Court Opinion

ID: 4625548
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:24.884251+00
Date Added: 2024-06-11T07:56:43.769256
License: Public Domain

MODERN INVENTIONS CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Modern Inventions Corp. v. CommissionerDocket No. 25377.United States Board of Tax Appeals16 B.T.A. 1267; 1929 BTA LEXIS 2415; June 29, 1929, Promulgated 1929 BTA LEXIS 2415">*2415  The value of patent rights paid in to the petitioner corporation for shares of stock in 1920 determined for depreciation purposes.  Maxwell Shmerler, C.P.A., for the petitioner.  P. M. Clark, Esq., for the respondent.  SMITH 16 B.T.A. 1267">*1267  This is a proceeding for the redetermination of a deficiency in income tax for 1922 in the amount of $569.09.  The petitioner alleges that in the determination of the deficiency the Commissioner allowed no depreciation for patents for the calendar year 1922, and also failed to allow the deduction from gross income of a loss sustained in the calendar year 1921.  Petitioner further alleges that consideration was not given to a waiver of the right to file a petition with the United States Board of Tax Appeals, consenting to a deficiency for the calendar year 1922, filed by the petitioner on request of the Commissioner and acknowledged by him.  FINDINGS OF FACT.  The petitioner is a New York corporation, organized in December, 1920, with a capital stock of $50,000, divided into 500 shares of a par value of $100 each.  Of this stock 100 shares were sold at par for cash and 400 shares in the purchase of certain patent1929 BTA LEXIS 2415">*2416  rights.  Letters  were granted to Henry Lasko on September 28, 1920.  This patent was on an invention relating to a stamping machine known as a "nameograph." On September 30, 1920, the same inventor made application for a patent on an improvement of the machine, such application bearing Serial No. 413,774.  The rights in the patent and the patent application were assigned by the inventor to Ludwig Lasko, and in turn assigned by him to the petitioner on January 22, 1921.  The incorporators of the petitioner were Ludwig Lasko, Charles J. Ball, Jr., and Max Sherover.  The 500 shares of stock of the corporation were to be issued to the incorporators in equal amounts.  Sherover and Ball were to pay to the corporation $5,000 cash and Lasko $500 in addition to the assignment by the latter of certain rights in the patent and patent application above referred to.  The invention upon which Letters  were issued involved the idea of applying electrically heated devices and impressing these heated devices into hard rubber with a mechanism that would propel the object on which the stamping were done one step forward each time that the die was returned to1929 BTA LEXIS 2415">*2417  its original position.  The machine operated in much the same manner as a 16 B.T.A. 1267">*1268  typewriter.  It was designated to imprint upon fountain pens the name of the seller or the name of the purchaser.  The application for a patent was for improvements and refinements upon the machine covered by Letters . The patent was placed upon the petitioner's books of account as having a value of $40,000.  This was based largely upon an estimate of the value made by a person who made a model for the machine and who was to superintend the production of it.  His estimate of the value was $75,000.  This estimate seemed to the incorporators to be in excess of the fair market value and the value placed on the books was accordingly reduced to $40,000.  The petitioner produced a few machines for sale in 1921.  On December 31, 1921, the petitioner charged as depreciation on patent rights $2,525.74.  The result of operation for 1921, as shown by its books of account, was an operating deficit of $2,164.67.  In 1922 a new machine, called an "engravograph," was patented, which did the same work as was done by the petitioner's machine and which practically superseded the nameograph. 1929 BTA LEXIS 2415">*2418  The engravograph operated upon an entirely different principle from the nameograph.  At December 31, 1922, the petitioner charged off depreciation in the amount of $6,948.90.  Of this amount the respondent disallowed the deduction of $6,773.50 in determining the deficiency for 1922.  The cash value of the patent rights acquired by the petitioner in exchange for shares of stock was $4,500.  On December 6, 1926, Max Sherover, as president-secretary of the petitioner, filed with the Commissioner a "Waiver of right to file a petition with the United States Board of Tax Appeals" which provided as follows: The undersigned taxpayer hereby waives the right to file a petition with the U.S. Board of Tax Appeals under Section 274(a) of the Revenue Act of 1926 and consents to the assessment and collection of a deficiency in tax for the year 1922 aggregating $548.18 subject to a credit of $270.58 (12 1/2% of $2,164.67, loss per 1921 return in error not deducted on 1922 return from profits of 1922).  The deficiency notice upon which the petition filed with this Board is predicated is dated December 26, 1927, and shows a deficiency in tax for 1922 of $846.69.  OPINION.  SMITH: The three1929 BTA LEXIS 2415">*2419  allegations of error contained in the petition filed in this proceeding have been set forth above.  The petitioner contends that the patent rights acquired by it in exchange for shares of stock had a value at the date of acquisition of $40,000.  We think that this is not proven by the evidence.  Apparently, the rights in the patent were owned at the date of the organization of the corporation by Ludwig Lasko.  He received one-third of the shares of stock of the corporation for $500 cash, plus his assignment of certain rights 16 B.T.A. 1267">*1269  in the patent owned by him.  Ball and Sherover received a like amount of stock of the corporation for $5,000 cash.  It appears to us therefore that these transactions show an agreed cash value of the patent rights turned in to the corporation by Lasko of $4,500.  We therefore determine that the cash value of the patent rights paid into the corporation was $4,500.  From the record we can not determine whether the petitioner had a net loss for 1921.  The books of account show an operating deficit for 1921 of $2,164.67 but this was after the deduction from gross income of depreciation on patent rights in the amount of $2,525.74.  This deduction for1929 BTA LEXIS 2415">*2420  exhaustion of patent rights was apparently predicated upon a cash value of the patents at the time acquired by the corporation of $40,000, which we have found to be greatly in excess of the true value.  We therefore question whether the petitioner had a net loss for 1921 within the meaning of section 204 of the Revenue Act of 1921.  The deficiency due from the taxpayer for 1922 should be recomputed upon this basis.  The so-called waiver of right to file a petition with the United States Board of Tax Appeals was predicated upon the proposition that the Commissioner would determine a deficiency for 1922 of $548.18, subject to a credit of $270.58.  This was not accepted by the Commissioner.  It did not bind the Commissioner to find such a deficiency, and has no bearing upon the determination of the deficiency by this Board.  Judgment will be entered under Rule 50.