Court Opinion

ID: 4597874
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:20:05.901963+00
Date Added: 2024-06-11T07:51:52.093664
License: Public Domain

HAZELTINE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hazeltine Corp. v. CommissionerDocket No. 68074.United States Board of Tax Appeals32 B.T.A. 110; 1935 BTA LEXIS 994; February 20, 1935, Promulgated *994  1.  The amount of an allowance for depreciation for the year 1930 determined.  2.  During 1930 the petitioner spent $41,363.92 for patent applications and $36,681.26 for patent interferences.  Held, that the amounts are not legal deductions from gross income.  Paul Armitage, Esq., E. H. McDermott, Esq., and Willis H. Taylor, Jr., Esq., for the petitioner.  Bruce A. Low, Esq., and L. H. Rushbrook, Esq., for the respondent.  SMITH *111  This is a proceeding for the redetermination of a deficiency in income tax for 1930 in the amount of $45,014.04.  The petition alleges that the determination of the tax set forth in the respondent's notice of deficiency is based upon the following errors: (a) Disallowance by the Commissioner of the amount of the deduction for obsolescence and amortization of patents, patent rights, in the amount of $242,071.76.  (b) Disallowance of expenditures for other and new patent applications as necessary and proper deduction, amounting to $41,363.92.  (c) Disallowance of expenditures for patent interferences as necessary and proper deduction, amounting to $36,681.26.  (d) Disallowance of a reserve for*995  bad debts in the amount of $55,000.00.  FINDINGS OF FACT.  on January 29, 1924, with an authorized capital stock of 200,000 on January 29, 1924, with an authorized caital 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 (hereinafter sometimes referred to as the 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 (hereinafter 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 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 noises.  On August 7, 1919, he made application for his first patent.  On March 27, 1923, this application*996  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: TitleApplicationPatent grantedPatentExhibitfilednumbernumberMethod and Means for Neutral-izing Capacity Coupling inAudionsDec. 28, 1920Apr. 1, 19241,489,2282Method and Means for Neutral-izing Capacity Coupling inAudionsDec. 28, 1923Apr. 14, 19251,533,8583Means for Eliminating MagneticCoupling Between CoilsApr. 7, 1924Mar. 16, 19261,577.4214Wave Signaling SystemFeb. 27, 1925Nov. 8, 19271,648,8085Unicontrol Signaling SystemApr. 3, 1925Apr. 15, 19301,755,1146Means for Eliminating MagneticCouplingJune 30, 1925Jan. 8, 19291,698,364FWave Signaling SystemJan. 4, 1927Nov. 22, 19271,650,353EWave Signaling SystemSept. 24, 1927Nov. 15, 19271,649,589DVariable CondenserOct. 7, 1927Apr. 15, 19301,755,1157*112 Patent No. 1,533,858 was a division of the application which materialized in Patent No. 1,489,228.  Exhibits*997  F, E, D, and 7 were divisions of Exhibits 4, 5, and 6, respectively.  The principal patent in the above group of patents 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 Independent Radio Manufacturers, Inc., a Delaware corporation doing business in New York City (hereinafter referred to as 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 I.R.M. was to be owned only by persons engaged in the business of manufacturing and selling radios; that the license granted to I.R.M. should extend*998  to its stockholding companies only when they were licensed by 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 invention 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.  * * * 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 or sold under this agreement, the I.R.M. agrees for itself and its sublicensees to pay a royalty of six (6%) percent. of the licensees' selling*999  price of such apparatus"; and that of the 6 percent royalties collected by I.R.M. from its sublicensees, as provided, 1 percent should be set aside and paid into a fund to be established by I.R.M. for litigation purposes, and, of the 5 percent royalties payable to Hazeltine, 1 percent thereof should be withheld by I.R.M. and paid *113  into the 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 172137, 172138, and 172139, respectively.  On August 28, 1923, Hazeltine assigned to the Research Corporation Patent No. 1,450,080, the application filed December 28, 1920, "all reissues and extensions of said Letters Patent and any and all Letters Patent of the United*1000  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'", the I.R.M. contract dated February 17, 1923, and his entire business and good will resulting therefrom.  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., his friend and patent counsel, to see what could be done towards capitalizing Hazeltine's inventions so that Hazeltine might get out of the commercial field and devote his exclusive time to his professional work.  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 into a contract on February 2, 1924.  At this time also there were two Dreyer brothers preparing to file an application for*1001  letters patent on the "Means for Neutralizing Capacity Coupling." All of their rights in that invention had been acquired by Taylor.  The application was filed on February 20, 1924, and resulted in Patent No. 1,672,641 being granted on June 5, 1928.  