
    370 F. 2d 336
    D. J. CAMPBELL CO., INC. v. THE UNITED STATES
    [No. 76-63.
    Decided December 16, 1966]
    
      
      Charles E. Prieve, attorney of record, for plaintiff. John A. Meyer, of counsel.
    
      Edward B. Oreensfelder, /r., with whom was Assistant Attorney General Mitchell Bogovin, for defendant. Lyle M. Turner and Philip B. Miller, of counsel.
    
      Before CoweN, Chief Judge, LaRamoee, Dureee, Davis and ColliNs, Judges.
    
   Per Curiam:

This case was referred to tlie late Trial Commissioner Bobert K. McConnaughey, with directions to make findings of fact and recommendation for conclusions of law. The commissioner did so in an opinion and report filed on November 10, 1965. Exceptions to the commissioner’s findings and recommended conclusion of law were filed by the parties. The case has been submitted to the court on the briefs of the parties and oral argument of counsel. Since the court is in agreement with the opinion and recommendation of the commissioner, with modifications, it hereby adopts the same, as modified, as the basis for its judgment in this case, as hereinafter set forth. Therefore, plaintiff is not entitled to recover an amount of tax commensurate with the reduction of its taxable income for 1958 that would result from amortization, during 1958, as the cost of a depreciable intangible asset, of the amount it paid to Louis C. Martin in December 1957, but is entitled to recover an amount reflecting amortization, during 1958, of an appropriate portion of an unamortized residue of $3,714.50 of the original cost of the heyco contract, and judgment is entered to that effect with the amount of recovery to be determined pursuant to Buie 47(c).

Commissioner McConnaughey’s opinion, as modified by the court, is as follows:

In this suit the plaintiff asserts a claim for refund of an alleged overpayment of income taxes for 1958, on two alternative grounds.

Primarily it claims an overpayment resulting from the defendant’s refusal to allow it to amortize, during 1958, a ratable portion of $54,565.18 it paid, on December 19, 1957, to Louis C. Martin, a former stockholder, as a result of which it acquired from Martin, pursuant to an option, title to a contract it had transferred to Martin on October 16, 1957, as partial consideration for Martin’s surrender of bis stock.

The plaintiff’s alternate claim is that, if it is not entitled to amortize the cost of reacquiring the heyco contract from Martin in 1957, it is entitled to amortize, during 1958, part of a previously unamortized remainder of the original cost of acquiring the contract in 1956, and to recover an amount of tax commensurate with the consequent reduction of its taxable income for 1958.

The circumstances that led the plaintiff to acquire the heyco contract in 1956, to transfer it to Martin in October 1957, and to reacquire it from Martin about 2 months later, were incidents of a course of events that began on July 1, 1948, when the heyco contract was initiated between the Hey-man company and D. J. Campbell, then doing business in Milwaukee, Wisconsin, as an individuad, under the name of I). J. Campbell Co.

The heyco contract obligated the Heyman company to provide sufficient heycos to fill all of Campbell’s orders at prices to be agreed upon that would not exceed 90 percent of the lowest current list prices for comparable sizes of heycos. The contract’s original term was 10 years from July 1,1948, but it contained a provision for renewal at the end of that period—

* * * for one additional period of five (5) years unless Campbell gives written notice of his intention not to renew * * * at least six (6) months before the termination of the original ten year period.

The Heyman company had the right to terminate the contract (a) at the end of any calendar year in which Campbell failed to purchase designated minimum amounts of heycos, running from 2 million in 1948 to 5 million in each year after 1950, and (b) on 3 days’ written notice at any time after Campbell filed a petition in bankruptcy or was adjudicated a bankrupt, or made any assignment for the benefit of creditors to take advantage of any insolvency act.

In addition to selling heycos under the contract, Campbell also distributed other products of the Heyman company, and sold insulated wire.

Among Campbell’s employees were Philip It. Glaser, now president of the plaintiff, who was employed early in 1949, primarily to promote the sale of heycos, and Louis C. Martin, who was originally employed about 1947, and whose principal job was to sell wire.

Under Campbell’s direction, Glaser and Martin were both good at their separate jobs, in part because they had quite different and, as later developments proved, mutually incompatible temperaments.

Campbell became ill in January of 1956 and, for several months in 1956, Glaser and Martin operated the business under a power of attorney executed by Campbell during the spring of that year.

Campbell died on July 27, 1956. Thereafter, until September 14, 1956, Glaser and Martin continued to operate the business, as coadministrators of Campbell’s estate, under appointment by the probate court.

On 'September 14,1956, they purchased the business assets of the Campbell estate, including the heyco contract, for $50,000 and the assumption of certain liabilities.

The probate court’s order directed the transfer to Glaser and Martin of only tangible property appraised at $39,948.90 and the heyco contract, which had not been appraised. Insofar as this record shows, the original cost of the heyco contract to Glaser and Martin was in the neighborhood of $10,051.10, the balance of the $50,000 cash purchase price they paid for the Campbell assets that is not accounted for by the $39,948.90 appraised value of the tangible assets they received.

The plaintiff corporation was formed on September 14, 1956, the same day Glaser and Martin acquired the heyco contract from the Campbell estate. Glaser was president and held 100 shares of the stock. Martin was vice president and also held 100 shares.

Glaser and Martin did not transfer the assets they had acquired from the Campbell estate to the plaintiff until sometime in October 1956. Meanwhile they operated the business as a partnership.

When the plaintiff received the Campbell assets, it retained the inventory of heycos, the heyco contract, and office and warehouse equipment needed to conduct the business of selling heycos, and contributed the insulated wire inventory and the remaining office and warehouse equipment to its wholly owned subsidiary, Martin-Gaertner Sales, Inc.

The diverse temperaments of Glaser and Martin soon led to disagreements between them about the management of the business. Their differences increased until, on September 12,

1957, at a meeting of the plaintiff’s board of directors (which Heyman did not attend), Glaser read a prepared statement in which he contended that the business could not continue under the conditions that prevailed. No action was taken at the meeting to resolve the difficulties, but, from that time on, Glaser persistently sought means to achieve two specific, coordinate objectives: (1) to exclude Martin from ownership of any interest in the plaintiff and from active participation in its management, and (2) to assure the plaintiff’s retention of the right to sell heycos on the terms provided in the heyco contract.

During the rest of September 1957, Glaser and Martin had numerous discussions, in a fruitless effort to settle their disputes. These included discussions in New Jersey with officials of the Heyman company, late in September.

Shortly after he returned to Milwaukee from New Jersey, Martin asked Prieve, the plaintiff’s attorney, to prepare a plan for segregating Martin’s and Glaser’s interests in the enterprise. Prieve drafted such a plan and mailed a copy to Heyman on October 1,1957.

In summary, Prieve’s plan provided for:

1. Purchase of 16 of Martin’s 100 shares of the plaintiff’s stock, by the Heyman company from Martin, for $16,000;
2. Surrender of Martin’s remaining 84 shares to the plaintiff in exchange for (a) all of the Martin-Gaertner stock (valued on the books at $8,000), (b) $6,000 in cash, and (c) the heyco contract;
3. Purchase by the Heyman company from the plaintiff, for $6,300, of the 84 shares of stock redeemed by the plaintiff;
4. Exercise by Martin of the right to extend the heyco contract for 5 years, to J une 30,1963; and
5. A license, from Martin to the plaintiff, authorizing the plaintiff to sell heycos under the contract in exchange for monthly payments based on a percentage of heyco sales until $70,000 had been paid, whereupon no further payments to Martin would be required and he would reassign the contract to the plaintiff.

Glaser rejected the Prieve plan of October 1, 1957. He wanted nothing further to do with Martin. He objected to Martin’s having the heyco contract and to the requirement that the plaintiff pay Martin royalties in order to continue selling heycos, even though the contract would revert to the plaintiff when $70,000 had been paid to Martin. Glaser said that, if Martin held the heyco contract, he would be virtually working for Martin, and that he did not care to do.

Another meeting was held in Milwaukee on October 15, 1957, in a further effort to devise some generally acceptable plan for separating Martin’s and Glaser’s interests in a way that would enable the plaintiff to continue to sell heycos under Glaser’s direction, free of the dissension within its management which all concerned had come to regard as detrimental to its prospects of continued success.

Heyman attended the meeting, accompanied by Robert R. Mandel, a certified public accountant who was Heyman’s ad-visor on all financial matters, including taxes.

