*3604 Valuation of patent applications as of March 1, 1913, determined.
*98 In this proceeding the petitioner seeks a redetermination of its income and profits-tax liabilities for the years 1917 to 1920, inclusive, for which the respondent in his deficiency letter dated September 16, 1925, determined deficiencies of $15,440.23, $90,230.66, $13,714.01, and $21,954.77, respectively. Two errors were assigned but the second one was withdrawn leaving only the question of the March 1, 1913, value of certain inventions and applications for patents for the purpose of exhaustion and as a basis for computing the profit on the sale of certain of the foreign rights during the taxable years in question. The respondent determined that the said inventions and applications for patents had no value on March 1, 1913.
FINDINGS OF FACT.
The petitioner is a New York corporation with its principal office at Hartford, Conn. It was incorporated on April 11, 1912, by a group of engineers in Hartford (Karl E. Peiler, *3605 W. A. Lorenz, *99 W. H. Honiss and E. H. Lorenz) and two corporations, the Beechnut Packing Co. and the Monongah Glass Co.
The Beechnut Packing Co. had for about 12 years prior to the organization of the petitioner been making an exhaustive search for an improved method of producing glass jars used in their packing business. In manufacturing such glass containers there are four principal operations, as follows: first, melting the glass in a furnace; second, delivering portions of such molten glass from the furnace to the forming or shaping machine; third, shaping, by pressing or blowing the charge in the iron molds of the forming machine into the shape of the finished article; and fourth, annealing or tempering the article in an oven or lehr. It was with the second step mentioned above that the Beechnut people, and in fact the entire glass industry, was at that time principally concerned. Originally this operation was performed by hand, the gatherer thrusting an iron rod into an opening in the furnace and revolving it gradually toward the left until a sufficient amount of molten glass had adhered to the rod at which time he simultaneously rocked and moved*3606 the rod over a mold, holding it stationary until the glass had sagged off into the mold. This hand-gathering method had numerous drawbacks such as slow production, high cost, and the impossibility of producing an article of uniform weight, which latter factor depended upon the gatherer's estimate and varied from 8 to 12 per cent. By 1911, the business of the Beechnut people had become seriously endangered by the spoilage of its products due to the faults inherent in the hand method of gathering glass. The need for a better method became imperative and Peiler, Lorenz, and Honiss undertook to investigate the entire situation.
As a result of such investigation, Peiler, in 1912, invented certain machines and devices designed to supplant the old hand-gathering method. During 1912, he filed with the United States Patent Office five applications for letters patent covering various mechanical contrivances for the delivering of molten glass from the furnace to the mold. On April 11, 1912, the date of its incorporation, the petitioner entered into an agreement with Peiler whereby, in consideration of 20 of the 600 shares of the petitioner's stock, Peiler agreed that for the next two*3607 years and three months he would "exercise his energy and skill in developing and perfecting inventions and improvements in or applicable to processes or machinery for the manufacture of glassware" and that he would during that period "upon the request and at the expense of the said Company or its legal representatives or assigns, execute the said applications for letters patent, and assignments thereof, requesting the Commissioner of Patents to issue to *100 the said Company and its assigns the patents granted." The five applications mentioned above were duly assigned by Peiler to the petitioner during July and August, 1912.
At the time Peiler made the above inventions and assignments to the petitioner there existed in the glass industry at least two other mechanical methods of feeding open glass. One of these was the Owens suction method, by which the molten glass was sucked up into a suction mold from a specially constructed revolving furnace. It was developed about 1905 and was highly successful by 1913 for certain types of blown ware, principally the narrow-necked bottle. About one-fifth of the 1913 production was being manufactured by the Owens machine. It was not, *3608 however, originally suitable for making wide-mouthed ware, or ware in which the top or neck had to be finished or manufactured without a seam. It was then being put out only under highly restricted and frequently exclusive licenses; was very expensive in installation; called for high royalties; was controlled by one concern and could not make pressed or pressed and blown ware. The other method was the so-called Brooke Flow or Flowing Stream Feed, by which the glass was poured in a stream, very hot, in liquid condition into the mold. The latter method was never widely used; was confined principally to medicine jars of cheap variety such as vaseline containers and was not considered as an important factor in the bottle business.
The methods conceived by Peiler, and as set out in the applications filed during 1912, were fundamentally different from the Owens suction method and from the unsuccessful Brooke or stream method. They consisted of (1) a paddle feeder, (2) a plunger feeder, (3) a punty feeder, and (4) a steam lined oscillating trough. The paddle feeder operated by means of a horizontally moving paddle in the tank of molten glass which pushed or surged out periodic discharges*3609 of glass over an outlet above the level of the glass in the tank. The plunger feeder operated by means of a vertically reciprocating plunger, which reciprocated in line with the outlet and caused the pulsatory discharge of glass, resulting in temporary suspension of masses of glass beneath the outlet. The punty feeder was one in which a constant stream of glass was flowed upon an intermittently rotating punty head located just outside of the tank. On this the glass was collected during rotation, and from it sagged in suspended mold charges upon the cessation of rotation. The steam lined oscillating trough was a device for carrying the separated charge from the gatherer to the mold.
During the summer of 1912, the petitioner caused models to be made of the various feeding devices which were then operated with *101 molasses. After these models had been operated the petitioner's engineers decided upon the paddle feeder as the most promising. Paddle Feeder A was built in September, 1912. Paddle Feeder B was completed and successfully operated for a series of operating runs from October, 1912, to January, 1913. This feeder delivered proper mold charges of varying sizes*3610 and shapes, according to the adjustments made by the operator, at the rate of 24 per minute, which was at least four times as fast as the old hand-gathering method. It maintained a uniformity in weight which the hand gatherer was unable to accomplish. Its operation was observed by various stockholders of the petitioner and the Monongah Glass Co., especially the latter's president, Harry L. Heintzelman, who was a practical glass manufacturer of long experience.
