*3049 Amounts expended held to have been for a secret formula in use in the petitioner's business during the years in controversy and improperly excluded from the petitioner's invested capital during those years.
*1364 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1918, 1919, and 1920, in the respective amounts of $3,609.01, $1,108.08, and $1,523.63. The amounts in controversy are $1,377.74, $618.14, and $808.94, respectively. *1365 Two errors are alleged with respect to the respondent's computation of the petitioner's invested capital for the years in question: (1) That the respondent excluded $88,234.05, the cost of a patent which, it is alleged, was part of the cost of certain secret processes used in the petitioner's business, and (2) that the respondent excluded $13,234 as part of the cost of secret formulae represented by the cost of experimental machinery necessary to discover and develop said formulae.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with*3050 its principal office and place of business in Chicago. Under date of January 23, 1900, Letters 1 were granted by the United States to William G. King, who sold and assigned the same to one Carl Schroeder. On or about June 25, 1906, Carl Schroeder sold and assigned said letters patent to petitioner for the sum of $88,234.05, which was paid in cash. The patent covered a process of fire proofing cloth and textile fabrics, etc., and specified an open formula for chemicals to be used that was not satisfactory for practical purposes. At the same time that the patent was purchased by the petitioner, Schroeder assigned to the petitioner a secret formula for a process of refining ammonia sulphate from crude ammonia sulphate that was very valuable. In 1906 the cost of crude ammonia sulphate was 4 cents a pound. Refined ammonia sulphate sold on the market for from 20 to 25 cents a pound. By the secret process the refined ammonia sulphate could be obtained at a cost of about 1 cent a pound. On the acquisition of the formula and the patent, the petitioner developed additional formulae derived from the original formula between the years 1906 and 1913, so that at the present*3051 time it has 40 or 50 formulae. Between 1906 and 1913 it made machinery for experimental purposes. Such machinery was built in a small way and resulted in the development of certain formulae.
Prior to 1913, after such formulae were developed, and in 1913, the experimental machinery was scrapped, larger commercial units having been built for the purpose of manufacturing. Machinery so built and scrapped in 1913 cost $13,234.
The minutes of the meeting of the directors of the petitioner of June 25, 1906, containing a resolution for the purchase of Letters 1 made no mention of the secret formula. The understanding with Schroeder was verbal that he would turn over the secret formula and show the petitioner's chemist how to use it.
OPINION.
SIEFKIN: Two questions are raised relating to amounts excluded by the respondent from invested capital of the petitioner during the *1366 years in question. The evidence is clear that in 1906, when the petitioner paid $85,000 ostensibly for a patent, it was, in reality, purchasing a secret formula for refining ammonia sulphate which made the patent (otherwise of no value) a valuable asset. The patent expired in 1917*3052 and the question is whether the petitioner still had in the years 1918, 1919, and 1920 an asset which should be included in its invested capital. We are satisfied that what was really purchased and was the consideration for the amount paid, was the secret formulae which existed and were used in the petitioner's business after the expiration of the patent and during the taxable years in controversy. The difference between the amount of $85,000 and the $88,234.05 alleged as the cost by the petitioner, is the amount of salary paid to the owner of the patent during the time when he was showing the petitioner's chemist how to build the machinery to refine the ammonia sulphate. Such amount, in our opinion, should also be added to the cost of the secret process.
Our conclusions as to the first item cause us to hold that the respondent was also in error in excluding the sum of $13,234 spent for experimental machinery in developing formulae. Both amounts should be included in invested capital for the years in question.
Judgment will be entered under Rule 50.