Petition to review the decision of the United States Board of Tax Appeals.
Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
This case is here on petition to review an order of redetermination made by the United States Board of Tax Appeals. 17 B.T.A. 1107. The case involves income taxes for the years 1921, 1922, 1923, and 1924, in the aggregate amount of $14,370.17, being the amount of the deficiency found by the Commissioner and approved by the Board.
The petitioner, Taylor, devised a plan designed to enable a newspaper purchasing it to acquire supremacy in the field of classified advertising in its territory. The plan was copyrighted in 1899, and renewed in 1926, as the "Taylor Plan." The details of the plan remain a mystery. The petitioner has continually regused to divulge the details, and each purchaser of the plan must, as a condition of its contract, keep the plan a secret.
Prior to March 1, 1913, the petitioner made four sales of his plan, from which he realized a total compensation of $10,000. After 1919 he sold his plan to a number of newspapers. In particular, this controversy arises out of the sale of the Taylor Plan to the Minneapolis Journal on January 19, 1921.
Section 214(a)(8) of the Revenue Act of 1921 (42 Stat. 239), and section 214(a)(8) of the Revenue Act of 1924, 26 USCA § 955(a)(8) and note, provides: "That in computing net income there shall be allowed as deductions: * * * A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In case of such property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913. * * *"
The petitioner claims (a) that his plan for effecting supremacy of classified advertising is an exhaustible asset within the meaning of the Revenue Act, and (b) that its value is to be based on its fair market value of March 1, 1913.
The Board disposed of these contentions as follows: "It is doubtful, to say the least, whether the petitioner has or had on March 1, 1913, an exhaustible asset in the copyrighted plan in question. We know nothing about it and the petitioner refused to divulge its detail. Whether the petitioner was protected by the copyright in the use of the plan or only in the name 'Taylor Plan,' we know not. However, passing that question and assuming for the moment that the Taylor Plan was an exhaustible asset, we are unable to find any basis for holding that it had any value on March 1, 1913, except a speculative or potential value."
The petitioner says the Board erred in thus disposing of the case because he produced a number of expert witnesses who testified that his plan was worth at least $500,000, and their testimony should have been accepted as to its value. But no facts were disclosed to show on what grounds their conclusions were based. The whole structure, on which they are built, is carefully concealed. The government is not obliged to accept the conclusion of these experts as to the value of the plan without being shown what it is and without being shown some sound basis on which their opinion rests. We are inclined to feel that the intrinsic value of the plan lies in secrecy and in salesmanship.
The determination of this case depends in the final analysis upon whether or not the "Taylor Plan" is "property" within the meaning of the act, because the deductions it allows are for the exhaustion, wear, and tear of "property." It is the use in the trade or business of "property" that entitles the taxpayer to a deduction. Unless property is used, no deduction is allowable. In other words, before any plan, idea, theory, or system can be used as an exhaustible asset in an income tax computation, it must be determined that it is "property."
It appears that the "Plan" is copyrighted, and the question at once arises as to whether or not the copyright is property. It is true that copyrights are subject to depreciation and may be charged off under the same procedure as patents, taking the term of the copyright into consideration. Klein, Federal Income Taxation, p. 628 et seq. Copyright laws afford protection for a limited time against the publication only and not against the use of a system or plan or idea of which the work is an exposition. Stone & McCarrick v. Dugan Piano Company (D.C.) 210 F. 399; Baker v. Selden, 101 U.S. 99, 25 L. Ed. 841. A copyright does not give its owner any property in the thing copyrighted. It simply gives him protection against anybody else copying it. Nor does it prevent any one from using the copyrighted matter, if it is not copied or published. The value of the "Taylor Plan" lies in its application and not publication. And so the copyright of the "Plan," whether it discloses the secret features or not, does not help the petitioner, for it is not "property," on the exhaustion, wear, and tear of which a deduction may be based.
The scope of the meaning of the term "property," as it is used in the revenue acts, includes both tangibles and intangibles. A taxpayer has the right to take a reasonable allowance for depreciation of an intangible just as in the case of a tangible, if it is property used in the trade or business. But the plan of the petitioner cannot meet the real and definite characteristics that the law requires of "property."
What was the "Taylor Plan?" Taylor had an idea, theory, or system in his head.It could not be subject to ownership in a legal sense any more than the multiplication table. Its value, if it has other than the benefit of Taylor's salesmanship, lies, not simply in the plan itself, but in the retention of its details in secret, in being withheld from the public. This in itself is a demonstration that it is not property which is ...