1925 BTA LEXIS 2737 | B.T.A. | 1925
Lead Opinion
The Commissioner disallowed the amount set up on the books of the taxpayer as being the cost of patents acquired, to the extent of $10,000, upon the ground that the taxpayer had originally deducted the expenditures made in the development, of patents as expense, and upon the further ground that it was not shown that an expenditure to the extent of $10,000, which was capitalized upon the books of the taxpayer, had been actually made in acquiring said patents.
We think the evidence establishes the fact that the amount claimed as capital expenditures in acquiring the patents was actually expended for that purpose. The patents had been in the process of development for a long period of years beginning prior to 1913. The taxpayer had seven men who devoted at least one-half of their time in the development of the improvements and the patent ideas. The actual expenditure attributable to patents was at least the amount claimed by the taxpayer.
With reference to the question as to whether the taxpayer should be permitted to capitalize expenditures in the development of patents which had previously been deducted as an ordinary and necessary expense, we held, in the Appeal of Union Metal Manufacturing Co., 1 B. T. A., 395, that the provisions of the statute with reference to depreciation deductions was not in the alternative, and the fact that a taxpayer had not taken depreciation on patents but had permitted its invested capital to remain intact, would not prevent it from subsequently claiming the depreciation which had actually been sustained. The same is true with reference to the capitalization of patents. If the amounts expended were actually paid out in acquiring patents, the deduction of such amounts as ordinary and necessary expenses of carrying on a trade or business was not proper. The fact that a taxpayer did deduct such items or considered them as expenses does not alter the situation. Such treatment was erroneous. The taxpayer has no option to treat expense items as capital or capital expenditures as ordinary and necessary expenses of carrying on a trade or business and had a right, as it did, to change its erroneous accounting methods. The patents, when acquired, formed a part of the capital investment of the taxpayer and the costs thereof were not ordinary and necessary expenses of carrying on its trade or business. The amount of $10,000 set up by the taxpayer on its books on August 31,1915, is as much a part of the cost of patents as the attorneys’ fees or other expenses incurred in the actual procurement of said patents.
With respect to the debt of McKinley, alleged to have been ascertained to have become worthless in 19Í8 and for which a deduction in that year is claimed, the Board is not convinced, from the facts, that the said debt was ascertained to be worthless in that year. McKinley signed an affidavit in which he stated that on February 1, 1915, he was connected with the Gilliam Manufacturing Company and about that daté secured $10,000 from the company; that this amount was immediately turned over to B. T. Steiner and that he