The contract dated February 2, 1924, was between four parties, namely, (1) Hazeltine, (2) Research Corporation, (3) Taylor, and (4) Foster, McConnell & Co.  The contract provided in substance as follows: Hazelton Corporation would be organized under Delaware law, with 200,000 shares of no par value stock and three to eleven directors.  Hazeltine, Taylor, and one Russ would be directors, but Foster, McConnell & *114  Co. (hereinafter sometimes referred to as the Firm), would nominate the balance of the board.  On notice from the Firm, the Research Corporation agreed to transfer to the new corporation the patents, applications, and trade names set forth in an attached schedule (relating to the neutrodyne inventions) and also certain improvements in "Uni-Control" or "Unit Control" of broadcast receivers that had been invented by Hazeltine; all agreements with I.R.M., and any business and good will of the Research Corporation associated*1002  with the aforesaid assets.  Hazeltine and the Research Corporation agreed to assign rights to obtain foreign patents and to lend any assistance necessary to obtain the same.  Upon acquisition of the above property by the new corporation, 155,250 shares of its stock would be issued to the Research Corporation, and 14,750 shares to Taylor in consideration of the transfer by him of the Dreyer invention covering a small instrument (a condenser) valuable in accomplishing the Hazeltine neutralization.  The Firm was to subscribe for 5,000 shares at $10 per share and the balance of 25,000 shares would remain unissued until further order of the board of directors.  The Research Corporation agreed immediately to transfer 135,000 shares of the stock to the Firm for $650,000 cash, payable on delivery of the stock.  Hazeltine and the Research Corporation also gave the Firm an option for one year to purchase 10,000 shares of the 155,250 shares referred to above at $15 per share, and Taylor gave the Firm a similar option on 7,500 shares.  Hazeltine and the Research Corporation agreed to withhold 10,000 shares of the retained stock from the market for six months, and Taylor made a similar agreement*1003  as to 7,250 shares.  Hazeltine contracted to assign any new inventions covering improvements on the inventions transferred, or any alternate or substitute devices or parallel developments, without further consideration.  He conract was to be performed within five days after written notice by the Firm to the other parties, but if notice was not given on or before March 1, 1924, the contract was to be held void.  A consent to an assignment of this contract to a Delaware corporation to be formed was included.  The Hazeltine Corporation, the petitioner herein, was the new corporation referred to in the contract.  The first meeting of its board of directors was held on February 15, 1924.  At this meeting the contract was ratified.  Hazeltine and Taylor retired from the meeting and, pursuant to the Delaware statute, the directors determined that the value of the assets to be received for the 170,000 shares of stock was $3,500,000.  Prior to the meeting the Firm had proceeded with preparations for marketing the 140,000 shares of stock it was to receive.  A syndicate had been organized, and *115  on February 11, 1924, public trading in petitioner's stock had begun on a "when, as and*1004  if issued" basis on the New York Curb Exchange.  The Firm had also organized the H.N. Corporation, to which their interest in the contract of February 2, 1924, was assigned.  This was simply a trading corporation for the members of the Firm.  Verbal notice of intent to proceed under the contract had been given by the Firm to the other parties on or prior to February 11, 1924, and on February 15, 1924, a formal written notice was given by the H.N. Corporation, calling for performance on February 20, 1924, of the transfer of the "patent situation" of Hazeltine, the trade names, the I.R.M. contract, and the Dreyer invention to the corporation, the issue of its capital stock therefor, and the transfer of 135,000 shares to the Firm.  On February 19, 1924, the Research Corporation executed a general assignment of the neutrodyne patent, applications, inventions, and trade-marks to the petitioner, followed on February 20 by separate assignments of the specific patent, applications, inventions, and the I.R.M. contract.  On the same day Taylor executed an assignment of the Dreyer invention.  On February 19, 1924, the Research Corporation executed an assignment of 135,000 shares of stock to*1005  the Firm.  Stock certificates dated February 18, 1924, were prepared as follows: T-1 Hazeltine Research Corporation135,000 sharesT-2 Foster, McConnell & Co5,000 sharesT-3 Hazeltine Research Corporation20,250 sharesT-4 Willis H. Taylor14,750 sharesAll of these certificates were delivered on February 19, 1924, to the parties in whose names they were issued, except T-1.  On February 19 certificates T-1 and T-2, issued for cash subscribed by the Firm to petitioner, as per contract, were canceled and new certificates, T-5 to T-1192, inclusive, for a total of 140,000 shares, were issued for distribution on February 20 to participants in the syndicate and purchasers on the Curb.  On February 19 the Research Corporation received the check of the H.N. Corporation for $650,000.  These transactions were simultaneous and completed the performance of the contract of February 2, 1924.  The Research Corporation owned assets other than those which were transferred to the petitioner in pursuance of the contract of February 2, 1924.  