Hazeltine Corp. v. Commissioner

HAZELTINE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hazeltine Corp. v. Commissioner Docket Nos. 42277, 47011, 51931, 60313. United States Board of Tax Appeals 32 B.T.A. 4; 1935 BTA LEXIS 1008; February 7, 1935, Promulgated *1008 1. (a) EXHAUSTION AND OBSOLESCENCE OF PATENTS, ETC. - BASIS. - On February 2, 1924, corporation X, sole stockholder A, individual B, and bankers C agreed to organize a new corporation (petitioner). X agreed to transfer substantially all its assets, business and good will, B certain inventions, and C $50,000 in cash to the new corporation for 155,250, 14,750, and 5,000 shares of the latter's no par value stock, respectively, and in the same agreement X agreed to sell C 135,000 of such new shares for $650,000 cash. Contract was executed on February 19, 1924. Held, that an ownership, interest, or control of less than 80 percent remained in the transferors, and that petitioner's basis for exhaustion and obsolescence is "cost" to if of the assets acquired. (b) ASSETS ACQUIRED FOR STOCK - COST. - Where assets are acquired for stock the cost of such assets is the fair market value of the stock. Seymour Manufacturing Co.,19 B.T.A. 1280. (c) FAIR MARKET VALUE - STOCK. - Upon the record, held, the fair market value of petitioner's stock on February 19, 1924, was $10 per share, making the cost of all assets acquired from X and B $1,700,000. (d) ALLOCATION*1009 OF COST. - Where exhaustible and nonexhaustible assets are acquired for lump sum consideration, held, cost of each class should be allocated on basis of fair market value of each class. Held, further, the fair market value of the exhaustible assets acquired by petitioner on February 19, 1924, was $1,275,000. (e) RATE OF EXHAUSTION OF PATENTS, ETC. - The patent applications and inventions acquired by petitioner on February 19, 1924, later ripened into patents. Held, the cost of the exhaustible assets in the amount of $1,275,000 should be exhausted over a period of 17 years from the date of issuance of the principal patent. Hyatt Roller Bearing Co. v. United States, 43 Fed.(2d) 1008, 1013, followed. (f) EVIDENCE INSUFFICIENT. - The evidence offered by petitioner in support of its contention for deductions for obsolescence, held, insufficient to overcome the prima facie correctness of respondent's determination. 2. EVIDENCE INSUFFICIENT. - The evidence offered by petitioner in support of its contention for deductions for business expenses, held, insufficient to overcome the prima facie correctness of respondent's determination. *1010 3. NET LOSSES. - Upon the record, held, petitioner sustained no net loss for the two periods in 1927. Paul Armitage, Esq., and R. C. Klugescheid, Esq., for the petitioner. Bruce A. Low, Esq., for the respondent. SEAWELL *5 These proceedings, duly consolidated for hearing and decision, are for the redetermination of deficiencies in income tax, as follows: Year or period Docket No. Deficiency Feb. 1 to Dec. 31, 1924 42277 $26,302.50 Calendar year 1925 42277 31,275.00 Calendar year 1926 42277 35,921.57 Jan. 1 to Apr. 10, 1927 47011 5,361.04 Apr. 11 to Dec. 31, 1927 47011 13,889.60 Calendar year 1928 51931 45,135.24 Calendar year 1929 60313 32,025.59 The issues, more fully stated in the opinion, involve the determination of (1) the basis and the amount of claimed deductions in all *6 years for exhaustion and obsolescence of radio patents, trade-marks, and a license agreement; (2) whether the respondent erred in disallowing certain deductions claimed by petitioner in 1927, 1928, and 1929 as ordinary and necessary expenses; (3) whether petitioner sustained a net loss for the year 1927; and*1011 (4) the respondent's affirmative allegation that he erred in allowing petitioner a deduction for 1929 of a reserve for bad debts in the amount of $71,500. On these issues petitioner claims there is no deficiency due for any year, and that it is entitled to a refund of all taxes paid by it for the year 1929, in the amount of $29,812.91. In its brief petitioner claims obsolescence for the year 1929 only. FINDINGS OF FACT. Petitioner is a corporation, organized under the laws of Delaware on January 29, 1924, with an authorized capital stock of 200,000 shares of no par value, of which 175,000 shares have been issued. Its business is that of owning and licensing radio patents. It was organized principally to take over certain assets of the Hazeltine Research Corporation. The latter corporation was organized under the laws of Delaware on May 7, 1923. All of its stock (5,000 shares, par value $100 each), except six qualifying shares, was owned by Louis A. Hazeltine, hereafter referred to as Hazeltine. Since 1915 Hazeltine has made a specialty of radio. He was the professor of electrical engineering at Stevens Institute of Technology. Prior to 1923 radio receivers then on*1012 the market were not satisfactory. They were all subject to discomforting squeals, howls, and whistles. Hazeltine devoted his time and attention to perfecting a radio receiver which would eliminate such discomforting noises. On August 7, 1919, he made application for his first patent. On March 27, 1923, this application ripened into Patent No. 1,450,080, entitled "Method and Electric Circuit Arrangement for Neutralizing Capacity Coupling." Hazeltine thereafter filed applications upon which patents were granted