Hyatt Roller Bearing Co. v. United States

Full title: HYATT ROLLER BEARING CO. v. UNITED STATES, and four other cases

Court: Court of Claims

Date published: Oct 20, 1930

43 F.2d 1008 (Fed. Cir. 1930)

Opinion

Nos. B-426 to B-430.

October 20, 1930.

Separate suits by the Hyatt Roller Bearing Company, by the Remy Electric Manufacturing Company, by the Perlman Rim Corporation, by the Dayton Engineering Laboratories Company, and by the New Departure Manufacturing Company, against the United States.

Judgment for plaintiffs.

These suits are for the recovery of certain amounts with interest paid as income and profits tax alleged to have been erroneously and illegally collected for the fiscal year ended June 30, 1917, as follows: Hyatt Roller Bearing Company, $84,857.09; Remy Electric Manufacturing Company, $24,529.20; Perlman Rim Corporation, $19,713.63; Dayton Engineering Laboratories Company, $71,128.02; New Departure Manufacturing Company, $74,646.98; totaling $274,854.92.

The defendant contends that plaintiffs are not entitled to recover, and although no counterclaims were filed it asks the court to give judgments in favor of the defendant against the plaintiffs for certain amounts with interest representing income and profits tax alleged to be due from the plaintiffs in excess of the amounts paid as follows: Hyatt Roller Bearing Company, $112,492.03; Remy Electric Manufacturing Company, $39,487.62; Perlman Rim Corporation, $62,729.99; Dayton Engineering Laboratories Company, $65,526.71; New Departure Manufacturing Company, $91,234.11; totaling $371,470.46.

The plaintiffs and certain other corporations hereinafter mentioned were affiliated with the United Motors Corporation during the taxable year. The questions involved are all substantially issues of fact, and are: (1) The actual cash value of stock of plaintiffs paid in to the United Motors Corporation prior to and during the taxable year for its stock for consolidated invested capital purposes; (2) the March 1, 1913, value of certain patents and patent rights of the Hyatt Roller Bearing Company, Dayton Engineering Laboratories Company, and the New Departure Manufacturing Company, and the cost of certain patents to the Perlman Rim Corporation for exhaustion purposes; (3) the reasonableness of the allowances by the Commissioner of Internal Revenue for exhaustion, wear, and tear of physical assets; (4) whether the Perlman Corporation received taxable income of $1,010,000 on December 6, 1916, in connection with patent No. 1052270 as damages and profits for infringement prior to the date on which it acquired the patents, or whether the amount represented a capital transaction; and (5) whether plaintiffs may legally recover any amounts in respect of the tax paid, it being the contention of the defendant that inasmuch as the tax sought to be recovered represented a portion of the tax paid by plaintiffs on their returns filed for the fiscal year 1917 no recovery can be had.

The plaintiffs duly filed claims for refund and these suits were timely instituted. The Commissioner of Internal Revenue made audits of the income-tax returns of plaintiffs and the consolidated excess-profits tax return filed for plaintiffs, the United Motors Corporation, the Harrison Radiator Corporation, United Motors Service, Inc., the New Departure Realty Company, and the Jackson Rim Company, for the fiscal year ended June 30, 1917, and held that there had been no overpayments. For the purpose of consolidated invested capital, the commissioner valued the stock of plaintiffs determined by him to have been paid in to United Motors Corporation on the basis of $55 a share for the number of shares of stock of United Motors Corporation issued therefor and reduced the amount allowable in invested capital thus determined by the amount of $9,915,346.69 through the application of 20 per cent. limitation on intangibles. At that time it was the position of the Commissioner of Internal Revenue that the acquisition of stock of plaintiffs by United Motors Corporation for its stock was the acquisition of tangible and intangible assets. The Commissioner of Internal Revenue determined the total consolidated invested capital for the taxable year to be $51,353,588.50. All parties now agree that the starting point for the determination of consolidated invested capital is the actual cash value of the stock of plaintiffs paid in to United Motors Corporation for its stock.

The defendant now contends that the consolidated invested capital for the taxable year was $40,223,756.37 and plaintiffs claim that the consolidated invested capital was in excess of $73,000,000. The commissioner, although he determined large values for patents, allowed no deduction to any of the plaintiffs except the Perlman Corporation for exhaustion of patents because they had claimed none in their original returns. In the case of the Perlman Corporation, he allowed a deduction of $145,323.68 for exhaustion of patents. The defendant now contends for lesser values for the patents upon which to compute the allowances for exhaustion.

Plaintiffs, who owned patents, claim large values therefor and, together, they contend for deductions for exhaustion totaling $1,687,158.90.

The Commissioner of Internal Revenue allowed deductions for depreciation of plant and equipment totaling $843,990.54. Plaintiffs contend for greater deductions through increased values, and higher rates; the total amount claimed being $1,647,728.80. The defendant insists that the allowances by the commissioner were reasonable.

The defendant contends that the Perlman Corporation received income in December, 1916, when it received a check from the Standard Parts Company for $1,010,000 in connection with the infringement of Perlman patent, No. 1,052,270, and that, as this amount was not reported by the Perlman Company, its income should be increased accordingly.

The Perlman Corporation contends that inasmuch as it acquired this patent and all rights to damages and profits for past infringement for stock, whatever it subsequently received from the Standard Parts Company was merely a conversion of a capital asset and did not represent income.

On the fifth point, the defendant contends that inasmuch as the tax for which plaintiffs seek judgment was paid without protest they cannot recover. Plaintiffs insist that since they duly filed claims for refund they are entitled to recover under section 252 of the Revenue Act of 1918 ( 40 Stat. 1085) and sections 1316 and 1318 of the Revenue Act of 1921 (26 USCA §§ 156, 157).

Findings of Fact

1. The United Motors Corporation was organized under the laws of New York, May 11, 1916. Prior to May, 1917, its business was the acquisition and holding of stock of companies engaged in the manufacture and sale of automobile parts, and thereafter this company itself engaged in the manufacture of automobile parts and continued to acquire stock of other companies so engaged from the date of organization. The authorized capital stock of the United Motors was at first 1,200 shares of no par value. On May 22, 1916, the authorized stock was increased to 1,200,000 shares of no par value, of which 1,195,000 shares were designated as class A and had no voting power, and 5,000 shares were designated as class B voting stock. May 16, 1917, by amendment of the certificate of incorporation, this classification of shares was eliminated and all shares were given equal voting rights.