For a time it held certain "power valve" patents of Hazeltine, concerned with the conversion of large blocks of electrical energy.  The*1006  transfer to the petitioner did not include these other patents and inventions or any other assets save the neutrodyne patents.  Following the transfer, the Research Corporation continued to make studies and experiments in furthering these inventions in other *116  fields.  It continued in existence until 1926 or 1927, when it was dissolved and its assets distributed to its stockholders.  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 accepted 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 shares of petitioner's stock "when, as and if issued and accepted*1007  by us" at $10 per share.  The fair market value of the assets transferred by Hazeltine, the Research Corporation, and Taylor to the petitioner in exchange for 170,000 shares of its no par value stock was $1,700,000.  Of this amount $1,275,000 represented the fair market value of exhaustible assets.  Shortly after the petitioner was organized it took steps towards creating a research laboratory.  Its employees made inventions from time to time which were assigned to the petitioner under prior agreements to that effect.  Under this arrangement, 128 applications have been filed by petitioner since its inception in 1924.  Of the 128 that were filed, 69 were issued as patents, 2 were abandoned because of actions in the Patent Office, and 61 interferences were declared by the Patent Office.  Of the 61 interferences heard, petitioner has won 14 and lost 10, and 37 are still pending.  The I.R.M. contract dated February 17, 1923, was canceled on June 6, 1927, at which time a new agreement was entered into between the petitioner and 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*1008  permitted to grant licenses to companies other than those affiliated with I.R.M.  About the year 1925 the 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. contract in 1927, petitioner's licensees also procured the right to use the Latour inventions.  During the year 1929 petitioner acquired the remaining 20 percent of the capital stock of the Latour Corporation from Latour.  *117  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$550,887.021925594,767.051926432,616.041927$350,086.221928608,652.871929919,835.371930$1,172,409.321931584,973.901932382,797.18In 1933 an accounting was being conducted under court orders, and it was estimated that petitioner might possibly recover approximately $2,600,000 as damages due from certain infringement suits which had been instituted. *1009  In 1929 and 1930 the patents and patent applications acquired by the petitioner from the 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.  In its income tax return for 1930 the petitioner deducted from gross income $246,901.71 for amortization of patents.  Of this amount the respondent allowed the deduction of $4,829.95 and disallowed the deduction of the balance of $242,071.76, stating in his deficiency notice: Amortization of patents originally owned by the Hazeltine Research Corporation and sold to the Hazeltine Corporation for capital stock of no par vlaue disallowed for the reason that no evidence has been submitted to establish a basis for amortization.  The $4,829.95 represented an amount for the "Amortization of patents purchased for cash." In its income tax return for 1930 the petitioner also claimed the deduction*1010  of the following amounts: patent applications, $41,363.92; patent interferences, $36,681.26.  These amounts were disallowed as deductions in the computation of the deficiencies for the reason that: "These patent applications and interference expenses should be set up as a deferred asset until such time as a final decision is made by the patent office." In its income tax return for 1930 the petitioner also claimed the deduction from gross income of a reserve for bad debts in the amount of $55,000.  This amount was disallowed as a deduction by the respondent - * * * for the reason that in 1926 and 1927 the corporation had elected to charge off the actual bad debts.  Having elected to charge off the bad accounts a corporation is not allowed to change to the reserve method of treating bad debts without first obtaining permission from the Commissioner.  *118  OPINION.  SMITH: The first question to be considered is the basis to be used in the determination of the amortization allowance for patents for the year 1930.  The respondent contends that this basis is the same as would be available to the predecessor owner, the Hezeltine Research Corporation, if it had not transferred*1011  them to the petitioner, for, he argues, in its income tax return for 1924 the Hazeltine Research Corporation treated the transfer which was made in that year as one under the reorganization provisions of the Revenue Act of 1924, and the Research Corporation accounted for no taxable profit arising from the transfer of its patents to the petitioner for that year.  The respondent has proved by an exhibit of the return of the Research Corporation for 1924 that it included in its gross income only amounts received from the sale of the Hazeltine Corporation stock acquired by it on the deal.  