as follows: Exhibit number Title Application filed Patent granted Patent number [2] Method and Means for Neutralizing Capacity Coupling in Audions Dec. 28, 1920 Apr. 1, 1924 1,489,228 [3] Method and Means for Neutralizing Capacity Coupling in Audions Dec. 28, 1923 Apr. 14, 1925 1,533,858 [4] Means for Eliminating Magnetic Coupling Between Coils Apr. 7, 1924 Mar. 16, 1926 1,577,421 [5] Wave Signaling System Feb. 27, 1925 Nov. 8, 1927 1,648,808 [6] Unicontrol Signaling System Apr. 3, 1925 Apr. 15, 1930 1,755,114 F Means for Eliminating Magnetic Coupling June 30, 1925 Jan. 8, 1929 1,698,364 E Wave Signaling System Jan. 4, 1927 Nov. 22, 1927 1,650,353 D Wave Signaling System Sept. 24, 1927 Nov. 15, 1927 1,649,589 [7] Variable Condenser Oct. 7, 1927 Apr. 15, 1930 1,755,115 *1013 *7 Patent No. 1,533,858 was a division of the application which materialized in Patent No. 1,489,228. Exhibits F, E, D, and 7 were divisions of Exhibits 4, 5, 5, and 6, respectively. In the above group of patents the principal one was Patent No. 1,489,228. In 1922 Hazeltine became interested in the means of "neutralizing capacity coupling" in a commercial way. The inventions involved in all of the above mentioned patents, except the unicontrol patent, were embodied in a radio receiver, which Hazeltine named the "Neutrodyne" receiver. It was put into successful operation in December 1922. On February 17, 1923, Hazeltine entered into a written contract with the Independent Radio Manufacturers, Inc., a Delaware corporation doing business in New York City, and hereinafter referred to as the I.R.M. The stockholders of this corporation were a number of radio manufacturers who were interested in obtaining the right under the Hazeltine inventions to manufacture the "Neutrodyne" receiver. The I.R.M. contract contained 22 numbered paragraphs. That portion which is material here may be summarized as follows: It was mutually understood that the stock of the I.R.M. was*1014 to be owned only by persons engaged in the business of manufacturing and selling radios; that the license granted to the I.R.M. should extend to its stockholding companies only when they were licensed by the I.R.M. under its sublicensing power; that "Hazeltine hereby grants to the I.R.M. an exclusive license to manufacture and sell radio receiving apparatus embodying the inventions set forth in said applications" to the end of the terms for which patents may be granted, and any reissues or extensions; and that "It is understood and agreed that the license herein granted shall extend to and include any future applications for Letters Patent filed by Hazeltine for inventions constituting improvements upon the inventions set forth and described in the applications for Letters Patent hereinbefore specified, and coming within the scope of such inventions * * *." The I.R.M. specifically agreed that it was to pay to Hazeltine the sum of $10,000 as advance royalties; that it would pay to Hazeltine as annual royalties a minimum sum of $30,000 per year; that for each sublicense granted prior to July 1, 1923, it would pay to Hazeltine $1,000 as advance royalty; that "For all apparatus manufactured*1015 or sold under this agreement, the I.R.M. agrees for itself and its sublicensees to pay a royalty of six (6%) per cent of the licensees' selling price of such apparatus"; and that of the 6 percent royalties collected by the I.R.M. from its sublicensees, as provided, 1 percent should be set aside and paid into a fund to be established by the *8 I.R.M. for litigation purposes, and of the 5 percent royalties payable to Hazeltine 1 percent thereof should be withheld by the I.R.M. and paid into said fund until Hazeltine's contribution thereto should total the sum of $12,500. The last paragraph provided: 22. This agreement shall not be transferable by the I.R.M., by operation of law or otherwise, but shall be binding upon and shall inure to the benefit of the heirs, assigns and legal representatives of Hazeltine. On February 27, 1923, Hazeltine filed with the United States Patent Office three applications for registration of the trade-marks "Neutrodyne", "Neutroformer", and "Neutrodon", which were registered by the Patent Office on August 21, 1923, as Trade-Marks 172,137, 172,138, and 172,139, respectively. Less than two weeks after entering into the contract with the I. *1016 R.M., namely, on March 2, 1923, Hazeltine demonstrated a neutrodyne receiver, and delivered a lecture in connection therewith at Columbia University before the Radio Club of America. The Sunday edition of the New York Tribune for March 4, 1923, carried a three-column article on the lecture, and a concrete diagram of the "Hazeltine Neutrodyne Receiver." The lecture given by Hazeltine was also published in the proceedings of the Radio Club and issued in periodical form. The next two important events were the granting of the first patent on March 27, 1923, and the organization of the Hazeltine Research Corporation on May 7, 1923. On August 28, 1923, Hazeltine assigned to the Hazeltine Research Corporation Patent No. 1,450,080, the application filed December 28, 1920, "all reissues and extensions of said Letter Patent and any and all Letters Patent of the United States or of any foreign country or countries which may be granted on said application or on any division or renewal thereof", certain "other improvements