*2448 1. The fair market value on March 1, 1913, of certain inventions and applications for United States Letters Patent determined from the evidence.
2. Basis for gain or loss on the sale in 1919 of certain foreign patent rights held not to have been established.
3. Exhaustion of alleged cost of certain contracts denied.
*1099 In these proceedings, which have been consolidated for hearing and opinion, the petitioner seeks a redetermination of its income and excess-profits-tax liabilities for the following years, for which the respondent has determined deficiencies as follows:
| Docket No | Year | Date of letter | Deficiency |
| 19745 | 1919 | July 12, 1926 | $38,595.94 |
| 19745 | 1920 | do | 29,036.39 |
| 19745 | 1921 | do | 8,971.46 |
| 25570 | 1923 | Jan. 29, 1927 | 1,786.00 |
The issues between the parties are the fair market value on March 1, 1913, of a certain patent and patent applications and whether such value, if any, may be used as a basis for:
(a) The allowance of a deduction*2449 from gross income under section 234(a)(7) of the Revenue Acts of 1918 and 1921, for the years 1919, 1920, and 1921, for exhaustion of the rights in such inventions, patents or applications owned or held by the petitioners in the taxable years under consideration, these being described as the "non-bulb" rights;
(b) The allowance of a deduction from gross income for all of the years in question of an aliquot part of an alleged cost of certain contracts acquired by the petitioner for its unaffiliated subsidiary, namely, the American Blank Co., to which latter company the petitioner, shortly after March 1, 1913, assigned all of its "bulb" rights in exchange for all of the capital stock of the American Blank Co.
A further assignment of error relating to invested capital was withdrawn by the petitioner at the hearing.
FINDINGS OF FACT.
The petitioner is a corporation incorporated in 1909 under the laws of the State of Maine. Its principal stockholders have always been *1100 Alanson B. Houghton and Arthur A. Houghton. Their grandfather, Amory Houghton, founded the Corning Glass Works at Corning, N.Y., in 1868. This company made the first bulbs used by Thomas Edison in*2450 his development of the incandescent electric lamp.
For many years prior to 1913, the Corning Glass Works had been engaged in the making of "paste-mold" glassware. The descriptive name "Paste-mold ware" results from the peculiar processes used in making the articles. This process may be summarized as follows: While the glass is still hot and soft it is inserted into an iron mold, the inside of which is coated with a mixture of carbon and linseed oil, and the glass is rotated inside the mold against this "paste," which process gives the smoother finish required for certain types of ware. The two main classifications of paste-mold ware are (1) bulbs and (2) non-bulbs. The former consists of bulbs for electric lights and the latter principally of such were as tumblers, stemware, bar goods, lamp chimneys and globes. Of the two classes, the bulbs were the most difficult to make on account of the very rigid requirements as to thinness, optical perfection, strength and uniform distribution of glass therein. A machine capable of producing highgrade bulbs could be made to produce any other type of paste-mold ware.
Prior to 1904, all paste-mold articles were made by hand. A skilled*2451 workman, called the "gatherer," inserted an iron blow-pipe called a "punty" into the furnace and rotated it on the surface of the molten glass, thus winding the required quantity of glass on the punty. The glass thus wound on the punty is called a "gather." He then withdrew the "punty" with its "gather" of glass, and "marvered" (formed or shaped) the glass and gave it a "skin," by rolling it on a flat surface. He then blew into it through the blow-pipe a small amount of air. This act of blowing is described as the "initial puff." He then handed the rod to another workman, the "blower" (sometimes called the "blocker" or "gaffer"), who swung the "gather" to elongate it, and then inserted it into the mold, blew it until the plastic glass was pressed out and filled the inside of the mold, and then rotated it to get the final surface. The mold was then opened and the article withdrawn and cracked off from the punty rod.
