National Elec. Ticket Register Co. v. Commissioner

NATIONAL ELECTRIC TICKET REGISTER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. National Elec. Ticket Register Co. v. Commissioner Docket No. 37745. United States Board of Tax Appeals 17 B.T.A. 42; 1929 BTA LEXIS 2369; July 31, 1929, Promulgated *2369 Held that petitioner has failed to prove that it is the owner of the patent upon which it claims deductions for exhaustion and the determination of the respondent is upheld. J. G. Korner, Jr., Esq., and M. T. Weinshenk, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. SIEFKIN *42 This is a proceeding for the redetermination of deficiencies in income taxes for the calendar years 1923 to 1926 as follows: [1923] $625.00 [1924] 625.00 [1925] 573.00 [1926] 595.58 Total 2,418.58 It is alleged that the respondent erred in disallowing deductions for depreciation sustained on patents, trade-marks, good will, etc., paid for in stock of the petitioner having a value of $75,000 at the time of acquisition by the petitioner. *43 FINDINGS OF FACT. Petitioner is a Missouri corporation with principal office at St. Louis. The president of the corporation is W. L. Sullivan, who, by profession, is a draftsman and inventor. On July 29, 1912, W. L. Sullivan filed with the United States Patent Office an application for the issuance to him of a patent on an invention for the automatic vending of tickets. *2370 This invention was a ticket issuing machine in which a continuous ticket strip is fed forwardly and severed into lengths containing one or more tickets, the length of the severed portion of the ticket strip being governed by the operator who actuates a certain key or control device when it is desired to issue one ticket, a different key or device when it is desired to issue two tickets, a different key or device when it is desired to issue three tickets, etc. The principal of the machine invented by Sullivan is the one controlling the machine in common use in moving-picture ticket offices generally. There was issued upon this application on July 8, 1919, Patent No. 1,308,966. The petitioner was organized in December, 1912, by Sullivan and three of his associates for the purpose of taking over Sullivan's patents and patent applications. The authorized capital stock was $150,000 of which none was preferred. In December, 1912, Sullivan transferred to the petitioner his patent application which later resulted in Patent No. 1,308,966, in exchange for $75,000 par value of petitioner's stock. At the same time Sullivan contracted and agreed with petitioner that in consideration of*2371 the $75,000 par value stock received by him, he would turn over to petitioner, without further compensation, all other pending applications and any other improvements, devices, inventions, applications, or patents which he might thereafter invent, acquire or perfect in the line of ticket-vending machines. The law of Missouri under which the petitioner was formed required that at least one-half of the authorized capital stock of a corporation be fully paid up in cash or other assets. The Secretary of State of Missouri authorized the incorporation of petitioner and allowed $75,000 par value, or one-half of its capital stock, to be issued for the patent application owned by W. L. Sullivan. The only asset of the petitioner at this time was the patent application. W. L. Sullivan had formerly been employed by the Temco Manufacturing Co. as draftsman and inventor. He left their employ in October, 1911, and at that time had a contract with that company providing that any inventions on which he had worked while in the employ of that company and on which he should apply for patents within three years after he left there, should belong to the Temco Manufacturing Co. While in the employ*2372 of the Temco Manufacturing *44 Co. he had worked on matters relating to a ticket-issuing machine. Shortly after the incorporation of the petitioner and the assignment of the patent application of July 29, 1912, to the petitioner the Temco Manufacturing Co. instituted certain litigation in which it claimed to be the owner of this application. This litigation was still pending in the courts of Missouri at the time of the hearing of this case. In December, 1912, the petitioner began to sell its stock to the public. The stock sold to the public was without bonus in cash or stock and was sold without commissions to brokers or agents. Sales of stock were made to the public as follows: December, 1912 $2,700 January, 1913 2,200 March, 1913 [200] May, 1913 [850] June, 1913 [850] July, 1913 3,800 August, 1913 $4,400 September, 1913 1,500 October, 1913 2,750 November, 1913 1,300 December, 1913 [200] Total 22,450 During the following year the sales of the petitioner's stock to the public