The meeting was characterized by strenuous negotiations. Numerous and varied proposals were exchanged in an effort to devise a plan that would meet Glaser’s and Martin’s conflicting demands, and satisfy Martin’s shifting estimates of the value of his interest. Among these was a proposal developed by Martin and Heyman in a separate conference, outside the principal meeting room. Martin was demanding $100,000 for his interest. Heyman suggested $50,000 as a suitable figure. Martin and Heyman agreed 'between themselves on a compromise whereby the Heyman company would get Martin’s half of the plaintiff’s stock for $75,000 and Martin would be out completely. For reasons not disclosed by the record, this proposal, among others, was not generally agreed upon by the meeting.

After much discussion, Martin said he would be willing to surrender 70 shares of his 'Stock to the plaintiff in exchange for the heyco contract, but Glaser said the plaintiff could not continue in operation “unless there were some licensing agreement to the contract.”

The meeting continued throughout the day of October 15. During the evening, Prieve and Mandel prepared a draft of corporate minutes to record the results of the day’s negotiations, and agreements to implement the plan described in the minutes.

In summary, the plan included the following provisions:

1. The Heyman company would acquire 30 of Martin’s shares of the plaintiff’s stock directly from Martin for $24,600;
2. There would be a partial liquidation of the plaintiff, whereby, in exchange for the heyco contract and the Marbin-Gaertner stock, Martin would pay the plaintiff $500 and surrender Ms remaining 70 shares of stock to the plaintiff for cancellation;
3. Glaser would contribute 70 of his 100 shares to the capital of the plaintiff to complete the partial liquidation;
4. Martin would exercise the right to extend the heyco contract for 5 years, to June 30, 1963, and would grant the plaintiff an exclusive license to sell heycos m accordance with the contract, in exchange for the plaintiff’s agreement to pay Martin 5 percent of its net sales of heycos;
5. Martin would resign as vice president and director of the plaintiff and would agree not to compete with the plaintiff in the sale of strain relief bushings for a period not exceeding 2 years; and
6. Various other provisions designed to adapt the plaintiff’s operations to functioning under the revised structure.

Glaser refused to sign the proposed license agreement unless it contained an option granting the plaintiff the right to reacquire the heyco contract from Martin within a specified period, and the license agreement, as finally signed on October 16, 1957, included the following provision—

For a period of ninety (90) days from October 16, 1957 the Campbell Co. shall have an option to purchase the contract of July 1,1948 for a price equal to $57,400.00 less the amount of any royalties paid prior to the date of the exercise of the option. If such option is exercised, upon receipt of the cash price, Licensor shall deliver to the 'Campbell Co. a complete assignment of all of his right, title, and interest in and to said contract of July 1, 1948 as well as any further rights under this contract.

By these transactions, Glaser substantially achieved both his objectives, despite the necessity of transferring the heyco contract to Martin. (1) Martin’s ownersMp interest in the plaintiff was wholly eliminated and he was excluded from any active participation in its management, and (2) the plaintiff’s right to continue to sell heycos under the terms of the heyco contract was substantially assured. All it had to do to retain that right was to make the 5 percent monthly payments to Martin that were required by the license and avoid termination of the contract or the license by continuing to sell the required minimum quantities of heycos each year and by avoiding bankruptcy and any assignment under an insolvency act.

Nevertheless Glaser was determined that the plaintiff should retrieve title to the contract by exercising the option if he could possibly get the money to do so. His reasons are not altogether clear, but apparently they included a desire to avoid paying Martin the monthly royalties and a desire to protect the plaintiff against any risk of some capricious attempt by Martin to sell the heyco contract to someone else, or to 'attempt to perform it himself.

Glaser and Prieve each discussed with Heyman and Man-del, while they were in Milwaukee in October, the prospect that the plaintiff would not have enough money of its own within 90 days to exercise the option. They did not directly request a loan to enable the plaintiff to take up the option but their comments were designed to afford Heyman and Mandel an opportunity to offer to make such a loan.

Heyman was favorably disposed to Glaser, and anxious to have the plaintiff succeed under his management. He may even have offered Glaser financial assistance, if it should be needed, to further the plaintiff’s success.

There is no evidence, however, that either Heyman or Mandel made any promise in October 1957 that the Heyman company would lend the plaintiff the amount necessary to exercise the option. On the contrary, Heyman and Mandel left both Prieve and Glaser with the impression that they intended to postpone any decision about the option until they had a chance to observe the plaintiff’s operations under the new arrangement.

The evidence affords far more reason for believing that Heyman and Mandel genuinely wished to have more assurance that the plaintiff would be successful under Glaser’s management than they had in October 1957 before they committed the Heyman company to advance $55,000 to exercise the option, than it does for believing that they gave any covert assurance in October that the Heyman company would make such a loan.

Shortly after the October meeting, Prieve attempted to arrange for a Milwaukee bank to lend the plaintiff the amount necessary to exercise the option but was turned down.

On October 22, 1957, Mandel wrote a note to Heyman reminding him to inquire, on December 10, “about payment of $55,000.00 to Campbell so that we exercise the opportunity of buying back the Heyco contract from Louis C. Martin.”

During November and December 1957, the plaintiff paid Martin $2,834 under the licensing agreement, based on 5 percent of its net sales of all Heyman company products during the last half of October and all of November.

As far as this record shows, nothing more happened about the option until December 11, 1957. On that date the plaintiff’s board of directors authorized the exercise of the option and the borrowing of $55,000 from the Heyman company, and Glaser wrote to Heyman requesting the loan. Apparently they also communicated less formally, for, on the same day, the Heyman company’s board of directors authorized a loan of $55,000 to the plaintiff.

Notes totaling $55,000 were signed on behalf of the plaintiff on December 16th, and on December 19th, the plaintiff exercised the option and Martin assigned the contract to the plaintiff “in consideration of the payment to Louis C. Martin of $54,565.18.”

The evidence that discloses the transactions described above does not sustain the plaintiff’s principal claim that the $54,565.18 it paid Martin in December 1957 to reacquire the heyco contract was the cost of acquiring a depreciable intangible asset — that it is entitled to amortize that cost over the 5y2 years of life that remained in the heyco contract— and that $11,480.04 is deductible from its income for 1958 as a ratable share of the total amortizable depreciation.

This is not because the rights established by the heyco contract do not constitute a depreciable intangible asset within the meaning of the statute and the regulations. They do.

Nor is it because the plaintiff’s transfer and reacquisition of the heyco contract was a sham transaction, carried out through a covertly prearranged plan. The evidence shows that it was not.

It is because tlie $54,565.18 the plaintiff paid to Martin in December 1957 was not paid to acquire any rights established by the heyco contract which might constitute an asset of use in the plaintiff’s business and in the production of income. The plaintiff already had, through the license, all of the operative rights under the heyco contract. In its true substance, the payment was made to satisfy an obligation the plaintiff had incurred, in October 1957, to pay Martin in cadh for his stock by either of two kinds of deferred payments.

The reasons for these conclusions are disclosed by a summary analysis of the facts of this particular case.

Beyond their recognition and consistent confirmation of the established principle that, in adjudging the effect of transfers of property on tax liabilities, the courts look beyond the form of the transaction to its substance, the cases cited by the parties, and others in this general field, are limited by their own particular facts, to which they apply variations of that underlying principle. In view of the controlling effect of factual distinctions on the tax consequences of individual transactions, there seems to be little point in interlarding this opinion with a multiplicity of citations of only tangential relevance to particular points of the analysis on which it rests. Within the general principle that substance, rather than form, determines the tax consequences of property transfers, the answer to the plaintiff’s principal claim appears from an objective analysis of the evidence.

The heyco contract was an intangible asset. The rights it established were of use in the plaintiff’s business and in the production of income. Those rights were available for only a limited period of time, the length of which was fixed by the terms of the contract itself and therefore need not be estimated. It conforms with the statutory definition of depreciable intangible property.

It is true, as the defendant says, that the heyco contract was not automatically productive of income. Few contracts are. Neither are patents or licenses under patents — or exclusive franchises to produce materials from designated, exhaustible sources, or to provide public service for defined periods — or even licenses to exercise rights under a contract such as the license the plaintiff here had from Martin. In common, such arrangements accord primarily a right to exploit an opportunity for the production of income, although they may also provide facilities for doing so. To the extent the opportunity accorded is exclusive, the likelihood of realizing income by its exploitation may involve less risks of failure than the exercise of a nonexclusive right to compete with others having similar rights. But even an exclusive right, whether granted by contract or otherwise, is in essence a license to try to realize income through the application of effort, and competence, and perhaps physical and financial resources in pursuit of an established and defined opportunity.