About 1905 the increase in the paste-mold business of the Corning Glass Works, and of the country generally, made it obvious that it would be a great advantage, if not perhaps a necessity, to have mechanical means for producing bulbs and other paste-mold articles. *2452 Accordingly, the two above-mentioned Houghton brothers decided to enter exhaustively into the development of such machinery. For that purpose they secured, during the years 1905 to 1907, the assistance *1101 of three expert engineers, namely, Arthur L. Day, Orin A. Hanford, and Benjamin D. Chamberlin. The latter was in constant touch with Vernon M. Dorsey, a patent attorney, who has represented the Houghton interests since 1898. As early as the summer of 1909 these engineers, as the result of their inventions and developments, had built a machine which produced a satisfactory bulb for the incandescent electric light. The father of the Houghton brothers died in 1909, and, shortly before his death, Arthur Houghton took a sample machine-made bulb to his father, who, after examining it carefully, said, "Well, Arthur, I did not think you would be able to do it." On November 30, 1911, Chamberlin wrote in his diary: "I am thankful for having succeeded in working out a bulb machine so as to get 75 good bulbs."
The petitioner company was incorporated to take over and carry on the development of the machines for the mechanical production of paste-mold ware. All of the inventions*2453 and patent applications of Dorsey, Hanford, and Chamberlin were immediately assigned to the petitioner. Subsequent inventions and patent applications were similarly assigned concurrently with the filing of the application. All of the applications here in question and Patent No. 1,052,902 were owned by the petitioner on March 1, 1913. A schedule of such applications, showing (1) the date of the filing of the original application, (2) the serial number of the original or divisional application, (3) the name of the inventor, (4) the date on which the letters patent were issued, (5) the patent number, and (6) the nature of the patent, is as follows:
| Original application | Serial | Inventor | Letters patent | Patent No. |
| filed | No. | issued | ||
| Apr. 27, 1907 | 370593 | Dorsey | Dec. 14, 1915 | 1,163,983 |
| Feb. 15, 1908 | 700800 | do | Oct. 12, 1915 | 1,156,868 |
| Do | 668762 | do | June 20, 1916 | 1,187,889 |
| June 30, 1908 | 700802 | do | Feb. 11, 1913 | 1,052,902 |
| July 24, 1908 | 589786 | Chamberlin | Apr. 27, 1915 | 1,137,304 |
| Oct. 27, 1909 | 737377 | Hanford | Jan. 5, 1915 | 1,123,525 |
| Mar. 23, 1910 | 716916 | Chamberlin | Oct. 12, 1915 | 1,156,056 |
| Aug. 1, 1910 | 574922 | Hanford | July 1, 1913 | 1,066,270 |
| Nov. 4, 1910 | 590693 | do | Jan. 5, 1915 | 1,123,523 |
| Jan. 13, 1911 | 737402 | Chamberlin | Jan. 12, 1915 | 1,124,700 |
| Do | 602532 | do | do | 1,124,698 |
| Do | 737403 | do | July 27, 1915 | 1,148,212 |
| Do | 649557 | do | Oct. 12, 1915 | 1,156,057 |
| Feb. 7, 1911 | 607179 | do | Jan. 12, 1915 | 1,124.699 |
| Apr. 20, 1911 | 829379 | do | Nov. 17, 1914 | 1,117,322 |
| Do | 622391 | do | Oct. 12, 1915 | 1,156.058 |
| June 2, 1911 | 135006 | do | Feb. 19, 1918 | 1,256,979 |
| Do | 109791 | do | do | 1,256,980 |
| Do | 94787 | do | Dec. 2, 1919 | 1,323,450 |
| Feb. 1, 1912 | 674814 | do | July 27, 1915 | 1,148,213 |
| Feb. 6, 1912 | 675897 | Day | Sept. 30, 1913 | 1,074,167 |
| Feb. 17, 1912 | 678231 | Hanford | Jan. 5, 1915 | 1,123,524 |
| Mar. 30, 1912 | 687467 | Chamberlin | Jan. 12, 1915 | 1,124,701 |
| Do | 101173 | Hanford | Sept. 26, 1916 | 1,199,695 |
| May 31, 1912 | 700831 | Chamberlin | Oct. 12, 1915 | 1,156,756 |
| Aug. 24, 1912 | 716915 | do | Jan. 12, 1915 | 1,124.702 |
| Do | 504 | do | July 27, 1915 | 1,148,214 |
| Do | 505 | do | Oct. 12, 1915 | 1,156,858 |
| Original application | Nature of |
| filed | patent |
| Apr. 27, 1907 | Glass-blowing machine. |
| Feb. 15, 1908 | Do. |
| Do | Do. |
| June 30, 1908 | Do. |
| July 24, 1908 | Do. |
| Oct. 27, 1909 | Automatic elongation control |
