*2370 1. Respondent's determination approved for lack of evidence.
2. Respondent's claim that his determination of a deficiency was erroneous held not sustained by the evidence, the burden being on the respondent.
*48 This is a proceeding for the redetermination of deficiencies in income and excess-profits taxes for the calendar years 1920 and 1921 in the respective amounts of $94.13 and $1,455.92.
It is alleged in the petition that the respondent erred in disallowing as part of petitioner's invested capital an amount of $48,750 of the total alleged value of $75,000 of patents, trade-marks, good will, etc.
At the hearing the motion of the petitioner to dismiss the appeal was denied and the respondent was allowed to amend his answer to allege that the respondent erred in the following respects:
(a) Net income was understated for the year 1920 in the amount of $4,411.76 and for the year 1921 in the amount of $4,411.76 through the allowance of exhaustion on a patent equal to one-seventeenth of $75,000 for each*2371 year.
(b) Invested capital was overstated for the year 1920 in the amount of $26,250 and for the year 1921 in the amount of $26,250, patents and intangibles acquired for stock having been included in the invested capital in said amounts for each year.
FINDINGS OF FACT.
Petitioner is a Missouri corporation with principal office at St. Louis. The president of the corporation is W. L. Sullivan, who, by profession, is a draftsman and inventor.
On July 29, 1912, W. L. Sullivan filed with the United States Patent Office an application for the issuance to him of a patent on an invention for the automatic vending of tickets. This invention was a ticket-issuing machine in which a continuous ticket strip is fed forwardly and severed into lengths containing one or more tickets, the length of the severed portion of the ticket strip being governed by the operator, who actuates a certain key or control device when it is desired to issue one ticket, a different key or device *49 when it is desired to issue two tickets, a different key or device when it is desired to issue three tickets, etc. The principal of the machine invented by Sullivan is the one controlling the machine*2372 in common use in moving-picture ticket offices generally. There was issued upon this application on July 8, 1919, Patent No. 1,308,966.
The petitioner was organized in December, 1912, by Sullivan and three of his associates for the purpose of taking over Sullivan's patents and patent applications. The authorized capital stock was $150,000, of which none was preferred. In December, 1912, Sullivan transferred to the petitioner his patent application which later resulted in Patent No. 1,308.966, in exchange for $75,000 par value of petitioner's stock. At the same time Sullivan contracted and agreed with petitioner that in consideration of the $75,000 par value stock received by him, he would turn over to petitioner, without further compensation, all other pending applications and any other improvements, devices, inventions, applications or patents which he might thereafter invent, acquire or perfect in the line of ticket-vending machines.
The law of Missouri under which the petitioner was formed required that at least one-half of the authorized capital stock of a corporation be fully paid up in cash or other assets. The Secretary of State of Missouri authorized the incorporation*2373 of petitioner and allowed $75,000 par value, or one-half of its capital stock, to be issued for the patent application owned by W. L. Sullivan. The only asset of the petitioner at this time was the patent application.
W. L. Sullivan had formerly been employed by the Temco Manufacturing Co. as draftsman and inventor. He left their employ in October, 1911, and at that time had a contract with that company providing that any inventions on which he had worked while in the employ of that company and on which he should apply for patents within three years after he left there, should belong to the Temco Manufacturing Co. While in the employ of the Temco Manufacturing Co. he had worked on matters relating to a ticket-issuing machine. Shortly after the incorporation of the petitioner and the assignment of the patent application of July 29, 1912, to the petitioner, the Temco Manufacturing Co. instituted certain litigation in which it claimed to be the owner of this application. This litigation was still pending in the courts of Missouri at the time of the hearing of this case.
