Concrete Engineering Co. v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 05 March 1930 |
| Docket Number | Docket No. 19257. |
| Parties | CONCRETE ENGINEERING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
George E. H. Goodner, Esq., for the petitioner.
John D. Foley, Esq., and Lloyd W. Creason, Esq., for the respondent.
In this proceeding, the petitioner seeks a redetermination of its income and profits-tax liability for the calendar year 1920, for which year the respondent has determined a deficiency in the amount of $29,483.78. The petitioner claims that, instead of a deficiency for the year 1920, the respondent should have found an overassessment for that year in the amount of $2,430.68, which makes the total taxes here in controversy the amount of $31,914.46.
The errors alleged are, (1) the failure to allow a deduction of $38,235.29 from gross income on account of exhaustion of patents owned by the petitioner and used in its business; (2) the failure to include in invested capital as paid-in surplus, the unexhausted portion of the value of patents acquired by the petitioner in 1914 and 1918, amounting to not less than $476,429.81; (3) the failure and refusal to allow the petitioner the benefits of sections 327 and 328 of the Revenue Act of 1918; and (4) that the respondent is attempting to assess and collect an alleged deficiency in tax, for the year 1920, after the statute of limitations has run against such assessment and collection.
Petitioner prays that if the Board finds the value of the patents may not be included in invested capital, as paid-in surplus as set forth in allegation of error numbered two hereinabove, and/or finds depreciation deductions on account of exhaustion of said patents are not allowable in computing net income, as set forth in allegation of error numbered one hereinabove, then, in the alternative, it should find that its profits tax should be computed under the provisions of section 328 of the Revenue Act of 1918 as urged in allegation of error numbered three hereinabove.
FINDINGS OF FACT.
The petitioner is a corporation, organized on July 28, 1914, under the laws of the State of Nebraska, with its principal place of business at Omaha. Ever since organization it has been exclusively engaged in reinforced concrete floor construction, utilizing a patent on removable steel forms.
In April, 1912, Charles Louis Meyer, who was an engineer with several years experience in reinforced concrete construction, conceived the idea of using removable steel forms in combined concrete floor and joist construction, instead of the stationary metal and tile forms then in use. He did not have capital of his own with which to exploit the idea, and took the matter up with John W. Towle and the two agreed to organize a partnership in or about April, 1912, under the name of Concrete Engineering Co., Towle to supply the necessary credit, and Meyer to contribute his experience and the use of his idea. Meyer was to have full charge of the partnership's operations.
On July 31, 1912, Meyer, in his own name, made application to the United States Patent Office for a patent on his invention.
The partnership continued until July 28, 1914, at which time it was incorporated as the petitioner herein. During the two years of its existence the partnership manufactured a certain number of steel forms for use under Meyer's invention, and with such forms it, as a subcontractor, constructed 1,500,000 square feet of floor construction at a net profit of approximately $30,000, an average net profit of 2 cents per square foot of floor construction.
Prior to Meyer's invention, the first type of fireproof reinforced floor construction used was the solid concrete slab. This type combined excessive weight with excessive cost. The upper third of the floor slab was in compression, while the lower two-thirds was in tension, the reinforcing steel taking care of this tensional strain. To save on this excessive weight and cost of concrete, the industry resorted to the hollow clay tile construction, in which the hollow tile replaced most of the solid concrete in the lower two-thirds of the slab. This improvement saved both on weight and cost, the steel reinforcing taking care of the tension, and the solid concrete of the upper one-third taking care of the compression. The next improvement was the substitution of a metal form for the hollow clay tile, which further lightened the weight and cheapened the cost without impairing the strength. It was while working with the stationary or permanent steel form that Meyer conceived the idea of a removable steel form, which could be held in place on a frame work until the reinforcing could be placed and the concrete poured and set, and then removed and used on as many subsequent operations as the life of the form would permit.
The advantage of the removable form over the stationary one was the great saving in the cost of the metal of which the forms were constructed. Meyer's idea was merely to rent, install and remove the forms on each contract. It had an additional advantage in that the metal laths necessary for plastering the ceiling, could, under Meyer's idea, be attached after the cement had set; thereby eliminating the possibility of the penetration of rust through the plaster, which was common where the laths had to be installed before the wet cement was poured. About one-half of the first forms made are still in use.