and inventions relating to 'Uni-Control of Radio Receivers' and improvements relating to the 'Disposition of Coils at an Incline to Prevent Magnetic Coupling There Between'", *1017 the I.R.M. contract dated February 17, 1923, and his entire business and good will resulting therefrom. The neutrodyne receiver became widely known immediately upon the reading of the lecture given by Hazeltine. The set was easy to operate. It could be more easily tuned and more easily controlled than the other sets then on the market. Its operation was not accompanied by the discomforting squeals, howls, and whistles that came from the regenerative receiver. One could obtain the same station at the same place on the dial. The public acceptance was so great that the demand was greater than the supply. Sets were manufactured up to the limit of the licensees' factory facilities. *9 During December 1923 or January 1924, one of the sublicensees of I.R.M. attempted to cut down on the rate of royalties, which necessitated the bringing of a suit against such sublicensee. Hazeltine then requested Willis, H. Taylor, Jr., to see what could be done towards raising additional capital. Robert McConnell, an engineer and a member of the investment firm of Foster, McConnell & Co., was a mutual friend of Taylor and Hazeltine. Negotiations were had with McConnell which matured*1018 into a contract dated February 2, 1924. At this time also, there were two Dreyer brothers preparing to file an application for letters patent on the "Means for Neutralizing Capacity Coupling." All their rights in that proposed invention had been acquired by Taylor. The application was filed on February 20, 1924, which resulted in Patent No. 1,672.641 being granted on June 5, 1928. The contract dated February 2, 1924 (petitioner's Exhibit No. 18), was between four parties, namely, (1) Hazeltine, (2) Hazeltine Research Corporation, referred to therein as "The Corporation", (3) Taylor, and (4) Foster, McConnell & Co., referred to therein as "The Firm." Among other things, the contract provided for the organization of a new corporation (the petitioner herein), to which was to be transferred substantially all the assets then owned by the Hazeltine Research Corporation, including "All of the business heretofore carried on by it [Hazeltine Research Corporation], associated with the said inventions and trade-marks and the said agreement of February 17, 1923, * * * together with the good-will thereof, and the right to the said new corporation to advertise itself as the successor of 'THE*1019 CORPORATION' and its business", and in addition thereto "any new inventions, covering improvement on the inventions disclosed, in and by the letters patent and pending applications * * * or any devices that may be alternates or substitutes or parallel developments, within the scope of the said patents without further consideration", the new corporation to pay all the legal expenses and fees connected therewith. It also provided: WHEREAS, "THE FIRM" is desirous of acquiring certain stock holdings in such new corporation when organized, Now, THEREFORE, * * * the parties hereto agree as follows: FIRST: "HAZELTINE", "THE CORPORATION" and "TAYLOR" agree to organize a new corporation under the laws of the State of Delaware the name of which shall be Hazeltine Corporation, having a capital stock of two hundred thousand (200,000) shares of no par value, with broad powers similar to that of "THE CORPORATION." Said new corporation to have perpetual existence and a board of three to eleven directors. "HAZELTINE", "TAYLOR" and W. C. Russ shall be among the directors of the new corporation. * * * After *10 the acquisition of the stock in the new corporation as hereinafter provided, *1020 "THE FIRM" shall nominate the balance of the board of directors for the first year. * * * FIFTH: Upon the acquisition by the new corporation of the property heretofore specified in Clauses "Second" and "Third", (1) * * * (155,250) shares of the authorized capital stock shall be issued to "THE CORPORATION" in payment thereof; (2) * * * (14,750) shares of the authorized capital stock of the New Corporation shall be issued to "TAYLOR" in consideration of the transfer by "TAYLOR" to the New Corporation of a certain invention and the application for letters patent to be covering the condenser sold under the trade mark "Neutrodon" or as embodied in the "Neutrodyne" Receiver, together with the right to obtain or prosecute any letters patent in foreign countries, States or Republics, including the Dominion of Canada. (3) Five thousand (5,000) shares shall be subscribed for and paid for by "THE FIRM" at Ten Dollars ($10.00) per share. (4) The balance of * * * (25,000) shares shall remain unissued until the further order of the board. * * * SIXTH: "THE CORPORATION" agrees to sell and deliver to "THE FIRM" * * * (135,000) shares of the stock of the New Corporation, to be formed, *1021 pursuant to this agreement which it has received in exchange for the assets of "THE CORPORATION", set over to the New Corporation as hereinbefore described; the price of the same to be * * * ($650,000) payable on delivery of the stock properly stamped and endorsed. "HAZELTINE", "THE CORPORATION", and "TAYLOR" hereby give to "THE FIRM" an option to purchase for a period of one year at * * * ($15.00) per share as follows: "THE CORPORATION" and "HAZELTINE" - 10,000 shares of stock of the new corporation issued to it by subdivision 1 of Paragraph FIFTH of this contract. "TAYLOR" - 7500 shares * * *. On February 15, 1924, the board of directors of petitioner held their first meeting. Excerpts from the minutes of this meeting follow: All of the Directors present, stated that prior to this meeting, they had read and considered carefully and familiarized themselves with the business assets, situation and prospects of the said Neutodyne business and said patents, and felt in a position to express an opinion in regard thereto. Messrs. Willis H. Taylor, Jr. and Walter C. Russ withdrew from the meeting and took no part in the discussion and did not vote on these resolutions. After*1022 deliberation and full discussion, the following resolutions were duly adopted: RESOLVED, that the acquisition by this Corporation of the said business and assets described in the said offer of the said Louis A. Hazeltine and the Hazeltine Research Corporation, are necessary for the carrying out of the business and franchises of this Corporation, and that in the opinion of the Board of Directors, the assets are fairly and reasonably worth the sum of at least Three Million Five Hundred Thousand ($3,500,000) Dollars. RESOLVED, that the said offer of said Louis A. Hazeltine and the Hazeltine Research Corporation be and the same hereby is accepted and that the proper officers of this Corporation forthwith cause to be said Hazeltine *11 Research Corporation, a certificate or certificates in the temporary form heretofore approved at this meeting, for 155,250 shares of the no par value stock of this corporation the amount called for in said offer, said stock to be fully paid and non-assessable. Resolutions were also adopted to issue Taylor 14,750 shares for the Dreyer invention, and Foster, McConnell & Co. 5,000 shares for $50,000 in cash. During January or February 1924, *1023 Foster, McConnell & Co. organized the H.-N Corporation. The purpose of this corporation was largely to take care of speculative ventures that the firm partners might want to go into without having those ventures go through the firm. Foster, McConnell & Co. assigned their interests in the contract dated February 2, 1924, to the H.-N Corporation for 900 shares of the latter's stock. Under date of February 18, 1924, petitioner issued certificates of its capital stock as follows: Certificate Stockholder Shares Number T 1 Hazeltine Research Corporation 135,000 T 2 Foster, McConnell & Co 5,000 T 3 Hazeltine Research Corporation 20,250 T 4 Willis H. Taylor, Jr 14,750 Total shares issued 175,000 Under date of February 19, 1924, certificate No. T 1 was assigned by the Hazeltine Research Corporation to Foster, McConnell & Co. in exchange for a check for $650,000 issued by the H.-N Corporation. On February 20, 1924, Taylor executed an assignment of the Dreyer invention to the petitioner herein. On February 19 and February 20, 1924, the Hazeltine Research Corporation executed specific assignments and a general assignment of all of its properties*1024 covered by the contract dated February 2, 1924, to the petitioner herein. On February 11, 1924, Foster, McConnell & Co. addressed a letter to Colgate, Hoyt & Co., inviting that firm to participate with them in a syndicate to sell 135,000 shares of petitioner's capital stock at $10 per share, less a selling commission of $2 per share, and 5,000 shares at $10, without any commission. The invitation was accpted and on the same day Foster, McConnell & Co. addressed a confidential communication to the same party, stating, in part, "we have allotted you when, as and if issued and accepted by us and subject to approval of counsel, 40,000 shares at $10 per share for delivery on or about February 20th, 1924 * * *." Presumably about this same time these two investment firms printed a prospectus offering 140,000 *12 shares of petitioner's stock "when, as and if issued and accepted by us" at $10 per share. Beginning February 13, 1924, petitioner's stock was sold on the New York Curb on a "when, as and if" issued basis, as follows: Date Low High February 13, 1924 $13 $13 1/2 February 14, 1924 [14] 14 3/4 February 15, 1924 14 7/8 15 3/4 February 19, 1924 13 3/4 14 3/4 February 20, 1924 16 1/2 16 5/8 February 21, 1924 16 1/2 16 3/4 February 24, 1924 16 3/4 16 3/4 February 25, 1924 16 1/2 16 1/2 February 26, 1924 16 3/4 16 3/4 February 27, 1924 $14 3/4 $16 3/8 March 1924 [14] 17 3/4 April 1924 14 1/2 18 1/4 May 1924 15 3/4 [18] June 1924 16 1/2 [22] July 1924 19 1/2 [30] August 1924 22 1/2 25 5/8 Later in 1924 [48] April 1933 [2] *1025 Shortly after petitioner was organized it took steps towards creating a research laboratory. Its employees made inventions from time to time, which were assigned to petitioner under prior agreements to that effect. Under this arrangement 128 applications have been filed by petitioner since its inception in 1924 to the date of the hearing herein. Of the 128 that were filed, 69 were issued as patents, two were abandoned because of actions in the Patent Office, and 61 interferences were declared by the Patent Office. Of the 61 interferences heard, petitioner hs won 14 and lost 10, and 37 are still pending. Among these inventions was the automatic volume control, which came to be used generally about 1929. Petitioner's licensees were given the right