| Mar. 23, 1910 | Mold-dipping mechanism. |
| Aug. 1, 1910 | Automatic elongation control. |
| Nov. 4, 1910 | Magnetic chuck. |
| Jan. 13, 1911 | Blow-pipe receiving device. |
| Do | Blow-pipe rotation control. |
| Do | Glass-working apparatus. |
| Do | Mold-dipping mechanism. |
| Feb. 7, 1911 | Puff-blow mechanism. |
| Apr. 20, 1911 | Gathering-glass mechanism. |
| Do | Mold-dipping mechanism. |
| June 2, 1911 | Stream-feed devices. |
| Do | Flowing-glass process. |
| Do | Stream-feed devices. |
| Feb. 1, 1912 | Cupping device. |
| Feb. 6, 1912 | Automatic level regulator. |
| Feb. 17, 1912 | Automatic elongation control. |
| Mar. 30, 1912 | Puff-blow system. |
| Do | Glass-forming machine |
| May 31, 1912 | Glass-blowing mold. |
| Aug. 24, 1912 | Air mechanism. |
| Do | Working-glass apparatus. |
| Do | Blow pipe take-off mechanism. |
*1102 The average date on which the above patents were issued was August 17, 1915.
The result of the foregoing inventions and applications was the creation of a machine for making paste-mold glassware (hereafter*2455 referred to as the "E" machine). This machine practically revolutionized the paste-mold glassware industry. At least 12 such machines were built by the petitioner and put into operation prior to March 1, 1913, and at least 6 machines were being built for the General Electric Co. at their Central Falls plant at that date.
The great advantages of the "E" machine were (1) its low cost of construction, (2) its enormous savings in labor and overhead expenses, (3) its increased speed of production, (4) its adaptability to installation in the ordinary glass plants of 1913, without any substantial plant alterations or scrapping of machinery or equipment, and (5) its freedom from infringement trouble.
The total cost of building one "E" machine was not more than $1,500.
Under the old hand method, the "gatherer" and the "blower," worked together and constituted what was known as a "shop." Under the "E" machine method, about 60 per cent of the highly skilled work of the gatherer and all of the work of the blower was done by an "arm" or unit of the machine. By this machine the labor of marvering, forming the initial cavity, swinging for proper elongation and final blowing, with attendant*2456 rotation, were all eliminated. The early machines had three "arms" but later, as the gatherers became more experienced and skilled, this number was increased to 4 and finally to 5. An average gatherer with the assistance of two boys could feed 4 arms. Each arm of the machine had a speed equal to that of a shop under the hand process. Translated into terms of actual production, a 4-armed machine, 1 gatherer and 2 boys produced the equivalent of 8 skilled workmen under the old hand process. The total labor cost per 1,000 bulbs by the hand and "E" machine processes in 1913 was $7.90 and $3.15, respectively. The use of the machines thus resulted in a labor saving on the cost of production of 1,000 bulbs in the amount of $4.75. Assuming a year to consist of 250 working days, a 4-armed "E" machine would produce about 2,500,000 bulbs annually. The average life of a machine was about 6 2/3 years. A reasonable interest rate on money invested in each machine was 6 per cent. On the basis of the cost of constructing a machine of $1,500, a depreciation rate of 15 per cent, an interest rate of 6 per cent, and an annual production of 2,500,000 bulbs, the overhead cost of operating a*2457 4-armed "E" *1103 machine was about 13 cents per thousand bulbs. This overhead cost of 13 cents was considerably less than the savings effected in fuel and increased production.
On March 1, 1913, the only three important bulb manufacturers in the United States were the Corning Glass Works, the General Electric Co. and the Libby Glass Co. There were a number of companies engaged in the production of non-bulb paste-mold ware.
During 1913 about 120,000,000 bulbs were being produced in the United States. Of this amount, the Corning Glass Works produced about three-eighths, or 44,000,000.
