*2557 1. OBSOLESCENCE OF PATENT. - The amount of obsolescence of a patent resulting from the entry into the same field of a newly patented machine determined and allowed as a deduction from gross income.
2. EXTENSION. - A so-called unlimited waiver, consenting to the extension of time within which income and profits taxes may be assessed and collected, entered into on February 5, 1923, expired on April 1, 1924, by virtue of Commissioner's order dated April 11, 1923.
*567 In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the year 1917, for which the Commissioner has determined a deficiency of $7,626.88. The petitioner alleges error on the part of the Commissioner (1) in disallowing as a deduction from income an amount of $20,000, representing obsolescence of a patent, and (2) in assessing the tax after the statute of limitations had expired.
A third allegation of error was made in regard to assessment under section 210 of the Revenue Act of 1917, but no evidence was submitted and no argument was*2558 made in respect thereto.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of Ohio with paid-up capital stock of $10,000 par value. Its principal offices are at Toledo. Frank O'Neill owned 88 1/2 per cent of the capital stock. Mr. Graham owned 10 per cent and each of the three other persons owned one-half of one per cent.
Prior to December, 1912, Frank O'Neill had invented a machine for making wide-mouth hollow glassware. On December 7, 1912, he applied for a patent which was granted on July 20, 1915. Thereupon O'Neill and others organized the petitioner corporation for the purpose of manufacturing and selling this machine, known as the "press machine."
When the company was organized O'Neill and the company made an oral agreement whereby the company acquired from him the exclusive manufacturing and selling rights to the O'Neill press machine. In consideration therefor it agreed to pay to him the sum of $50,000 as soon as it should be financially able to do so.
*568 The company thereupon commenced and carried on the manufacture and sale of the press machine under the agreement. The press machine made wide-mouth hollow*2559 glassware by pressing molten glass into a mould by means of a plunger. This machine could make only jars and ware having a mouth of large diameter, due to the necessity of withdrawing the plunger after it had formed the hollow in the ware.
In 1914 O'Neill started to build a machine for making narrow-neck glassware. He applied for a patent on this invention on August 6, 1914. This patent was subsequently granted on February 20, 1917.
This latter machine, which was known and is hereinafter referred to as the "blow machine" formed narrow-neck hollow glassware by blowing molten glass into a mould by means of compressed air. In its original state it would not make ware having an opening of more than one inch. This machine successfully made bottles in 1915.
In 1916 several narrow-neck machines were built by the O'Neill Machine Co. and installed in the factory of the Toledo Bottle Co., and in December of that year the Toledo Bottle Co. was successfully blowing bottles on the blow machine. O'Neill owned an interest in the Toledo Bottle Co. which he had acquired so that he could experiment with and perfect his blow machine at the glass plant of that company.
On January 2, 1917, at*2560 a meeting of all the stockholders and directors of the O'Neill Machine Co. the company's liability to O'Neill on account of the patent rights to the press machine was settled by O'Neill's agreeing to accept $20,000 in full payment for the patent rights to the press machine.
On January 2, 1917, O'Neill also agreed to sell to the company the exclusive manufacturing rights to the blow machine for $30,000, which amount was subsequently paid to him on February 27, 1917. There had been no previous agreement between O'Neill and the company for the purchase of the rights to the blow machine.
Until the summer of 1917 the O'Neill Machine Co. was manufacturing the press machine for making wide-mouth ware only, and also the blow machine for making narrow-neck ware only. Neither machine could at that time make both types of glassware. The blow machine as originally designed would not make wide-mouth ware in the manner that it made narrow-neck ware because it was found that the arch of a formed blank with a large opening would not support itself in an inverted position as would a formed blank with a narrow opening during the change of the blank from one station of the machine to the next. *2561 This difficulty had not been encountered with the press machine, which formed the blank with *569 the opening upwards instead of downwards as in the case of the blow machine.
In June, 1917, O'Neill and Arduser commenced experimenting with the narrow-neck blow machine to find out if it could be improved so that it could make wide-mouth ware as well as narrow-neck ware. At that time Arduser was working for the Toledo Bottle Co., in charge of the upkeep of its machines, but was also specially employed by O'Neill to assist in the experiments.
Additional parts necessary to carry out the experiments were designed, and an order dated June 20, 1917, was sent to the machine shop of the O'Neill Machine Co. to make the parts.
It was found necessary during the experiments with the blow machine to devise and perfect means for carrying a moving air supply which could be let in to sustain the arch of a wide-mouth blank in its inverted position while it passed from one station of the machine to the next to be blown.
In August, 1917, the blow machine had been changed so that it would successfully make jars and other wide-mouth ware on a commercial scale in addition to the narrow-neck*2562 ware which it had made before.