to use any subsequent invention of petitioner's staff without the payment of any increase in royalties. On April 11, 1927, petitioner caused to be incorporated under the laws of the State of New York a corporation to handle the affairs of the laboratory under the corporate name of Hazeltine Service Corporation. Petitioner acquired all of the no par value capital stock of this corporation. The I.R.M. agreement dated February 17, 1923, was*1026 canceled on June 6, 1927, at which time a new agreement was entered into between petitioner and the I.R.M. Under the new agreement the rate of royalty was reduced from 5 percent of the net selling price of the apparatus to 2 1/2 percent, and petitioner was permitted to grant licenses to companies other than those affiliated with the I.R.M. About the year 1925 petitioner acquired 80 percent of the capital stock of the Latour Corporation for a consideration of $275,000, plus a five-year contract for the services of Latour. There were about 57 Latour patents, some of which related to a number of subjects other than radio receivers. After the cancellation of the I.R.M. agreement in 1927, petitioner's licensees also procured the right to use the Latour inventions. During the year 1929 petitioner *13 acquired the remaining 20 percent of the capital stock of the Latour Corporation from Latour. The total royalties received by petitioner from all sources, as shown by its books and reported in its income tax returns, are as follows: [1924] $550,887.02 [1925] 594,767.05 [1926] 432,616.04 [1927] $350,086.22 [1928] 608,652.87 [1929] 919,835.37 [1930] $1,172,409.32 [1931] 584,973.90 [1932] 382,797.18 *1027 At the time of this hearing an accounting was being conducted under court orders, and it was estimated that petitioner might possibly recover approximately $2,600,000 as damages due to the infringements involved in the infringement suits heretofore mentioned. The I.R.M. went into bankruptcy and was dissolved during the year 1931. In 1929 and 1930 the patents and patent applications acquired by petitioner from the Hazeltine Research Corporation lost a large part of their value by reason of the more general use of a screen grid tube. After 1930 radio receiver manufacturers largely ceased making neutrodyne receivers. The neutrodyne patents were not, however, entirely obsolete and some manufacturers used the neutrodyne patents in connection with other patents, and the petitioner continued to receive some royalties from them. The amounts deducted by petitioner as "Depreciation (resulting from exhaustion, wear and tear, or obsolescence)" in its income tax returns for the years 1924 to 1926, inclusive, and its consolidated income tax returns for the years 1927 to 1929, inclusive, the cost and probable life of the "Patents, trademarks, etc." claimed by petitioner in such returns, *1028 and the amounts disallowed by the respondent are as follows: Year Reported cost Probable life Amount deducted Amount disallowed [1924] $3,607,500.00 15 years $210,420.00 $210,420.00 [1925] 3,617,275.72 15 years 241,152.00 240,576.96 [1926] 3,627,275.72 15 years 241,152.00 240,400.57 [1927] 3,637,275.72 15 years 241,152.00 239,400.49 [1928] 3,647,275.72 15 years 241,152.00 238,812.25 [1929] 4,107,388.52 15 years 272,118.23 242,072.05 The fair market value of petitioner's no par value stock on February 19, 1924, was $10 per share. The cost of all of the properties acquired by petitioner on February 19, 1924, in exchange for 170,000 shares of its no par value stock was $1,700,000. The fair market value of the exhaustible assets acquired by petitioner on February 19, 1924, was $1,275,000. *14 As shown by the statement attached to the deficiency notice covering the year 1927, the respondent disallowed as deductions from gross income an item for "Patent applications" in the amount of $21,381.41, and an item for "Patent Interferences" in the amount of $9,254.66, and gave as a reason therefor, the following: Legal expenses incurred*1029 in connection with new patent applications and patent interferences disallowed as expense. These items have been capitalized pending the decision of the patent office as to whether the patents shall be issued. As shown by the statement attached to the deficiency notice covering the year 1928, the respondent disallowed as deductions from gross income an item for "Patent applications" in the amount of $20,144.41, and an item for "Patent interferences" in the amount of $13,704.96, and gave as a reason therefor, the following: Expenditures for patent applications and interferences are not allowable deductions for income tax purposes. If the patents are issued or the interference proceedings decided in your favor they are capital expenditures. On the other hand if, or when, the patent applications are denied or the interference proceedings decided against you, that portion of the expense can be charged off. As shown by the statement attached to the deficiency notice covering the year 1929, the respondent disallowed as deductions from gross income an item for "Patent applications" in the amount of $31,411.28, and an item for "Patent interferences" in the amount of $17,658.46, *1030 and stated merely that the items had been "disallowed as an expense." Petitioner filed a consolidated income tax return for the year 1927 and claimed a net loss of $103,465.41, which amount it