May 22, 1916, W.C. Durant and Louis G. Kaufman made an offer in writing to the United Motors to sell to it the control of certain companies engaged in the automobile parts business, as follows:

"We hereby offer to purchase and pay for 5,000 shares of the class B stock and 1,125,000 shares of the class A stock of your company by delivering to your company the following securities upon the following terms and conditions:

"(a) 1,500 shares of the common capital stock of the Dayton Engineering Laboratories Company, a corporation of Ohio.

"(b) 7,963 shares of the capital stock of the Remy Electric Company, a corporation of Indiana.

"(c) 3,997 shares of the capital stock of the Hyatt Roller Bearing Company, a corporation of New Jersey.

"(d) 25,000 shares of the common capital stock of the New Departure Manufacturing Company, a corporation of Connecticut.

"(e) 97,000 shares of the common stock of the Perlman Rim Corporation, a New York corporation.

"(f) 3,000 shares of the class A stock of the Perlman Rim Corporation, a New York corporation.

"If we shall be unable to deliver all of the shares set forth above, there shall be reserved by you for future delivery to us the following amounts:

"(1) Four and one-fourth (4¼) shares of your class A stock for each share of New Departure common stock not delivered.

"(2) Two shares (2) of your class A stock for each share of Perlman Rim stock not delivered."

This offer was presented to the stockholders of United Motors at a meeting held May 22, 1916, at which a resolution was adopted authorizing the board of directors to accept the offer and to issue and deliver the company's stock in payment therefor. On the same date the board of directors of United Motors accepted the offer in its terms and authorized the issuance and delivery of certificates for 5,000 shares of class B stock and 1,195,000 shares of class A stock to Louis G. Kaufman and W.C. Durant or their order upon delivery of the stock of the corporations mentioned. The transaction was carried out, as will hereinafter be set forth in more detail.

2. The Hyatt Roller Bearing Company, a New Jersey corporation, was organized November 7, 1892, with its principal place of business at Harrison. Until May 1, 1917, it was engaged in the manufacture and sale, and thereafter in the sale, of roller bearings for automobiles and other purposes.

From April 23, 1900, until June 26, 1917, the authorized capital stock of the Hyatt Roller Bearing Company consisted of 4,000 shares of common stock and 1,000 shares of preferred stock, both of the par value of $100 a share. June 26, 1917, the stockholders reduced the authorized capital stock of the Hyatt Company to 1,500 shares.

From May 31, 1916, to May 1, 1917, the entire outstanding capital stock of the Hyatt Company consisted of 3,997 shares of common stock, all of which was acquired by the United Motors June 6, 1916, in the manner hereinafter set forth, and was owned by said United Motors until May 1, 1917. On the last-mentioned date United Motors surrendered 2,497 shares of this stock, which were retired and not reissued, but retained the balance of the stock. Upon the surrender of said 2,497 shares of stock, the Hyatt Company transferred to United Motors its entire assets with the exception of the following:

Buildings .................................................. $78,923.26 Office and laboratory furniture and fixtures ............... 22,650.31 Automobiles ................................................ 2,500.90 __________ 104,074.47 Less reserve for depreciation .............................. 5,784.31 __________ Total property and plant .............................. 98,290.16 Cash ............................................ $45,603.30 Accounts receivable ............................. 5,983.03 United Motors Corporation ....................... 123.51 _________ Current assets ............................................. 51,709.84 __________ Total ................................................. 150,000.00

United Motors Corporation assumed all the debts, liabilities, and accounts payable of the Hyatt Company, and thereupon constituted the Hyatt Roller Bearing Division of United Motors to conduct the business, and such division did thereafter conduct the business theretofore conducted by the Hyatt Roller Bearing Company.

At all times herein mentioned until April 30, 1917, the Hyatt Roller Bearing Company owned and employed in its business a large number of patents relating to antifriction bearings, of which the principal patent was No. 958,144 issued April 17, 1910, upon the application of Charles S. Lockwood relating to improvements in the processes for making helical rolls for use in roller bearings. May 1, 1917, United Motors acquired all the patents owned by Hyatt Roller Bearing Company through a partial liquidation of the Hyatt Company and thereafter owned and employed the same in its business. The Lockwood patent, No. 958,144, afforded a monopoly during its life of the helical roller bearing business.

The fair market value on March 1, 1913, of the patents owned by the Hyatt Roller Bearing Company, of which the Lockwood patent was the principal one, was $4,000,000. The reasonable allowance for ten months of the taxable year for the exhaustion of the patents owned by the Hyatt Roller Bearing Company, as aforesaid, computed upon the life of the principal patent, No. 958,144, of 14 years and 2 months, was $235,294.12.

On May 1, 1917, United Motors Corporation acquired in partial liquidation of the Hyatt Roller Bearing Company all of the patents owned by the latter company at a cost of $6,923,076.92, at which time the remaining life of the patents computed upon the basis of the principal patent, No. 958,144, was ten years, and the reasonable allowance for exhaustion of said patents for the last two months of the fiscal year ended June 30, 1917, was $158,384.62.

The Commissioner of Internal Revenue, in the determination of allowances to the plaintiffs and other members of the consolidated group for exhaustion, wear, and tear of physical assets used in businesses, used the values or costs as determined by him as the basis for such allowances. In computing such allowances the Commissioner of Internal Revenue applied the rates normally used for depreciation of such properties to the various classes of depreciable property. Plaintiffs claim that the values upon which the commissioner computed his allowances were inaccurate and that the allowances for exhaustion for the taxable year should be at rates in excess of those used by the commissioner. The plants and properties were in almost constant operation, and practically throughout the entire taxable year the corporations were compelled to employ to a large degree in the operation of their plants and equipment persons who were unskilled and incompetent properly to operate and care for the various classes of machinery and equipment. Great effort was made by the corporations to maintain their properties in good condition and to maintain their machinery and equipment in a proper state of efficiency, but the circumstances and conditions were such that they were not able properly to do this, and the exhaustion, wear, and tear of the buildings, machinery, and equipment were greater than under ordinary circumstances.

Some of the depreciable property owned by plaintiff was acquired prior to March 1, 1913, and a portion subsequent thereto. There is no satisfactory proof that the values and costs of depreciable assets owned by plaintiff on March 1, 1913, and acquired subsequent to that date as determined by the Commissioner of Internal Revenue were incorrect.

