*3413 The cash value of an application for a patent paid into the petitioner corporation in 1907 in exchange for shares of stock and cash determined.
*1062 This is a proceeding for the redetermination of a deficiency in income and profits tax for 1921 in the amount of $8,377.44. All of the assignments of error stated in the petition were waived at the hearing except as follows:
Disallowance of patents in an amount of $219,700 as part of taxpayer's invested capital for the year 1921.
FINDINGS OF FACT.
The petitioner was incorporated under the laws of the State of New York on November 9, 1907, with the expressed object of manufacturing machines for the purpose of affixing bands to cigars. The capitalization was $400,000, which consisted of $200,000 of preferred stock and $200,000 of common stock. Petitioner is a manufacturer of the only cigar-banding machine in existence.
At the time of incorporation an application for patent was pending and the patent thereunder was issued in 1909. The patent is basic and was sustained*3414 by the United States Circuit Court of Appeals, Second Circuit, in International Banding Machine Co. v. American Bander Co., 9 Fed.(2d) 606. Under this decision claims 22 and 99 in Wagner and Malocsay Patent No. 920698, issued May 4, 1909, were held valid and infringed and claim 97 not infringed.
The credit for the idea expressed in the patent and for the development of the business of the petitioner is due entirely to Isidor Steiner, president of the petitioner. His father, William Steiner, was engaged in the lithographing business and specialized in the manufacture of cigar bands. The business was established in 1872 and was made a partnership in 1896 by the admission of the sons and Joseph Kopperl, a son-in-law of William Steiner, and the firm name became William Steiner Sons & Co.
The Steiner firm prior to 1907 manufactured between 6,000,000 and 7,000,000 cigar bands a year and it had as its customers a large number of cigar manufacturers with whom Isidor Steiner conferred and from whom he learned there would be a ready market for a *1063 machine which would band cigars, as all cigars were at that time banded by hand. In about 1904, Isidor Steiner*3415 had spoken to one Charles Wagner, who was a manufacturer of a lithographing machine which was used by the Steiners, about getting up a cigar-banding machine. When the company was formed in 1907, the machine that had been built at the instigation of Isidor Steiner was already operating successfully and there was simply a question of building it smaller.
In 1907 the Steiner firm took over this machine into their own building and also took Malocsay, the inventor, with them and established a machine shop. They bought a lathe and some drill presses, a power saw and some milling machines. At that time the petitioner was without funds and, necessarily, all expenses in experimentation, development and building the machine had to be paid out by those interested in the project and particularly by members of the Steiner firm, who were the largest stockholders.
Upon the organization of the petitioner it was agreed that $250,000 of the capital stock of the petitioner should be issued to Wagner and Malocsay upon their executing and delivering to the petitioner a proper assignment of all their right, title and interest in and to the application for patent already filed and to pay to them*3416 the sum of $17,500 when the sum of $25,000 should have been realized from the sale of the treasury stock of the company. Of the required cash payment of $17,500 the sum of $2,500 was actually paid to Wagner and Malocsay. The patent application was duly assigned to the petitioner.
Before March 1, 1913, the petitioner had finished 10 machines, making everything by hand, in the Steiner factory. The machines at that time had 600 or 700 parts. The Steiner firm had 5 or 6 men in its employ whose salaries were paid sometimes by the Steiner firm and sometimes by the individual members thereof. The 10 machines which had been built were actually in operation in various cigar factories on March 1, 1913, and were doing satisfactory work. Each machine was capable of banding between 30,000 and 42,000 cigars a day. The average worker could band only about 4,000 cigars a day by hand.
The first machines built went into the Eisenlohr factories in Pennsylvania and Eisenlohr has continuously used the petitioner's machines since and at the present time has 42 in operation. These machines are never sold but are rented out on 5-year contracts.
*3417 The patent subsequent to the one for which the $250,000 par value of stock was issued was granted to Malocsay, No. 1,261,832, under date of April 9, 1918, and one of the claims under this second patent was, in International Banding Machine Co. v. American Bander Co.,*1064 supra, held valid and infringed. The following is quoted from said decision:
The object of the invention of the first patent is said to provide a new and improved banding machine, designed for rapidly and accurately applying bands or labels to cigars and other articles and to wrap the same singly around the articles and secure their overlapping ends together, without danger of injury to the articles or to the bands or labels.