deducted from its gross income in a consolidated return filed for the year 1928. As shown by the statement attached to the deficiency notice covering the year 1928, the respondent disallowed the entire deduction claimed in the amount of $103,465.41, on the ground that "Examination of your return for 1927 discloses a profit for that year." OPINION. SEAWELL: Issue 1 (a). - We will first direct our attention to the statutory basis for the exhaustion and obsolescence deductions claimed by petitioner. The proof offered by both parties was on the ground that the basic date of valuation was February 19, 1924, the date petitioner acquired the properties in question from the Hazeltine Research Corporation and Taylor in exchange for 155,250 and 14,750 shares, respectively, of petitioner's capital stock. Petitioner in its brief argues, as a question of law, that the base for measuring exhaustion *15 and obsolescence of the "patent situation" is not the base of the predecessors, but*1031 the cost of the properties to petitioner. The respondent, in his brief, and again in his reply brief, on the question of law thus referred to, simply remarks that while he has not seen fit to argue the case on the basis of the deficiency notice, "it is not to be presumed therefrom that the issue is waived." In the statement attached to the deficiency notice in Docket No. 42277 the respondent said: Your contention that the depreciation deductions claimed on patents be allowed has been denied. * * * Section 204(a)(8) of the Revenue Acts of 1924 and 1926 provides that if the property was acquired by a corporation by the issuance of this [sic] capital stock then the basis shall be the same as it would be in the hands of the transferor. It is noted that the patents acquired for stock were valued on the books in the amount of $3,607,500.00 and depreciation computed on that basis. No evidence has been submitted to disclose the value of the patents in the hands of the transferor. In the absence of evidence to establish the basis on which the depreciation allowance may properly be computed under the regulations referred to herein, no allowance may be made. Substantially*1032 similar statements were made in all of the later notices. The applicable statutes are the Revenue Acts of 1924, 1926, and 1928. Section 204(c) of the Revenue Acts of 1924 and 1926 and section 114(a) of the 1928 Act provide that the "basis" upon which exhaustion and obsolescence are to be allowed in respect of any property shall be the same as is provided "for the purpose of determining the gain or loss" upon the sale or other disposition of such property. Section 204(a) of the 1924 and 1926 Acts and section 113(a) of the 1928 Act provide in part as follows: The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - The only exceptions necessary to consider are paragraphs (7) and (8) of those sections, which are as follows [The following quotations are from the 1924 and 1926 Acts; paragraphs (7) and (8) of section 113(a) of the 1928 Act are substantially the same]: (7) If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and*1033 immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made; (8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation *16 by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivisions (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. [Italics supplied.] Section 203(b)(4) of the*1034 1924 and 1926 Acts, referred to in paragraph (8), supra, and section 112(b)(5) of the 1928 Act are identical and provide that: No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. [Italics supplied.] The term "control" is defined identically the same in all three acts, in section 203(i) of the 1924 and 1926 Acts and section 112(j) of the 1928 Act, as follows: As used in this section the term "control" means the ownership of atleast 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation. Did an interest or control in the assets transferred or ownership of 80 percent or more of petitioner's stock remain in or vest in the transferors, the Hazeltine Research*1035 Corporation and Willis H. Taylor, Jr.? These transferors transferred property to the petitioner in exchange for 170,000 shares or more than 96 percent of its total issue of 175,000 shares. But more than two weeks before the exchange, namely, on February 2, 1924, one of the transferors, the Hazeltine Research Corporation, had agreed to sell 135,000 of such shares to Foster, McConnell & Co. for $650,000 in cash. In the contract providing for the organization of petitioner it was not intended that the old corporation should remain in control of the new corporation or retain ownership of more than approximately 12 percent of its capital stock. The contract further provided that of the remaining 12 percent or 20,250 shares, Foster, McConnell & Co. was to have an option for a period of one year to purchase 10,000 of such shares at a price of $15 per share. In issuing the 155,250 shares to the Hazeltine Research Corporation, petitioner executed two stock certificates, numbered T 1 and T 3. T 1 was for 135,000 shares and T 3 was for 20,250 shares. T 1 was immediately assigned by the Hazeltine Research Corporation to Foster, McConnell & Co. in exchange for $650,000 in cash. A substantial*1036 majority of the original board of *17 directors of petitioner had been nominated and elected by interests adverse to the Hazeltine Research Corporation. In West Texas Refining & Development Co. v. Commissioner, 68 Fed.