accurate determination of the amount of profit attributable to that brand during that year, and where this practice is continued for a long enough period to show that this amount was fairly constant and regular and might be expected to yield annually that average profit, by capitalizing this earning at the rate, say, of 20 per cent, the value of the brand is fairly well established.

"Another method is to compare the volume of business done under the trade-mark or brand under consideration and profits made, or by the business whose good will is under consideration, with the similar volume of business and profit made in other cases where good will or trademarks have been actually sold for cash, recognizing as the value of the first the same proportion of the selling price of the second, as the profits of the first attributable to brands or good will, is of the similar profits of the second.

"The third method and possibly the one which will most frequently have to be applied as a check in the absence of data necessary for the application of the preceding ones is to allow out of average earnings over a period of years prior to March 1, 1913, preferably not less than five years, a return of 10 per cent upon the average tangible assets for the period. The surplus earnings will then be the average amount available for return upon the value of the intangible assets, and it is the opinion of the Committee that this return should be capitalized upon the basis of not more than five years' purchase-that is to say, five times the amount available as return from intangibles should be the value of the intangibles.

"In view of the hazards of the business, the changes in popular tastes and the difficulties in preventing imitation or counterfeiting of popular brands affecting the sales of the genuine goods, the Committee is of the opinion that the figure given of 20 per cent return on intangibles is not unreasonable, and it recommends that no higher figure than that be attached in any case to intangibles without a very clear and adequate showing that the value of the intangibles was in fact greater than would be reached by applying this formula.

"The foregoing is intended to apply particularly to businesses put out of existence by the prohibition law, but will be equally applicable so far as the third formula is concerned, to other businesses of a more or less hazardous nature. In the case, however, of valuation of good will of a business which consists of the manufacture or sale of standard articles of every-day necessity not subject to violent fluctuations and where the hazard is not so great, the Committee is of the opinion that the figure for determination of the return on tangible assets might be reduced from 10 to 8 or 9 per cent, and that the percentage for capitalization of the return upon intangibles might be reduced from 20 to 15 per cent.

"In any or all of the cases the effort, should be to determine what net earnings a purchaser of a business on March 1, 1913, might reasonably have expected to receive from it, and therefore a representative period should be used for averaging actual earnings, eliminating any year in which there were extraordinary factors affecting earnings either way. Also, in the case of the sale of good will of a going business the

percentage rate of capitalization of earnings applicable to good will shown by the amount actually paid for the business should be used as a check against the determination of good will value as of March 1, 1913, and if the good will is sold upon the basis of capitalization of earnings less than the figures above indicate as the ones ordinarily to be adopted, the same percentage should be used in figuring value as of March 1, 1913." (A. R. M. 34. 10-20-777.)

"Information helpful in establishing the values would be of the following general character:

A. Where the good will, trade-marks or trade brands were acquired prior to March 1, 1913;

1. The nature of the business (whether distillers, wholesalers or retailers, or a combination thereof).

2. Date of foundation of business and whether organized as an individual, partnership, or corporation. Also, date and particulars of change in ownership or form of organization of the business. 3. In respect to the trade-marks or trade brands for which a deduction is claimed:

(a) The date established and by whom.

(b) The date of acquisition by the present owners.

(c) The price paid therefor and whether paid in cash or stock; if the latter, state the basis of valuation on which the purchase price was determined.

(d) For each year from 1900, or the date of the establishment of the trade-mark or trade brand, if subsequent to that year, to 1913, inclusive.

(1) Annual sales (quantity and amount).

(2) The gross profit on sales, i. e., the difference between the selling price and the cost price of the merchandise sold. (3) The total expenses and losses of the business which, when deducted from the gross profit on sales, will produce― (4) The net income.

(5) The amount of Capital Invested in the business as at the beginning of each year.

(6) The amount included in the Invested Capital at the beginning of the period in respect of good will, trade-marks or trade brands, and the date and amount of each subsequent addition to the good will, trade-marks or trade brands. (e) Full details of each offer to purchase any of the trademarks or trade brands, setting forth in particular the date of each offer, by whom and on whose behalf made; the amount of each offer, and whether payable in cash or stock; and the date or dates on which the purchase price was proposed to be paid, and the amounts to be paid on each such date."

(Letter to Mr. Levi Cooke, Washington, D. C., signed by Acting Commissioner J. H. Callan, and dated August 19, 1919.)

"The purpose and intent of the method prescribed in A. R. M. 34 for determining the value of good will of a business as of March 1, 1913, is to provide for a return to the taxpayer of 10 per cent upon so much of his investment as is represented by tangible assets entering into net worth, and to capitalize the excess of earnings over the amount necessary to provide such return at 20 per cent." (A. R. M. 68. 28-20-1048.)

A sample valuation will suffice to illustrate the method often employed by companies to secure a valuation for entry on their books or for purposes of sale or purchase, and the figures so ascertained have been passed by the Tax Unit.

A corporation making a patented machine tool (covered by a group of patents) had for the four years preceding the date on which the valuation was desired made average net profits of $300,000. Its invested capital was $1,000,000, and the average time the patents had yet to run was ten years. The company, desiring to place a valuation on the patents, secured appraisals from three men experienced in dealing with patents and the affairs of large corporations manufacturing and selling patented articles, and the average value assigned in their separate appraisals was taken as the value of the patents. Each appraiser utilized substantially the same method in computing the value he assigned, differing mainly in the percentage of profit he thought was due to the Capital Invested under the circumstances. The average profit assigned to the use of the Capital in a specialty business of this nature was 15 per cent, so that the computation ran as follows: Average yearly profit....

