*2915 1. Held, that no value for invested capital for years 1919, 1920, and 1921 is allowable for applications for patents acquired by petitioner for capital stock where the date of acquisition is not shown and the amount of the par value of the total stock or shares outstanding at the beginning of the taxable years is not shown.
2. Patent acquired for cash allowed in invested capital in the amount paid therefor.
*748 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1919, 1920, and 1921, in the respective amounts of $13,788.28, $13,122.51, and $24,990.67, not all of which amounts are in controversy.
It is alleged that the respondent erred in refusing to allow as a part of the invested capital of the petitioner:
(1) The sum of $38,000 paid by petitioner to P. M. Gelatt for patents owned by him covering the manufacture of an oil gauge and a gasoline gauge, which sum of $38,000 was paid on June 2, 1916, by the issuance to him of $38,000 in capital stock of petitioner;
(2) The sum of $100,000*2916 paid by petitioner on October 22, 1916, to P. M. Gelatt in capital stock of petitioner for a patent owned by him covering the manufacture of the radi-meter; and
(3) The sum of $100,000 in cash paid by petitioner on June 17, 1919, to P. M. Gelatt, D. G. MacMillan, and various other persons for a patent covering the manufacture of an ammeter, which patent had previously been acquired by Gelatt and MacMillan from the original owner, John L. Axen.
FINDINGS OF FACT.
The petitioner was incorporated under the laws of the State of Wisconsin in 1915, and was successor to the Hans Motor Equipment *749 Co., which had been engaged in the manufacture of automobile accessories. The petitioner continued manufacturing and selling gauges and indicating devices designed for automobiles. During 1918, 1920, and 1921, petitioner sold oil-pressure gauges to 80 or 90 per cent of the automobile manufacturers. Petitioner also manufactured a radi-meter, an ammeter and a gasoline-tank gauge. The oil-pressure gauge, the ammeter and the radi-meter were designed to be mounted on automobile dashboards and later all three instruments were assembled in panels. All these instruments are necessary*2917 for the efficient operation of an automobile.
At the time of organization P. M. Gelatt and MacMillan each received one-half of the capital stock of the petitioner. Gelatt was vice president and secretary of petitioner and was active in the engineering and sales end of the business. MacMillan was president. Gelatt and MacMillan had equal authority in all departments.
On January 29, 1918, patent No. 1,254,672 was issued to P. M. Gelatt. This patent covered the sawed-pin feature of the oil-pressure gauge. It was an important development of this instrument. From 1918 on, petitioner manufactured oil-pressure gauges and gas-tank gauges in quantities. The gross sales of oil-pressure gauges from 1915 to 1925 were as follows:
| 1915 | $73,399.70 |
| 1916 | 140,293.26 |
| 1917 | 228,192.82 |
| 1918 | 262,122.42 |
| 1919 | 443,438.72 |
| 1920 | 467,694.02 |
| 1921 | $227,069.54 |
| 1922 | 540,939.85 |
| 1923 | 705,795.40 |
| 1924 | 522,222.76 |
| 1925 | 532,068.95 |
P. M. Gelatt had no agreement with petitioner by which petitioner was to become the owner of this patent, nor was there an agreement that petitioner should not have the benefit of any inventions invented by Gelatt.
At the present time the oil-pressure*2918 gauge manufactured under this patent is used on automobile dashboards generally throughout the United States.
Another patent issued to Gelatt was numbered 1,252,682, and covered a new type of Bezel ring for gauges used on automobiles. This is the ring that holds the glass in the gauge casing. The use of this ring has greatly declined since instrument clusters under a common glass have come into general use. There was never any agreement providing that the petitioner should receive this patent without compensation, nor was there any agreement that petitioner should not receive the benefit of any invention invented by Gelatt.
The applications for these two patents, No. 1,254,672 and No. 1,252,682, were assigned to petitioner, in return for which petitioner issued to Gelatt $38,000 par value of its capital stock in 1916.