Where the opportunity granted is limited as to time— whether by the terms of the grant, as it was here, or by some other ascertainable factor, such as the expiration of a predictable market or the exhaustion of some quantity of physical resources capable of approximate estimation — such value as the rights may have at the beginning decreases as the time passes during which they are available and the date ap-proacbes when, the opportunity they afford to earn income will no longer exist.

In this sense the heyco contract was an exhausting, intangible asset, useful in the plaintiff’s business for the production of income. It conveyed the opportunity to make money by granting an exclusive right, good until June 30, 1963, to buy heycos at an advantageous price and resell them throughout a designated territory.

The defendant contends, however, that the term of the heyco contract was indefinite and could not be estimated with reasonable accuracy because, in 1957, the Heyman company was disposed to agree to extend the contract indefinitely as long as it believed the plaintiff was likely to produce satisfactory results as an outlet for heycos.

The likelihood that the heyco contract would be extended without change upon its expiration was pure conjecture in 1957. The possibility, or even the probability, that it might be extended does not override the fact that neither the plaintiff nor the Heyman company had any obligation to extend it, or any right to an extension. At any time during the 5% years the contract had to run, either the plaintiff or the Hey-man company could have decided against continuing the existing arrangement beyond June 30,1963, and there would have been nothing the other could have done to require an extension. In December 1957, none of the terms of any arrangements for selling heycos in the contract territory after June 30,1963, were fixed. All were subject to negotiation at the instigation of either party. There was no assurance that the existing arrangement would be continued after June of 1963 on any terms.

The fact that, as matters stood between October and December 1957, the rights established by the contract would end on June 30,1963, not only legally, but as a practical matter, is confirmed by the inference, compelled by all the evidence here, that any arrangement the Heyman company might have been willing to make for the sale of heycos after June 30,1963, would have been made with the plaintiff, under a new contract, and not with Martin, by means of an extension of the existing contract, which he then held, and would continue to hold until the end of the contract’s term if the plaintiff should not exercise the option.

For the reasons summarized above, the evidence does not support the defendant’s contention that the heyco contract was not a depreciable intangible asset within the definition of the statute and the Treasury regulations.

Neither does the evidence support the defendant’s contention that the plaintiff’s reacquisition of the contract was the culmination of a perfected plan or agreement that existed when the contract was transferred to Martin in October. Glaser had hoped to retain the contract when Martin surrendered his stock. Failing that, he hoped to reacquire the contract within the option period. But neither he nor the plaintiff had the funds to do either. Nor did they have any assurance that the necessary funds would be available from any source in time to exercise the option. Heyman and Mandel had made it clear that the Heyman company was going to wait to see how things went before deciding whether to lend the amount needed. The record affords no persuasive reason to doubt that their representation reflected their intention. Indeed, the evidence suggests ample reasons why the Heyman company might have had no interest in ever financing the plaintiff’s exercise of the option. Obviously the plaintiff had no reliable assurance that funds would be forthcoming from the bank that, shortly afterwards, denied its request for a loan. In summary, in October 1957, Glaser and the plaintiff had nothing more than a hope that they could raise the funds they needed in order to exercise the option before the middle of January 1958 when it would expire.

The evidence affords no basis for substantial doubt that the plaintiff’s transfer of the contract to Martin and its later reacquisition through exercise of the option were bona fide transactions, the form and substance of which were dictated by circumstances which neither Glaser nor the plaintiff could wholly control.

The trouble with the plaintiff’s position is more subtle, but no less fundamental, than the lack of a depreciable asset or the existence of what would have amounted essentially to a sham transaction if the Heyman company had already been covertly committed to finance the exercise of the option at the time when the contract was transferred to Martin.

The trouble with the plaintiff’s principal claim is that, when the plaintiff reacquired title to the heyco contract from Martin in December 1957, it acquired from him no right or property that was useful in its business or in the production of income. It already had all rights useful in its business and in the production of income that were conveyed by the heyco contract. It had them under the license, which it had held continuously from the time it transferred the contract to Martin in October. During the period between October 16 and December 19,1957, it could do everything authorized by the heyco contract that it could have done if it had retained title to the contract during that period, and everything it could do after it got the contract back in December. Martin had no operating rights under the contract at any time, and he transferred no such rights when he retransferred the contract to the plaintiff in December of 1957.

The basic reason for this lies in the nature of the transaction that occurred in October. That transaction preordained that its sequel in December would be the redemption of security given to assure the future payment of a deferred obligation and not a transfer of operating rights under the heyco contract.

At the time of the October meeting, the plaintiff did not have enough money of its own to buy Martin’s stock outright, at any price he was willing to accept.

For this reason, the elimination of Martin’s stock interest had to be arranged some other way.

The arrangement agreed upon was that 30 shares of Martin’s stock would be bought by the Heyman company and paid for outright, and that the other 70 shares would be transferred to the plaintiff and paid for, partly by an unconditional transfer of the Martin-Gaerfcner stock and partly by deferred payments of cash, either in monthly installments over a 5^-year period, equal to 5 percent of the plaintiff’s heyco sales, or within 90 days, as a cash payment of $57,400 under the option, less any royalties previously paid.

The other elements of the transaction, including the assignment of the contract to Martin, were all designed either to secure the making of these payments or to facilitate them.

The title to the contract was transferred to Martin solely as security for the deferred payments. He acquired none of the current operating rights provided for by the contract. The operating rights remained with the plaintiff by virtue of the license. Martin acquired only a contingent right to intervene in case the plaintiff should fail to make the required payments or to fulfill the minimum conditions required by the contract itself to avoid its termination. These are typical rights of a secured creditor. They were the only rights Martin ever had.

The plaintiff, on the other hand, retained all the rights and opportunities afforded by the contract to sell heycos. Thereby it was enabled to earn the money to make the periodic payments Martin had exacted as the price of his stock. This part of the arrangement, too, is typical of provisions for assuring the deferred payment of a secured obligation.

The option gave the plaintiff the right to pay in advance of the recurring due dates of its principal obligation — to curtail its liability to make the periodic payments by making an earlier, lump-sum payment. By exercising the option, it might fully satisfy the price Martin had demanded for his stock. By doing so, it could extinguish its obligation to continue making monthly payments and redeem the contract which Martin held as security for the monthly payments.

The plaintiff elected to exercise the option. The $54,565.18 it paid under the option was not made >to purchase the contract. Coupled with the $2,834.82 already paid under the license, it constituted payment of the plaintiff’s obligation to pay Martin the price he wanted for his stock. His re-transfer of the contract when the payment was made was merely the relinquishment of the security he held to assure that the stock would be paid for in one or the other of the two ways provided for under the plan.

As indicated above, the security rights Martin relinquished when he retransferred the contract did not include any operating rights useful in the plaintiff’s business or in the production of income. The formal retransfer of the contract merely extinguished Martin’s contingent right as a creditor to intervene if the plaintiff should fail to make the monthly payments under the license, or should fail to sell at least 5 million heycos a year, or to avoid bankruptcy.

In sum, it was highly probable that plaintiff would exercise the option within the 90 days, and therefore Martin had, from the beginning, only a minimal connection with, and only a security interest in, the assigned contract. On those facts the case falls within the area marked out by United States v. General Geophysical Co., 296 F. 2d 86 (C.A. 5, 1961), cert. denied, 369 U.S. 849 (1962).

Thus the $54,565.18 the plaintiff paid Martin in December 1957 was not the cost of acquiring a depreciable asset. It was a deferred payment for Martin’s stock and may not be amortized under the provisions of the statute and the regulations on which the plaintiff relies.

The plaintiff’s alternate claim of a right to amortize, during 1958, a previously unamortized remainder of the original cost of acquiring the contract in 1956 rests on a sounder basis.

As indicated above, the operating rights under the heyco contract constituted an intangible asset, useful in the plaintiff’s business and in tbe production of income, and the cost of acquiring such, rights may be amortized under the applicable statute and the regulations.

The plaintiff had not fully amortized the cost of the contract before 1958.

Glaser and Martin paid $10,051.10 to the Campbell estate for the contract on September 14,1956, after they had used it for approximately 1% months while they were managing the business as coadministrators of Campbell’s estate.