By reason of the conditions existing in the taxable year, the reasonable allowance for exhaustion, wear, and tear of the plant and equipment of the Hyatt Roller Bearing Company and the Hyatt Roller Bearing Division of United Motors upon the values determined by the Commissioner of Internal Revenue was, for the buildings, 2½ per cent.; machinery and equipment, 15 per cent.; office and laboratory equipment, 15 per cent.; tools, dies, and patterns, 100 per cent.; automobiles, 25 per cent.

The Hyatt Roller Bearing Company upon its return for the taxable year paid income and profits tax for the fiscal year ended June 30, 1917, of $30,580.84 on December 10, 1917, and $131,619.14 on June 15, 1918, totaling $162,199.98. This tax was paid without specific protest.

June 10, 1922, this company duly filed a claim for refund of $97,239.98, or such greater amount as might be legally refundable. This claim was either not acted upon or was denied by the Commissioner of Internal Revenue and this suit was timely instituted.

In 1923 the Commissioner of Internal Revenue made a jeopardy assessment of an additional tax against this company. The company filed a claim for abatement, and subsequently, February 13, 1925, the Commissioner of Internal Revenue allowed the claim in abatement in part. The company instituted a proceeding before the United States Board of Tax Appeals contesting the correctness of the commissioner's determination of an additional tax. On May 6, 1929, the Board of Tax Appeals entered its decision that collection of the proposed additional tax was barred by the statute of limitation and dismissed the proceeding.

3. The Remy Electric Manufacturing Company, an Indiana corporation, with principal place of business at Anderson, was organized October 5, 1901. Until June 1, 1917, its business was the manufacture and sale, and, after that date, the sale of automotive electric equipment and similar articles.

After October 7, 1912, and at all times herein mentioned, the authorized capital stock of this company consisted of 10,000 shares of common and 5,000 shares of preferred stock of the par value of $100 each.

From May 1, 1915, to June 1, 1917, the entire outstanding stock of this company consisted of 7,963 shares of common stock of $100 par value, all of which was acquired on June 6, 1916, by United Motors in the manner hereinafter set out, and was owned by said United Motors until June 1, 1917.

On the last-mentioned date United Motors surrendered 5,963 shares of common stock of the Remy Company, which were thereupon retired and not reissued, but retained the balance of 2,000 shares. Upon the surrender of said 5,963 shares the Remy Company transferred to the United Motors its entire assets with the exception of the following:

Real estate, plant, and equipment ............ $175,268.51 Less reserve for depreciation ................ 17,222.81 ___________ $158,045.70 Cash ..................................................... 2,000.00 Accounts receivable, Remy Electric Division .............. 39,954.30 ___________ In all .............................................. 200,000.00

United Motors assumed all the debts, liabilities, and accounts payable of the Remy Company and thereupon constituted the Remy Electric Division of United Motors to conduct the business, and such division did thereafter and throughout the taxable year conduct the business theretofore carried on by the Remy Electric Manufacturing Company.

The allowance to which Remy Electric Manufacturing Company was entitled for exhaustion of patents owned by it during the taxable year was $7,335.66, and the allowance to which the Remy Electric Division of United Motors Corporation was entitled for exhaustion of patents for the month of June, 1917, was $1,057.82.

Some of the depreciable property owned by plaintiff was acquired prior to March 1, 1913, and a portion subsequent thereto. There is no satisfactory proof that the values and costs of depreciable assets owned by plaintiff on March 1, 1913, and acquired subsequent to that date, as determined by the Commissioner of Internal Revenue, were incorrect.

By reason of the conditions existing in the taxable year, the reasonable allowance for exhaustion, wear, and tear of the plant and equipment of the Remy Electric Manufacturing Company and the Remy Electric Division of United Motors upon the values determined by the Commissioner of Internal Revenue was, for the buildings, 2½ per cent.; machinery and equipment, 15 per cent.; furniture and fixtures, 15 per cent.; dies, jigs, tools, patterns, and drawings, 100 per cent.; automobiles, 33 1/3 per cent.

The Remy Electric Manufacturing Company upon its returns for the taxable year paid income and profits tax for the fiscal year ended June 30, 1917, of $15,736.53 on December 12, 1917, and $40,467.59 on June 17, 1918, totaling $56,204.12. This tax was paid without specific protest.

June 10, 1922, this company duly filed a claim for refund of $23,404.32, or such greater amount as might be legally refundable. This claim was either not acted upon or was denied by the Commissioner of Internal Revenue, and this suit was timely instituted.

In 1923 the Commissioner of Internal Revenue made a jeopardy assessment of an additional tax against this company. The company filed a claim for abatement, and subsequently, February 13, 1925, the Commissioner of Internal Revenue allowed the claim in abatement in part. The company instituted a proceeding before the United States Board of Tax Appeals contesting the correctness of the Commissioner's determination of an additional tax. On May 6, 1929, the Board of Tax Appeals entered its decision that collection of the proposed additional tax was barred by the statute of limitation and dismissed the proceeding.

4. The Dayton Engineering Laboratories Company, an Ohio corporation with principal place of business at Dayton, was organized July 22, 1909, and was engaged in the manufacture and sale of automotive electrical equipment.

On and after May 1, 1916, the authorized capital stock of this company consisted of 1,500 shares of common and 2,000 shares of preferred stock, of a par value of $100 each. All voting power was vested in the common stock. The entire authorized capital stock of the Dayton Company was outstanding at all times herein mentioned. United Motors acquired the entire 1,500 shares of common stock of the Dayton Company in the manner hereinafter set out and on June 6, 1916, and thereafter, was the owner of such stock.

The Dayton Engineering Laboratories Company acquired and thereafter at all times referred to herein owned and employed in its business a license from Conrad Hubert (said license being exclusive except as to the grantor, who did not engage in business) under Coleman patent 745,157 issued November 24, 1903, and Coleman patent No. 842,827 issued January 29, 1907, both relating to electric starters for automobiles, such license being for the life of said patents. The fair market value of the license owned by this company for these patents on March 1, 1913, was $4,000,000. Coleman patent No. 842,827, January 29, 1907, was the principal of these patents and on March 1, 1913, it had a remaining life of 10 years and 11 months, and the reasonable allowance to the Dayton Company for exhaustion of its license for the taxable year was $366,412.21.

