[183]*183OPINION.
Trammell:
Both the questions involved in this appeal affect invested capital for the fiscal year ended February 28, 1917. It is contended by the taxpayer that the license agreements acquired by the corporation for the issuance of its stock were tangible property and as such should not be subjected to the limitation on intangibles paid in for stock contained in the Eevenue Act of 1917. The Commissioner in adjusting the invested capital took the position that such agreements were intangible property. The taxpayer in support of its position claimed that the license agreements related to rights in tangible property, that is in machines by which the process was used, to such an extent that their value arose chiefly therefrom. If Dwight and Lloyd had had no patents upon which the license agreements were based, the value of the machines would probably have been limited to their actual cost or their replacement cost. The cost of each machine was only $3,500. Yet from one license agreement alone the taxpayer received $50,000 a year until $400,000 had been received. The right to make and use the machines was dependent upon the patent. Without the patent rights the taxpayer would have had little or no source of income. All persons would have been at liberty to make and use the process and machines without restriction and without any interference by the taxpayer. The value of the machine was small in comparison with the value of the license agreements under the patent.
When the license agreements were made the machines which were to be used were not in existence. There were no machines to lease yet the license agreements were clearly as valuable as after the construction of the machines. The licensees were given the right to use the processes and mechanism patented by Dwight and Lloyd provided they constructed their own machines, the ownership of which passed immediately to the licensors. The fact that the licensees were required to turn over the machines to the li-censors added nothing over the standard cost of the machines to the cash value of the agreements. The value of the contracts rests [184]*184chiefly, if not entirely, upon the patents. Without them there could have been no license agreements of any substantial value.
The taxpayer relies upon article 811 of regulations 45 in support of its position that the license agreements were tangible property. That article of the regulations provides that most contracts are intangible property and that a contract may be regarded as tangible only after a full statement as to its exact nature and a showing to the satisfaction of the Commissioner that it relates to rights in tangible property to such an extent that its value arises chiefly therefrom. This article, however, does not support the position of the taxpayer in this case, as the license agreements do not relate to the machines to such an extent that they derive their chief value therefrom.
Patents, under the Revenue Act of 1917, are not treated as intangibles nor yet specifically as tangibles; the license agreements are one step removed from the patents. They amounted to no more than licenses in the ordinary meaning of that word or privileges to use the processes and mechanism protected by the patents. As such they are intangibles. The article of the regulations above referred to is not authority for holding that contracts or agreements which derive their chief value from patents are tangible assets.
The corporation made no allocation of values as between patents and license agreements when such assets were paid in for stock and the taxpayer has not claimed a value for patents separate and apart from the license agreements. Patents paid in for stock are not, for the year 1917, subject to the limitation prescribed for intangibles. A redetermination of invested capital should be made by the Commissioner in which the aggregate value of patents and license agreements determined by the application of the principles set out in this opinion should be prorated between the patents and license agreements. The limitation on intangibles should be applied to the license agreements. The Revenue Act of 1917 prescribes no limitation on patents paid in for stock other than that they can not be included in excess of the par value of stock issued therefor. The limitation on intangibles should not be applied to the value of the license agreements until that value shall have been separated from the value of the patents.