After they acquired the Campbell business assets on September 14, 1956, they continued to operate the business as a partnership for about a month and then, in October 1956, transferred the contract to the plaintiff, along with the other assets they had bought from the Campbell estate.

Thereafter the plaintiff utilized the contract as the basis for its business in heycos throughout the remainder of its extended term.

For 1956 and 1957, the plaintiff treated the contract as having a basis equivalent to its original cost to Glaser and Martin of $10,051.10. This basis was reduced by $655.50 for 1956 at the rate of $437 a month for 1% months, for the period from July 27 to September 14, 1956, when the business was run by Glaser and Martin under direction of the probate court. This reduction in basis was computed as %6 of $10,051.10, assuming a useful life of 23 months ending with the original terminal date of the contract on June 30, 1958.

Thereafter the plaintiff took $1,529.60 as amortization for 31/2 months during 1956, at the rate of $437 a month for the period from September 14 to December 31, 1956. This apparently included the period of approximately a month, from September 14 to sometime in October 1956, during which Glaser and Martin ran the business as partners, after the corporation was formed but before they transferred the Campbell assets to it.

For 1957 the plaintiff claimed amortization of $4,151.50, at the rate of $437 a month for 10 y2 months from January 1 to October 15, 1957, when the contract was transferred to Martin.

This left $3,714.50 of the original cost unamortized. The plaintiff is entitled to amortize, during 1958, an appropriate portion of this unamortized residue of the contract’s original cost, and judgment should be entered to that effect. The amount of recovery should be determined through proceedings under Buie 47(c).

FINDINGS op Fact

1. This is a timely suit to recover, with interest, $5,379.28 of income taxes paid by the plaintiff for 1958. The plaintiff has not assigned its claim and no other proceedings are pending with reference to it.

2. The plaintiff is a Wisconsin corporation, organized September 14, 1956. It reports its income on a calendar-year 'basis.

3. During 1957, at least 95 percent of the plaintiff’s sales represented sales of a patented form of strain relief bushing, called a “heyco,” made by the Heyman Manufacturing Company in Kenilworth, New Jersey, and distributed by the plaintiff under a contract, hereafter called the heyco contract.

4. (a) A strain relief bushing is a device adapted to secure an electric cord at the point where the cord enters an electric appliance, in a manner which (1) prevents the cord from being pulled loose accidentally from its interior connections within the appliance, and (2) minimizes wear and tear on the cord at the point where it enters the appliance.

(b) Heycos are made by Pleyman under patents which include an improvement patent issued March 29, 1960.

(c) A strain relief bushing is a necessary prerequisite to approval of a portable electric appliance by insurers’ underwriter laboratories. Although strain relief bushings other than heycos are sold and used in sustantial quantities, the patented structure of the heyco is widely regarded as an acceptable form of strain relief bushing, and competition has never prevented the Heyman company from maintaining what its management has regarded as a satisfactory volume of business in heycos.

5. (a) The heyco contract was originally made July 1, 1948, between the Heyman company and Donald J. Campbell, then doing business as an individual under the name of D. J. Campbell Co.

(b) The heyco contract gave Campbell the exclusive right to sell heycos (including any improvements or replacements thereof) in 11 midwestern states. The Heyman company agreed to provide sufficient heycos to fill all of Campbell’s orders promptly. The heycos were to be furnished at prices to be agreed upon that would not exceed 90 percent of the lowest price currently listed for each particular size of heycos.

(c) The contract was for a term of 10 years from July 1, 1948, but provided that it might be renewed at the end of that period — ■

* * * for one additional period of five (5) years unless Campbell gives written notice of his intention not to renew * * * at least six (6) months before the termination of the original ten year period.

(d) Heyman had the right to terminate the contract at the end of any calendar year in which Campbell failed to purchase designated minimum amounts of heycos, running from 2 million in 1948 to 5 million in each year after 1950.

(e) The contract also provided for termination by Hey-man, on 8 days’ written notice, at any time after Campbell filed a petition in bankruptcy or was adjudicated a bankrupt, or made any assignment for the benefit of creditors to take advantage of any insolvency act.

6. The principal issue here is whether, in the circumstances of this case, the plaintiff is entitled to amortize its cost incurred in reacquiring the heyco contract on December 19, 1957, pursuant to an option granted October 16,1957, as part of a transaction whereby the contract was transferred to Louis C. Martin, a former stockholder of the plaintiff, as partial consideration for Martin’s transfer of part of his stock to the plaintiff for cancellation. The primary purpose of the transaction that gave rise to the option was to divest Martin of all his stock in the plaintiff and thereby to exclude him from further participation in the ownership and operation of the plaintiff, for reasons hereafter described.

7. In 1947 and for some years thereafter, Campbell, doing business as D. J. Campbell Co., distributed other products of the Heyman company, as well as heycos, and was also engaged in the highly competitive business of selling insulated wire.

8. (a) Early in 1949, Campbell employed Philip E. Glaser, now president and principal stockholder of the plaintiff, to promote the sale of heycos.

(b) About 2 years before 1949, Campbell had employed Martin, whose primary responsibility in the enterprise was selling insulated wire.

(c) Glaser’s and Martin’s temperaments were different, and, as will appear, they ultimately proved to be incompatible as business associates when they tried to manage the plaintiff without Campbell’s supervisory guidance. Each was well adapted, however, to performance of his principal function as an employee under Campbell’s direction. Martin was successful in selling wire, which, was largely a standard product, competitively priced, the sale of which required much entertaining and relatively little discussion of engineering factors. Glaser proved to be good at selling heycos, which required considerable teclmical discussion with engineers representing potential users of strain relief bushings, to persuade them of the suitability of heycos as elements of equipment their employers were making or planning to make.

9. In January of 1956, Campbell became ill and, in April of 1956, suffered a cerebral hemorrhage. Shortly thereafter he executed a power of attorney authorizing Glaser and Martin to operate the business. This they did under the power of attorney until July 27, 1956, when Campbell died.

10. After Campbell’s death, Glaser and Martin continued to operate the business as court-appointed special coadminis-trators of Campbell’s estate until September 14,1956. Then the probate court approved the sale of the business assets of the Campbell estate to Glaser and Martin for $50,000.

11. (a) The order of the probate court directed the transfer to Glaser and Martin of identified tangible property appraised at $39,948.90, and the heyco contract, which had not been appraised, in exchange for $50,000 and the assumption of various liabilities. No intangible assets, other than the heyco contract, were designated by the court order for transfer.

(b) Insofar as appears from this record, the cost of the heyco contract to Glaser and Martin, when they acquired it from the Campbell estate, was at least $10,051.10, the balance of the $50,000 purchase price they paid for the assets transferred to them from the Campbell estate that is not accounted for by the $39,948.90 appraised value of the tangible assets transferred.

(c) The plaintiff began amortizing the original cost of the heyco contract through part of 1956 and 1957 on the basis of its determination that the price paid for it to the Campbell estate was $10,051.10 and that its remaining useful life was 23 months to the end of the original term on June 30, 1958 (without taking account of the right of renewal for one period of 5 years that was provided for in the contract but had not yet been exercised). On its federal income tax returns, the plaintiff amortized and deducted a total of $5,681.10, on this basis ($1,529.60 for 1956, and $4,151.50 for 1957) leaving unamortized $4,870 of the original cost as determined by the plaintiff, of which $655.50 was attributed to 1% months in 1956, during which the business was operated under direction of the probate court.

(d) The plaintiff claims that, if the contract had not been assigned to Martin as of October 15, 1957, amortization of $5,244 at $437 per month would have been allowable throughout 1957 on the original basis ($1,092.50 more than the $4,151.50 the plaintiff claimed on its return), and that $2,622 would have been allowable for 1958, up to June 30 of that year.

12. (a) On September 14,1956, the same day the Campbell business assets were transferred to Glaser and Martin, the plaintiff corporation was formed, with Glaser as president and Martin as vice president. At the same time, another corporation, called Martin-Gaertner Sales, Inc., was formed to handle the wire business as a wholly owned subsidiary of the plaintiff. The plaintiff paid $500 in exchange for all the Martin-Gaertner stock.

(b) Of the plaintiff’s stock, 100 shares were issued to Glaser, 100 shares to Martin, and 1 share each to Charles E. Prieve, the plaintiff’s secretary and attorney, William H. Murray, the plaintiff’s accountant, and Horace W. Heyman, the president and a director of the Heyman company. The shares issued to Prieve, Murray, and Heyman were callable at the will of the plaintiff.