(2d) 77, the West Texas Co. owned certain assets consisting of a refinery, pipe lines, etc. On June 2, 1925, it and its stockholders entered into a contract with the Standard Oil Co. whereby "they agreed to transfer to the Standard Co. 50 percent of the capital stock" of a new corporation to be formed, called the Col-Tex Refining Co., for a cash consideration. In actually carrying out the contract the new corporation was formed and issued 50 percent of its stock to the Standard Co. for the cash consideration, which cash consideration and the remaining 50 percent of the stock was transferred to the West Texas Co. in payment for the assets there in question. The question before the court was whether the gain to the transferor was nonrecognizable to the transferor under section 203 of the Revenue Act of 1926. In holding that the transaction was not within section 203, the Circuit Court of Appeals for the Tenth Circuit said in part: * *1037 * * The whole transaction was the means adopted to carry out the contract between the West Texas Company and the Standard Company. In substance it was but one single transaction. * * * * * * Here it was contemplated that in substance the West Texas Company should dispose of its assets and receive therefor a cash consideration, and also stock. What was done amounted to a single transaction for income tax purposes, and when it was fully consummated the West Texas Company had received only a 50% stock interest in the Col-Tex Company and $184,771.34 in cash. Therefore the transaction was not within the exceptions defined in Sec. 203, supra, and must be considered as a sale. It is our opinion that the transactions involved in the instant proceedings must be looked at as a whole and, when so viewed, it can not be said that "immediately after the transfer an interest or control" of 80 percent or more of petitioner's capital stock remained in the transferors of the assets. We therefore hold that, under section 204(a) of the 1924 and 1926 Acts and section 113(a) of the 1928 Act, the "basis" for determining the claimed deductions for exhaustion and obsolescence is the "cost" *1038 to petitioner of the assets acquired on February 19, 1924. Issue 1(b) and (c). - What was the cost to petitioner of the assets acquired from the Hazeltine Research Corporation and Taylor on February 19, 1924? As full consideration for such assets petitioner issued 155,250 shares of its capital stock to the Hazeltine Research Corporation and 14,750 shares to Taylor, or a total consideration of 170,000 shares. In Seymour Manufacturing Co.,19 B.T.A. 1280, we said: "The cost of property acquired for stock is the 'fair market value' of the stock." To the same effect see Ambassador Petroleum*18 Co.,28 B.T.A. 868. We believe and have so found in our findings of fact, that the fair market value of petitioner's stock on February 19, 1924, was $10 per share. On this basis, the cost of all of the assets to petitioner was $1,700,000. This value is considerably more than the respondent has argued for in his briefs, namely, $4.81 per share, and considerably less that the value contended for by petitioner, namely, $20 per share. In arriving at our value of $10 per share we have carefully weighed all the evidence before us and are of the opinion*1039 that the record does not justify a higher value or a lower value on February 19, 1924, than $10 per share. Issue 1 (d). - Having decided that the basic date in question is February 19, 1924, and that the cost to petitioner of all the assets acquired on that date was $1,700,000, we come now to the determination of the exact amount of the deduction to which petitioner is entitled for each of the years before us under section 234(a)(7) of the Revenue Acts of 1924 and 1926, and section 23(k) of the 1928 Act, which sections, so far as are material here, are identical, and provide as follows: In computing the net income of a corporation * * * there shall be allowed as deductions: * * * A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. Under this phase of our determination it is necessary to decide (1) which of the assets acquired by petitioner are subject to the statutory allowance; (2) the portion of the total cost of $1,700,000 that should be allocated to each separate class of assets acquired; (3) the rate of the allowance; and (4) whether the rate first established should*1040 be increased in later years due to obsolescence. Petitioner has briefed these proceedings upon the supposition that all of the assets acquired were subject to the statutory allowance; that it was not necessary to allocate the total cost to any particular asset or group of assets; that the entire cost of all the assets should be spread over either a five or eight-year period (according to the life of the "patent situation" as the Board might find from the evidence); and that the entire unexhausted cost remaining on January 1, 1929, should be allowed as a deduction in that year due to obsolescence on account of the commercial appearance at that time of the screen grid invention. On this basis petitioner contends it is entitled to deduct annually, as exhaustion, from 1924 to 1928, inclusive, either one fifth or one eighth of the alleged cost of $3,400,000 (170,000 shares at $20 per share), and for the year 1929, as obsolescence, the remaining unexhausted cost of the patent situation on January 1, 1929. *19 We find ourselves unable to agree with petitioner's contentions in several particulars. We have already discussed the cost feature and have found such cost to be $1,700,000*1041 instead of the amount contended for by petitioner. This cost represented the cost of all the assets acquired by petitioner, including Patent No. 1,450,080, two patent applications, the inventions described in our findings, three trade-marks, the I.R.M. contract, and the entire business and good will of the Hazeltine Research Corporation. Trade-marks are not susceptible to exhaustion. Norwich Pharmacal Co.,30 B.T.A. 326. Neither is good will. Red Wing Malting Co. v. Willcuts, 15 Fed.