The Dayton Company also acquired at the respective dates of filing, and thereafter owned and employed in its business, the following patents and applications for patents:

(1) Application of Charles F. Kettering, No. 633443, filed June 15, 1911, relating to improvements in engine-starting devices, and letters patent No. 1150523 issued thereon August 17, 1915.

(2) Application of Charles F. Kettering, No. 621512, filed April 17, 1911, relating to improvements in engine-starting, lighting, and ignition systems, and letters patent No. 1171055 issued thereon February 8, 1916.

(3) Application of Charles F. Kettering, No. 699400, filed May 24, 1912, relating to improvements in electric machines, and letters patent No. 1191083 issued thereon July 11, 1916.

(4) Application of Charles F. Kettering, No. 564737, filed June 3, 1910, relating to improvements in ignition systems, divided and filed as No. 699536, filed on May 24, 1912, and letters patent No. 1233369 issued thereon July 17, 1917.

(5) Application of Charles F. Kettering, No. 721237, filed September 19, 1912, relating to improvements in engine-starting devices, and letters patent No. 1240348 issued thereon September 18, 1917.

(6) Application of Kettering and Chryst, No. 732483, filed November 20, 1912, relating to improvements in systems of selective electrical distribution, divided and filed as No. 94664, filed May 1, 1916, and letters patent No. 1264943 issued thereon May 7, 1918.

The fair market value on March 1, 1913, of the aforementioned patents and applications for patents was $1,000,000. The principal patent in the group of patents and applications was the Kettering patent, No. 1171055, relating to improvements in engine-starting, lighting, and ignition systems, for which application was filed April 17, 1911, on which patent was issued February 8, 1916. The reasonable allowance for the taxable year for the exhaustion of the patents in the last-mentioned group which had been issued to the Dayton Company to the taxable year, computed upon the life of the principal patent, No. 1171055, was $58,823.53.

Some of the depreciable property owned by plaintiff was acquired prior to March 1, 1913, and a portion subsequent thereto. There is no satisfactory proof that the values and costs of depreciable assets owned by plaintiff on March 1, 1913, and acquired subsequent to that date, as determined by the Commissioner of Internal Revenue, were incorrect.

By reason of the conditions existing in the taxable year, the reasonable allowance for exhaustion, wear, and tear of the plant and equipment of the Dayton Engineering Laboratories Company upon the values determined by the Commissioner of Internal Revenue was, for the buildings 2½ per cent.; machinery and equipment, 15 per cent.; furniture and fixtures, 15 per cent.; automobiles and trucks, 25 per cent.; tools, dies, jigs, patterns, and drawings, 100 per cent.

The Dayton Engineering Laboratories Company upon its returns for the taxable year paid an income and profits tax for the fiscal year ended June 30, 1917, of $25,526.22 on December 12, 1917, and $66,275.92 on January 4, 1918, totaling $91,802.14. This tax was paid without specific protest.

June 10, 1922, this company duly filed a claim for refund of $47,922.14, or such greater amount as might be legally refundable. This claim was either not acted upon or was denied by the Commissioner of Internal Revenue, and this suit was timely instituted.

In 1923 the Commissioner of Internal Revenue made a jeopardy assessment of an additional tax against this company. The company filed a claim for abatement, and subsequently, February 13, 1925, the Commissioner of Internal Revenue allowed the claim in abatement in part. The company instituted a proceeding before the United States Board of Tax Appeals contesting the correctness of the commissioner's determination of an additional tax. On May 6, 1929, the Board of Tax Appeals entered its decision that collection of the proposed additional tax was barred by the statute of limitation, and dismissed the proceeding.

5. The New Departure Manufacturing Company, a Connecticut corporation, was organized in 1899 and was engaged principally in the manufacture and sale of ball bearings, coaster brakes, cyclometers, bells, and similar devices.

On and after May 1, 1916, the authorized capital stock of this company consisted of 25,000 shares of common stock and 5,000 shares of preferred stock, of the par value of $100 each. All voting power was vested in the common stock.

On June 30, 1916, the entire authorized capital stock of the New Departure Company was issued and outstanding.

June 6, 1916, the United Motors acquired for its stock in the manner hereinafter set forth 23,038 shares of the common stock of New Departure Manufacturing Company. Thereafter the United Motors acquired on the several dates specified, and for the amounts stated, the following shares:

=============================================== Date | Cash paid | No. shares ---------------------|------------|------------ October 31, 1916 ... | $30,750.00 | 110 November 30, 1916 .. | 34,625.00 | 125 December 30, 1916 .. | 3,300.00 | 12 March 8, 1917 ...... | $ 2,475.00 | 9 March 17, 1917 ..... | 1,365.00 | 5 March 30, 1917 ..... | 35,750.00 | 130 -----------------------------------------------

All such stock was thereafter owned by United Motors.

6. The New Departure Realty Company, a Connecticut corporation, was organized June 20, 1916, as a realty holding corporation, with an authorized capital stock of 2,500 shares of a par value of $100 each. With the exception of three qualifying shares, all this stock was subscribed for at par and paid for in cash by the New Departure Manufacturing Company prior to June 30, 1917, and was owned and held at all times herein mentioned by that company.

Prior to March 1, 1913, the New Departure Manufacturing Company acquired and thereafter owned and employed in its business the applications upon which were issued letters patent No. 850077, April 9, 1907, of Harry P. Townsend, and letters patent No. 1069603 issued August 5, 1913, on application filed by James S. Copeland; both relating to bicycle and motor-cycle coaster brakes. This company has at all times owned said applications and the patents issued thereon. It also owned a number of supporting patents relating to the same business, of which it enjoyed a monopoly except to the extent that it granted licenses to others.

On March 1, 1913, the fair market value of the aforementioned patents and applications for patent was $1,750,000. Copeland Patent, No. 1069603, issued August 5, 1918, was the principal and most important of these patents. The reasonable allowance for the taxable year for the exhaustion of these patents, computed upon said March 1, 1913, value, upon the basis of the life of the principal patent mentioned, was $102,941.18.

Prior to March 1, 1913, the New Departure Manufacturing Company also acquired and thereafter owned and employed in its business letters patent No. 921464, issued May 11, 1909, upon the application of Albert F. Rockwell relating to antifriction bearings and particularly double-roll ball bearings supporting both thrust and radial loads. The fair market value of this patent on March 1, 1913, was $750,000, at which time it had a remaining life of 13 years and two months. The reasonable allowance for the taxable year for exhaustion of this patent was $56,962.02.

