APPEAL OF GOULD COUPLER CO.
| Decision Date | 16 November 1926 |
| Docket Number | Docket No. 791. |
| Citation | 5 BTA 499 |
| Parties | APPEAL OF GOULD COUPLER CO. |
| Court | U.S. Board of Tax Appeals |
Richard T. Greene, Esq., and James L. Dohr, Esq., for the petitioner.
E. C. Lake, Esq., for the Commissioner.
The petitioner appeals from the determination of a deficiency of $202,104.65 in income and profits taxes for the years 1918 and 1919. It alleges error by the Commissioner, in excluding from invested capital the value of patents acquired for capital stock; in offsetting operating deficits of some affiliated companies against the surplus of other companies in the affiliated group in ascertaining invested capital of the group; in excluding from invested capital expenditures for development of patents; in using an incorrect capital sum in computing exhaustion, wear and tear and obsolescence; in disallowing the deduction in 1918 of intercompany losses occurring prior to 1918; and in disallowing the deduction of a loss arising through the stock of subsidiary corporations having become worthless.
FINDINGS OF FACT.
About 1884, Charles A. Gould started in the business of manufacturing and selling car axles, locomotive axles, locomotive frames and link-and-pin couplers for railroad equipment. In 1886 he acquired a patent for an automatic car coupler known as the "Barnes" patent. Shortly thereafter he acquired the so-called "Browning" patent covering an automatic coupler with a self-opening head. Up to this time the link-and-pin coupler was being used on the railroads of the United States. Gould obtained orders from certain railroad companies, including the New York Central, the Erie, and the Lackawanna, and commenced supplying automatic couplers to them, although continuing to make and to sell the link-and-pin couplers. To obtain orders it was necessary to secure the confidence of the railroads in automatic couplers, and Gould was enabled to do this because of the contacts he had made in selling his other products to them. There was another patent for an automatic coupler known as the "Jenny" patent which was ahead of the Barnes patent in time. This was being used on Pullman cars as well as on freight cars, and had been adopted by the Pennsylvania Railroad. The patents thus far owned by Gould were for freight cars. Thereafter he bought the Cowell patents for a platform buffer to be used on passenger cars in conjunction with the automatic coupler, and he then obtained orders from the New York Central Railroad for couplers, vestibules and platforms for passenger cars. At that time there were about twenty different patents for automatic couplers being made by as many competitors in the automatic coupler field.
In 1889 the Gould Coupler Co. of West Virginia was organized, with an authorized capital stock of $5,000,000. In December, 1889, Charles A. Gould sold and conveyed to this company all letters patent which he owned for "automatic car coupling device" for the United States, in exchange for $4,999,500 par value of its capital stock. The remaining $500 of capital stock was issued for cash. The letters patent so transferred were the following:
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Patent No. | Date of | Subject. | Inventor
| issuance. | |
---------------------------|---------------|---------------------------|-----------------
10291 ___________________ | Feb. 27, 1883 | Car coupling ___________ | Browning
254106 __________________ | Feb. 28, 1882 | ____do___________________ | Do
273343 __________________ | Mar. 6, 1883 | ____do___________________ | Do
273664 __________________ | ____do_______ | ____do___________________ | Do
274569 __________________ | Mar. 27, 1883 | ____do___________________ | Cutler
295483 __________________ | Mar. 18, 1884 | Car coupler buffer _____ | Browning.
337650 __________________ | Mar. 9, 1886 | Car coupling ___________ | Barnes.
304668 __________________ | Sept. 2, 1884 | Car buffer _____________ | Ricker.
306777 __________________ | Oct. 21, 1884 | ____do___________________ | Do.
319796 __________________ | June 9, 1885 | Car bumper _____________ | Cowell.