The following table shows how the production of bulbs by the Corning Glass Works increased over periods of five years, beginning with the year 1899:
| Year. | Production. |
| 1899 | 13,000,000 |
| 1904 | 14,760,000 |
| 1909 | 35,800,000 |
| 1914 | 45,200,000 |
Statistics show that in the United States during 1913 there were manufactured the following quantities of non-bulb paste-mold ware.
| Article. | Production. |
| Lamp chimneys | 48,000,000 |
| Electric globes | 8,500,000 |
| Tumblers | 120,000,000 |
The typical lamp chimney in use in the ordinary farm houses in 1913 was known as*2458 the "No. 2 bulb." It could be made by hand at the rate of about one every minute. The union wage scale of the blower employed in 1913 to blow No. 2 bulbs, was $12.70 per 1,000. By using the "E" machine to manufacture chimneys, the services of the blower were eliminated.
In the manufacture of electric globes (not bulbs) by hand in 1913 there were employed in the paste-mold department a blower, a blocker, a gathering boy, a clean-off or pull boy, a mold boy, and a carrying-in boy. The blower blew the article after the glass was put in workable shape by the blocker. The blocker did the marvering and blocking. The wages of the blocker and blower, combined, in 1913 were $8.74 per 1,000. By the use of the "E" machine the services of the blocker and blower were dispensed with.
The average wage of a blower in the manufacture of tumblers by hand was $3.70 per 1,000 in 1913. His services were also eliminated by the use of the "E" machine.
The "E" machine was mounted on rollers and could be put into operation in any of the ordinary glass plants of 1913, without the necessity of scrapping other machinery.
*1104 On March 1, 1913, there existed three other machines for*2459 the making of paste-mold glassware, besides the petitioner's "E" machine, namely, the Owens, the Westlake, and the Hartman. The Owens was the so-called tumbler or chimney machine and was wholly distinct from what is generally known as the "Owens Bottling Machine." It only provided for the automatic blowing and rotation of a hand-marvered blank and did not provide for the marvering, the initial puff, or the elongation, all of which still had to be done by hand. It had never been successfully applied to bulbs. The Westlake machine was being used by a company formed by the Libby Glass Co., the Corning Co.'s chief rival in the manufacture of bulbs. The work on it was commenced about the same time that Chamberlin commenced his development work for the petitioner or its predecessors. The Westlake machine was of a very different type, because of the attempt to work it out under the Owens suction patent. On it the blowing was done "by hand," and the marvering feature of the machine was not successful. It had certain features which could not be used without infringement upon the inventions made by Chamberlin. The Hartman machine for making bulbs was developed by the General Electric*2460 Co., and several of them were put into use before 1913. It only supplanted the blower, did no marvering, and did not swing for elongation. A representative of the General Electric Co. called at the petitioner's plant in 1912 to see the "E" machine in operation. He found the "E" machine superior to the Hartman machine in many ways, the most important of which was that a comparatively inexperienced man could operate the "E" machine, whereas it took a skilled gatherer to feed the Hartman. The result was that in 1913 the General Electric Co. abandoned the Hartman machine altogether and made arrangements to use the "E" machine exclusively.
The "E" machine was strictly a pioneer development in the pastemold glassware field and the petitioner never had any trouble with infringements in connection with its "E" machine.
About the middle of 1913, and before any of the income-tax acts had been passed by Congress, Alanson B. Houghton made a very careful estimate and appraisal of the inventions and improvements owned by the petitioner as of 1909 and at that time he placed a value on such inventions and patent applications of $1,995,000, assigning a value of $1,000,000 to the domestic*2461 and foreign (except British) bulb rights, $10,000 to British bulb rights, $735,000 to the domestic non-bulb rights, and $250,000 to foreign non-bulb rights. This appraisal was made for the purposes of stock capitalization and especially for a division of the value into the classification of *1105 bulbs and non-bulbs. Houghton delivered the appraisal which he made, together with the figures upon which it was based, to Alexander D. Falck, then counsel for the petitioner, who at that time prepared the following signed memorandum:
| EMPIRE. | |
| Capital Stock $10,000 - issued for U. S. & Foreign Patents. | |
| (1) U.S. & Foreign rights for certain limited uses | |
| (bulbs, &c) sold for $1,000,000 in stock of | |
| purchaser - Est | $1,000,000 |
| (2) British Rights for bulbs exchanged for Rights for other | |
| things under purchasers patents - Est | 10,000 |
| (3) Foreign Rights for all uses other than bulbs to be | |
| sold for Est | 250,000 |
| (4) U.S. Rights for all uses other than bulbs still held | |
| and (a) licenses upon royalties to be granted or (b) | |
| rights to be sold - Est | 735,000 |
| (5) Certain tools and machinery on hand paid for by | |
| purchaser of rights under (1) and (2) supra as part of | |
| development cost - Est | 5,000 |
| 2,000,000 |
*2462 Open an account of licensed machines (including those licensed by Am. Blank Co.) showing serial no. of each, date of manufacture or delivery, name of licensee, uses for which licensed, amt. of royalty pd. therefor and date of payment.