Some of the depreciable property owned by plaintiff was acquired prior to March 1, 1913, and a portion subsequent thereto. There is no satisfactory proof that the values and costs of depreciable assets owned by plaintiff on March 1, 1913, and acquired subsequent to that date, as determined by the Commissioner of Internal Revenue, were incorrect.

By reason of the conditions existing in the taxable year the reasonable allowance for exhaustion, wear, and tear of the plant and equipment of the New Departure Manufacturing Company upon the values determined by the Commissioner of Internal Revenue was, for the buildings, brick, and concrete, 2½ per cent.; buildings, temporary, 5 per cent.; machinery and equipment, 11.1 per cent.; furniture and fixtures, 15 per cent.; additions to leased property, 5 per cent.

The New Departure Manufacturing Company upon its returns for the taxable year paid income and profits tax for the fiscal year ended June 30, 1917, of $94,345.83 on December 12, 1917, $44,066.77 on June 15, 1918, and $2,026.10 on May 2, 1921, totaling $140,438.70. This tax was paid without specific protest.

June 10, 1922, this company duly filed a claim for refund of $69,173.01, or such greater amount as might be legally refundable. This claim was either not acted upon or was denied by the Commissioner of Internal Revenue and this suit was timely instituted.

7. The Perlman Rim Corporation was organized March 15, 1916, under the laws of New York, with principal place of business at New York City, and continued in existence throughout the taxable year. It was engaged in the manufacture and sale of demountable automobile rims.

The authorized capital stock of this company consisted of 3,000 shares of class A stock having the entire voting power and 97,000 shares of common stock without voting rights; both classes being of no par value.

March 15, 1916, Louis H. Perlman made a written offer to Perlman Rim Corporation, as follows:

"I hereby agree to transfer and assign to your company for $25,000 a year during the life of the patent hereinafter mentioned and 3,000 shares of its class A stock and 97,000 shares of its common stock, the following letters patent and applications for letters patent, namely:

"U.S. Letters Patent No. 1052270, granted to me February 4th, 1913, covering improvement in wheels;

"Serial No. 701214, for improvements in demountable-rim wheels, filed by me in the U.S. Patent Office on June 7th, 1912;

"Serial No. 746078, for improvements in processes of applying pneumatic tires to demountable rims, filed by me in the U.S. Patent Office on February 3rd, 1913;

"Serial No. 483815, for improvement in wheels, filed by me in the U.S. Patent Office on March 16th, 1909; and

"Serial No. 823764, for improvement in wheels, filed by me in the U.S. Patent Office on March 10th, 1914;

"Together with all my rights in and to the said patent and in and to any and all patents or inventions owned by me affecting wheels or rims, together with all improvements thereon and substitutes therefor that at any time may be made by me, including also the right or claim for profits or damages for past infringements.

"I also agree to donate to the treasury of the company for the purpose of procuring working capital and other proper corporate purposes 2,000 shares of the class A stock and 62,000 shares of the common stock of said corporation."

This offer was accepted on the date made. Pursuant to the offer and acceptance, the corporation on March 15, 1916, acquired from Louis H. Perlman, in the manner stated, Perlman patent, No. 1052270, issued February 4, 1913, and the applications recited in said offer and the rights to all claims for past infringement. At the time of acquisition of this patent and the applications the United States courts had held the patent last above mentioned to have been infringed by the Standard Welding Company, afterwards the Standard Parts Company, and had ordered an accounting. The Perlman Rim Corporation issued to Louis H. Perlman, in consideration for the patents and the applications, 35,000 shares of its common stock and 1,000 shares of its class A stock, and agreed to, and did, pay him $25,000 a year during the remaining life of the patent. The fair market value of the stock of the Perlman Rim Corporation issued for this patent and claims for damages and profits for prior infringement was $137.50 a share. The cost to the corporation of said patent on March 15, 1916, was $3,816,850. Upon this cost the Perlman Corporation is entitled to a deduction in the taxable year for the exhaustion of this patent.

April 17, 1916, pursuant to an offer made to and accepted by the board of directors of the Perlman Corporation on March 20, 1916, W.C. Durant and Louis G. Kaufman purchased from the Perlman Corporation 58,000 shares of common stock and 2,000 shares of class A voting stock for which they paid $3,000,000 in cash.

From and after April 17, 1916, the entire outstanding capital stock of Perlman Rim Corporation consisted of 3,000 shares of class A voting stock and 93,000 shares of common, nonvoting stock.

June 6, 1916, the United Motors acquired in the manner hereinafter set forth 3,000 shares of class A stock and 10,000 shares of common stock of the Perlman Rim Corporation. Thereafter, from time to time during the taxable year, the United Motors acquired for its stock additional shares of Perlman stock as hereinafter set forth.

Subsequent to the organization of Perlman Rim Corporation and the acquisition by it from Louis H. Perlman of patent No. 1052270, together with the rights to damages and profits for past infringement, the Perlman Corporation thereafter received from the Standard Parts Company 10,000 shares of the latter's stock which was held by the Perlman Company as security for the claim for damages and profits for infringement which the Perlman Corporation had acquired from Louis H. Perlman for its stock. On December 6, 1916, the Standard Parts Company issued its check for $1,010,000 to the Perlman Corporation in settlement of all claims for infringement, and, at the same time, the Perlman Corporation issued its check for a like amount to the Standard Parts Company for 10,000 shares of Standard Parts Company stock.

The allowance made by the Commissioner of Internal Revenue to the Perlman Corporation of $336.71 for exhaustion, wear, and tear of physical assets for the taxable year was reasonable.

The Perlman Rim Corporation upon its returns for the taxable year paid an income and profits tax for the fiscal year ended June 30, 1917, of $25,328.51. This tax was paid without specific protest.

June 10, 1922, this corporation duly filed a claim for refund of $25,328.51, or such greater amount as might be legally refundable. This claim was either not acted upon or was denied by the Commissioner of Internal Revenue, and this suit was timely instituted.

