*2253 1. Where licenses to manufacture under patents were acquired before March 1, 1913, in exchange for capital stock of unproven value, and in 1916 the title to the patents was acquired for a nominal consideration, no amount may be included on account thereof in invested capital.
2. In the same situation there is no basis on which depreciation can be computed.
*725 This proceeding is brought to redetermine a deficiency in income and profits taxes for the year 1921 in the sum of $7,359.94.
*726 The petitioner alleges the following errors:
(1) Refusal to allow a deduction from income representing depreciation on patents held and owned by the petitioner.
(2) Refusal to allow for invested capital purposes the cash value of such patents at the date of their acquisition.
FINDINGS OF FACT.
The petitioner is a corporation organized in 1910 under the laws of the State of New York. Its business is to manufacture and sell machines known as the Dearborn Blind Stitch Machine and the Dearborn Edge Worker Baster. *2254 Charles A. Dearborn, the inventor and designer of these various devices covered by the patents hereinafter mentioned, has always been and is practically the sole stockholder of the said corporation, now owning 2,837 of the 2,850 shares. The function of the blind stitch machine is to produce stitching that will show on but one side of the fabric stitched, while the function of the edge worker baster is to break out the edge and baste coats and other such garments, giving the edge the smooth, thin effect desired in good tailoring. There is a large demand in both this country and abroad for the blind stitch machines and the edge worker baster machines. Each blind stitch machine does the work of about twenty-four employees.
Charles A. Dearborn is a man approximately eighty years of age. Since 1882 he has been engaged in designing sewing machines. In 1899 he secured a patent, No. 639,669, covering the first blind stitch machine ever developed in this country and in 1901 and 1902 obtained patents covering improvements thereon. In the year 1901 he sold his right to these patents to a concern called the New York & Pittsburgh Manufacturing Co. for $50,000 in cash. That company was*2255 succeeded by the Acme Keystone Co., which, for a number of years, continued to manufacture and sell blind stitch machines under such patents. In 1907 litigation was initiated against Dearborn by the Acme Keystone Co. for the alleged infringement of patents. This litigation was pending throughout 1910 and later resulted favorably to Dearborn.
Subsequent to the sale of Dearborn's patent rights to the New York & Pittsburgh Manufacturing Co. he continued to develop blind stitch machinery and on March 6, 1906, was granted two patents, Nos. 814,025 and 814,026, for improvements therein. An improved feed mechanism and looper arrangement were the distinctive features of the new machines and greatly enhanced their commercial value. The cost of developing and securing patents Nos. 814,025 and 814,026 was not less than $10,000. Prior to July 25, 1910, Dearborn manufactured about 200 machines, under Patents Nos. 814,025 *727 and 814,026, and sold them at $200 each. On that date Dearborn granted to the American Blind Stitch Co. a license to make, use and sell blind stitch sewing machines manufactured under United States Letters Patent Nos. 814,025 and 814,026, for stock of the petitioner*2256 of a par value of $15,000, and in addition entered into a contract with that company by which he was to receive a salary of $30 a week and royalty of $30 on each machine manufactured and sold. On February 2, 1916, for a nominal consideration, Dearborn sold and assigned to the petitioner all his right, title and interest in Letters Patent Nos. 814,025 and 814,026, 1,018,885 and 1,025,082, with which last named patent we are not concerned.
On February 27, 1912, there were issued to Dearborn United States Letters Patent No. 1,018,885, covering an improvement in stitch-forming mechanism for sewing machines. The principal features of this improvement were a change from a bottom feed to a top feed, the incorporation of a ridge-forming rib and an improved loop-movement mechanism. The application of these improvements resulted in a machine simpler, speedier and more efficient in operation. On June 10, 1911, Dearborn granted to the petitioner the exclusive license to make, use, vend and sell blind stitch sewing machines under his application for patent dated August 12, 1910 (later becoming Letters Patent No. 1,018,885), for capital stock of the petitioner corporation of a par value of*2257 $70,000, and a royalty of $30 for each machine manufactured under that application and the ensuing patent. The petitioner sold 1,756 blind stitch machines known as Model No. 5 and manufactured under Patent No. 1,018,885, prior to date of hearing. The title to this patent was sold to petitioner in 1916 in the same transaction by which, for nominal consideration, Patents Nos. 814,025 and 814,026 were sold to petitioner.
Subsequent to the granting of patents for the blind stitch machines, Dearborn developed the edge worker baster, described above, and on July 20, 1915, was granted Patents Nos. 1,147,486 and 1,147,614. The edge worker baster was an entirely new device, and produces an output equivalent to that of six tailors, as well as creating a more finished garment than that constructed by hand tailoring. In December, 1920, a hand baster received from $25 to $30 a week. From December, 1920, to the date of hearing, 1,050 edge worker basters had been manufactured and sold by the petitioner at a price of $250 each.
