*2526 DEDUCTIONS - EXHAUSTION OF PATENTS. - On the facts, held that respondent erred in disallowing deductions taken by petitioner in the years 1923 to 1926, inclusive, for exhaustion of a patent, the application for which was acquired in 1914 in consideration of its issue of capital stock.
*1103 This is a proceeding for the redetermination of deficiencies in income taxes for the calendar years and in amounts as follows:
| 1923 | $625.00 |
| 1924 | 625.00 |
| 1925 | 573.00 |
| 1926 | 595.58 |
| Total | 2,418.58 |
It is alleged that respondent erred in disallowing deductions for depreciation of a patent paid in for stock of the petitioner, having a value of $75,000 at the time of acquisition by the petitioner.
This proceeding was heard on March 12, 1929, at Chicago, Ill., and thereafter on July 31, 1929, findings of fact and division of opinion were promulgated and decision thereon entered on the same date *2527 (17 B.T.A. 42">17 B.T.A. 42). Thereafter, on October 21, 1929, petitioner filed a motion asking that the final order entered July 31, 1929, be vacated; that an alleged material error appearing in the record of the testimony taken on the hearing be corrected; and that the findings of fact and opinion of July 31, 1929, be reconsidered. This motion was granted and, upon reconsideration of the proceeding upon the record as corrected, the following amended findings of fact are submitted and opinion rendered.
*1104 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. Prior to October 19, 1911, the said Sullivan was employed by the Temco Manufacturing Co., a corporation, as draftsman and inventor, under a contract of employment providing that any inventions on which he worked while in that employ and on which he should apply for patents within three years after he left that employment, should belong to the Temco Manufacturing Co. While in this employ Sullivan worked on certain inventions relating to ticket-issuing machines. On October 19, 1911, Sullivan*2528 left the employ of the Temco Manufacturing Co. and on July 29, 1912, within the three-year period specified in his former contract of employment, filed an application with the United States Patent Office for issuance to him of a patent on an invention for the automatic vending of tickets on which application there was issued on July 8, 1919, Patent No. 1,308,966.
In December, 1912, Sullivan and three associates organized the petitioner corporation with an authorized capital stock of $150,000, and in the same month there was issued to Sullivan $75,000 par value of petitioner's stock in exchange for the aforesaid pending patent application and an agreement by him to turn over to petitioner, without further compensation, all other applications for patents which he might have or thereafter acquire or inventions which he might thereafter originate or perfect in the line of ticket-vending machines.
Shortly after the incorporation of petitioner and its acquisition of the patent application of July 29, 1912, the Temco Manufacturing Co. instituted suit in which it claimed to be the owner of this application.
In the year following the organization of petitioner $22,450 par value of*2529 its stock was sold for this sum in cash to outside investors and $7,500 additional stock was sold at par in the year following. No stock was sold after 1914. All of the sales of stock were made on the open market for cash at par and none of these sales were to Sullivan or the other incorporators of petitioner. The balance of petitioner's stock has never been issued, $45,000 par value being held in the treasury of the company and is not for sale. In the spring of 1914 Sullivan sold an application which he had filed for Canadian patent on his invention for $3,000 in cash and, under his agreement with petitioner, turned the proceeds over to petitioner, receiving no additional consideration for this action.
Subsequent to 1912 the invention covered by patent application of July 29, 1912, and the title to which was in controversy, proved in some respects defective and Sullivan developed a new and improved *1105 electric ticket-vending machine and on October 26, 1914, more than three years after leaving the employ of the Temco Manufacturing Co., he filed an application with the United States Patent Office for a patent thereon, resulting in the issuance on July 6, 1915, of Patent*2530 No. 1,145,818. Pursuant to his contract and agreement with petitioner, Sullivan transferred this patent application to petitioner and the latter reassigned without consideration to Sullivan the patent application of July 29, 1912, which he had previously transferred to it and the title to which had been questioned by the suit instituted by the Temco Manufacturing Co. Petitioner has manufactured ticket-vending machines under the patent application of October 26, 1914, and resulting Patent No. 1,145,818 after 1914 and during the taxable years here involved.
The patent application of October 26, 1914, which resulted in the issuance of Patent No. 1,145,818 in 1915, had an actual cash value of at least $75,000 when acquired by petitioner in 1914. The $75,000 par value stock issued to Sullivan by petitioner in 1912 had a fair market value when issued, on March 1, 1913, and during the year 1914 of $75,000.
The respondent determined that the patent application acquired in 1914 had no value and disallowed depreciation on the resulting patent claimed in the amounts of $5,000 in 1923, $5,000 in 1924, $4,411.76 in 1925, and $4,411.76 in 1926.
OPINION.
TRUSSELL: The sole question*2531 for determination is whether the respondent erred in refusing to allow any deductions in the years in question for exhaustion of a patent issued in 1915 upon an invention and application for patent acquired by petitioner in 1914. An examination of the deficiency letter, a copy of which is attached to the petition, shows the disallowance of the deduction was upon one ground alone, it being stated that "Information submitted indicates that the patent paid in for stock in 1914, had no value, and the depreciation claimed on the patent, is, therefore, disallowed."
Respondent now contends that an application made for patent by Sullivan on July 29, 1912, and hereafter referred to as the "1912 patent" is shown by the record to have been in fact the property of a corporation by which Sullivan had been formerly employed, as it was made within three years after his leaving that employment, the contract under which he had formerly rendered services providing that any invention on which he should make application for patent within three years after leaving such employment would be the property *1106 of his employer. It is insisted that, this application being the property of Sullivan's*2532 former employer, his attempted transfer of it to petitioner in December, 1912, was void, as he could transfer no better title than he himself had, and consequently petitioner received nothing of value in return for the $75,000 par value stock issued in return for the assignment. It is further insisted that the reassignment of this application to Sullivan was the consideration for the latter's assignment in 1914 to petitioner of a second invention and application for patent thereon, deductions for exhaustion of the patent issued on which are here involved. He contends that, as the first application had no value to petitioner, it must follow that the second application for patent acquired in consideration of the reassignment of the valueless first application must be considered to have been acquired by petitioner without cost, and that it accordingly can not be considered as having a cost value subject to depreciation.
The record clearly shows that the consideration for both of the patent applications was the $75,000 par value stock issued to Sullivan; that the 1912 application for patent proved defective and the title questionable and a reassignment of same without consideration*2533 was made to Sullivan; and that his continued possession and ownership of the $75,000 of stock issued was thereafter in consideration of the assignment of this 1914 application for patent. The fact that petitioner acquired this asset in 1914 and owned it during the taxable years here in question is not disputed. Those facts are not in issue in this proceeding nor does the record contain any testimony from which a contrary conclusion might be reached.
It is clearly shown that the application for patent which resulted in the issuance of Patent No. 1,145,818, referred to as the "1914 patent" and on which respondent has disallowed deductions taken by petitioner for exhaustion in the calendar years 1923 to 1926, inclusive, was acquired by petitioner in 1914 and that the consideration paid for it by petitioner was the $75,000 par value of stock theretofore issued to Sullivan. We have found on the evidence that this $75,000 par value of stock had a fair market value on that date, on March 1, 1913, and during 1914 of $75,000, and that the patent application referred to had an actual cash value of at least $75,000 when so acquired.
Respondent was in error in disallowing the deductions*2534 for exhaustion, on the basis of $75,000 taken by petitioner.
Reviewed by the Board.
Judgment will be entered for the petitioner.