*2777 The actual cash value of an application for patent at the time paid in to the petitioner corporation on May 1, 1916, upon which letters patent issued on January 2, 1917, determined for the purpose of computing invested capital for the years 1920 and 1921, and for the purpose of computing allowances for exhaustion for those years.
*862 This is a proceeding for the redetermination of deficiencies in income and profits tax for the calendar years 1920 and 1921 in the amounts of $2,473.88 and $551.11, respectively. The point in issue is the actual cash value on May 1, 1916, of an application for patent paid in to the petitioner corporation in exchange for shares of stock for the purpose of computing invested capital for the years 1920 and 1921, and also the allowance for exhaustion, if any, deductible from gross income of the taxable years in respect of a patent issued on January 2, 1917, upon the application for patent theretofore filed.
FINDINGS OF FACT.
The petitioner*2778 is a Connecticut corporation with principal office at Danbury. It was incorporated in 1914, with an authorized capital stock of $300,000 divided into 3,000 shares of a par value of $100 each.
From 1909 to 1916 Lewis R. Heim, of Danbury, was engaged in the design and manufacture of laundry machinery, conducting his business as a sole proprietor under the trade name of Heim Machine Co. In 1910 Heim began the manufacture of ball bearings and roller bearings and in 1913 discovered the principle governing the so-called two-wheel centerless grinder, since known as the Heim centerless grinder. From 1913 to 1916 he devoted most of his time to the development of this invention and expended large amounts of money for the purpose of perfecting it, which were charged to operating expenses of the Heim Machine Co.
The invention above referred to constitutes a basic improvement in the art of grinding cylindrical rollers for roller bearings. It is generally referred to as "centerless grinding" and represents a radical departure from prior grinding practice, taking the place in the art of cylindrical grinding. Generally speaking, in order to *863 grind the outer surface of articles*2779 under the prior art it was necessary to mount them on centers or in a chuck, very much as they are mounted in a lathe, and to treat their surface with a grinding wheel individually; then remove the article being ground, replace it with another article to be ground, and so on. The broad idea of Heim's invention of the two-wheel centerless grinder is simply to put such articles between two wheels rotating with their surfaces in opposite directions, so that one wheel would do the grinding and the other would not only rotate the work but feed or propel the work and govern it. The two-wheel centerless grinder did automatically about everything that the old grinding process would do with a certain number of operations and a very large number of elements. By the use of the two-wheel centerless grinder it became possible to take articles to be ground and run them through the machine in a stream, end to end, entirely separate; the machine would automatically take entire charge of them and turn them out at a rapid rate. The effect was to revolutionize the art of grinding cylindrical articles, manufacturing roller bearings and other sundries, where a high degree of accuracy is essential, *2780 and increasing production many fold and producing greater accuracy and a much finer finish than under the prior art of center grinding.
In 1914 Heim turned over to the petitioner merchandise of a value of approximately $10,000 in exchange for $10,000 par value of capital stock, less qualifying shares.
On March 6, 1915, Heim applied for United States letters patent upon his invention of the two-wheel centerless grinder and purported to assign his invention to the petitioner in such application. He received no consideration at this time for the assignment of the invention.
The Heim Machine Co. engaged only in the manufacture of laundry machinery. On or prior to May 1, 1916, Heim disposed of his entire laundry machinery business to one Fiddler. On May 1, 1916, he transferred to petitioner all of the assets of the Heim Machine Co. remaining after the sale of the laundry business. In exchange for these assets he received capital stock of the petitioner of the par value of $290,000, which, with the $10,000 capital stock theretofore received by him in 1914, less qualifying shares, aggregated $300,000 in par value. Of this amount $100,000 was at the time of the transfer attributed*2781 to the value of the intangible assets transferred, including the application for patent, and $200,000 was attributed to the tangibles, such estimate of $200,000 being based upon an appraisal made for the petitioner by a firm of certified public accountants engaged for that purpose. In the books of account opened for the petitioner in 1916, $100,000 was attributable to "patents *864 and good will." It was the intention of all parties concerned that the $100,000 should be regarded as the value of the application for patent upon the Heim centerless grinder.
The business of the petitioner, commencing May 1, 1916, was that of manufacturing ball bearings and roller bearings and Heim centerless grinding machines made in accordance with the application for letters patent above referred to. On January 2, 1917, United States Letters Patent No. 1,210,937 were issued upon the application theretofore made by Lewis R. Heim. Letters patent were issued to the petitioner as assignee of Lewis R. Heim.
The invention of the Heim centerless grinding machine effects very great savings over the prior art. In some cases one centerless grinding machine has displaced from 6 to 20 men who were*2782 grinding work on the center grinders. The labor cost of finished articles by this machine is but one-sixth or one-eighth of the cost of finishing on the center grinder and, under particularly favorable circumstances, much less than such fraction. The petitioner made large profits from the manufacture of centerless grinding machines during the period from 1916 forward. The actual profits attributable to the manufacture of these machines can not be stated with accuracy, but apparently reliable estimates placed the average annual profits of the petitioner, attributable exclusively to the invention from 1916 to 1923, at approximately $28,000. From 1917 to 1919 the petitioner was manufacturing ball bearings solely on requisitions or orders approved by the United States Government, the petitioner having placed its entire production to the support of the Government. Sales of Heim centerless grinders, commencing in 1921, were as follows:
| 1921 | $47,950.04 |
| 1922 | 137,833.45 |
| 1923 | 247,258.31 |
Petitioner's profits were seriously impaired, even during the war period, by the unlawful competition of four principal infringers. Petitioner commenced litigation in the United States*2783 District Court for the District of Connecticut against some of these infringers, which litigation was decided against the petitioner, but on appeal the decision of the lower court was reversed by the Circuit Court of Appeals for the Second Circuit in 1924, in the case of Ball & Roller Bearing Co. v. Sanford Manufacturing Co.,297 Fed. 163.
The actual cash value of the application for patent of the Heim centerless grinder paid in to the petitioner in 1916, in exchange for shares of stock, was $100,000 and the actual cash value of Letters Patent No. 1,210,937, issued to the petitioner on January 2, 1917, was at least $100,000.
*865 OPINION.
SMITH: That an application for letters patent is property subject to inclusion in invested capital has been many times decided by this Board. Individual Towel & Cabinet Service Co.,5 B.T.A. 158">5 B.T.A. 158; Starbuck, Administrator,13 B.T.A. 796">13 B.T.A. 796; Hershey Mfg. Co.,14 B.T.A. 867">14 B.T.A. 867. The respondent contends that the application for patent on the Heim centerless grinder was paid in to it for the nominal consideration of one dollar and not for shares of stock. *2784 The evidence, however, completely refutes this contention. There is no question but that Heim was fully cognizant of the value of his invention and that he intended to and did pay it in to the petitioner corporation in exchange for $100,000 par value of capital stock. Letters patent were not granted on this invention until 1917. It is apparent, however, from the entire record that the invention was something absolutely new in the art of grinding cylindrical bearings. The field for the use of such bearings was practically unlimited. Numerous competent witnesses have testified as to the value of the invention and some of these competent witnesses have testified that in their opinion the value was much in excess of $100,000. The petitioner has sustained the burden of proving an actual cash value of the application for patent of at least the $100,000 contended for.
The Letters Patent No. 1,210,937, issued on the application for patent on January 2, 1917, had a cash value of $100,000. A reasonable allowance for the exhaustion of the patent for each of the taxable years was one-seventeenth of $100,000.
Judgment will be entered under Rule 50.