(Signed) ALEXANDER D. FALCK.
The respondent, in determining the deficiencies for the years 1919 to 1921, inclusive, disallowed the following amounts claimed by the petitioner on its returns for those years as exhaustion of the March 1, 1913, value of a patent and patent applications:
| 1919 | $50,212.50 |
| 1920 | 50,500.73 |
| 1921 | 50,403.63 |
The following explanation of the action taken was made by the respondent in his deficiency letters dated July 12, 1926:
In regard to the March 1, 1913, value of patents, it is held by this office that there is no depreciable asset which may be depreciated at that date and that depreciation cannot be computed on patent applications and that any patents issued subsequent to that date, cost must be the basis of depreciation. (A.R.R. 1086 - Sol. Memo. 5038.)
The development expenditures set forth in your briefs have been made the subject of a depreciation allowance as shown in the attached schedule.
*2463 The amounts allowed by the respondent as exhaustion of development expenditures for the years 1919, 1920, and 1921 are $14,174.44, $14,946.80, and $16,048.73, respectively, and were determined by him as follows:
| Cost | Year incurred | 1/17 of cost allowed | ||
| 1919 | 1920 | 1921 | ||
| $ 36,763.19 | 1909-10 | $2,162.55 | $2,162.55 | $2,162.55 |
| $26,066.88 | 1911 | 1,533.34 | 1,533.34 | 1,533.34 |
| $47,229.84 | 1912 | 2,778.23 | 2,778.23 | 2,778.23 |
| $44,431.39 | 1913 | 2.613.61 | 2.613.61 | 2.613.61 |
| $26,131.07 | 1914 | 1,537.12 | 1,537.12 | 1,537.12 |
| $13,955.60 | 1915 | 620.91 | 620.91 | 620.91 |
| $15,146.92 | 1916 | 932.12 | 932.12 | 932.12 |
| $19,965.31 | 1917 | 1,174.43 | 1,174.43 | 1,174.43 |
| $8.560.16 | 1918 | 503.54 | 503.54 | 503.54 |
| $10,832.20 | 1919 | 318.59 | 637.19 | 637.19 |
| $15,427.98 | 1920 | 453.76 | 907.52 | |
| $22,037.92 | 1921 | 648.17 | ||
| Total deductions allowed | 14,174.44 | 14,946.80 | 16,048.73 |
*1106 The fair market value, on March 1, 1913, of the inventions, patent applications, and the United States Letters Patent, covering mechanical means for the manufacture of paste-mold articles of glass, owned by the petitioner on that date was at least $2,000,000, one-half of which is applicable to*2464 the classification of bulbs, and one-half to nonbulbs. This finding does not include the value of any foreign rights.
Of this $1,000,000 applicable to the nonbulb rights, at least one quarter, $250,000, is applicable to the nonbulb rights in foreign countries, and of this amount of $250,000, the amount applicable to the nonbulb rights in Japan which the petitioner sold in 1916 is $5,000, and the amount applicable to the nonbulb rights in Great Britain which the petitioner sold in 1919 is $70,000.
The petitioner also applied for foreign patents to cover the inventions embodied in its "E" machine. The respondent, in his determination for the year 1919, included in the net income an amount of $49,411.76 as "cost of rights sold," with the following explanation:
Cost of rights sold claimed as a deduction disallowed on grounds that it is not substantiated. (See above explanation for accrued depreciation of patent rights.)