*750 Patent No. 1,220,150, covering a temperature-indicating device for internal-combustion engines, known as a radi-meter, was issued to O. J. Williams. Gelatt had also made an application for a patent on the same device and had sold the application to petitioner for $100,000 par value of petitioner's capital stock. There was no knowledge of Williams' *2919 application until the Patent Office declared interference. By agreement between Gelatt and Williams, or because Williams' application had priority over that of Gelatt, the patent issued to Williams and he assigned it to petitioner on or about March 20, 1917. The petitioner had paid Williams $1,500 in consideration of his relinquishing his rights in the application and agreeing to assign the patent to petitioner when issued.
Petitioner has owned the patent ever since and has continued to manufacture the device, which was commonly used on both automobiles and aeroplanes. In the past three years it has become very popular and at the present time more radi-meters are being sold than Boyce Motor-Meters.
The manufacture of the radi-meter was necessary for the purpose of continuing the business of the petitioner.
The gross sales of radi-meters from 1915 to 1925 were as follows:
| 1915 | None. |
| 1916 | 27.65 |
| 1917 | 16,449.25 |
| 1918 | 154,036.01 |
| 1919 | 18,797.07 |
| 1920 | 22,280.19 |
| 1921 | $12,452.58 |
| 1922 | 15,042.05 |
| 1923 | 17,739.08 |
| 1924 | 72,533.62 |
| 1925 | 108,277.55 |
Patent No. 1,247,813, covering an ammeter, was issued to John L. Axen on June 27, 1917, and was later assigned*2920 by him to P. M. Gelatt and D. G. MacMillan for $1 and other considerations, among which was a job with petitioner to look after the reissue of this patent. Gelatt and MacMillan, for $1 and other consideration, transferred to each of four other individuals, La Vaque, Schumacher, Richmond, and Stroup, a one-tenth share in the patent. On May 5, 1919, this patent was assigned directly to petitioner and the six individuals received $100,000 from petitioner. Gelatt and MacMillan each received $30,000 on June 17, 1919. La Vaque and Schumacher each received $10,000 on June 17, 1919, and on July 5, 1919, Stroup and Richmond each received $10,000. Gelatt and MacMillan each added $25,000 to his share and purchased $55,000 par value of capital stock of petitioner. Each of the other four paid their money back to petitioner for $10,000 par value of capital stock of petitioner.
Axen was the owner of the majority of the capital stock of the Clark Electrical Equipment Co., which manufactured ammeters under the patent in question. The petitioner, in April, 1919, paid Axen $50,000 in cash and two notes for $25,000 each for the stock of *751 the Clark Electric Meter Co. The transaction*2921 was retroactive to January 1, 1919. The capital stock and surplus of the Clark Electric Meter Co. at January 1, 1919, amounted to $17,142.87.
About 1 1/2 or 2 years later the Clark Electric Meter Co. was absorbed into petitioner.
Gelatt and MacMillan received the following amounts from the Clark Electric Co. as royalties from the patent:
| January, 1919 | $587.50 |
| February, 1919 | 649.60 |
| March, 1919 | 929.10 |
| April, 1919 | $983.95 |
| May, 1919 | 1,118.20 |
| June, 1919 (1 to 17) | 722.55 |
Richmond, Schumacher, Stroup, and La Vaque never received royalties.
Within two years after petitioner acquired the patent on the ammeter the production of ammeters increased from 700 to 7,000 per day. Petitioner had not manufactured ammeters prior to this.
The gross sales of ammeters from 1919 to 1925 were as follows:
| 1919 by Clark Co | $343,000.81 |
| 1919 by petitioner | 86,811.67 |
| 1920 by Clark Co | 361,063.80 |
| 1920 by petitioner | 221,925.33 |
| 1921 by companies consolidated | 332,858.61 |
| 1922 by companies consolidated | 430,848.60 |
| 1923 | 616,693.60 |
| 1924 | 430,848.60 |
| 1925 | 399,825.59 |
The Clark Electric Meter Co. received no income except from ammeters which it manufactured*2922 under the Axen patent which it had a license to use.