continued and amounted to $7,550. No stock was sold after 1914. All of the sales of stock were made on the open market for cash at the par value. None of the above*2373 listed sales were to Sullivan or the other incorporators of the petitioner. No stock has been sold by the petitioner since December 31, 1914. Only $105,000 par value of the stock (out of the authorized capital stock of $150,000) has been issued. There remains, therefore, $45,000 of authorized capital stock which has never been issued and which is not for sale. The number of purchasers among the public who bought $30,000 par value of the petitioner's stock was about 70. In the spring of 1914 Sullivan sold the application for the Canadian patent on his invention for $3,000 in cash and turned the proceeds over to the petitioner in accordance with his contract and agreement with it made in December, 1912. He received no additional consideration from petitioner on this account. Sullivan also developed another invention for an improved electric ticket-vending machine and on October 26, 1914, he filed an application with the United States Patent Office for a patent thereon. Pursuant to the former contract and agreement with petitioner, Sullivan transferred this patent to petitioner. The petitioner returned to Sullivan the patent application which he had previously transferred*2374 to petitioner. The petitioner paid Sullivan no further or additional compensation for this new patent application. The patent application of October 26, 1914, resulted in the issuance of Patent No. 1,145,818 on July 6, 1915. *45 On November 12, 1914, petitioner entered into a written contract with Samuel H. Deroy of Pittsburgh, Pa., who assigned the contract to the Automatic Ticket Selling & Cash Register Co., a New York corporation. This contract recites that petitioner is the owner of a patent application pending in the United States Patent Office and by agreement with W. L. Sullivan, an application for further patents on electric ticket-vending machines about to be filed by Sullivan was also the property of the petitioner. The contract apparently was drafted prior to the filing of the second application by Sullivan on October 26, 1914. By the terms of the contract Deroy agreed to purchase at least 500 machines the first year of the contract, 600 machines during the second year, 700 machines the third year and 700 machines the fourth and fifth years. Deroy's assignee, the Automatic Ticket Selling & Cash Register Co., took 575 machines the first year. The contract*2375 was for five years, with option to Deroy to renew for another period of five years. The contract provided that if petitioner should be unable to supply the stipulated number of machines, Deroy might take over petitioner's plant, manufacture the machine, and pay to the petitioner a royalty on the sales of the machines. The petitioner computed its profit to be $10 per unit under the contract, or the profit to be about $10,000 the first year, about $12,000 the second year, about $14,000 for the next three years or in case of a five-year renewal, for the succeeding eight years. Nathan Hofheimer of New York endeavored to bring the petitioner and the Automatic Ticket Selling & Cash Register Co. into one organization. On December 2, 1915, he entered into a written contract with petitioner for the purchase of petitioner's assets, exclusive of cash on hand and in the bank, accounts receivable and some other items for $99,750. The assets comprehended in the contract were plant equipment and supplies in the amount of $5,794.50 and the United States Patent No. 1,145,818. The contract, in effect, granted to Hofheimer an option for one year to purchase at the figure named. Hofheimer paid*2376 $10,000 in cash to the petitioner for this option contract. The Automatic Ticket Selling & Cash Register Co. consented and agreed to the contract between petitioner and Hofheimer. The execution of the Hofheimer contract did not interrupt the performance of the prior contract between petitioner and the Automatic Ticket Selling & Cash Register Co., and when Hofheimer failed to exercise his option under his contract the Automatic Ticket Selling & Cash Register Co. proceeded without interruption to take petitioner's machines under the contract of November 12, 1914, and so continued under that contract until about the beginning of the *46 year 1918. In the early part of 1918 petitioner notified the Automatic Ticket Selling & Cash Register Co. that it proposed to terminate the contract. The Automatic Ticket Selling & Cash Register Co. brought suit to compel petitioner to continue to perform under that contract, but the suit resulted in a judgment for the petitioner, permitting it to terminate the contract. From the date of the organization of the petitioner