In December, 1912, the petitioner began to sell its stock to the public. The stock sold to the public was*2374 without bonus in cash or stock and was sold without commissions to brokers or agents. Sales of stock were made to the public as follows:
| December, 1912 | $2,700 |
| January, 1913 | 2,200 |
| March, 1913 | 200 |
| May, 1913 | 850 |
| June, 1913 | 850 |
| July, 1923 | 3,800 |
| August, 1913 | $4,400 |
| September, 1913 | 1,500 |
| October, 1913 | 2,750 |
| November, 1913 | 1,300 |
| December, 1913 | 200 |
| Total | 22,450 |
*50 During the following year the sales of the petitioner's stock to the public continued and amounted to $7,550. No stock was sold after 1914. All of the sales of stock were made on the open market for cash at the par value. None of the above listed sales were to Sullivan or the other incorporators of the petitioner. No stock has been sold by the petitioner since December 31, 1914. Only $105,000 par value of the stock (out of the authorized capital stock of $150,000) has been issued. There remains, therefore, $45,000 of authorized capital stock which has never been issued and which is not for sale. The number of purchasers among the public who bought $30,000 par value of the petitioner's stock was about 70.
In the spring of 1914 Sullivan sold the application for the Canadian*2375 patent on his invention for $3,000 in cash and turned the proceeds over to the petitioner in accordance with his contract and agreement with it, made in December, 1912. He received no additional consideration from petitioner on this account.
Sullivan also developed another invention for an improved electric ticket-vending machine and on October 26, 1914, he filed an application with the United States Patent Office for a patent thereon. Pursuant to the former contract and agreement with petitioner, Sullivan transferred this patent to petitioner. The petitioner returned to Sullivan the patent application which he had previously transferred to petitioner. The petitioner paid Sullivan no further or additional compensation for this new patent application. The patent application of October 26, 1914, resulted in the issuance of Patent No. 1,145,818 on July 6, 1915.
On November 12, 1914, petitioner entered into a written contract with Samuel H. Deroy of Pittsburgh, Pa., who assigned the contract to the Automatic Ticket Selling & Cash Register Co., a New York corporation. This contract recites that petitioner is the owner of a patent application pending in the United States Patent*2376 Office and, by agreement with W. L. Sullivan, an application for further patents on electric ticket-vending machines about to be filed by Sullivan was also the property of petitioner. The contract apparently was drafted prior to the filing of the second application by Sullivan on October 26, 1914. By the terms of the contract Deroy agreed to purchase at least 500 machines the first year of the contract, 600 machines during the second year, 700 machines the third year and 700 machines the fourth *51 and fifth years. Deroy's assignee, the Automatic Ticket Selling & Cash Register Co., took 575 machines the first year. The contract was for five years with option to Deroy to renew for another period of five years. The contract provided that if petitioner should be unable to supply the stipulated number of machines, Deroy might take over petitioner's plant, manufacture the machines, and pay to the petitioner a royalty on the sales of the machines.
The petitioner computed its profits to be $10 per unit under the contract, or the profit to be about $10,000 the first year, about $12,000 the second year, about $14,000 for the next three years or in case of a five-year renewal, *2377 for the succeeding eight years.
Nathan Hofheimer of New York endeavored to bring the petitioner and the Automatic Ticket Selling & Cash Register Co. into one organization. On December 2, 1915, he entered into a written contract with petitioner for the purchase of petitioner's assets, exclusive of cash on hand and in the bank, accounts receivable and some other items for $99,750. The assets comprehended in the contract were plant equipment and supplies in the amount of $5,794.50 and the United States Patent No. 1,145,818. The contract, in effect, granted to Hofheimer an option for one year to purchase at the figure named. Hofheimer paid $10,000 in cash to the petitioner for this option contract. The Automatic Ticket Selling & Cash Register Co. consented and agreed to the contract between petitioner and Hofheimer.