Heintzelman testified that in his opinion the patent applications owned by the petitioner on March 1, 1913, could have been sold at that time for $2,000,000 cash.
Robert T. Cunningham, who has been a director in the Monongah Glass Co. since 1910 and one of its executive officers since 1914, testified that in his opinion, had he been confronted with the proposition of having to sell the patent applications owned by the petitioner on March 1, 1913, he could have obtained a minimum price of at least $2,500,000. His opinion was based more or less on the fact that on March 1, 1913, he personally knew of about 200 manufacturers who were in dire need of a gathering machine such as was then being demonstrated by the petitioner; *3611 that these manufacturers were then producing from ten to thirteen million gross of ware; that by using the petitioner's gathering method there would be a saving of from 30 to 40 cents per gross; and that, assuming a production of 12,000,000 gross with a saving of 30 cents, there would be an annual saving of around $3,600,000.
Frank F. Ferguson, who has been with the Illinois Glass Co. for about 30 years, testified that in his opinion the Illinois Glass Co. would have been willing on March 1, 1913, to have given between $2,000,000 and $2,500,000 for the inventions and patent applications owned by the petitioner on that date. The Illinois Glass Co. was one of the largest manufacturers of narrow-neck ware in the country, and was one of the petitioner's competitors. It had an Owens license on March 1, 1913, but it was so restricted that it could not make beer and soda bottles and food containers, for which products there was the greatest demand at that time.
The petitioner's paddle-feeder device, for which applications for patents were pending on March 1, 1913, had demonstrated prior to *102 that date a saving of from 12 to 17 cents per gross in labor charges on pressed*3612 ware and at least 39 cents per gross on bottles, together with a saving in fuel and overhead of from 7 to 13 cents per gross due to the capacity of the feeder for running 24 hours per day instead of the 17 or 18 hours provided for by union rules.
Although the principle of the petitioner's feeder had been fully demonstrated prior to March 1, 1913, it was not put into commercial operation until the end of January, 1915. The first carload of ware was shipped the following May. The first royalties received by the petitioner were in 1917.
From March 1, 1913, until the present the petitioner has steadily tried to improve its feeders. Such improvements consisted mostly of minor changes in detail, the shape of some part, or the addition of some part without change of function. The principles claimed in the patent applications filed by Peiler in 1912 still furnish the substance for and are still embodied in the feeders used at the present time. The principal patents were granted on August 27, 1918.
In January, 1920, the petitioner's executive board appraised the patent applications which it owned on March 1, 1913, as of that date at $2,400,000, allocating $1,500,000 of the appraisal*3613 to domestic rights and $900,000 to foreign rights.
On the income-tax returns filed by the petitioner for the years 1914 and 1915, under the heading of "Deductions" was written "All experimental." Similar statements were made on the return filed for the year 1916.
In 1922, the Hartford-Empire Co. acquired all of the stock and assets of the petitioner. Between 1917 and 1922, the petitioner sold foreign rights in its feeder inventions in 15 different countries for a total cash consideration of $1,009,946. Its successor up to the end of 1926 sold foreign rights in eight different countries for a total cash consideration of $146,006. The petitioner's successor still owns feeder patent rights in at least 13 foreign countries. Royalties earned and received by the petitioner and its successors for the years 1917 to 1926, inclusive, are as follows:
| 1917 | $11,392.51 |
| 1918 | 81,689.21 |
| 1919 | 135,964.00 |
| 1920 | 237,901.10 |
| 1921 | 288,756.21 |
| 1922 | 330,159.38 |
| 1923 | $506,586.41 |
| 1924 | 592,199.39 |
| 1925 | 794,392.84 |
| 1926 | 1,214,320.11 |
| Total for the ten years | 4,193,361.16 |
Of this total not over $930,000 represents royalties from milk bottle units, which included a forming*3614 machine as well as a feeder, leaving at least $3,263,361.16 received from feeders only.
*103 The respondent determined that the inventions and patent applications owned by the petitioner on March 1, 1913, had no value on that date. In determining the deficiencies for the years in question he has, therefore, not allowed any deduction for the exhaustion of any March 1, 1913, value or taken into consideration any March 1, 1913, value in computing the profits on the various sales of foreign rights, which profits he determined to be as follows:
| 1917 | $214,961.47 |
| 1918 | 87,007.56 |
| 1919 | 85,420.21 |
| 1920 | 333,624.36 |
The fair market value of the inventions and patent applications owned by the petitioner on March 1, 1913, was at least $2,000,000.
OPINION.
GREEN: The question here is one of fact, namely, whether the inventions and patent applications owned by the petitioner on March 1, 1913, had any fair market value, and if so, what that value was. This we have determined from all of the evidence.
As set out in the findings, our conclusion, after considering the entire record, is that the inventions and patent applications owned by the petitioner on March 1, 1913, had*3615 a fair market value of at least $2,000,000. The petitioner had contended for a value of $2,400,000, with $1,500,000 apportioned to domestic rights and $900,000 to foreign. The respondent did not seriously object to the basis of the apportionment but on the contrary contended that such inventions had no value whatever on March 1, 1913. Under such circumstances we find that the $2,000,000 should be apportioned $1,300,000 to domestic rights and the balance, or $700,000, to foreign. The deficiencies should be recomputed by correcting the profit on the sales of the foreign rights during 1917 to 1920, inclusive, and by allowing a deduction for exhaustion from the date the principal patents were issued, namely, August 27, 1918.
Judgment will be entered under Rule 50.