The second question is whether the value of the license agreements and patents turned over to the corporation for stock at the time of the organization of the corporation had a cash value equal to the par value of the stock issued therefor. The values of the machines and other tangible assets were accepted by the Commissioner, leaving only the question of the values of the intangibles to be determined by the Board. If such intangible assets had an actual cash value at the time they were paid in for stock that value should be included in invested capital up to the par value of the stock issued therefor, subject to the limitation on intangibles contained in the Revenue Act of 1917. The Commisioner determined the value of such intangible assets by taking the average earnings over a period of four and one-sixth years, from January 1,1911, to February 28,1915. These earnings were allocated by attributing to tangible assets a return of 10 per cent, and the balance was capitalized on a basis of 20 per cent. The Commissioner used the earnings for a period of approximately [185]*185three years after acquisition of said assets in ascertaining the cash value thereof as of November, 1912, when they were acquired. In determining the value of assets acquired for stock, the valuation should be based on facts known at the time they were acquired. Subsequent earnings can not be used in the determination unless from past experience or known facts such future earnings might reasonably have been anticipated. Such was the situation in this case. The taxpayer’s business had passed beyond the experimental stage. The Dwight and Lloyd process and mechanism had been recognized by engineers of high standing. Leading scientific publications had contained articles which discussed and approved the process. It was then rapidly replacing the older and more crude methods of refining ores, and it was reasonably anticipated that it would entirely replace other methods in the future. It had been adopted by the leading industrial enterprises in the country engaged in the refining of ores, and they had entered into contracts to use the process for the life of the patents. If the output of ore by these companies by the use of these processes had been uniform the income could have been determined by a mathematical calculation. The taxpayer from all the facts and circumstances had reason to believe that the industrial enterprises using this process would not only increase their output generally but would increase the output from the particular machines then in use and that they would acquire other machines. It had been clearly demonstrated that by the use of these processes ores could be refined on a larger scale and with less expense than by any other method and that certain ores could be treated by this method which otherwise would have been waste material. The foregoing facts were all known at the time the corporation acquired the patents and license agreements.
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[183]*183OPINION.
Trammell:
Both the questions involved in this appeal affect invested capital for the fiscal year ended February 28, 1917. It is contended by the taxpayer that the license agreements acquired by the corporation for the issuance of its stock were tangible property and as such should not be subjected to the limitation on intangibles paid in for stock contained in the Eevenue Act of 1917. The Commissioner in adjusting the invested capital took the position that such agreements were intangible property. The taxpayer in support of its position claimed that the license agreements related to rights in tangible property, that is in machines by which the process was used, to such an extent that their value arose chiefly therefrom. If Dwight and Lloyd had had no patents upon which the license agreements were based, the value of the machines would probably have been limited to their actual cost or their replacement cost. The cost of each machine was only $3,500. Yet from one license agreement alone the taxpayer received $50,000 a year until $400,000 had been received. The right to make and use the machines was dependent upon the patent. Without the patent rights the taxpayer would have had little or no source of income. All persons would have been at liberty to make and use the process and machines without restriction and without any interference by the taxpayer. The value of the machine was small in comparison with the value of the license agreements under the patent.
When the license agreements were made the machines which were to be used were not in existence. There were no machines to lease yet the license agreements were clearly as valuable as after the construction of the machines. The licensees were given the right to use the processes and mechanism patented by Dwight and Lloyd provided they constructed their own machines, the ownership of which passed immediately to the licensors. The fact that the licensees were required to turn over the machines to the li-censors added nothing over the standard cost of the machines to the cash value of the agreements. The value of the contracts rests [184]*184chiefly, if not entirely, upon the patents. Without them there could have been no license agreements of any substantial value.
The taxpayer relies upon article 811 of regulations 45 in support of its position that the license agreements were tangible property. That article of the regulations provides that most contracts are intangible property and that a contract may be regarded as tangible only after a full statement as to its exact nature and a showing to the satisfaction of the Commissioner that it relates to rights in tangible property to such an extent that its value arises chiefly therefrom. This article, however, does not support the position of the taxpayer in this case, as the license agreements do not relate to the machines to such an extent that they derive their chief value therefrom.
Patents, under the Revenue Act of 1917, are not treated as intangibles nor yet specifically as tangibles; the license agreements are one step removed from the patents. They amounted to no more than licenses in the ordinary meaning of that word or privileges to use the processes and mechanism protected by the patents. As such they are intangibles. The article of the regulations above referred to is not authority for holding that contracts or agreements which derive their chief value from patents are tangible assets.
The corporation made no allocation of values as between patents and license agreements when such assets were paid in for stock and the taxpayer has not claimed a value for patents separate and apart from the license agreements. Patents paid in for stock are not, for the year 1917, subject to the limitation prescribed for intangibles. A redetermination of invested capital should be made by the Commissioner in which the aggregate value of patents and license agreements determined by the application of the principles set out in this opinion should be prorated between the patents and license agreements. The limitation on intangibles should be applied to the license agreements. The Revenue Act of 1917 prescribes no limitation on patents paid in for stock other than that they can not be included in excess of the par value of stock issued therefor. The limitation on intangibles should not be applied to the value of the license agreements until that value shall have been separated from the value of the patents.