13. Glaser and Martin operated the business as a partnership between September 14, 1956, and sometime in October 1956, when they transferred to the plaintiff the business assets they had acquired from the Campbell estate.

14. Of the property Glaser and Martin transferred to it, the plaintiff retained the inventory of heycos, the heyco contract, and office and warehouse equipment needed to operate the business of selling heycos. It contributed to Martin-Gaertner Sales, Inc., the insulated wire inventory and the remaining office and warehouse equipment.

15. From the time when Campbell became ill, early in 1956, and continuing into the period when they were operating the business as a corporation, the diverse temperaments of Glaser and Martin led to an almost continuous succession of disagreements and disputes, between them, about the management of the business.

16. On September 12,1957, at a meeting of the plaintiff’s board of directors, attended by Glaser, Martin, Murray, and Prieve, the difficulties resulting from antagonisms and disputes between Glaser and Martin were discussed. Glaser read a prepared statement at the meeting in which he contended that the business could not continue to exist under the conditions that then prevailed, but no definite action was taken to resolve the difficulties.

17. During the succeeding week, Glaser and Martin had further, but futile, discussions about settling their disputes.

18. Thereafter Glaser and Martin traveled separately to New Jersey, to discuss their troubles with Heyman and others at the Heyman company. Glaser was primarily interested in getting rid of Martin, and, as a basis for discussing evaluation of the several interests in the plaintiff with a view to separating out Martin’s interest, he took along to New Jersey a balance sheet that stated the plaintiff’s condition as of August 31,1957, and a profit and loss statement for the period January 1, 1957, through August 1 of that year. These he left with Heyman when he and Martin returned to Milwaukee, by separate routes, without having settled upon any plan for resolution of their difficulties.

19. Shortly after Glaser and Martin returned to Milwaukee from New Jersey, Martin consulted Prieve, as an attorney, about preparing a plan for segregating Martin’s and Glaser’s interests in the Campbell enterprise. Prieve drafted such a plan, a copy of which he mailed to Heyman on October 1, 1957.

20. The plan drafted by Prieve provided that:

(a) Martin would sell 16 of his shares of plaintiff’s stock to the Heyman company for $16,000;
(b) The plaintiff would give Martin, for Martin’s remaining 84 shares: (1) all of the stock of Martin-Gaertner Sales, Inc. (valued on its books at $8,000) ; (2) $6,000 cash, and (3) the heyco contract;
(c) The Heyman company would buy from the plaintiff, for $6,300, the 84 shares of its stock the plaintiff was to redeem from Martin;
(d) Martin would exercise the right expressly provided in the heyco contract to extend it until June 30, 1963; and
(e) Martin would grant the plaintiff an exclusive license to sell heycos for the extended period of the contract, on the terms and in the territory described in the contract, in exchange for monthly payments based on a percentage of heyco sales (subject to a minimum of $1,029.41 a month) until $70,000 had been paid, whereupon no further payments to Martin would be required, and he would reassign the contract to the plaintiff.

21. Glaser would not agree to the Prieve plan of October 1, 1957, because he wanted to have nothing further to do with Martin and objected to the proposal whereby Martin would have the heyco contract and the plaintiff would have to pay royalties to Martin in order to continue selling heycos until $70,000 was paid, even though the contract would then revert to the plaintiff. As Glaser stated his position: “* * * [I] f he held the Heyco 'Contract I would be virtually working for him, and I didn’t care to do that.”

■22. (a) On October 15,1957, another meeting was held, at Prieve’s office, attended by Glaser, Martin, Prieve, Murray, Heyman, and Robert R. Mandel, a certified public accountant, who, since 1930, had performed accounting work for the Heyman company, and had advised Heyman and the Heyman company on taxes and other financial matters. Mandel was intimately familiar with the operations of the Heyman company.

(b) The purpose of the meeting was to consider and, if possible, to agree upon, a generally acceptable plan for separation of Martin’s and Glaser’s interests in the plaintiff, in a manner that would exclude Martin from ownership and management of the plaintiff and enable the plaintiff to continue operations under Glaser’s direction, free of the disputes which, by this time, appeared to be an inevitable consequence of any association of Glaser and Martin in its management.

23. (a) The meeting was characterized by strenuous negotiations. There was much discussion of the overall value of the plaintiff’s assets and particularly of the heyco contract, but, according to the minutes of the meeting, no definite agreement was reached as to the value of the contract. Numerous and varied proposals and counterproposals were exchanged in an effort to accommodate the plan to Glaser’s and Martin’s conflicting demands, and to Martin’s shifting estimates of the value of his interest.

(b) Among the various proposals made, but not generally agreed to, was one developed in a separate conference between Martin and Heyman, outside the principal meeting room. Martin wanted $100,000 for his interest. Heyman thought $50,000 was a suitable figure. Martin and Heyman agreed upon a compromise whereby, for $75,000, the Heyman company “* * * would get half of the [plaintiff’s] stock and he [Martin] would be out completely.” According to Hey-man, after he and Martin reached agreement, Martin added a demand for some commission or some insurance or some other benefits. The proposal was not adopted by the meeting.

(c) After much discussion, Martin said he would be willing to surrender 70 shares of his stock to the plaintiff in exchange for the heyco contract, but Glaser said the plaintiff could not continue in operation “unless there were some licensing agreement to the contract.” The plan eventually adopted, as described in the minutes of the meeting, took this form, subject, however, to agreement between Martin and Glaser on some of the terms and conditions of the licensing agreement.

(d) The plan included various other provisions not directly related to the disposition of the heyco contract but more or less significant with respect to the general nature and purpose of the plan as a whole.

24. During the evening of October 15, Prieve and Mandel prepared a draft of corporate minutes to reflect the results of the negotiations that had occurred during the meeting. They also prepared drafts of agreements to implement the plan reflected in the minutes.

25. (a) In essence the plan, as described in the minutes, provided for the Heyman company to acquire directly from Martin (for $24,600) 30 of Martin’s 100 shares of the plaintiff’s stock, and for a partial liquidation of the plaintiff, whereby certain of the plaintiff’s assets, including the heyco contract, would be transferred to Martin in exchange for his surrender of his remaining 70 shares to the plaintiff for cancellation. By these arrangements, the plan proposed to exclude Martin from direct participation in the ownership and management of the plaintiff.

(b) Glaser would agree to contribute 70 of his 100 shares to the capital of the plaintiff, leaving the stock ownership equally divided between Glaser and the Heyman company, each holding 30 shares. The three callable qualifying shares held by Prieve, Murray, and Heyman were to be surrendered.

(c) Martin was to grant the plaintiff an exclusive license to sell heycos in accordance with the heyco contract, and the plaintiff was to pay Martin 5 percent of its net sales of heycos.

(d) Martin was to purchase, for $500, all of the stock of Martin-Gaertner Sales, Inc., and Martin-Gaertner was to assume the lease tmder which the plaintiff occuped its warehouse and office building, and would give the plaintiff 30 days to find new quarters.

(e) A noncompetition agreement was to be entered into with Martin, restricting him, for not more than 2 years, from competing with the plaintiff in the sale of strain reliefs in the area covered by the heyco contract, and from disclosing the names of customers, the quantities of strain reliefs used, and the prices or the uses for such strain reliefs.

There was to be a similar agreement, with respect to wire and related products, between the plaintiff and Martin, Martin-Gaertner Sales, Inc., and a corporation, called “Marcam Corporation.” The agreement between the plaintiff and Martin-Gaertner Sales, Inc. (and Marcam) was to be drafted as a joint agreement that would bind Glaser as well.

(f) A pre-existing stock purchase agreement with Glaser was amended to provide for purchase of his stock by the plaintiff, at a minimum price of $75,000 if he should die before December 31,1958, and at $100,000 if his death should occur after December 31, 1958. This provision reflected arrangements for insurance on Glaser’s life, payable to the plaintiff in case of his death.

(g) The plan included arrangements for proration of the expenses between the plaintiff, Martin-Gaertner Sales, Inc., and Marcam Corporation, and for a division of the office equipment according to the needs of the several corporations.

(h) The minutes indicate Martin’s resignation as vice president and director, effective as of the close of the meeting, and include a provision for Martin to purchase a $50,000 insurance policy the plaintiff held on his life.