Dearborn caused the American Felling Machine Co. to be incorporated for the purpose of manufacturing and selling the basting machines and on October 14, 1919, sold*2258 and assigned to that corporation his rights to the edge worker baster machine, covered by Patents Nos. 1,147,486 and 1,147,614, for capital stock of that corporation of *728 a par value of $199,800 and for the further consideration of a royalty of $10 on each machine manufactured and sold. At the same time Louis Rivers and Stuart F. Peterkin each purchased one share of the capital stock of the American Felling Machine Co. and paid therefor $100 in cash. The patents constituted the sole assets of the company. The American Felling Machine Co. never engaged in any activity but on December 28, 1920, its stockholders exchanged their capital stock for an equal number of shares of the capital stock of the petitioner, which had increased its stock issue by $200,000 in order to accomplish such exchange. The petitioner thereupon acquired the assets of the American Felling Machine Co. and the latter corporation was dissolved.
The edge worker baster machine was at the time of its invention and has continued to be in great demand in the clothing manufacturing industry. The stockholders and officers of both the American Felling Machine Co. and the petitioner were fully aware of the*2259 need of such a machine in the industry, of the basic nature of the patents secured by Dearborn and of the advantage their ownership would give.
No records of the petitioner prior to 1917 were available. The petitioner company followed a practice of paying no dividends but paid substantial sums in salaries. The following table shows the amounts paid out in royalties and salaries from 1919 to 1924, inclusive:
| Year | Salaries | Royalties |
| 1919 | (Dearborn's salary) $9,000 | $24,120 |
| 1920 | (Dearborn's salary) $12,000 | None. |
| 1921 | (Dearborn's salary) $15,000 | No record. |
| 1922 | (Dearborn's salary) $20,000 | 15,090 |
| 1923 | (Officers' salary) $14,333.36 | 15,720 |
| 1924 | (Dearborn's salary) $26,000 | 13,380 |
From 1919 to 1924, inclusive, the net profits of the petitioner were as follows:
| Year | Net profit |
| 1919 | $2,618.26 |
| 1920 | 2,081.72 |
| 1921 | 2,849.84 |
| 1922 | $4,533.20 |
| 1923 | 8,926.44 |
| 1924 | 579.76 |
OPINION.
VAN FOSSAN: There are three transactions involved in this case. In the first a nonexclusive license to manufacture and sell machines under Patents Nos. 814,025 and 814,026 was granted petitioner in 1910 in consideration of the issuance of capital stock*2260 of a par value *729 of $15,000. In 1916 the full title to the patents was sold and assigned to petitioner for a nominal consideration. The assets owned by petitioner in 1921 which petitioner seeks to include in invested capital and to depreciate, are the patents themselves. These assets were acquired for a nominal cash consideration. This being the fact and the actual value of the stock issued for the license not being proven, there is no allowance which may be made therefor in invested capital. Similarly, since these assets were acquired after March 1, 1913, and for a nominal consideration, there is no cost upon which depreciation can be based.
In the second transaction the situation is similar. An exclusive license to manufacture and sell, under application for Patent No. 1,018,885, was granted petitioner in 1911 in exchange for capital stock of a par value of $70,000. In 1916 the title to this patent was sold to petitioner at the same time the previous patents were conveyed. Following the above reasoning, we are unable to find any basis either for computation of an amount to be included in invested capital or for depreciation.
In the third transaction two patents, *2261 Nos. 1,147,468 and 1,147,614, were issued to Dearborn on July 20, 1915. In 1919 these patents were transferred to the American Felling Machine Co., a corporation organized and owned by Dearborn, for capital stock of a par value of $199,800. In December, 1920, the stockholders of American Felling Machine Co. exchanged their stock for an equal amount of stock of petitioner corporation. Since the patents were acquired after March 3, 1917, the provisions of section 331 of the Revenue Act of 1921 are applicable. In a situation where this section applies the taxpayer may not include an asset in invested capital at a greater value than his predecessor in title could have employed. Since the American Felling Machine Co. acquired the patents from Dearborn, the owner of the company, the maximum amount available for its use in invested capital would be the cost of acquisition to Dearborn. We are unadvised of the amount of this cost to Dearborn and therefore can make no finding as to the amount at which American Felling Machine Co. could have included these patents in invested capital. It follows that we are without information on which to base any allowance to petitioner for invested capital*2262 purposes.
Petitioner acquired these patents upon the issuance of its stock of the par value of $199,800 in exchange for stock of a similar amount in the American Felling Machine Co. We are without evidence, however, sufficient to establish the actual value of the stock thus issued and we are unable to find a basis for the computation of depreciation of these patents.
Reviewed by the Board.
Judgment will be entered for the respondent.