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In addition to selling automatic couplers this company continued the business of manufacturing and selling axles, locomotive frames, and link-and-pin couplers, that had been established and carried on by Gould individually. At first the company did not have the facilities for manufacturing the automatic couplers but it had them made for it by others under contract. In the fall of 1893 it completed a plant at Depew, N. Y., where it manufactured malleable iron couplers, passenger car platforms, vestibules, draft gears, passenger car vestibules, and journal boxes. The link-and-pin coupler was covered by patents but the company did not own any of these patents.
The "Jenny" coupler and the "Barnes" coupler each was based on contour lines and was known as a vertical plane coupler. They were made on the principle of two swinging knuckles or jaws pivoting in the head of the coupler, one knuckle engaging in the counter or recess of the opposite coupler. The Barnes coupler differed from the Jenny coupler in the means of locking the knuckle in position. The railroads would not adopt a patented device, so the owners of the Jenny patent waived their rights to the contour-lines principle in so far as its use on freight cars was concerned, but they did not waive it as to passenger cars. The Gould Coupler Co. then made some changes in the contour-lines principle so as to avoid infringing the Jenny patent on passenger cars, and acquired patents covering these changes.
It was necessary to develop and improve the first automatic couplers in order to overcome difficulties encountered from time to time in use and to meet the requirements of the railroads for safety and increased service. On March 3, 1893, the Federal Safety Appliance Act became a law. It prohibited the use after January 1, 1898, in interstate traffic, of cars not equipped with couplers which coupled automatically by impact and which could be uncoupled without the necessity of men going between the ends of the cars. By the date prescribed in that Act the link-and-pin coupler disappeared from use on the railroads. With the advent of the automatic coupler it became possible to increase the size and capacity of cars and to increase the number of cars in a train, and this result in turn necessitated further development and improvement in the automatic coupler. The period from 1892 to 1900 was one of continuous experimentation and development. During that time there were improvements and developments of the Barnes coupler, especially in the locking device. About 1900 the Gould Coupler Co. adopted a new style of lock, known as the Allen lock. Some years later the Barnes coupler evolved into what was known as the "D" type, or A. R. A. standard coupler, and the "Z" type, which is still being made by the corporation which succeeded the petitioner. In 1892 there were thirty-five other automatic couplers on the market with different types of locking devices. The number of concerns making automatic couplers was gradually reduced until there were five besides the Gould Coupler Co. With the exception of McConway & Torley, who owned the Jenny patent and who made couplers for passenger cars as well as for freight cars, these concerns originally made only automatic couplers for freight cars.
The Gould Coupler Co. of West Virginia, during the period from the date of its organization down to June, 1903, acquired a number of letters patent which were developments, improvements, or changes of the Barnes and Browning patents, and also letters patent covering buffers, passenger car platforms and vestibules, car trucks, draft gears and journal boxes. These letters patent were acquired by purchase or taken out by or on behalf of the Gould Coupler Co. upon inventions made by persons in its employ. Some of them were necessary to protect patents already owned; others covered improvements or developments of such patents.
This company also acquired a series of patents covering improved methods of lighting passenger trains. Originally passenger cars were lighted by oil lamps. This method was replaced by the Pintsch gas system, which was in general use up to the time of the introduction of electricity. The Pintsch gas system was objectionable from the standpoint of comfort and safety. About 1898, Gould acquired the American rights to an English system of lighting cars by electricity, known as the "Stone" system, whereby each car was equipped with a generator driven from the axle and with batteries for the storage of electricity for use while the car is not in motion. The "Stone" system was put into use on the New York Central and the Michigan Central railroads. It did not meet the demands for service of the railroads of the United States, and the Gould Coupler Co. acquired letters patent covering American inventions for lighting systems similar to, but which were improvements over, the "Stone" system.
The following is a list of the patents acquired by the Gould Coupler Co. of West Virginia, in addition to those originally transferred to it by Gould, between the time of its organization and June, 1903. Those dated subsequent to June, 1903, are patents for which application had been filed prior thereto and the rights therein assigned to the Gould Coupler Co. of West Virginia.
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