Section 113 of the Revenue Act of 1928 provides in part: (a) Property acquired after February 28, 1913. - 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 subdivisions (7) and (8), which are as follows: (7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY REMAINS IN SAME PERSONS. - If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer*1012  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) SAME - CORPORATION CONTROLLED BY TRANSFEROR. - If the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112(b)(5) (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.  [Emphasis supplied.] Section 112(b)(5) provides: (5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized*1013  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.  [Emphasis supplied.] *119  The term "control" is defined in section 112(j) of the Revenue Act of 1928 as follows: As used in this section the term "control" means the ownership of at least 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.  In this proceeding the petitioner contends that after the contract of February 2, 1924, was performed, the Research Corporation owned only approximately 12 percent of the outstanding stock of the petitioner corporation; that it never was contemplated that the Research Corporation should have any substantial interest in the petitioner corporation.  We think this is clear from the testimony of*1014  Louis A. Hazeltine.  The transcript of his testimony upon this point is as follows: Q.  Did you request Mr. Taylor to enlist the aid of some concern in setting up a situation to handle these things and acquire an interest in these inventions?  A.  It was not so much in the nature of a request, but I told him I would be glad to capitalize the situation, and then if I remember correctly, a short time after that Mr. McConnell and his associates were interested in the matter.  Q.  Let me ask you this: Was it your purpose in doing that to retain control of these patents?  A.  Absolutely not.  The purpose was to get out of the commercial field, and realize what I could on my own work, and to relieve myself of the troubles inciden to the business and to commercial organizations in regard thereto.  Under the contract of February 2, 1924, the Hezeltine Research Corporation was to dispose of the patents and other assets which were transferred to the petitioner by it for 155,250 shares of stock of the petitioner and the Research Corporation was immediately to transfer 135,000 shares of such stock to Foster, McConnell & Co. for $650,000 cash.  The contract was carried out according to*1015  its terms.  Looked at as a whole, we think that it can not be sdia that "immediately after the transfer an interest or control" of 80 per centum or more of the petitioner's capital stock remained in the Research Corporation.  The transaction must be so viewed.  Cf. West Texas Refining & Development Co. v. Commissioner, 68 Fed.(2d) 77. The facts in this case are substantially different from those which obtained in Samuel Insull, Jr.,32 B.T.A. 47">32 B.T.A. 47, in which we held that where the petitioners exchanged certain securities for shares of stock of Insull Utility Investments, Inc., the Insulls were in control of the corporation immediately after the transfer.  There the disposition of the shares of stock of Insull Utility Investments, Inc., soon after acquisition by the Unsulls, was the result of an independent contract, and not, as here, in fulfillment of the contract which gave rise to the new corporation.  See Hazeltine Corporation,32 B.T.A. 4">32 B.T.A. 4. *120  We are of opinion that under section 113(a) of the Revenue Act of 1928 the "basis" for determining the claimed deductions for exhaustion and obsolescence of patents is the "cost" *1016  to the petitioner of the assets acquired under the contract.  What was the cost to the petitioner of the assets acquired from the Research Corporation and from Taylor in February 1924?  The petitioner contends that such cost was the fair market value of the assets transferred to the petitioner and that such value was $3,500,000, the value placed upon them by the board of directors of the petitioner in February 1924.  The respondent, on the other hand, contends that the cost was the fair market value of the shares of stock issued by petitioner in exchange for those assets and that such fair market value was $4.81 per share, the price at which the Research Corporation sold to Foster, McConnell & Co. 135,000 shares of stock.  The respondent submits that the fair market value of all the assets transferred is $817,700, computed as follows: ConsiderationShares of stock sold$650,000/135,000 = $4.81Shares issued for patents, trade-marks,contracts, good will, etc170,000 X $4.81 = $817,700We are of the opinion that the respondent's method of determining the value of the assets acquired by the petitioner from the Hazeltine Research Corporation is not a correct*1017  method to be applied in this case.  In Seymour Manufacturing Co.,19 B.T.A. 1280">19 B.T.A. 1280, 1285, we said: "The cost of property acquired for stock is the 'fair market value' of the stock." To the same effect see Ambassador Petroleum Co.,28 B.T.A. 868">28 B.T.A. 868. In this proceeding we note that Foster, McConnell & Co. paid $10 per share for 5,000 shares of stock purchased from the petitioner.  It further appears that Foster, McConnell & Co. was able immediately to sell approximately all of the 135,000 shares of stock which it had acquired from the Hazeltine Research Corporation at approximately $10 per share.  