The petitioner paid all attorneys' fees, filing fees, material costs and other incidental expenses connected with patents Nos. 1,254,672, 1,252,682, and 1,220,150. The respondent has allowed the inclusion in petitioner's invested capital of such amounts as were expended by petitioner in developing the inventions and in patenting them.
All the patents acquired by the petitioner were necessary to make the petitioner a prosperous corporation, since it was in a highly competitive business.
*752 The total sales of all products of the petitioner and the Clark Co. from 1915 to 1925 were as follows:
| 1915 | $173,153.00 |
| 1916 | 327,742.58 |
| 1917 | 447,152.34 |
| 1918 | 754,709.48 |
| 1919 | 985,457.05 |
| 1919 Clark Co | 343,000.81 |
| 1920 Petitioner | 1,333,199.75 |
| 1920 Clark Co | $361,063.80 |
| 1921 (consolidated companies) | 866,776.51 |
| 1922 | 1,665,603.88 |
| 1923 | 2,217,858.99 |
| 1924 | 2,195,071.53 |
| 1925 | 2,566,634.43 |
| 1915 | $167,269.61 |
| 1916 | 274,844.12 |
| 1917 | 426,300.51 |
| 1918 | 670,279.07 |
| 1919 Petitioner | 902,417.78 |
| 1919 Clark Co | 323,941.87 |
| 1920 Petitioner | 1,319,585.81 |
| 1920 Clark Co | $312,472.89 |
| 1921 (consolidated companies) | 790,665.05 |
| 1922 | 1,297,378.28 |
| 1923 | 1,762,411.46 |
| 1924 | 1,718,358.52 |
| 1925 | 2,069,212.01 |
*2923 OPINION.
SIEFKIN: The position of the respondent in this proceeding is that all the patents, except that covering the ammeter, cover instruments which were invented on behalf of the petitioner and that the only basis upon which they can be included in invested capital is on the cost of development to the petitioner. The petitioner did make expenditures on each of these patents and these have been allowed by the respondent in invested capital. The petitioner contends that the patents or the applications therefor were acquired by petitioner for cash and capital stock and should be included in invested capital at their fair value at the time of acquisition.
The respondent cites the case of Gill v. United States,160 U.S. 426">160 U.S. 426. In that case, as well as in the case of Solomons v. United States,137 U.S. 342">137 U.S. 342, the Supreme Court held that an employer had a license to use the inventions of his employees under certain circumstances. The facts in these two cases were similar. In the Solomons case the court said:
* * * An employe, performing all the duties assigned to him in his department of service, may exercise his inventive faculties*2924 in any direction he chooses, with the assurance that whatever invention he may thus conceive and perfect is his individual property. There is no difference between the government and any other employer in this respect. But this general rule is subject to these limitations. If one is employed to devise or perfect an instrument, or a means for accomplishing a prescribed result, he cannot, after successfully accomplishing the work for which he was employed, plead title thereto as against his employer. That which he has been employed and paid to accomplish becomes, when accomplished, the property of his employer. Whatever rights as an individual he may have had in and to his inventive powers, and that which they are able to accomplish, he has sold in advance to his employer. So, also, when one is in the employ of another in a certain line of work, and devises an improved method or instrument for doing that work, and uses the property of his employer and the services of other employes to develop and put in practicable form his invention, and explicitly assents to the use by his employer of such invention, a jury, or a court trying the facts, is warranted in finding that he has so*2925 far recognized the obligations of service flowing from his employment and the benefits resulting from his use of the property, and the assistance of the coemployes of his employer, as to have given to such employer an irrevocable license to use such invention. * * *
However, *753 in the instant proceeding, the evidence discloses that Gelatt was not employed specifically to make inventions for the petitioner. While it is true that he was active in the engineering department of petitioner, yet he and MacMillan had equal authority in all departments. Gelatt did the work upon the inventions himself and did not use other employees of petitioner in developing it. We believe that these inventions conceived by Gelatt were his individual property and that the petitioner had no implied license to use them.