(i) Arrangements with respect to the signature of documents, the borrowing of money, and the exercise of various other corporate functions were modified to conform with the other rearrangements provided for by the plan.

26. Glaser refused to sign the license agreement unless it contained an option specifically granting the plaintiff the right to reacquire the heyco contract. As a consequence of Glaser’s insistence, the license agreement, dated October 16, 1957, as finally signed by Martin (as licensor), and Glaser (as president of the plaintiff), included the following provision as paragraph 9—

For a period of ninety (90) days from October 16, 1957 the 'Campbell Co. shall have an option to purchase the contract of July 1,1948 for a price equal to $57,400.00 less the amount of any royalties paid prior to the date of the exercise of the option. If such option is exercised, upon receipt of the cash price, Licensor shall deliver to the Campbell Co. a complete assignment of all of his right, title, and interest in and to said contract of July 1, 1948 as well as any further rights under this contract.

27. (a) At the time the license agreement, containing the option provision, was signed, neither the plaintiff nor Glaser had sufficient funds of their own to exercise the option, nor did they anticipate that they would have the necessary amount in their own funds within the 90 days provided in the option.

(b) While Heyman and Mandel were in Milwaukee on October 15 and 16, 1957, Glaser and Prieve each discussed with them the likelihood that the plaintiff would need to borrow the amount necessary to exercise the option. They did not directly request a loan of that amount but their comments concerning the need for money to take up the option were intentionally calculated to afford Heyman and Mandel an opportunity to offer to make a loan for that purpose. There is no evidence, however, that either Heyman or Mandel then made any promise or commitment, formal or informal, to either Glaser or to Prieve that the Heyman company would lend the plaintiff the amount necessary to exercise the option.

(c) On the contrary, at the time of the October meeting, Heyman and Mandel intended to maintain a wait-and-see attitude, observing the plaintiff’s operations under Glaser’s sole management, and to decide later, on the basis of their observations, what course the Heyman company would take with respect to assisting the plaintiff to take up the option. They made that intention clear to Prieve and Glaser.

(d) They were favorably disposed to Glaser and anxious to have the plaintiff succeed under his unencumbered management, if for no other reason because the plaintiff’s success would maintain an established outlet for heycos throughout the 11-state area covered by the heyco contract without further drastic readjustments.

(e) Moreover, the arrangement established at the October meeting, if it should succeed, would afford to the Heyman company not only its profit as a manufacturer supplying the plaintiff, but a bountiful share, as a 50-percent stockholder in the plaintiff, in whatever profit the plaintiff might realize through the sale of heycos and any other operations it might carry out.

(f) As fair as appears from the evidence, the prospects for the plaintiff were good, and it was generally anticipated that its sales of heycos would continue in satisfactory volume and probably would increase.

(g) Nevertheless, Glaser had not previously been solely responsible for all phases of management of the plaintiff’s business, and whatever their subjective estimates of the plaintiff’s prospects were, it is quite clear that Heyman and Mandel were not prepared, in October 1957, to commit the Heyman company to a loan to finance the plaintiff’s exercise of the option.

28. Shortly after the October 15 meeting, Prieve made an unsuccessful effort to arrange with a Milwaukee bank for a loan to the plaintiff of the amount necessary to take up the option.

29. During October 1956, Martin exercised the right provided in the heyco contract to renew the contract for “one additional period of five (5) years”, thereby extending its term to June 30,1963. The contract contained no provision for any additional extension.

30. (a) The plaintiff’s operations through October and November, and into December of 1957, maintained gross sales, net sales, and net profits before taxes that were not notably disparate in relation to its prior performance.

(b) During November and December of 1957, the plaintiff paid Martin a total of $2,834.82 under the license agreement; $902.14 on November 11, 1957, representing 5 percent of its net sales of all Heyman company products from October 16 to October 31,1957, and $1,932.68, in early December, representing 5 percent of the plaintiff’s net sales of all Heyman company products during November 1957.

(c) The payments described in finding 30(b) reflected sales, not only of heycos, but of relatively minor quantities of other Heyman company products. To that extent, the payments exceeded the amounts required to be paid to Martin under the license agreement. Glaser testified that this occurred because the amounts attributable to sales of other products were so small that it was not worth trying to isolate them.

31. On October 22, 1957, Mandel wrote to Heyman, stating:

I would like you to note your calendar on December 10th to inquire about payment of $55,000.00 to Campbell so that we exercise the opportunity of buying back the Iieyco contract from Louis C. Martin.

32. On December 11,1957, the plaintiff’s board of directors authorized the borrowing of $55,000 from the Heyman company, and the exercise of the option to repurchase the heyco contract from Martin.

33. On December 11, 1957, Glaser wrote to Heyman, requesting a loan of $55,000 from the Heyman company for the purpose of exercising the option.

34. On December 11, 1957, the Heyman company’s board of directors authorized the making of the requested loan of $55,000 to the plaintiff.

35. On December 16, 1957, five promissory notes, each for $11,000, payable by the plaintiff to the Heyman company at 1-year intervals beginning December 16, 1958 and ending December 16, 1962, were executed on behalf of the plaintiff.

36. On December 19,1957, the plaintiff exercised the option and Martin assigned the contract to the plaintiff on that date “in consideration of the payment to Louis C. Martin of $54,565.18 * *

37. (a) Beginning, at least as soon as his differences with Martin became acute, Glaser had definite purposes with regard to rearrangement of the plaintiff’s ownership and management, but no definite plan for achieving them. He persistently sought, but, for some time, failed to find, means of accomplishing two coordinate objectives: (1) to exclude Martin from ownership of any stock interest in the plaintiff and from active participation in its management, and (2) to assure that the plaintiff would retain the opportunity to sell heycos on the terms provided in the heyco contract, under his management, unencumbered by his differences with Martin.

(b) Glaser would have preferred that the exclusion of Martin be accomplished in a manner that would enable the plaintiff to retain title to the heyco contract. As the discussions progressed, it became apparent that neither Glaser nor the plaintiff had adequate independent resources to avoid the necessity of transferring the contract to Martin in order to procure the surrender of his stock, and that, as of the middle of October 1957, the Heyman company was not ready to commit itself to finance any plan, acceptable to Martin, that would retire Martin’s stock and still enable the plaintiff to retain title to the contract.

38. (a) As matters stood after the meeting in October 1957, Glaser’s failure to arrange for the exclusion of Martin without transferring the heyco contract to him, left undisposed of what Glaser regarded as a persistent threat to full achievement of his second objective — to assure continuance of the plaintiff’s right to sell heycos under the terms of the heyco contract, without any risk of interference by Martin.

(b) From October 15, 1957, on, Glaser was determined to reacquire title to the heyco contract, in the plaintiff’s name if possible, by whatever means that could be accomplished.

(c) Glaser’s desire to have the plaintiff reacquire title to the heyco contract was not based solely on a wish to avoid the cost of paying Martin a percentage of the plaintiff’s heyco sales, although that was probably a factor.

More important was the fact that Glaser wanted Martin altogether excluded from any possible influence on the plaintiff’s business. It was apparent to Glaser that Martin, regardless of what anyone else thought, believed he was fully capable of selling heycos, independently of Glaser or the plaintiff, and also believed that the heyco contract had substantial market value and could readily be disposed of by sale at an advantageous price. As long as Martin owned the contract, Glaser didn’t trust him to refrain from some action that might embarrass the success of the plaintiff’s business.

(d) At the time of the October meeting, neither Glaser nor the plaintiff had enough money of their own to exercise the option. Although they had some reason to hope that the Heyman company might lend the amount needed, they had no promise that it would. Indeed, they lacked any assurance that adequate funds would be available to the plaintiff within the option period, from any source, to enable it to pay Martin the full option price.

(e) On the basis of the foregoing facts, it cannot be found that the plaintiff’s exercise of the option on December 19, 1957, was the culmination of a plan that already existed when the heyco contract was transferred to Martin in October 1957. Whether the plaintiff would or could exercise the option before it expired remained contingent until December 11, when the Heyman company agreed to lend the plaintiff the amount it needed to take up the option.

89. (a) Deduction of the plaintiff’s taxes by obtaining a stepped-up basis for the heyco contract was neither the sole nor the dominant purpose of the plaintiff’s assignment of the heyco contract to Martin in October 1957. It is doubtful that Glaser would have agreed to the assignment if any way of 'accomplishing the retirement of Martin’s stock, other than the plan then agreed upon, had appeared to be feasible.