In 1912, due to the great difference, from a commercial standpoint, in the use of the "E" machine for the manufacture of the two general classifications of paste-mold ware, the petitioner decided to divide the right to the use of the inventions and patent rights*2465 embodied in the machine into the two classes, namely, bulb and nonbulb rights. The result of this decision was that in October, 1913, the petitioner caused the American Blank Co. to be incorporated under the laws of the State of Maine, with an authorized capital stock of the par value of $1,000,000, all of which was subscribed and paid for by the petitioner by the transfer from the petitioner to the newly organized corporation of the exclusive right (both domestic and foreign, except as to Great Britain) to use its inventions for the making of bulbs. The petitioner retained for itself all rights for the making of non-bulbs.
The basis for the profits realized by the petitioner on the sale in 1919 of the "nonbulb" rights in Great Britain is the amount *1107 received therefor, $110,000, reduced by the difference between the March 1, 1913, value of the British nonbulb rights $70,000 and the exhaustion or depreciation thereon at one-seventeenth of $70,000 per year from the average date of the patents, August 17, 1915, to June 30, 1919.
The following is the proper basis for the computation of development expenditures:
The cost incurred during the year 1913, $44,431.39 consisted*2466 of $873.83 expended from January 1 to February 28, 1913; of $33,557.56 expended from March 1 to December 31, 1913; and of $10,000 transferred from bulb rights for the exchange of the British bulb rights for additional nonbulb rights. The basis for exhaustion of (a) the March 1, 1913, value of the nonbulb rights of $1,000,000 and (b) of the development expenditures of the petitioner from and after March 1, 1913, should be reduced from July 1, 1916, by $5,000 for the March 1, 1913, value applicable to the Japanese rights sold in 1916, and from July 1, 1919, by $70,000 for the March 1, 1913, value of the British rights sold in 1919.
On January 9, 1914, the petitioner entered into a three-party contract between itself, the General Electric Co., and the Corning Glass Works. The agreement between the parties was that the petitioner was to transfer to the General Electric Co., "its physical assets" except that it should retain "such machine tools and purely experimental machines as it may wish, as well as one blowing machine of its present accepted type" and 25 per cent of the capital stock of the American Blank Co.; that the petitioner was to transfer 37 1/2 per cent of the*2467 capital stock of the American Blank Co. to a trustee (United States Mortgage & Trust Co.) "until such time as conditions shall, in the opinion of the General Company and the Empire Company, justify its sale or barter"; that "should the conditions not justify the sale or barter of the stock so deposited by January 1, 1919, then and thereupon such stock shall be divided equally between the General Company and the Empire Company"; that during the period of such deposit, the dividends on the deposited stock shall be paid 60 per cent to the petitioner and 40 per cent to the General Electric Company; that the General Electric Company was to pay the petitioner, in cash, the amount of $154,922.23 "being the amount of the Empire Company's development and patent costs to date"; that "the General Company and the Corning Company shall each apply to the American Company for, and the American Company shall grant to each of them sub-licenses under any and all the United States patent rights owned or controlled by the American Company throughout the life of this agreement, to use any and all inventions which form the subject of such patent rights to the extent of the interest of the American Company*2468 in such United States patent rights"; that "said *1108 sublicenses shall continue with royalty as above provided until January 1, 1931, and at the expiration of that period shall continue without royalty until the expiration of the terms of all of the then existing patents and the patents which shall be granted subsequently on applications for patent, which shall have been applied for by that date"; that the American Blank Co. was to receive a royalty of from 50 cents to $1 per 1,000 bulbs (depending upon the size of the bulb) and "a sum equal to the actual cost of manufacture of such machine, excluding development charges"; that "this agreement shall extend until January 1, 1931"; that "all inventions, including machines, processes and apparatus relating to glass blowing by machinery, which are now or may hereafter become the property of or under the control of the General Company or the Corning Company, or the Empire Company, shall, subject to the rights of the other parties under contracts now in force, inure within the United States to the exclusive benefit of the American Company for the production of incandescent electric lamp bulbs," that "neither the General Company, *2469 nor the Corning Company, nor the Empire Company shall acquire any rights within the United States to inventions of the class specified, unless the other parties to this agreement shall have opportunity to acquire equal rights to use the same upon the same terms"; and "the future cost of securing and maintaining in force the several foreign patents, interests under which have been or shall hereafter be conveyed by the Empire Company to the American Company, shall be divided equally between the Empire Company and the American Company." The agreement was duly executed. At a later date, but prior to the year 1919, the American Blank Co. called in and retired a portion of its stock at par and in that adjustment the General Electric Co. paid the petitioner $13,262.96. Subsequently, the petitioner delivered to the General Electric Co. capital stock of the American Blank Co. of the par value of $97,500.