In 1923 the Commissioner of Internal Revenue made a jeopardy assessment of an additional tax against this corporation. The corporation filed a claim for abatement and subsequently, February 13, 1925, the Commissioner of Internal Revenue allowed the claim in abatement, and determined an overassessment. The corporation instituted a proceeding before the United States Board of Tax Appeals contesting the correctness of the commissioner's determination. On May 6, 1929, the Board of Tax Appeals entered its decision that collection of the proposed additional tax was barred by the statute of limitation and dismissed the proceeding.

8. The Jackson Rim Company was a subsidiary of the Perlman Corporation.

By reason of the conditions existing in the taxable year, the reasonable allowance for exhaustion, wear, and tear of the plant and equipment of the Jackson Rim Company upon the values determined by the Commissioner of Internal Revenue was, for the buildings, 2½ per cent.; machinery and equipment, 10 per cent.; furniture and fixtures, 10 per cent.; autos and trucks, 25 per cent.

9. The Harrison Radiator Corporation was organized under the laws of New York, December 2, 1916. It was engaged in the manufacture of radiators for automobiles. Its authorized capital stock consisted of 10,000 shares of no par value common stock and 10,000 shares of 7 per cent. cumulative preferred stock of the par value of $100 a share. The preferred stock had no voting rights except in certain contingencies, none of which arose. All of the common stock was outstanding.

December 26, 1916, United Motors purchased 8,000 shares of common stock of the Harrison Corporation for $268,340 in cash, and on March 30, 1918, an additional 2,000 shares for $120,000 in cash. Between February 17 and May 14, 1917, United Motors purchased 3,000 shares of preferred stock for $285,000 cash, and on July 31, 1917, 1,000 shares of preferred stock for $97,500 cash.

By reason of the conditions existing in the taxable year, the reasonable allowance for exhaustion, wear, and tear of the plant and equipment of the Harrison Radiator Corporation upon the values determined by the Commissioner of Internal Revenue was, for the buildings, 2½ per cent.; machinery and equipment, 15 per cent.; furniture and fixtures, 15 per cent.; patterns, dies, and drawings, 100 per cent.

10. The United Motors Service, Inc., a Delaware corporation, was organized in November, 1916, with principal place of business at Detroit, Mich. It was engaged principally in the distribution and the servicing of products manufactured by affiliated companies and divisions of United Motors Corporation.

The authorized capital stock of this corporation was $50,000, consisting of 5,000 shares of stock of the par value of $10 each, all of which stock was issued and outstanding and was owned by the United Motors Corporation.

11. On June 6, 1916, W.C. Durant and Louis G. Kaufman substantially complied with their offer to the United Motors Corporation of May 22, 1916, as set forth in finding 1, by delivering to that corporation through the Guaranty Trust Company the following common stocks: Hyatt Roller Bearing Company, 3,918 shares; Remy Electric Manufacturing Company, 7,963 shares; Dayton Engineering Laboratories Company, 1,500 shares; New Departure Manufacturing Company, 23,038 shares; Perlman Rim Corporation, 10,000 common and 2,000 class A (voting). On June 14, 1916, 79 additional shares of common stock of the Hyatt Roller Bearing Company were paid in to the United Motors. On June 6, 1916, United Motors Corporation complied with its commitment to Durant and Kaufman by issuing and delivering to them or their order 932,660 shares of its class A and 5,000 shares of its voting stock. It also issued to John Thomas Smith for legal services rendered the corporation in its formation 1,000 shares of class A stock, totaling 938,660 shares, as follows:

Shares Shares Voting stock: To L.G. Kaufman ................................................. 2,500 To W.C. Durant .................................................. 2,500 _______ 5,000 Class A stock: To Dominick Dominick, for account of Kaufman and Durant ....... 390,000 To Alfred P. Sloan, Jr., for account of Kaufman and Durant ...... 135,000 To Stoughton A. Fletcher, for account of Kaufman and Durant (sh.) .................................................. 80,000 Less (returned) .......................................... 10,000 ______ 70,000 To E.A. Deeds and C.F. Kettering, for account of Kaufman and Durant ........................................................ 60,000 To various stockholders of New Departure Mfg. Co., for account of Kaufman and Durant ............................................ 40,000 To Louis H. Perlman, for account of Kaufman and Durant .......... 2,000 _______ 697,000 To L.G. Kaufman (sh.) ................................... 121,330 Less (returned) ......................................... 3,500 _______ 117,830 To W.C. Durant (sh.) .................................... 121,330 Less (returned) ......................................... 3,500 _______ 117,830 To John T. Smith, services ...................................... 1,000 _______ Total class A ................................................ 933,660 _______ 933,660 _______ Total ................................................................ 938,660

Upon the issuance of the aforementioned United Motors stock, 8,340 shares of class A stock were reserved for 1,962 shares of New Departure Manufacturing Company stock, and 174,000 shares of class A stock were reserved for 87,000 shares of Perlman Rim Corporation stock then outstanding. No additional shares of stock of the New Departure Manufacturing Company in addition to said 23,038 shares of common stock were acquired by United Motors by exchange.

The actual cash value of the aforementioned stocks of the plaintiffs paid in to the United Motors Corporation for its stock, as aforesaid, was $60,947,900. The assets owned by the plaintiffs had an actual cash value of at least this amount. The actual cash value of the stock of United Motors Corporation issued to plaintiffs in exchange for the above-mentioned shares of their stock was $65 a share. The actual cash value of services rendered by John Thomas Smith to United Motors Corporation in the organization of that company was $65,000, and the 1,000 shares of United Motors class A stock issued to him in payment for those services had an actual cash value of $65,000.

The offer made by Durant and Kaufman on May 22, 1916, to the stockholders of the Perlman Rim Corporation was as follows:

"A proposition has been made on behalf of United Motors Corporation to exchange its stock for Perlman Rim Corporation stock on the basis of two shares of its class A stock for one share of Perlman Rim Corporation common, on condition that the United Motors Corporation stock received in exchange shall be deposited with the Guaranty Trust Company, of No. 140 Broadway, New York City, for a period of six months from May 25th, 1916, unless sooner released by the undersigned.

"The United Motors Corporation has been incorporated under the laws of the State of New York, with a capital divided into 1,200,000 shares of no par value, of which 1,195,000 shares, designated as class A stock, have all the rights of class B stock except the right to vote.