The object of the second patent is said to provide a machine which will securely, accurately, and rapidly apply bands to cigars and other articles where an adhesive is used, and it is desired to return the cigars to the box whence they came without turning them in any way so that, if they happen to be dry, they will go back exactly as they came out, and thereby escape all injury. The second patent is said to be a patentable improvement over the first patent, *3418 and the machine is claimed to be a pioneer machine for banding boxed cigars. The first patent is a pioneer for banding cigars of any sort, particularly loose cigars. But the first patent did not band boxed cigars with sufficient rapidity for the trade. * * *
There were two occasions when stock of the petitioner corporation was sold. In 1910 the shares of stock were changed from $100 par value to $10 par value and in that year and in 1911 a total of a little over 430 shares of stock was sold to 20 or 30 purchasers through the medium of a broker on the basis of $10 for a unit of one share of preferred and one share of common stock, out of which the broker was to receive 25 per cent for his services. The broker, however, sold the preferred stock at par and kept the common stock for himself and because of this the further sale of stock was discontinued at that time.
In 1915, in order to raise necessary capital to manufacture machines in quantities, the financial structure of the petitioner was recast so that the $200,000 of preferred stock and $200,000 of common stock were all turned into common stock of a par value of $10 each, and $100,000 of new preferred stock was issued, *3419 carrying 7 per cent dividends, with a provision that the preferred stock should share in the common stock dividends. Of this new issue of preferred stock $83,350 was sold at par in 1915. During the year 1921 the common stock paid dividends at the rate of 6 per cent and preferred stock at the rate of 13 per cent.
The petitioner was in an experimental stage up to about 1917. Although certain cigar-banding machines had been placed in cigar factories for experimental purposes prior to that time the company received no rentals from the machines until 1917, during which year it received rentals of $1,850. In 1918 it received rentals of $10,707.50 and in 1921 $188,627.09 from 334 machines which it had in operation.
In its income-tax return for 1921 the petitioner included in invested capital an amount, not shown by the evidence, representing the value or depreciated cost of patents. Of the amount claimed the Commissioner *1065 disallowed $219,700 in the computation of the deficiency determined for 1921.
OPINION.
SMITH: The only assignment of error stated in the petition which was not waived at the hearing is the disallowance by the respondent of patents in an amount*3420 of $219,700 as part of petitioner's invested capital for the year 1921. The amount claimed in the return filed for 1921 is not in evidence. The deficiency notice sent to the petitioner by the respondent states:
Since the cash value of patents acquired with stock has not been established, depreciation has been disallowed on all patents acquired for stock. Depreciation on patents acquired for cash is computed as follows:
| Cost | Rate | Allowance | Claimed | |
| $46,772.72 | 1/17 | $2,751.34 | ||
| 1920 addition | 2,377.00 | 1/17 | 139.82 | |
| 1921 addition | 849.25 | 1/34 | 24.97 | |
| 2,916.13 | $15,674.86 | |||
| 2,916.13 | ||||
| 12,758.73 |
The Board assumes from this statement that the respondent disallowed the claim of the petitioner for the inclusion in invested capital of any amount in respect of the application for the patent paid in for $250,000 capital stock of the petitioner corporation in 1907. We are of the opinion that the application for the patent had some value at that time. The petitioner then had a model for a machine for the banding of loose cigars and the record indicates that the invention was basic. The petitioner paid $2,500 cash to the inventor for*3421 the patent and a resolution was passed by the board of directors of the petitioner corporation in 1907 by which the officers were authorized to pay Wagner and Malocsay in addition to the stock to be issued to them the sum of $17,500 when the sum of $25,000 had been realized from the sale of treasury stock. Only $2,500 of this amount was paid, however. The balance of $15,000 the petitioner claims should be included in invested capital as representing a part of the value of the patent application. No attempt was made at the time to sell shares of stock of the petitioner corporation. At a later date an arrangement was made with a broker for the sale of one share of preferred stock and one share of common stock at a price to the purchaser of the par value of the preferred stock out of which the petitioner was to receive 75 per cent of the amount received by the broker. By reason of the fact that the broker was not living up to his agreement with the petitioner only 430 shares of stock were thus sold. We are of the opinion that the *1066 evidence in the record warrants the conclusion that the patent application had a value at the time paid in for stock of $25,000 and that the*3422 patent application had the same value in 1909 when the patent was granted. Invested capital for 1921 should be computed accordingly.
At the hearing of this proceeding the petitioner made various claims which are not covered by the petitioner or amendments thereto. The issues thus attempted to be raised can not be considered in accordance with numerous decisions of this Board. Dixie Mfg. Co.,1 B.T.A. 641">1 B.T.A. 641; W. P. Weaver,2 B.T.A. 709">2 B.T.A. 709; W. A. Roth,4 B.T.A. 834">4 B.T.A. 834; S. L. Fowler,6 B.T.A. 250">6 B.T.A. 250; Old Colony Railroad Co.,6 B.T.A. 1025">6 B.T.A. 1025; H. D. & J. K. Crosswell, Inc.,6 B.T.A. 1315">6 B.T.A. 1315.
Judgment will be entered under Rule 50.