(2d) 626; certiorari denied, 273 U.S. 763. It is, therefore, imperative that before any deduction for exhaustion or obsolescence can be determined, the total cost of $1,700,000 must be allocated between the exhaustible and nonexhaustible assets. Upon the basis of all the evidence before us we are of the opinion and so find that of the total cost to petitioner of all the assets it acquired on February 19, 1924, from the Hazeltine Research Corporation and Taylor, both exhaustible and nonexhaustible, the fair market value of the exhaustible assets was the amount of $1,275,000, and that the fair market value of the nonexhaustible assets on that date*1042 was the amount of $425,000. Issue 1 (e). - Our next question concerns the rate of exhaustion applicable to the cost of the patent, patent applications, inventions, and other exhaustible assets, which we have determined was the amount of $1,275,000. The general rule with regard to the exhaustion of the value or cost of a patent application or invention on a given basic date is that such value or cost is to be written off over a 17-year period dating from the issuance of the patent, unless obsolescence becomes a factor prior to the end of the 17-year period. Hershey Manufacturing Co.,14 B.T.A. 867; affd., 43 Fed.(2d) 298; TennesseeFibre Co.,15 B.T.A. 133. Where the cost or value relates to an entire group of patents, applications, and inventions, as is the situation here, exhaustion is allowed either over the average life of the patents, as in Prophylactic Brush Co.,25 B.T.A. 676, 686, or upon the life of the principal patent, as in Hyatt Roller Bearing Co. v. United States, 43 Fed.(2d) 1008, 1013; *1043 Individual Towel & Cabinet Service Co.,5 B.T.A. 158, 162; and Hartford-Fairmont Co.,12 B.T.A. 98. In the instant proceedings, we think, in determining the deduction for exhaustion alone, that the cost of $1,275,000 should be spread over a 17-year period, beginning with the date of issuance of the principal patent, which we have found was Patent No. 1,489,228, which was granted on April 1, 1924. Issue 1 (f). - We come now to the obsolescence feature. Petitioner has treated the patent, patent applications, and inventions acquired *20 at the time of its organization as a single group. This group contained two general classes of patents, namely, those involving neutralization and those involving unicontrol. In 1929 it became evident that the methods of neutralization would be gradually displaced by the more efficient screen grid tubes, but this displacement had no effect upon the unicontrol patents, which are still in use. Since petitioner has treated both classes of inventions as a single group, we have no basis upon which an allowance for obsolescence can be determined, and we, therefore, hold that petitioner is limited to the deduction*1044 for exhaustion in the annual amount of $75,000. Issue 2. - In the last three docket numbers, covering the years 1927 to 1929, inclusive, petitioner assigns as error the "Disallowance of expenditures for other and new patent applications and interferences as necessary and proper deductions, cost of litigation, etc." The respondent in determining the deficiencies for those years disallowed, under the caption of "patent applications" and "patent interferences", certain amounts which petitioner had deducted from its gross income as ordinary and necessary expenses. The respondent determined that such items were capital rather than expense items. The evidence on this point is very meager, and insufficient, we think, to overcome the prima facie correctness of the respondent's determination. The petitioner's contention on this issue is, therefore, denied. Issue 3. - Relative to the claimed net loss for the year 1927, the statement attached to the deficiency notice for the two periods in 1927 shows that the respondent determined that petitioner had a net income of $39,711.43 for the period January 1 to April 10, inclusive, and a net income of $105,235.28 for the period April*1045 11 to December 31, inclusive. After making proper adjustments for the proportionate part of the annual allowance for exhaustion, in the amount of $75,000, determined above, it is apparent that no net loss will result. The respondent's determination on this point is sustained. Issue 4. - The respondent has apparently abandoned his affirmative allegation of error, as he offered no evidence in support thereof and has made no reference to it in his briefs. Respondent, therefore, is not sustained on this issue. Reviewed by the Board. Decision will be entered under Rule 50.