"Arrangements have been made by United Motors Corporation to acquire controlling stock interests in the following companies:

"The New Departure Company, of Bristol, Conn.,

"The Hyatt Roller Bearing Company, of Harrison, N.J.,

"The Dayton Engineering Laboratories Company, of Dayton, Ohio,

"The Remy Electric Company, of Anderson, Indiana, and

"The Perlman Rim Corporation, of New York.

"In the event of your desiring to accept the foregoing offer, please forward, subject to the order of the undersigned, your stock certificates, endorsed in blank, to the Guaranty Trust Company, No. 140 Broadway, New York City, which will issue its receipts therefor.

"To avail of this offer, stock certificates must be so deposited with the Guaranty Trust Company on or before June 15th, 1916."

In acceptance of this offer and extensions thereof, and in addition to the 13,000 shares of Perlman Rim Corporation stock paid in by Durant and Kaufman as aforesaid, 52,468 shares of Perlman Corporation stock were paid in to the United Motors Corporation between June 6 and June 15, 1916, both dates inclusive, which said 52,468 shares had an actual cash value of $7,222,517.75, as follows:

================================================= Date | Number of | Amount | shares | ----------------------|-----------|-------------- June 6, 1916 ........ | 3,275 | $512,537.50 June 7, 1916 ........ | 209 | 32,395.00 June 8, 1916 ........ | 1,225 | 184,056.25 June 9, 1916 ........ | 1,200 | 166,800.00 June 12, 1916 ....... | 230 | $33,005.00 June 13, 1916 ....... | 7,770 | 1,041,180.00 June 14, 1916 ....... | 5,680 | 781,000.00 June 15, 1916 ....... | 32,879 | 4,471,544.00 -------------------------------------------------

Thereafter, between June 19, 1916, and June 15, 1917, 29,087 shares of Perlman Rim Corporation stock were paid in to the United Motors Corporation for its stock, which said 29,087 shares had a total actual cash value at the time paid in of $3,852,459.25, as follows:

============================================== Date | Number | Amount | shares | ----------------------|--------|-------------- June 19, 1916 ....... | 1,500 | $ 220,500.00 June 27, 1916 ....... | 306 | 39,321.00 July 17, 1916 ....... | 50 | 6,575.00 July 20, 1916 ....... | 210 | 28,927.50 July 21, 1916 ....... | 40 | 5,575.00 July 26, 1916 ....... | 195 | 26,251.88 Aug. 1, 1916 ........ | 55 | 7,376.87 Aug. 3, 1916 ........ | 410 | 50,942.50 Aug. 7, 1916 ........ | 25 | 3,206.25 Aug. 14, 1916 ....... | 50 | 6,525.00 Aug. 25, 1916 ....... | 1,700 | 215,050.00 Aug. 28, 1916 ....... | 1,000 | 122,375.00 Aug. 30, 1916 ....... | 100 | 11,587.50 Sept. 6, 1916 ....... | 10 | 1,202.50 Sept. 14, 1916 ...... | 13,100 | 1,819,262.50 Sept. 19, 1916 ...... | 231 | 31,069.50 Oct. 16, 1916 ....... | 120 | 16,200.00 Oct. 17, 1916 ....... | 100 | 13,425.00 Oct. 28, 1916 ....... | 8,600 | 1,102,950.00 Oct. 30, 1916 ....... | 55 | $6,902.50 Oct. 31, 1916 ....... | 5 | 623.75 Nov. 2, 1916 ........ | 20 | 2,612.50 Nov. 11, 1916 ....... | 20 | 2,480.00 Nov. 14, 1916 ....... | 10 | 1,241.25 Nov. 20, 1916 ....... | 310 | 38,905.00 Nov. 22, 1916 ....... | 40 | 5,060.00 Dec. 1, 1916 ........ | 35 | 4,165.00 Dec. 12, 1916 ....... | 100 | 11,675.00 Dec. 14, 1916 ....... | 100 | 10,600.00 Jan. 2, 1917 ........ | 5 | 470.00 Feb. 15, 1917 ....... | 10 | 790.00 Mar. 1, 1917 ........ | 5 | 377.50 Mar. 5, 1917 ........ | 200 | 15,500.00 Apr. 4, 1917 ........ | 20 | 1,490.00 May 4, 1917 ......... | 200 | 12,475.00 May 31, 1917 ........ | 50 | 3,031.25 June 15, 1917 ....... | 100 | 5,737.50 ----------------------------------------------

The United Motors Corporation upon payment in of the aforementioned 81,555 shares of Perlman Corporation stock became obligated to and did issue its class A stock for such Perlman stock on the basis of two shares for each share of Perlman Rim Corporation stock paid in.

12. During the fiscal year ended June 30, 1917, the United Motors Corporation owned directly, or controlled through closely affiliated interests, all, or substantially all, of the voting stock of the Hyatt Roller Bearing Company, Remy Electric Manufacturing Company, Perlman Rim Corporation, Dayton Engineering Laboratories Company, New Departure Manufacturing Company, Harrison Radiator Corporation, New Departure Realty Company, Jackson Rim Company, and United Motors Service, Inc., and, during such taxable year these corporations were affiliated for excess-profits tax purposes.

Charles R. Carroll, of New York City (Bright, Thompson, Hinrichs Warren, of Washington, D.C., and John Thomas Smith, of New York City, on the brief), for plaintiffs.

E.C. Lake, of Washington, D.C., and Herman J. Galloway, Asst. Atty. Gen. (Fred K. Dyar, of Washington, D.C., on the brief), for the United States.

Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.

LITTLETON, Judge.

The issues involved in these cases are all essentially questions of fact.

As to the actual cash value of the stocks of the plaintiffs paid in to the United Motors Corporation for its stock, we have found the fact to be that the value of the stocks of the Hyatt Roller Bearing Company, the Remy Electric Manufacturing Company, and the Dayton Engineering Laboratories Company, and 13,000 shares of stock of the Perlman Rim Corporation, paid in was $60,947,900 at the time of such payment, and that the cash values of the additional shares of the Perlman stock paid in between June 6, 1916, and June 15, 1917, were as set forth in Finding 11. These values are clearly warranted and are fully established by the evidence. The capital stocks of the Hyatt Roller Bearing Company, the Remy Electric Manufacturing Company, and the Dayton Engineering Laboratories Company were at all times closely held, and there was no established market price for them. The stocks of the United Motors Corporation and the Perlman Rim Corporation were extensively bought and sold upon recognized stock exchanges. The plaintiffs submitted voluminous proof relative to the various sales of United Motors and Perlman Rim stock and as to the values of the tangible and intangible assets of all of the plaintiffs at the time the stocks were paid in to United Motors Corporation, all of which fully justifies the cash values which we have found for all of the stocks paid in to United Motors Corporation for its stock for consolidated invested capital purposes.