.$300,000

Amount of profits due to use of capital 15 per cent of $1,000,000.. 150,000 Amount of profits assignable to use and protection affordedby patents

.$150,000

It would accordingly seem at first glance that since the yearly profit derived from use of the patents is the same as that received from the use of a capital of $1,000,000 that the patents were worth the same amount-$1,000,000. This is not the case, however, for at the end of ten years (the remaining average life of the patents) the $1,000,000 capital would still be intact, while the patent value would have been used up. After the ensuing ten years, the Capital Invested would stand

Capital

Earnings (10 years at $150,000)..

.$1,000,000 1,500,000

Total

. $2,500,000

While the patent value would have disappeared leaving only Earnings of patents (10 years at $150,000). . . . . .

.$1,500,000

Which latter sum bears the relation to the former of 3:5, or 60 per cent thereof.

Accordingly, the value of the patents at this date was held to be 60 per cent of the value of the Capital Invested at the same date-or $600,000.

Note, however, the words of the Department in Art. 19:

"Where expert appraisers are to be employed, care should be taken to see that they are men of recognized competence with respect to the particular class of property involved. In order to facilitate the acceptance of the appraisal, appraisers should be employed whose competence is well established."

Another method of computing valuation sometimes employed is to deduct from the average yearly earnings the amount properly assignable as due to the use of the Invested Capital, and then to utilize the residue of the average yearly profits as representing 20% of the present value of the patents. Under this method the $150,000 assigned in the above example as due to the use of the patents would at 20% make the present value of the patents $750,000, instead of the figure of $600,000 reached by the method of appraisal utilized by the several appraisers.

The benefit to a company of substituting on its books the "fair market value" as of March 1, 1913, of its patents, trade-marks, etc., in force at that time is believed to be apparent. Such market value is in practically all cases greatly in excess of the cost value of the patents, etc.-the value ordinarily entered on a company's books-and the company thus enters an asset that can be depreciated proportionately during the remaining years of the life of the patents. In one instance, the value of patents, etc., was raised in this way from a figure of less than $500,000 to $7,000,000, and the annual depreciation reduction thus afforded for the next few years very materially reduced the net income figures in their tax returns, and in consequence, the taxes paid were greatly reduced. Particularly, where a company has carried its patents, etc., at a nominal figure, the saving in taxes due to revaluing them in this manner would be considerable.

It is possible at this late date to revalue patents, etc., to secure the fair market value as of March 1, 1913, and insert this value in the year 1913. Depreciation can then be taken on this figure in each ensuing year during the life of the patent, and because of this change in depreciation account (and consequent reduction in net income) the amount of taxes due to the Government may be lowered. (Note page 67, on reopening books for depreciation.) Such annual proportion of depreciation can be charged in the tax returns to be computed this year and subsequent years, if the patents are still in force, and, if desired, application can be made for refund (or credit) of the taxes overpaid during the years intervening between 1913 to date, since the taxes so computed after such revaluation are less than the taxes actually paid in the intervening years. Such application requires in addition to the request (Form 46) the filing of amended tax returns

for each of the years in which refunded (or credit) is asked, together with a full statement of the method used to appraise the valuation as of March 1, 1913, and for computing the annual depreciation. The Income Tax Unit will then decide whether the revaluation is properly made, etc., and, if approved, the refunds will be put through in accordance with the practice laid down for such cases. It should be noted here that section 252 of the latest revenue act (see Appendix, page 148) contains the proviso:

"Provided, that no such credit or refund shall be allowed or made after five years from the date when the return was due, unless before the expiration of such five years a claim therefor is filed by the taxpayer." It would accordingly appear to be too late to secure refunds for the years 1913 and 1914, and it will be in a few months too late for 1915, but refunds for the last five years may be secured.

It should be remembered, however, that when the books of a company are reopened to enter the desired changes, all accounts affected. thereby must be changed accordingly. No one should attempt such a revaluation without consulting a competent accountant skilled in dealing with income tax reports.

Also, if a patent has now expired, it is too late to go back and ask for depreciation for years when it was still alive. The claiming of depreciation allowances is held to be optional, and if no depreciation was claimed during the entire life of the patent, it is considered that the election was made not to make such a claim.

"The Committee has had under consideration the appeal of the M. Company from the action of the Income Tax Unit in disallowing for the taxable year 1917 an item of 50x dollars covering depreciation on certain patents.

*

In January, 1902, the M. Company, then a newly organized corporation, acquired ownership of eight patents. * * * * The patents so acquired, except one, issued in 1900, had expired prior to January 1, 1917, but as of March 1, 1913, all but one were in effect. * ** * No depreciation was taken by the taxpayer on the patents which were capitalized, until the year 1917, when one-seventeenth of the book value was charged to expenses, notwithstanding the fact that all except one of them had expired prior to January 1, 1917. * * * *

The taxpayer did not elect during the life of the patents acquired in 1902 to provide for this return of capital. Had he made this provision his surplus for invested capital purposes under the Revenue Act, would have been correspondingly reduced.

He, therefore, cannot now claim in a high taxable year, after the expiration of the life of the patents, an amount equivalent to one-seventeenth of the cost, thereby securing the benefit not only of a reduction in