The evidence discloses that petitioner had paid P. M. Gelatt $100,000 par value of its capital stock for an application for a patent on a radi-meter, but no evidence was adduced to show when this transaction occurred. In the absence of such evidence it would be impossible to determine the value of the application as of the date of acquisition. Gelatt had also applied for*2926 a patent on the sawed-pin feature of an oil-pressure gauge and for a patent on a new type of Bezel ring. These applications were assigned to petitioner by Gelatt and petitioner in consideration thereof issued to Gelatt $38,000 par value of its capital stock in 1916.
Section 326(a) of the Revenue Act of 1918 provides:
That as used in this title the term "invested capital" for any year means (except as provided in subdivision (b) and (c) of this section):
* * *
(4) Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest;
(5) Intangible property bona fide paid in for stock or shares on or after March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation*2927 outstanding at the beginning of the taxable year, whichever is lowest: Provided, That in no case shall the total amount included under paragraphs (4) and (5) exceed in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year * * *.
It will be noted that section 326(a)(4) and (5) of the Revenue Acts of 1918 and 1921 provides for limitation of the amount to be allowed in invested capital for intangible property, based upon the par value of the total stock or shares of the corporation outstanding at the beginning of the taxable year. No evidence was introduced to show the total stock or shares of petitioner outstanding at the beginning of the years 1919, 1920, and 1921, the years here involved, and the respondent's exclusion from invested capital of $38,000 for the application for patents covering the sawed-pin feature of the *754 oil-pressure gauge and the Bezel ring, and $100,000 for the radi-meter, must be upheld.
There remains to be considered the ammeter patent. The Clark Electric Meter Co. manufactured ammeters under patent No. 1,247,813, which was owned by John L. Axen, who owned*2928 the majority of the capital stock of the company and who drew royalties from the company on the patent.
The Clark Company received no income except from the sale of these ammeters. Its capital stock and surplus at January 1, 1919, amounted to $17,142.87. In April, 1919, the petitioner paid Axen $50,000 in cash and two notes for $25,000 each for his stock in the Clark Electric Meter Co. This transaction was retroactive to January 1, 1919. About two years later the Clark Electric Meter Co. consolidated with the petitioner.
Sometime in the early part of 1919 Axen assigned this patent to Gelatt and MacMillan for $1 and other considerations. The "other consideration" consisted of petitioner's employing Axen to secure a reissuance of the patent. Gelatt and MacMillan then transferred a one-tenth interest in the patent to each of four other individuals for $1 and other "valuable considerations." The testimony disclosed that the other valuable considerations were negligible. On May 5, 1919, the patent was assigned directly from Axen to the petitioner, and on June 17, 1919, petitioner paid MacMillan and Gelatt each $30,000, and two of the other individuals $10,000 each. On July 5, 1919, the*2929 other two individuals received $10,000 each from petitioner. Each of the six returned the money so received to petitioner in exchange for that amount of par value capital stock of petitioner. MacMillan and Gelatt each purchased in addition $25,000 par value of the stock. Gelatt and MacMillan received royalties under the patent from January 1, 1919, to June 17, 1919, but the other four individuals did not.
The respondent contends that these transactions indicate that the acquisition of this patent by the petitioner from the individuals, two of whom at least were officers of petitioner, was not a bona fide transaction and that the petitioner by acquiring the Clark Electric Meter Co. stock from Axen also acquired the patent. The evidence, however, shows that the patent was acquired by the six individuals, and that the petitioner paid them a total of $100,000 cash therefor. This amount should be allowed in invested capital of petitioner for that part of the year 1919 after May 5, 1919, for the year 1920, and for the year 1921.
Judgment will be entered under Rule 50.