(b) The contract was assigned to Martin out of necessity, as security to Martin for making, by the plaintiff, of future payments for Martin’s stock, either as monthly payments of 5 percent of the plaintiff’s sales of heycos over a 5^-year period or as a lump-sum payment within 90 days under the option. That was the only way that could then be devised, through arm’s-length negotiation, to satisfy, out of the limited resources then available to the plaintiff and its prospects for future business, Martin’s demands for compensation for the surrender of his stock.

40. (a) The assignment of the heyco contract to Martin, in October 1957, transferred no current operative rights under the contract to Martin. As a consequence of the license, the plaintiff, despite its lack of title to the heyco contract, continued to realize all the operative rights, and all but 5 percent of the economic benefits, established by the contract throughout the period between its assignment to Martin, in October 1957, and its reassignment by Martin to the plaintiff on December 19, 1957. During that period, Martin’s only rights under the contract consisted of a contingent right to intervene in case of default by the plaintiff in the making of the payments required under the license, or in the performance of the conditions imposed by the contract to avoid its termination by the Heyman company.

(b) In order to eliminate its obligation to pay Martin, as partial compensation for the surrender of his stock, 5 percent of its heyco sales over a 5^-year period under the license, and to assure continuance of its realization of the operative rights and economic benefits provided by the heyco contract through the balance of the extended term of the contract without risk of interference by Martin, the plaintiff paid Martin as partial payment for his stock, a total of $57,400 in cash ($2,834.82 in the form of royalties for October and November 1957, under the license, and $54,565.18 in December, as the balance of the total payment required for the exercise of the option).

(c) The plaintiff would not have had to pay this, or any other amount, in order to continue to realize the operative rights accorded by the heyco contract, if Glaser and the management of the Heyman company had not considered it necessary, in order to maintain successful operation of the plaintiff, to exclude Martin from the company by divesting him of his stock interest.

(d) Nor would the plaintiff have had to pay this amount, or any other amount, to assure continuance of its realization of the operative rights accorded by the heyco contract if the plaintiff had been willing to continue to pay to Martin the 5 percent monthly royalty payments provided under the license throughout the remainder of the extended term of the contract, and to assume the risk of interference by Martin in the plaintiff’s affairs, in case of default by the plaintiff under the license or the contract, or in case of some capricious attempt by Martin to assert operative rights under the contract which he did not have.

(e) Between October 16 and December 19, 1957, Martin had no current operative rights under the heyco contract that were useful in the plaintiff’s business or in the production of income, and his transfer of the heyco contract to the plaintiff, on December 19, 1957, conveyed no such nights to the plaintiff.

41. The heyco contract, by its terms and in its legal effect had a definite term. It ended June 30, 1963. It contained no provision for further extension beyond that time by unilateral action of either party. At the time the plaintiff’s option to reacquire the contract was exercised in December 1957, the plaintiff was disposed to extend the arrangements provided for in the contract, for as long as it could and the management of the Heyman company was willing at that time to continue that arrangement as long as the plaintiff’s actual and prospective sales of heycos continued to satisfy it. Nevertheless the plaintiff then had no right, and the Heyman company had no obligation, to extend the heyco contract beyond June 30, 1963, and the plaintiff had no assurance, under the terms of the contract or otherwise, that the arrangements provided for by the contract would be extended beyond June 30, 1963, without modification. Whatever the views of the parties may have been in December 1957, the contract still had 5% years to run, and any extension of arrangements for the sale of heycos after June 30, 1963, required a new agreement, the terms of which were subject to whatever 'bargaining either the plaintiff or the Heyman company might choose to undertake at any time during that period.

42. On October 1,1961, the plaintiff and the Heyman company executed an agreement extending the heyco contract for 5 years, beyond its terminal date of June 30, 1963, until July 1,1968. The effect of that new agreement was to assure continuance, until July 1, 1968, of the plaintiff’s right to realize the rights and economic benefits provided by the terms of the original heyco contract.

CONCLUSION OE Law

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is not entitled to recover an amount of tax commensurate with the reduction of its taxable income for 1958 that would result from amortization, during 1958, as the cost of a depre-ciable intangible asset, of the amount it paid to Louis C. Martin in December 1957, but that it is entitled to recover an amount reflecting amortization, during 1958, of an appropriate portion of an unamortized residue of $3,714.50 of the original cost of the heyco contract, and judgment is entered to that effect. The amount of recovery will be determined pursuant to Buie 47 (c). 
      
       The opinion, findings of fact and recommended conclusion of law are submitted under the order of reference and Rule 57(a).
     
      
       The contract, hereafter called the heyco contract, provided for an exclusive right to distribute, in 11 midwestern states, a patented form of strain relief bushing, called a “heyco,” manufactured since 1947, or before, by the Heyman Manufacturing Company of Kenilworth, New Jersey.
      A strain relief bushing is a device adapted to secure an electric cord at the point where the cord enters an electric appliance, in a manner which (1) prevents the cord from being pulled loose, accidentally, from its connections within the appliance, and (2) minimizes wear and tear on the cord at the point where it enters the appliance.
      Heycos, made of a plastic material, under patents which include an improvement patent issued March 29, 1960, have been widely used by manufacturers of electric appliances as an acceptable form of strain relief bushing, and have furnished the plaintiff and the Heyman company a volume of business which both companies have regarded as satisfactory. During 1957, about 95 percent of the plaintiff’s sales represented sales of heycos.
     
      
       Between October 16 and December 19, 1957, the plaintiff continued its distribution of heycos in accordance with the terms of the heyco contract, without interruption, under a license from Martin, granted as part of the transaction whereby he acquired title to the contract on October 16, 1957.
     
      
       Martin was successful in selling wire. Wire was largely a standard product, competitively priced, and was sold principally by maintaining a friendly clientele and inducing purchases on the basis of minor price advantages or other considerations which did not involve technical differentiation between the wire offered by Campbell and that available from other sources.
      The selling of heycos, at which Glaser was successful, required persuasion of engineers, representing potential purchasers, that heycos were technically preferable to other forms of strain relief bushings for use in electrical equipment made, or proposed to be made, by the prospective customers.
     
      
      
         It also required them to collect the accounts receivable of the business and to pay the amounts collected to the executor, and to satisfy certain contingent liabilities for returns and allowances and for shortages in consigned inventories. The evidence does not show the value or the burden of these responsibilities and liabilities.
     
      
       On the same day they formed another corporation, called Martin-Gaertner Sales, Inc., as a wholly owned subsidiary of the plaintiff, to handle the wire business. The plaintiff paid $500 for all of the Martin-Gaertner stock.
     
      
       Three additional shares, callable at the will of the plaintiff, were issued— one to Charles E. Prieve, the plaintiff’s secretary and attorney, one to William H. Murray, the plaintiff’s accountant, and one to Horace W. Heyman, the president of the Heyman company, hereafter caUed Heyman.
     
      
       As will be explained in more detail hereafter, the transfer of the heyco contract to Martin was made essentially as security for the plaintiff’s performance of its undertaking to pay Martin, as part of the consideration he demanded for his stock, either 5 percent of its heyco sales oyer a 5%-year period or, at the plaintiff’s option, $57,400 within 90 days, less any amounts previously paid as royalties under the license.
     
      
       Obviously the Heyman company’s interest in the pliantiff’s success was buttressed by selfish motives. The plaintiff was an established outlet for heycos throughout the territory defined in the heyco contract. The plaintiff’s continued success would avoid any necessity for drastic readjustments in the arrangements for distribution of heycos in that area. Moreover the Heyman company’s newly acquired 50-percent ownership of the plaintiff afforded it the favorable prospect of realizing, not only a profit, as manufacturer, on heycos it sold to the plaintiff, but half of all profits the plaintiff might realize through their resale, as well as half of its profits on any other business it might do.
     
      
       Tie record fails to disclose any persuasive reason why tie Heyman company should have been anxious to commit itself to a loan to enable the plaintiff to exercise the option, except perhaps to eliminate the royalties. Operating under the license, the plaintiff could continue with the sale of heycos as freely as it could if it owned the contract and, aside from the impact of the 5-percent royalty on the plaintiff’s net income (and on the Heyman company’s income as half owner of the plaintiff), the Heyman company would realize as much from the plaintiff’s operations under the license as it would if the plaintiff owned the contract. Moreover it would do so without risking a substantial loan to a company that was just commencing to operate under a new and relatively untested management.
     