The removable forms invented by Meyer effected a saving to the building industry, in labor and material, amounting to from 3 to 8 or 10 cents per square foot of floor construction, depending upon the types of construction against which the petitioner was competing and the location of the building to be constructed. On the May Building in Cleveland, which was begun in 1913 and finished in 1914, a saving of $70,000 was made by substituting the Meyer idea and forms for the method originally prescribed for the building. This was on an area of 700,000 square feet.
During the two years of the partnership operations, Meyer's steel forms were used as far west as Los Angeles, and as far east as Cleveland. At that time fireproof construction was steadily on the increase.
In 1914 the quantity of floor construction in the United States amounted to 200,000,000 square feet annually, of which one-fourth, or 50,000,000 square feet, was the estimated amount of fireproof or reinforced concrete construction. In July of that year Meyer had reached definite conclusions as to the marketability of his idea and estimated that a corporation operating on his patent could reasonably expect to do an average of 10 per cent of this amount, or 5,000,000 square feet annually, over a period of 15 years. On the basis of this estimate, and using the 2 cents per square foot net profit made by the partnership as a basis, he arrived at a total expected profit from his invention of $1,500,000 over the ensuing 15-year period. He, at that time, placed a cash value on his invention and patent rights of one-third of the total expected profit of $1,500,000, or $500,000.
In 1914 it became apparent that, in order to properly exploit the idea, a corporation was necessary. On July 18, 1914, Meyer assigned to the petitioner, then in the process of organization, his rights to said patent application. On July 28, 1914, the corporation was duly organized and on August 11, 1914, Letters Patent No. 1106665, covering Meyer's invention of "Removable Molds for Concrete Floors," was granted. No stock was issued to Meyer for this patent, and no value therefor has ever been set up on the books of the petitioner, which were but a continuation of the books of the partnership. At the time of incorporation, the petitioner issued $49,500 par value of its capital stock for tangible assets.
Since organization, the petitioner has been exclusively engaged in the reinforced concrete floor and joist construction business, by the use of the Meyer invention and patent thereon.
Meyer's original idea remained the highest development in the art of reinforced concrete floor construction until he developed the double tapered and type feature in 1917, covered by Letters Patent No. 1262686 granted to him on April 16, 1918. He immediately, without consideration, assigned this patent to the petitioner. No value has ever been placed on the books of the petitioner for this patent.
Meyer's second invention was the double tapered end form, the idea being to economize further on the quantity of concrete used where the floor joints join the girder, and yet afford greater strength where strength is needed. While this invention represented a separate and distinct idea, it could be used only in connection with the first invention, although the first one could be used independently of it. The economy effected by this second invention calculated by engineering methods, resulted in a further average saving of three-fourths of a cent per square foot of floor construction. The petitioner was in the position to take for itself the benefit of this additional saving. This saving, applied to the estimated average annual construction of 5,000,000 square feet by petitioner, would amount in 15 years to a total saving of $562,500.
No infringement proceedings have ever been brought against the petitioner in connection with the two patents here in question.
The total amount of square feet of floor constructed by petitioner, from organization in 1913 to October 31, 1928, and the net profit per year, before deducting income taxes, are as follows:
---------------------------------------------------------------
| Square feet |
Year | of floor construction | Net profit
-----------------------|-----------------------|---------------
1913 _________________ | 1,503,010 | ______________
1914 (July 29 to Dec. | |
31) ________________ | 195,876 | $8,101.86
1915 _________________ |...To continue reading
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In re Crist, Bankruptcy No. 86-01450D
...can be met by introducing into evidence a consent, valid on its face, that extends the period for assessment. Concrete Engineering Co. v. Commissioner, 19 BTA 212 (1930), aff'd. 58 F.2d 566 (8th Cir.1932) (cited in Lefebrve v. Commissioner, T.C. Memo 1984-202 para. 84,202 P-H Memo T.C.). If......