The second question is whether the value of the license agreements and patents turned over to the corporation for stock at the time of the organization of the corporation had a cash value equal to the par value of the stock issued therefor. The values of the machines and other tangible assets were accepted by the Commissioner, leaving only the question of the values of the intangibles to be determined by the Board. If such intangible assets had an actual cash value at the time they were paid in for stock that value should be included in invested capital up to the par value of the stock issued therefor, subject to the limitation on intangibles contained in the Revenue Act of 1917. The Commisioner determined the value of such intangible assets by taking the average earnings over a period of four and one-sixth years, from January 1,1911, to February 28,1915. These earnings were allocated by attributing to tangible assets a return of 10 per cent, and the balance was capitalized on a basis of 20 per cent. The Commissioner used the earnings for a period of approximately [185]*185three years after acquisition of said assets in ascertaining the cash value thereof as of November, 1912, when they were acquired. In determining the value of assets acquired for stock, the valuation should be based on facts known at the time they were acquired. Subsequent earnings can not be used in the determination unless from past experience or known facts such future earnings might reasonably have been anticipated. Such was the situation in this case. The taxpayer’s business had passed beyond the experimental stage. The Dwight and Lloyd process and mechanism had been recognized by engineers of high standing. Leading scientific publications had contained articles which discussed and approved the process. It was then rapidly replacing the older and more crude methods of refining ores, and it was reasonably anticipated that it would entirely replace other methods in the future. It had been adopted by the leading industrial enterprises in the country engaged in the refining of ores, and they had entered into contracts to use the process for the life of the patents. If the output of ore by these companies by the use of these processes had been uniform the income could have been determined by a mathematical calculation. The taxpayer from all the facts and circumstances had reason to believe that the industrial enterprises using this process would not only increase their output generally but would increase the output from the particular machines then in use and that they would acquire other machines. It had been clearly demonstrated that by the use of these processes ores could be refined on a larger scale and with less expense than by any other method and that certain ores could be treated by this method which otherwise would have been waste material. The foregoing facts were all known at the time the corporation acquired the patents and license agreements.
The formula for determining the value of intangible assets by attributing to tangible assets a certain percentage of return over a period of years and capitalizing the balance on a reasonable percentage basis has long been recognized. As to patents the same rule is applicable. The number of years to be used over which the earnings should be averaged; the per cent to be attributed to tangible assets, and the basis of the capitalization of the remaining earnings are questions to be determined from all existing facts and circumstances. The period used should be as nearly representative as possible, so that the average earnings over it will reflect the true condition of the company.
In this case, on account of all the facts and circumstances known at the time, neither the earnings prior to the acquisition of the assets by the taxpayer nor those subsequent taken alone would accurately reflect values existing when the corporation acquired them. The Commissioner recognized this fact and used a period prior to November 1, 1912, and a period subsequent thereto. The subsequent earnings could be, and were, reasonably anticipated. The earnings over a reasonable period after the acquisition of the patents and license agreements merely corroborated facts already known. In a court of law what is a reasonable period over which to average the earnings is a question of fact to be determined by the jury.
We are convinced from a consideration of all the facts that a period beginning January 1, 1911, and ending February 28, 1916, would be a more representative period, and would more accurately [186]*186reflect the actual cash values of the assets than the four and one-sixth years ending February 28, 1915, used by the Commissioner.
In view of the known stability of the business of the taxpayer with reference to its earning power it is the opinion of the Board that the value of its patents and intangible assets taken together should be determined by attributing to tangible property a return of 8 per cent and capitalizing the balance of the earnings on the basis of 15 per cent instead of by attributing 10 per cent to tangible assets and capitalizing the balance of the earnings on a basis of 20 per cent as was done by the Commissioner.
The Board has no evidence before it of the amount of the net earnings for the entire period over which they should be averaged as the basis for the determination and has no evidence of the value of patents separate and apart from the license agreements. For that reason no determination of values can be made by the Board. The appeal will be retained in the jurisdiction of the Board until by stipulation or upon rehearing, if necessary, the facts essential to a determination of these matters are submitted.