The defendant contends for a cash value for the stocks of plaintiffs paid in to United Motors upon the basis of small numbers of shares changing hands between stockholders from time to time prior to and near the time of the acquisition of the stocks by United Motors. We have examined such sales in the light of all of the other facts established by the testimony, and values based upon such contention are clearly shown not to be a fair basis for arriving at the actual cash values of the stocks paid in. The findings dispose of this question, and no useful purpose would be served by a lengthy discussion of the various contentions advanced by the parties relative to the values contended for by them.

The fair market values on March 1, 1913, which we have found for patents are clearly established by evidence of the position which the owners of such patents occupied in the industry and by facts relative to earnings attributable to such patents and by opinion evidence of value by those fully qualified to testify relative to the values of such property.

The allowances for depreciation upon the basis of the March 1, 1913, values have been computed upon the basis of the life of the principal patents. When the allowance is computed upon patents issued subsequent to March 1, 1913, upon the basis of the fair market value of the applications made prior to that date, the allowance begins from the date of issuance of the patent and is computed upon the basis of the remaining life thereof. This is the recognized method for computing allowances for exhaustion of patents in such cases. Individual Towel Cabinet Service Co., 5 B.T.A. 158; Hartford-Fairmont Co., 12 B.T.A. 98; A.E. Starbuck, Administrator, 13 B.T.A. 796.

In the case of Perlman Rim Corporation patent, No. 1052270, it appears that this patent, together with all rights to damages and profits for infringement of such patent prior to such acquisition, was acquired by the Perlman Rim Corporation on March 15, 1916, from Louis H. Perlman for 36,000 shares of stock and an annuity of $25,000 a year for the life of the patent. At the time of this acquisition the United States courts had found infringement and had granted an injunction and decree for accounting. Perlman v. Standard Welding Co. (D.C.) 231 F. 453, affirmed (C.C.A.) 231 F. 734.

Subsequent to December, 1916, the Standard Welding Company, then known as the Standard Parts Company, issued its check to the Perlman Corporation for $1,010,000 in settlement of all claims for infringement. The facts establish and we have found that the fair market value of the stock of the Perlman Corporation issued in payment for this patent and rights to damages for infringement was $137.50 a share. Upon the basis of this value and the value of the annuity, the cost to the Perlman Corporation of said patent was $3,816,850. Upon this cost the allowance for exhaustion should be computed on the basis of the remaining life of the patent at the date acquired.

In this connection the defendant contends that the check received by the Perlman Corporation from the Standard Parts Company constituted taxable income and, inasmuch as the Perlman Corporation had not reported the same in its return, its income should be increased accordingly. There is no merit in this contention. The Perlman Corporation purchased the right to whatever damages might be recovered for infringement of the patent for stock and to that extent the matter was therefore a capital transaction. The subsequent receipt by the corporation of a check from the Standard Parts Company was nothing more than the conversion of this asset, and no taxable income was received.

With reference to the matter of allowances for exhaustion, wear, and tear of the plants and equipment, the proof does not satisfactorily show that the values and costs of such assets as determined by the Commissioner of Internal Revenue, upon which he computed his allowances, were incorrect. The facts do establish, however, that in almost every case the rates used by the defendant in computing the allowances made were too low. The defendant, while conceding that unusual conditions existed in the plants of the plaintiffs, held that the efforts of plaintiffs to keep their plants, machinery, and equipment in a high degree of efficiency had prevented any extraordinary depreciation within the taxable year. He therefore applied the normal rates in computing exhaustion of such property under usual and ordinary circumstances on the basis of a life of 50 years for buildings, 12½ years for machinery, and 10 years for laboratory equipment and office furniture. The defendant allowed as deductions the total amounts expended for dies, jigs, tools, patterns, and drawings during the taxable year. The facts show that the plants of the plaintiffs were in almost constant operation during the taxable year; that plaintiffs were compelled to employ to a large degree in the operation of their plants and equipment persons who were unskilled and incompetent properly to operate and care for the various classes of machinery and equipment; and that, although plaintiffs made every effort to maintain their properties in good condition and to keep their machinery and equipment in a proper state of efficiency, the circumstances and conditions were such that they were not able properly to do this so as to prevent unusual exhaustion, wear and tear. We have set forth in the findings the rates which should be applied in computing the allowances for exhaustion, wear, and tear for the taxable year for the physical assets of the plaintiffs.

The claim of the defendant that plaintiffs may not recover because the tax in question was not paid under protest is not justified. These are suits against the United States. Section 252 of the Revenue Act of 1918, 40 Stat. 1085, is mandatory in its provision that any overpayment of tax shall be refunded or credited, and sections 1316 and 1318 of the Revenue Act of 1921, 42 Stat. 314 (26 USCA §§ 156, 157), authorize suits for refund if claims for refund are filed. Under these sections and section 145 of the Judicial Code (28 USCA § 250), the right of plaintiffs to maintain the suits and the authority of the court to render judgments for refunds cannot be made to depend upon whether the tax was paid under protest. United States v. Hvoslef, 237 U.S. 1, 35 S. Ct. 459, 59 L. Ed. 813, Ann. Cas. 1916A, 286; Greenport Basin Construction Co. v. United States (D.C.) 269 F. 58; Farmers' Loan Trust Co. et al. v. United States, 64 Ct. Cl. 516. In these cases claims for refund were duly filed and suits were timely instituted. Plaintiffs are therefore entitled to judgments for refund of such amounts as may have been overpaid.

The records do not contain sufficient information with reference to noncontested matters relating to consolidated invested capital and consolidated income for income and excess-profits tax purposes to enable the court to make a computation of the tax and to determine the amounts for which plaintiffs are entitled to judgment. The parties will therefore make a computation of the income and profits tax liabilities of the plaintiffs and the other corporations with which they were affiliated during the taxable year and file a stipulation of the amounts to be included in the judgments to be entered in favor of the plaintiffs.

Entry of judgment in each case will therefore be withheld pending the filing of such stipulation or computation.