items "as determined by the respondent should be restored and added to the inventory as submitted in the original returns." As to the omission of items of cost, above referred to, which are essential to a determination of inventory valuation, petitioner's brief is silent. Thus, it appears, there is no controversy between the parties respecting the inclusion of omitted items, nor is the correctness of respondent's allegations on this point assailed. The disagreement pertains to the matter of valuation. Petitioner's principal contentions are (1) that "for the year 1920, ending December 31, 1920, an adjustment should be allowed for market value of not less than 25% to 40%" on account of an alleged general decline in the market, and (2) "in the case of scrap iron the amount should be determined on a basis of $20 per ton." The first contention, that the prices at which all items were valued, except scrap iron, *862 should be reduced from 25 to 40 percent on account of a decline in the market, obviously can not be sustained. The decline referred to was from a prior market price, which may or may not have been the cost or invoice price to petitioner of the various items involved. In other words, to reduce the cost or invoice price by the percentages mentioned would not necessarily reflect the decline in the market. Furthermore, the general statement that the market declined 25 to 40 percent is too vague and indefinite to form any reasonable basis for valuation of a specific inventory. In respect of petitioner's second contention, that the scrap iron listed in the 1920 inventory should be valued at $20 per ton, it appears that respondent has used this figure in his proposed adjustment. *782 We find no basis of support in the record for petitioner's objections. On the other hand, the evidence supports the adjustments to inventories as set out in our findings of fact for all years involved. Petitioner complains in general terms respecting the methods of determining the inventory adjustments, alleging inconsistency and approximation of amounts in some instances. Such argument is*863 not impressive. If absolute accuracy in determining the amount of petitioner's inventories is not now attainable, it is the direct result of petitioner's own failure to take its inventories in a proper manner and to maintain proper records. In our opinion, the adjustments reflect petitioner's true income, as affected by inventories, as accurately as may be in the present circumstances. Petitioner is complaining in effect of the results of its own wrongful actions. "The Government should not be made to suffer because the taxpayer did not keep proper records to show its correct tax liability." . Special Assessment. Petitioner contends that under the provisions of section 327(d) of the Revenue Act of 1918 it is entitled to have its profits tax for the years 1918, 1919, and 1920 determined as provided in section 328 of said act. The statute, in part pertinent here, reads as follows: SEC. 327. That in the following cases, the tax shall be determined as provided in section 328: * * * (d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without*864 benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. * * * The sole question for consideration at this time is whether the record discloses abnormal conditions affecting the capital or income of petitioner. If so, petitioner has made a prima facie showing, indicating the probability that subdivision (d) is applicable, notwithstanding it can not be determined, in the absence of comparative data whether there is gross disproportion between the tax of this petitioner and comparable taxpayers, or whether petitioner, in the light of such comparison, would be subject to exceptional hardship. These are matters for later determination under the provisions of section 328. . Petitioner points to two factors which it asserts constitute abnormalities affecting capital and income, namely, the use of large *783 amounts of borrowed capital, *865 and a patent alleged to have a value of $350,000 to $600,000, neither of which items enters into the computation of statutory invested capital. Sec. 326, Revenue Act of 1918; art. 1561, Regulations 45; ; ; affd., . Since we have found that the patent in question had a value of only $25,000, its importance as a factor indicating special assessment is greatly diminished. And this is particularly true in the light of the uncertainty respecting the extent to which the patent was an income-producing factor. The use of this intangible asset in petitioner's business, under all the circumstances shown, is insufficient, we think, to justify the granting of special assessment. Does the fact that petitioner borrowed considerable amounts of money during the respective taxable years constitute an abnormal condition affecting its capital or income, entitling it to special assessment? Abnormality is a fact that must be determined in each case, and the burden of proof in this respect is upon the petitioner. *866 . The only evidence adduced by petitioner concerning borrowed capital is the stipulation of the parties showing the average daily borrowings for each of the years 1918, 1919, and 1920, which amounts are set out in our findings of fact hereinabove. Petitioner offered no evidence to show that the borrowed money was actually used in the operation of its business, or that it contributed to any extent to the production of the taxable income. These are essential elements of proof. ; . Nor did petitioner show that the use of borrowed money in the amounts stated was usual or unusual, normal or abnormal, in the industry or business in which it was engaged. If we should assume that the money borrowed by petitioner was used in its business and was an incomeproducing factor, nevertheless, if it was customary for corporations engaged in similar businesses to operate upon borrowed money to an extent comparable to that of this petitioner, the borrowed capital used by petitioner could not be said to constitute an abnormal condition. Mere proof*867 of borrowings does not establish abnormality, and, in the absence of evidence respecting the use generally of borrowed capital in the particular line of business, there is no basis upon which we may predicate an opinion that the use of borrowed money in this case created an abnormality. ; ; ;. *784 Petitioner's average daily borrowings approximated 48, 54, and 71 percent of its statutory invested capital for the respective taxable years, and its net income as computed by respondent amounted to 35, 35, and 47 percent of invested capital for the respective years. However, neither the fact that its percentages of profits were high, nor the fact that its borrowed capital constituted a large percentage of invested capital, alone would entitle petitioner to special assessment. ; *868 ; . See also ;. Petitioner has wholly failed to bring itself within the purview of section 327(d), supra, and, on authority of the decisions cited, its plea for special assessment of its profits taxes in accordance with the provisions of section 328 is denied. Reviewed by the Board. Judgment will be entered under Rule 50.