The execution of the Hofheimer contract did not interrupt the performance of the prior contract between petitioner and the Automatic Ticket Selling & Cash Register Co. and when Hofheimer failed to exercise his option under his contract the Automatic Ticket Selling & Cash Register Co. proceeded without interruption to take petitioner's machines under the contract*2378 of November 12, 1914, and so continued under that contract until about the beginning of the year 1918. In the early part of 1918 petitioner notified the Automatic Ticket Selling & Cash Register Co. that it proposed to terminate the contract. The Automatic Ticket Selling & Cash Register Co. brought suit to compel petitioner to continue to perform under that contract, but the suit resulted in a judgment for the petitioner, permitting it to terminate the contract.
From the date of the organization of the petitioner in December, 1912, it had no competition in the sale of its machines until about the year 1922. From time to time other machines appeared on the market, but they quickly disappeared. In 1922 the Automatic Ticket Selling & Cash Register Co. developed a machine similar to that of the petitioner. Petitioner has never felt the competition of the Automatic Ticket Selling & Cash Register Co. in any other part of the country than New York, and even in New York petitioner has *52 been able to keep its sales up to the level formerly established. At one time petitioner brought action in the United States District Court for the Southern District of New York against the*2379 Automatic Ticket Selling & Cash Register Co. for infringement of its Patent No. 1,145,818. This action was brought on 4 claims out of 76 appearing in the patent. Judgment was entered for the defendant and an appeal to the Circuit Court of Appeals for the Second Circuit was taken by the petitioner. The judgment of the lower court was affirmed on November 15, 1926, 15 Fed.(2d) 257, the court holding that claims 14, 20, 30 and 67 of Patent No. 1,145,818 were invalid for lack of invention. The United States Supreme Court denied certiorari, 47 Sup.Ct. 477.
There is no electric ticket-vending machine which does not operate on the principle embodied in the patents and patent applications of petitioner. Before the Sullivan patent, ticket-vending machines were operated by a foot treadle, but that type of machine became obsolete at the time petitioner entered the field.
The cost to the petitioner of the patent application in December, 1912, was $75,000 par value of its capital stock, which had a market value on that date and on March 1, 1913, of $75,000. The actual cash value of the patent application in December, 1912, and its fair market value on March 1, 1913, was*2380 $75,000.
For each of the years 1920 and 1921 respondent determined that petitioner was entitled to invested capital in the amount of $26,250 on account of patents and intangibles paid in for stock of the petitioner. Patents and intangibles were valued by the respondent at $75,000, but, due to statutory limitations, only $26,250 was allowable in invested capital on account thereof. Respondent also allowed, as a deduction in the year 1920 on account of exhaustion of the patent, an amount of $4,412.76, and in the year 1921, an amount of $4,406.76.
OPINION.
SIEFKIN: This is a companion case to Docket No. 37745, involving the same patents and intangibles for other years.
For each of the years 1920 and 1921 respondent determined that petitioner was entitled to invested capital in the amount of $26,250 on account of patents and intangibles paid in for stock of the petitioner. Patents and intangibles were valued by the respondent at $75,000, but, due to statutory limitations, only $26,250 was allowable in invested capital on account thereof. Respondent also allowed in each of the years 1920 and 1921 an amount of approximately $4,400 as a deduction on account of exhaustion of*2381 the patent, this being about equal to one-seventeenth of $75,000.
At the hearing the motion of the petitioner to dismiss the appeal was denied, and the respondent was allowed to amend his answer to *53 allege that he erred in allowing any amount in invested capital on account of patents and intangibles acquired for stock and in allowing deductions on account of exhaustion of the patent.
The respondent is contending that his deficiency letter was in error in allowing anything. The burden of proving such a contention is on the respondent. Upon the same evidence, in Docket No. 37745, which we held not to sustain the petitioner's burden, we hold that the respondent has not met his burden of showing that the deficiency which he asserted was in error. The deficiencies asserted in the deficiency letter will be approved.
Judgment will be entered that there is a deficiency for the year 1920 in the amount of $94.13 and that there is a deficiency for the year 1921 in the amount of $1,455.92.