Appeal of Bockhoff

[562] OPINION. Tkammell : The sole question involved in this appeal is whether the taxpayer shall be allowed a deduction from his gross income for the year 1919, for exhaustion on his one-fifth interest in a pat [563] ent acquired by gift as of June 30,1917. Section 214 (a) (8) of the Revenue Act of 1918 provides: Sec. 214. (a) That in computing net income there shall be allowed as deductions : [[Image here]] (S) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. This Board has already held that deductions for exhaustion of patents are allowable under this statute. Appeal of Union Metal Manufacturing Co., 1 B. T. A. 395. The fact that it was a gift to the taxpayer and that he owned but a fractional part of the patent does not deprive him of the right to a deduction on account of the exhaustion thereof. The real question in this appeal is the determination of the value of the patent at the time of acquisition by the taxpayer and the proper rate of exhaustion. It is very apparent that the patent had a substantial value at the time of acquisition. By means of the patent, the corporation manufacturing thereunder was able to create increasing sales in a practically unlimited market. In 1919 it paid the taxpayer $21,123.20 royalty, which represented but one-fifth of 10 per cent of the sales for that year. The question now is whether there is sufficient evidence to find a value for the patent from which the proper amount of exhaustion can be deducted. We must find a value as of June 30, 1911, the date of acquisition by the taxpayer, using the factors available at that time. The evidence is convincing that sales in the sum of at least $600,000 per year could have been reasonably anticipated under the circumstances. Witnesses familiar with the machinery market, and particularly this patented machine, who took into consideration the fluctuation of the market, possible business depressions, etc., testified that the minimum average of sales per year for 11 years should be well over $600,000. Although figures of sales in subsequent years have not been given us, it-is evident that, since in 1919 the taxpayer received $21,123.20, representing one-fifth of 10 per cent royalty, the 1919 sales were greater than the estimate we are asked to accept. Having established that $600,000 a year in sales could reasonably have been anticipated for the remaining life of the patent, the owners of the patent would then be assured of an income of at least $60,000 per year. The total return for 11 years would be $660,000. In consideration of all the facts and circumstances of this appeal, we find that the value of the patent at the time acquired was $337,000. The taxpayer’s interest therein would be one-fifth of this sum, or $67,400. The annual deduction for exhaustion of the tax [564] payer’s interest in the patent over its remaining life of 11 years, 5 months, and 19 days, is $5,879.79. We are of the opinion that the taxpayer is entitled to a deduction of $5,879.79, as exhaustion, from his gross income for the year 1919.