in December, 1912, it had no competition in the sale of its machines until about the year 1922. From time to time other*2377 machines appeared on the market, but they quickly disappeared. In 1922 the Automatic Ticket Selling & Cash Register Co. developed a machine similar to that of the petitioner. Petitioner has never felt the competition of the Automatic Ticket Selling & Cash Register Co. in any other part of the country than New York, and even in New York petitioner has been able to keep its sales up to the level formerly established. At one time petitioner brought action in the United States District Court for the Southern District of New York against the Automatic Ticket Selling & Cash Register Co., for infringement of its Patent No. 1,145,818. This action was brought on four claims out of 76 appearing in the patent. Judgment was entered for the defendant and an appeal to the Circuit Court of Appeals for the Second Circuit was taken by the petitioner. The judgment of the lower court was affirmed on November 15, 1926, 15 Fed.(2d) 257, the court holding that claims 14, 20, 30 and 67 of Patent No. 1,145,818 were invalid for lack of invention. The United States Supreme Court denied certiorari, *2378 47 Sup.Ct. 477. There is no electric ticket-vending machine which does not operate on the principal embodied in the patents and patent applications of petitioner. Before the Sullivan patent, ticket-vending machines were operated by a foot treadle, but that type of machine became obsolete at the time petitioner entered this field. The cost to the petitioner of the patent application in December, 1912, was $75,000 par value of its capital stock, which had a market value on that date and on March 1, 1913, of $75,000. The actual cash value of the patent application in December, 1912, and its fair market value on March 1, 1913, was $75,000. The patent application of October 26, 1914, which resulted in the issuance of Patent No. 1,145,818 in 1915, had a value of at least $75,000 in 1914. The respondent determined that the patent paid in for stock in 1914 had no value and disallowed depreciation thereon claimed in the amounts of $5,000 in 1923, $5,000 in 1924, $4,411.76 in 1925, and $4,411.76 in 1926. *47 OPINION. SIEFKIN: The sole question for determination is whether the respondent erred in refusing to allow any deductions in the years in question for*2379 exhaustion of the patent. W. L. Sullivan testified that he left the employ of the Temco Manufacturing Co. in October, 1911. He also testified that he entered into a contract with that company which provided that any inventions on which he had worked while in the employ of that company and on which he should apply for patents within three years after he left there should belong to the Temco Manufacturing Co. He further testified that while in the employ of the Temco Manufacturing Co. he had worked on matters relating to a ticket-issuing machine. On July 29, 1912, Sullivan filed with the United States Patent Office an application for the issuance to him of a patent on an automatic ticket-issuing machine. This application Sullivan transferred to petitioner for $75,000 par value of its capital stock. On October 26, 1914, Sullivan filed another application with the United States Patent Office for a patent upon a ticket-issuing machine. This application Sullivan also turned over to the petitioner without further consideration. This application resulted in the issuance to Sullivan of Patent No. 1,145,818, under which petitioner manufactured its machines, and it is upon this patent*2380 that the petitioner claims deductions for exhaustion. Shortly after Sullivan transferred the first patent application to petitioner the Temco Manufacturing Co. instituted certain litigation in which it is claimed to be the owner of this application. This litigation was still pending in the courts of Missouri at the time of the hearing of this case. The respondent contends that in view of the contract between Sullivan and the Temco Manufacturing Co., Sullivan had no interest in the patent applications and the resulting patent and that since the petitioner could receive no greater interest than Sullivan owned, petitioner is entitled to no deduction on account of the exhaustion of the patent. The burden of proof is upon the petitioner. From Sullivan's testimony we can not determine whether the patent applications and the patent belonged to petitioner or whether they belonged to the Temco Manufacturing Co. The contract between Sullivan and the Temco Manufacturing Co. was not introduced in evidence and we are unable to determine the rights of the parties under that contract. The respondent's disallowance of deductions for exhaustion of the patent must be upheld. Judgment*2381 will be entered for the respondent.