The respondent, in his determination of the deficiencies in question, did not allow the petitioner any deduction for the exhaustion of the alleged cost of the contract of January 9, 1914, referred to above and, for the year 1923, specifically disallowed as a deduction from gross income*2470 as "Excessive depreciation Royalty Contracts" an amount of $26,313.21, claimed by the petitioner on its income-tax return. The following explanation of the disallowance appears in the deficiency letter dated January 29, 1927:
The total depreciation claimed on Royalty Contracts has been disallowed for the reason that it is held by this office that no depreciable asset existed.
OPINION.
GREEN: The principal question in these cases is one of fact, namely, the fair market value on March 1, 1913, of the inventions, application *1109 for patents and patents owned by the petitioner on that date. A very considerable number of witnesses testified in behalf of the petitioner. The respondent offered no proof in support of his determination.
Our determination of value, as set forth in the findings of fact, is to no small extent predicated upon the testimony of four witnesses who testified as experts. We regard each of these witnesses as well qualified to express an opinion of value. Each had had a broad experience in the glass-making industry, though they had devoted themselves primarily to different phases of the work. It is not mere coincidence that these four men of*2471 undoubted ability and experience should arrive at practically the same valuations for all the rights and for the bulb and nonbulb rights. One of these witnesses, Dr. Arthur L. Day, is now a director of the Geophysical Laboratory of the Carnegie Institute at Washington. He is an engineer and has specialized in the science of heating and melting. He was president of the petitioner company in 1913, and has been a director and vice president of the Corning Glass Works for the past ten years. After detailing his knowledge of all of the conditions which would affect the value of the petitioner's inventions, applications and patents, he testified that in his opinion they could have been sold on March 1, 1913, for $2,000,000; that the bulb rights could have been sold for $1,000,000; and that the nonbulb rights could have been sold for from $1,000,000 to $1,500,000.
A second witness called to express his opinion of value was George D. Macbeth. Macbeth has devoted the last sixteen years to the glassmaking industry, being now the president of the Macbeth-Evans Glass Co. and thoroughly familiar with the use and value of all machines used in the industry. His testimony was confined to*2472 a valuation of the rights to use the "E" machine for the making of lamp chimneys and, after detailing his knowledge of the entire situation, he gave it as his opinion that such rights, on March 1, 1913, would have been worth at least $500,000.
The third witness was Harry L. Heintzelman, who for the last twenty-five years has been president and general manager of the Monongah Glass Co. After detailing his 39 years of experience in the industry, and his knowledge of the facts and circumstances surrounding the "E" machine, he testified that the conservative valuation of the nonbulb rights as of March 1, 1913, would be $900,000.
The last of these witnesses to be called was Samuel W. Banning, a patent attorney, who has had a broad experience in valuing, buying and selling patent applications and patents. There was propounded a hypothetical question in which was included all of the material facts and circumstances proven by the testimony of the prior witnesses. After a careful analysis of the entire situation, he testified *1110 that in his opinion the inventions, applications and patents had, on March 1, 1913, a fair market value of at least $1,850,000; that the fair market*2473 value on that date of the bulb rights was at least $750,000; and that the fair market value on that date for the nonbulb rights was $1,100,000.
These valuations confirm and support the valuation made by Alanson B. Houghton in 1913, and indicate that his appraisal as of that date was based upon a sound knowledge of the industry and its needs and the usefulness of the "E" machine in the manufacture of glass. Such appraisals actually made at or about the date as of which we are called upon to determine the valuation, particularly when made for other than tax purposes, should be given a very considerable weight in the determination of facts.