      
       The record fails to indicate that tax considerations substantially affected any of the actions of Glaser or the Heyman company with regard to the heyco contract. Even if tax consequences were considered, it is far from clear that the possibility of treating amounts paid to Martin under the license as deductible expense might not have been regarded as substantially offsetting any tax advantage the plaintiff (and the Heyman company, as a 50-percent stockholder of the plaintiff) might have hoped to achieve by claiming amortization of a stepped-up basis for the heyco contract.
     
      
       26 u.S.C. (I.R.C. 1954) § 167 (1958 ed.) provides:
      § 167. Depreciation.
      
      (a) General rule.
      
      There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—
      (1) of property used in the trade or business, or
      (2) of property held for the production of income.
      *****
      The applicable regulation is found in 26 C.F.R. § 1.167(a)-3 (1961 ed.), Treasury Regulations on Income Tax (1954 Code), which provides: Intangibles.
      
      If an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of whieh can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. Examples are patents and copyrights. An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life. No deduction for depreciation is allowable with respect to goodwill. Eor rules with respect to organizational expenditures, see section 248 and the regulations thereunder. For rules with respect to trademark and trade name expenditures, see section 177 and the regulations thereunder.
     
      
       See and compare, Commissioner v. Brown, 380 U.S. 563 (1965) ; Commissioner v. Court Holding Co., 324 U.S. 331 (1945) ; Higgins v. Smith, 308 U.S. 473 (1940) ; Gregory v. Helvering, 293 U.S. 465 (1935) ; Juniper Investment Co. v. United States, 168 Ct. Cl. 160, 338 F. 2d 356 (1964) ; Ingle Coal Corp. v. United States, 131 Ct. Cl. 121, 127 F. Supp. 573, cert. denied, 350 U.S. 842 (1955) ; Guinness v. United States, 109 Ct. Cl. 84, 73 F. Supp. 119 (1947), cert. denied, 334 U.S. 819 (1948) ; Campbell v. Carter Foundation Production Co., 322 F. 2d 827 (5th Cir. 1963) ; United States v. General Geophysical Co., 296 F. 2d 86 (5th Cir. 1961), cert. denied, 369 U.S. 849 (1962) ; United States v. Mattison, 273 F. 2d 13 (9th Cir. 1959) ; Granite Trust Co. v. United States, 238 F. 2d 670 (1st Cir. 1956) ; Commissioner v. Transport, Trading & Terminal Corp., 176 F. 2d 570 (2d Cir. 1949), cert. denied, 338 U.S. 955, rehearing denied, 339 U.S. 916 (1950) ; Commissioner v. Ashland Oil & Refining Co., 99 F. 2d 588 (6th Cir. 1938), cert. denied, 306 U.S. 661 (1939) ; and Kimbell-Diamond Milling Co. v. Commissioner, 14 T.C. 74 (1950), aff’d per curiam, 187 F. 2d 718 (5th Cir. 1951), cert. denied, 342 U.S. 827 (1951).
      None of these cases deals with facts directly comparable to those in this case and not all, or even a majority of them, deal with a legal issue identical to the one present here; indeed, the courts, in the cases cited, even place different nomenclature on the legal concepts upon which they base their decisions. They mate it clear, however, that, whatever the facts and whatever the form, the courts seek to penetrate deeply into the transaction and to base their conclusions on a measure of the substantiality of the form against the facts. If, upon careful analysis, the form and the substance of the transaction are equal, the facts are determinative. Por reasons elaborated hereafter, the facts of this case control the decision.
     
      
       If it Rad, this case probably never would have arisen. The plaintiff would have paid Martin cash for his stock in October and retained the heyco contract. There would have been no transfer of the contract to Martin then and no reacquisition of it by the plaintiff in December. As a consequence, there would have been no ostensible basis for any claim that the amount paid to Martin in December was paid to acquire a depreciable asset. It would have been quite clear that the amount paid to Martin was paid for his stock. But so it was in the actual transaction whereby the plaintiff reacquired the contract in December. There, too, the money was paid, not for the contract, but for the stock. By making the payment, the plaintiff merely satisfied and extinguished its obligation to pay for the stock and redeemed the contract which Martin had held as security to assure the making of deferred payments the plaintiff had agreed to make for the stock.
     
      
       If these payments had been, continued throughout the 5% years until June 30, 1963, at the average rate of the payments made for November and half ofi October 1957, they would have totaled in the neighborhood of $125,000.
     
      
       See footnote 11, supra.
      
     
      
       The plaintiff’s representation of the amortization, previously claimed on the basis of the original cost of the heyco contract, is reflected in the following tabulation:
      Original cost_$10, 051.10 Amortization 1% months in partnership — (useful life 23 months — July 27-Sept. 14, 1956, or of $10,051.10 at $437 per month)_ 655. 50
      Basis of contract on books of corporation_ 9, 395. 60 Amortization 3% months — (Sept. 14r-Dec. 31, 1956 at $437 per month)- 1, 529. 60
      Remaining basis Jan. 1, 1957_ 7, 866. 00 Amortization 8 months — (Jan. 1, 1957-Aug. 31, 1957 at $437 per month)_ 3, 496. 00
      Remaining basis Sept. 1, 1957_,_ 4, 370. 00 Amortization 1% months — '(Sept. 1, 1957-Oct. 15, 1957 at $437 per month)_ 655.50
      Remaining basis Oct. 15, 1957_ 3, 714. 50
     
      
       The plaintiff has urged, in addition, a claim based on an alleged right to deduct from its income for 1958 the amount of any additional bonus payable to its president for 1958 that might be attributable to increased profits in 1958 resulting from denial or reduction of its amortization of the cost of the heyco contract. This liability, however, will not be fixed and definite until this court’s decision becomes final; therefore the taxpayer cannot take a deduction for this additional bonus in 1958. United States v. Consolidated Edison Co., 366 U.S. 380 (1961).
     
      
       The record is not altogether clear with regard to the basis or computation of the plaintiff’s amortization of the original cost of the heyco contract, especially as the amounts may be affected by the period in 1956 when the contract was held by Glaser And Martin as partners, before they transferred it to the plaint!#,
     
      
       The Martin noncompetition agreement was to become null and void “with respect to Heyco strain relief bushings and the Campbell Co.”, if the license to be granted the plaintiff should be revoked or otherwise terminated during the 2-year period covered by the noncompetition agreement.
     
      
       Insofar as appears from this record, it was a matter of relative indifference to the Heyman company whether the plaintiff exercised the option. Operating under the license, the plaintiff was in a position to continue with the sale of heycos as freely as it could if it had title to the contract. The Heyman company would not only be paid for the heycos ordered by the plaintiff, but, as a 50-percent stockholder of the plaintiff, would share in the profits realized through the plaintiff’s sales, just as it would if the plaintiff owned the contract, except to such extent as the royalties payable to Martin might exceed the amount that would have to be paid him to restore the contract to the plaintiff. Thus, in October 1957, the Heyman company was in a position to realize from the arrangement as it then stood benefits that were not obviously different from those it might expect to realize if the option were exercised. Moreover it could do so without incurring whatever risks were involved in lending over $50,000 to the plaintiff to enable it to exercise the option.
      Although the parties have not briefed the point, and the record contains no evidence concerning it, the possibility is implicit that the amounts paid to Martin as royalties might have been susceptible to deduction as expenses of the plaintiff’s business and, depending upon factors that cannot be determined from this record, might have been expected to offset pro tanto any tax advantage to the plaintiff (and indirectly to the Heyman company) that might be achieved through possible amortization of the cost of reacquiring the contract.
     
      
       For 1957, the plaintiff’s monthly gross sales, net sales, and net profits, before taxes, 'were as follows :
      
        
      
      
      
       At the meeting on December 11, 1957, the plaintiff's directors also authorized payment to Glaser of an annual bonus equal to 25 percent of the plaintiff’s net profit before income taxes and before payment of the bonus.
     
      
       unless the plaintiff should default in its performance under the contract or fail to pay Martin the amounts required to be paid under the license, the risk that Martin might attempt to sell the contract or to perform it himself appear, objectively, to have been slight, even after the 2 years during which Martin was restrained from selling heycos by the noncompetition agreement. Nevertheless, Glaser, on the basis of his experience with Martin, apparently regarded Martin’s continued ownership of title to the contract as a potential source of trouble, regardless of the limited and contingent nature of Martin’s rights.
     