The O'Neill Machine Co. abandoned the manufacture of the press machine in the summer of 1917, and in October or November of that year the last press machine was sold to the Corning Glass Co. The special tools, patterns, dies, etc., used for the manufacture of the press machine were thereafter junked.
No press machines were made or sold by the O'Neill Machine Co. after November, 1917, as they had become valueless on the market. Manufacturers of glassware would not buy a machine which would make only wide-mouth ware when they could get one which would make either wide-mouth or narrow-neck ware.
On December 31, 1917, among the closing entries for the year the O'Neill Machine Co. charged off its patents account the amount of $21,765, of which $20,000 was for obsolescence of patents.
In its 1917 income-tax return the company deducted $21,765 under item 5(b), which appears analyzed on sheet 2 of the return as follows:
| Kind of property | Cost | Probable life | Amount |
| Patents | $30,000 | 17 years | $1,765 |
| Patents | 20,000 | 17 years (obsolescent) | 20,000 |
The deduction so taken on account of obsolescence was disallowed by the Commissioner*2563 in his determination of the company's taxable income for the year.
*570 The allowable deduction on account of obsolescence of the "press machine" patent for the year 1917 is $10,000.
The petitioner's return for the calendar year 1917 was filed on March 26, 1918. A field examination was made by officers of the Bureau of Internal Revenue which was commenced on March 21, 1921. On February 5, 1923, the petitioner and Commissioner signed a "waiver" consenting to the assessment and collection of the tax "irrespective of any period of limitations." The petitioner's letter accompanying the "waiver" expressed the desire to appeal from the determination of the Income Tax Unit of which the petitioner had been advised in a letter dated May 22, 1922. On December 3, 1923, the Income Tax Unit sent the petitioner a letter annulling the letter of May 22, 1922, insofar as the additional tax liability was concerned and advising the petitioner that its tax liability had been determined under section 210 of the Revenue Act of 1917 showing a deficiency of $7,626.88. In this letter the petitioner was granted 30 days in which to file an appeal in accordance with the provisions of section*2564 250(d) of the Revenue Act of 1921. On or about November 20, 1923, the Commissioner assessed against the petitioner an additional tax in the amount of $7,626.88.
OPINION.
TRUSSELL: The petitioner paid $20,000 on February 27, 1917, for the patent on the "press machine" pursuant to an agreement dated January 2, 1917. During 1917 this patent became obsolete due to a new invention whereby wide-mouth glassware could be manufactured on the same machine which made narrow-neck glassware. An examination of the specifications for patents for wide-mouth ware and for narrow-neck ware indicates that the processes and devices were similar in many respects up to the point where the molten glass was introduced into moulds, or blanks.
This similarity is particularly noted in the glass cut-off mechanism and the mold table advancing mechanism. From these specifications it would appear that the ownership of the patent for the "press machine" would be necessary to the petitioner to protect its patent on the "blow-machine." However, it is clear that a large part of the mechanism employed in the press machines became valueless and obsolete in 1917, specifically that portion made up of moulds, *2565 plungers and devices whereby the glass vessels were shaped by pressure.
In our opinion at least $10,000 of the $20,000 paid for the press machine patent was a loss in the year 1917 due to the obsolescence of the portion of the press machine devices which was not included in the blow-machine specifications.
The petitioner's return for income and profits taxes for the calendar year 1917 was filed with the collector of its district on March *571 26, 1918, and the statute of limitations defining the period within which tax liability upon said return might be assessed and collected would have expired on March 26, 1923. On February 5, 1923, the petitioner and Commissioner entered into an agreement extending the time within which taxes on said return might be assessed and collected for an indefinite period. Thereafter, and on April 11, 1923, the Commissioner issued a public order as follows:
Unlimited Waivers for 1917 Held to Expire April 1, 1924.
To Collectors of Internal Revenue, Internal Revenue Agents in Charge, and Others Concerned:
The form of waiver now in use extends the time in which the assessment of 1917 income and excess profits tax may be made to one*2566 year from the date of signing by the taxpayer. Inasmuch as there are many waivers on file signed by taxpayers containing no limitation as to the time which assessments for 1917 may be made, all such unlimited waivers will be held to expire April 1, 1924.
Under this order the time within which a tax against this petitioner for the calendar year 1917 might have been assessed and collected was entended to and limited by the day April 1, 1924. The Commissioner's final action determining the petitioner's tax liability for the calendar year 1917 was conveyed to the petitioner by a letter dated September 1, 1925, advising it of the rejection of its claim for abatement of additional taxes for the year 1917. At this time, September 1, 1925, the extended period within which any tax for the year 1917 could have been assessed and collected had already passed.
The Board has had occasion to review situations entirely similar to the one here existing in the cases of ; ; and *2567 . The reasoning and the decisions in those cases are controlling here.
Judgment of no deficiency will be entered.
Considered by LITTLETON, SMITH, and LOVE.