*2281 1. Cost of patent acquired by petitioner for its capital stock determined for purpose of computing an allowance for exhaustion.
2. Under section 331 of the Revenue Act of 1921, such patent can be included in invested capital only to the extent of its cost to the patentee, where such patentee owned 50 per cent or more of the stock of the petitioner.
*504 These proceedings, by order of the Board, were consolidated for hearing and decision. They involve deficiencies as follows:
| Docket No. | Year | Amount of deficiency |
| 15548 | 1921 | $3,762.17 |
| 22667 | 1922 | 661.77 |
| 1923 | 661.77 | |
| 29560 | 1924 | 734.10 |
| 1925 | 671.02 | |
| 40643 | 1926 | 714.71 |
*505 As to each of the years in question, it is urged that the Commissioner erred in refusing to allow any deduction from gross income for the depreciation or exhaustion of a certain patent and patent application acquired by the petitioner upon organization for $90,000 par value of its capital stock. It is also urged that the Commissioner erred in determining invested*2282 capital for 1921 in refusing to allow the petitioner to include any amount for the value of said patent and patent application.
FINDINGS OF FACT.
The petitioner is a corporation, organized under the laws of the State of Delaware, on or about August 12, 1918. Its office and place of business is located at Washington, Pa. At the date of its incorporation the authorized capital stock of the petitioner was $100,000, divided into 1,000 shares of a par value of $100 per share.
Since the date of its incorporation, the petitioner's business has been that of consulting and contracting engineers. It has constructed entire manufacturing plants, including plants for the manufacture of artificial gas. The petitioner's president, Chauncey E. Frazier, and secretary, Harry M. Thompson, are experienced engineers of wide acquaintance in the glass manufacturing industry.
On or about August 12, 1918, the petitioner purchased from Harry M. Thompson, United States Letters Patent No. 1,257,150, issued February 19, 1918, and an application for letters patent filed June 1, 1918. Thereafter, United States Letters Patent No. 1,281,713 was granted on the said application, on October 15, 1918. *2283 United States Letters Patent Nos. 1,257,150 and 1,281,713 relate broadly to annealing furnaces or leers for glassware, and more particularly to improvements in leers of the continuous mufflen type. The petitioner issued to Thompson 900 shares of its capital stock, in payment for the patent and application for patent in question. It was understood at that time that 450 shares of such stock would be assigned to Affill and Hazelton for services to be rendered. On the same day Thompson assigned 450 shares of such stock to P. M. Affill and Ben F. Hazelton in payment for services to be rendered by them in promoting and financing the patent and the corporation.
*506 The fair market value of the petitioner's capital stock on August 12, 1918, was $100 per share.
The cost to the petitioner of the patent and application for patent purchased from Thompson on August 12, 1918, was $45,000. The amount of $2,647.06 is a reasonable allowance for the annual exhaustion or depreciation of United States Letters Patent Nos. 1,257,150 and 1,281,713, during each of the years 1921 to 1926.
After the transfer of the patent and application for patent to the petitioner, Thompson controlled*2284 50 per centum or more of petitioner's issued and outstanding capital stock. The cost to Thompson of the patent and application for patent in question was the sum of $150.
OPINION.
PHILLIPS: The petitioner claims that the Commissioner erroneously refused to allow any deduction for depreciation of a certain patent and patent application acquired in payment for $90,000 par value of its capital stock. It takes the position that this patent and the patent application had a value of at least $90,000 when paid in, that this represents the cost of the patent to the petitioner and that it is entitled to depreciation on this basis. The Commissioner now concedes that the patent had value but urges that the cost did not exceed $22,500. Before petitioner was organized Thompson, the patentee, had arranged with two individuals, Affill and Hazelton, to become interested in the company and to aid in the promotion and financing of the patent. For their services they were to receive, and did receive, one-half of the stock which was issued for the patent. The assurance of this backing gave to the stock of the company, when issued, a value greater than would have been the case had it received*2285 only the patent. The evidence establishes that the patent, so promoted and financed, had a value of at least $90,000 and that the stock of the company, when issued for the patent, was worth par. While the transaction between Thompason and the petitioner took the form of an issue of $90,000 par value of the stock for the patent, the dealings between the individuals establish that in their opinion one-half of the value of the stock lay in the patent and the other half in the arrangements for its promotion and financing. In substance and effect, one-half of the stock was issued to Thompson for the patent and one-half to these others for the services which they undertook to perform. We are of the opinion that in such circumstances the cost of the patent and the patent application, for the purpose of computing an allowance for exhaustion, was $45,000.
At the time the patent was acquired on August 12, 1918, six months of its life had run. The assignment to the petitioner for its stock included not only this patent but an application for a patent covering *507 other features of the same type of leer. There is no basis on which to separate the cost of the patent from the cost*2286 of the application or on which to compute separate depreciation on each. They both relate to the same type of leer and apparently would give the petitioner a monopoly until after the expiration of the patent later granted upon the application. In these circumstances we are of the opinion that during the years here involved, an allowance of one-seventeenth of the cost would represent a reasonable allowance for exhaustion.
Petitioner also alleges that it is entitled to include in invested capital for 1921, the value of the patent when acquired, less exhaustion during the intervening years. Petitioner falls within the provisions of section 331 of the Revenue Act of 1921 and can not include the patent at a greater value than its cost to Thompson. The only cost established was $150. The invested capital should be adjusted accordingly.
Reviewed by the Board.
Decision will be entered under Rule 50.