We regard all of this evidence as more than sufficient to overcome the presumption of correctness attached to the respondent's determination and as amply sufficient to sustain our finding of fact that the inventions, applications and patents had a total value of $2,000,000 as of March 1, 1913, that the value of the bulb rights on that date was $1,000,000, and that the value of the nonbulb rights on the same date was $1,000,000.
The respondent contends that where a taxpayer on March 1, 1913, has only an application for a patent, he may not, *2474 when the patent is subsequently issued, be allowed exhaustion based upon the March 1, 1913, value of the application, but that he must be content with an allowance for exhaustion based upon the cost of the patent. This question has been before us in similar cases and we have consistently held that, where the patent application owned by the taxpayer on March 1, 1913, subsequently ripened into a patent, the taxpayer was entitled to an allowance for exhaustion based upon the March 1, 1913, value of the application, plus subsequent expenditures starting with the date of the issuance of the patent. See Individual Towel & Cabinet Service Co.,5 B.T.A. 158">5 B.T.A. 158; Hershey Manufacturing Co.,14 B.T.A. 867">14 B.T.A. 867; and Stephens-Adamson Manufacturing Co.,16 B.T.A. 41">16 B.T.A. 41. In the petitioner's brief is a discussion of the question of the allowance of the value of non-bulb rights as cost of foreign sales. The pleadings raise no similar issue and we, accordingly, have given no consideration to this question.
The remaining question in the case is whether the petitioner is entitled to an allowance for the exhaustion "of certain term contracts acquired by the*2475 petitioner for the immediate benefit of the petitioner's subsidiary and thereby for the indirect but actual benefit of the petitioner." Only one such contract was offered in evidence, although it is apparent that there was a somewhat similar one between the same parties at a later date.
*1111 The provisions of the contract material to the issue thus raised are that the General Electric Co. was to enter into royalty contracts with the American Blank Co. and to pay to the petitioner the amount of money which the petitioner had expended in the development of the inventions, in consideration of which the petitioner was to convey to the General Electric Co. a large number of shares of the American Blank Co. As we understand the petitioner's contention, it is that the difference between the par value of the stock thus conveyed and the amount of cash received from the General Electric Co. represents a capital expenditure by the petitioner, which it is entitled to exhaust or amortize over the life of the contract. It is, of course, true that the petitioners had parted with shares of stock of a substantial value, but it does not necessarily follow that in exchange therefor they*2476 had acquired an exhaustible asset. We are unable to see that the petitioner herein has anything in the nature of property, which it could have sold or disposed of. What it bargained for was the contract primarily of value to its subsidiary. This the subsidiary got, and while the indirect benefits, in part as least, come to this petitioner, it seems clear to us that the petitioner acquired no property right as the result of the expenditure.
Even if the petitioner were correct in its contention that it acquired a property right as to which it was entitled to an allowance for exhaustion, we would still be impelled to disallow the deduction, for the reason that it clearly appears from the contract that, in addition to the royalty agreement between the General Electric Co. and the subsidiary, the petitioner obtained other and further valuable rights, the life of which can not be determined. We refer particularly to those provisions of the contract which provide that the contract shall remain in effect "until the expiration of the terms of the then existing patents and the patents which shall be granted subsequently on applications for patents which have been applied for by that date"; *2477 that "all inventions including machines, processes and apparatus relating to glass blowing by machinery, which are now or may hereafter become the property of or under the control of the General Company or the Corning Company, or the Empire Company, shall, * * * inure within the United States to the exclusive benefit of the American Company * * *"; and that "Neither the General Company, nor the Corning Company nor the Empire Company shall acquire any rights within the United States to inventions of the class specified, unless the other parties to this agreement shall have opportunity to acquire equal rights to use the same upon the same terms." These and other provisions of the contract indicate clearly that there were therein many other provisions for the benefit of this petitioner, many of which could not be classified as property subject to exhaustion and to use. It seems impossible to segregate *1112 and value the royalty provisions of the contract from the remainder thereof, and we have, accordingly, concluded that the petitioner is entitled to no allowance by reason of the exhaustion of this contract. The respondent's determination on this issue is approved.
Judgment*2478 will be entered under Rule 50.