We think that this is the fair market value of the stock as of February 19, 1924, the date when the Hazeltine Research Corporation transferred its assets relating to the neutrodyne inventions to the petitioner.  We therefore have found the cost of the total assets acquired by the petitioner from Hazeltine Research Corporation and from Taylor to have been $1,700,000.  We have also determined from a consideration of all of the evidence that the fair market value of the exhaustible assets acquired by the petitioner upon the issuance of 170,000 shares of stock was*1018  $1,275,000.  Our next question relates to the rate of exhaustion applicable to the cost of the exhaustible assets.  The general rule with regard to the exhaustion of the value or cost of a patent application or invention *121  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 priot to the end of the 17-year period.  Hershey Manufacturing Co.,14 B.T.A. 867">14 B.T.A. 867; affd., 43 Fed.(2d) 298; TennesseeFibre Co.,15 B.T.A. 133">15 B.T.A. 133. Where the cost or value relates to an entire group of patents patent 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">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; Individual Towel & Cabinet Service Co.,5 B.T.A. 158">5 B.T.A. 158; and *1019 Hartford-Fairmont Co.,12 B.T.A. 98">12 B.T.A. 98. The petitioner contended that owing to the nature of the radio patents acquired by it, the rapid development in the radio art, and the many new devices that were being invented, the average useful life of the group of patents was not more than five years or, at the most, eight years.  It introduced the testimony of numerous witnesses to the effect that the cost of the assets acquired should be amortized over an eight-year life.  The evidence further indicates that in 1929 or 1930 the Hazeltine neutrodyne patents lost much of their value by reason of a more general use of the screen grid tube in radio receiving instruments.  It appears, however, that even though the value of some of the patents was greatly lessened in 1929 and 1930, the patents were not obsolete.  The petitioner continued to receive some royalties upon the neutrodyne patents even after 1930.  The record does not show upon just which patents royalties were received after 1930.  The amount of royalties received in 1931 was $584,973.90 and in 1932, $382,797.18.  The petitioner's licensees had the authority to use many different patents owned by the petitioner.  Some*1020  of the neutrodyne patents were used in connection with other and later patents taken out.  Upon a careful consideration of the entire record we are of the opinion that the petitioner is entitled to deduct from its gross income for the year 1930, one seventeenth of the basis hereinbefore indicated for the exhaustible assets acquired from the Research Corporation and from Taylor.  We conclude that the petitioner was entitled to deduct from its gross income for 1930, $75,000 representing depreciation of the exhaustible assets acquired from the Hazeltine Research Corporation and from Taylor.  In its notice of deficiency the respondent has determined that the petitioner was entitled to deduct from the gross income of 1930, $4,829.95 representing an amount for the "amortization of patents purchased for cash." This amount is in addition to the $75,000 representing the amortization of exhaustible assets acquired from the Hazeltine Research Corporation*122  and from Taylor.  Therefore, the total depreciation deduction to which the petitioner is entitled for 1930 is $79,829.95.  In its income tax return for 1930 the petitioner deducted from gross income the following items: patent*1021  applications, $41,363.92; patent interferences, $36,681.26.  These amounts were disallowed by the respondent in a computation of the deficiency.  In its brief upon this point the petitioner states: By contract, inventions made by engineers of the laboratory and research department of petitioner were assigned to petitioner.  The retained attorneys for the company applied for patents on these.  There were numerous cases, the services were rendered simultaneously and charges lumped without segregation.  Some of these applications ripened into patents, others were disallowed, others went into interference.  The charges were all lumped and paid monthly as the services were rendered.  There was no practical way to allocate each charge to each pending application.  To require this would be to deny to petitioner this expense in its entirety and capitalize it.  This Board has held in numerous cases that the cost of developing patents, secret processes, etc., are capital expenditures and that the taxpayer has no option to treat such costs as deductible expenses.  *1022 Gilliam Manufacturing Co.,1 B.T.A. 967">1 B.T.A. 967; Goodell-Pratt Co.,3 B.T.A. 30">3 B.T.A. 30; Beaumont Co.,3 B.T.A. 822">3 B.T.A. 822. The contention of the petitioner that the items referred to above constitute legal deductions from gross income as ordinary and necessary expenses is not sustained.  The petitioner offered no evidence with respect to the disallowance by the respondent of the deduction from gross income of $55,000 representing a reserve for bad debts.  Neither is that item referred to in the briefs.  For lack of evidence showing any error on the part of the respondent in disallowing this deduction the claim of the petitioner to the deduction is not sustained.  Reviewed by the Board.  Judgment will be entered under Rule 50.