
    E. I. DU PONT DE NEMOURS AND COMPANY v. THE UNITED STATES
    [No. 334-58.
    Decided April 7, 1961.
    Defendant’s motion for rehearing denied July 19, 1961]
    
      
      Newell W. Ellison for tbe plaintiff.
    
      Dmid O. Moore, Rogers Pleasants, Robert L. Randall, and Covington ds Burling were on tlie brief.
    
      Jerry M. Hamovit, with whom was Assistant Attorney General Charles X. Rice, for the defendant. James P. Garland, Lyle M. Turner, and Garry A. Pearson were on the brief.
   Jones, Chief Judge,

delivered the opinion of the court:

This is a suit for refund of taxes. Three separate claims are involved. The defendant has conceded plaintiff’s right to recover on the third claim.

The two primary contested issues are:

1. When deposits are made to assure the return of certain pressurized gas cylinders, and the cylinders are not returned and the deposits are forfeited, whether the excess of the deposits over the adjusted basis of the cylinders should be treated as capital gain or ordinary income.

2. Whether a taxpayer receives capital gain or ordinary income when he makes a nonexclusive transfer of certain rights in a secret process.

We will first take up the issue as to the cylinders.

The facts have been stipulated by the parties. Plaintiff is engaged in the manufacture and sale of industrial organic chemicals and related products. During 1950, plaintiff manufactured anhydrous ammonia, sulfur dioxide, and “Freon”. These products were sold as compressed gases principally to large industrial concerns for use in refrigerating systems. The physical and chemical nature of the gases required that they be sold and delivered in heavy steel cylinders. The cylinders were retained temporarily by the customers to store the gases. Ordinarily, when the cylinders were emptied they were returned to plaintiff.

Plaintiff required each of its customers who purchased the gases and took delivery in the pressurized cylinders to make a deposit on the cylinders. This deposit was required so as to secure the return of the cylinders. In each instance, the deposit was in excess of the average cost of the cylinders, thus providing an incentive for the customer to return the cylinder. Plaintiff wished to have the cylinders returned in order to avoid the additional administrative burdens involved in purchasing new replacements and testing and accounting for them in compliance with governmental regulations applicable to pressurized cylinders transported in interstate commerce.

During 1950, the documents providing for the sale of the refrigerant gases contained the following, or similar, provisions :

All returnable containers used in connection with shipments of Seller’s products are the property of the Seller and are loaned to the Buyer. Buyer shall use such containers only for reasonable storage of Seller’s products originally delivered therein and shall return such containers in good condition within [90] days from date of original shipment. Buyer shall make a deposit as security for the return of such containers equal to Seller’s current price therefor at the time of shipments, such deposit to be paid, without discount, when the invoice for the contents is paid. Upon return of such containers as above provided, with transportation charges prepaid to Seller’s original shipping point, Seller shall credit Buyer with amount of said deposit; but if Buyer fails to return said containers in good condition and within the specified time, Seller may refuse to accept same and may retain said deposit.

When these products were sold in pressurized cylinders, plaintiff billed these customers for the product, stating separately the amount of the deposit and the price of the chemical product. For its internal accounting, the plaintiff placed the amount of the customers’ deposits in a liability account denominated “Returnable Container Deposit.” When the customers returned the containers, plaintiff decreased the amount of the liability account and distributed cash or gave credits to the customers’ accounts. Because it desired the return of its cylinders, plaintiff made a practice of returning to the customers their deposits long after the usually specified 90-day period for return even when the cylinders had been damaged by the customers. In addition, plaintiff bore the cost of shipping its cylinders back to the plant location.

In 1950, plaintiff discovered that its customers had not returned an accumulating number of these cylinders although more than 3 years had elapsed since the date of their shipment. Accordingly, plaintiff determined to appropriate the deposits and made an entry on its books reducing the amount of the returnable containers deposit liability account and increasing general income.

Plaintiff claims that the profit element of this income is entitled to capital gain treatment. The Commissioner of Internal Revenue taxed the gain as ordinary income. Plaintiff paid the tax and now sues for a refund of taxes for the year 1950.

Various problems have arisen with respect to the tax treatment of income from the disposition of refillable containers. Some rules are evident and uncontested here. If the container is actually sold along with the contents and title passes to the customer, the price at which the container is billed is deemed to be income at the time of sale. Okonite Co. v. Commissioner, 4 T.C. 618 (1945), affirmed on other issues, 155 F. 2d 248 (3d Cir. 1946), cert. denied 329 U.S. 764 (1946). This rule applies even if the manufacturer has agreed to repurchase the container at the same price. La Salle Cement Co. v. Commissioner, 59 F. 2d 361 (7th Cir.) cert. denied, 287 U.S. 624 (1932). In the absence of an immediate sale, deposits received as security are not income at the time received. Wichita Coca Cola Bottling Co. v. United States, 152 F. 2d 6 (5th Cir. 1945) cert. denied 327 U.S. 806 (1946). But when unclaimed deposits are closed out, then income is received. Wichita, supra. If the manufacturer has credited to surplus in one year a substantial amount of these deposits which have been accumulating over a period of years, a tax applies in that year to the entire amount, and no averaging is permitted. Fort Pitt Brewing Co. v. Commissioner, 210 F. 2d 6 (3d Cir.) cert. denied 347 U.S. 989 (1954). Furthermore, the Commissioner has the right to reallocate sums from a deposit liability account to a general income account when the time for return has expired and it seems reasonable that some of the deposits will not be refunded. Fort Pitt, supra. Dealers have enjoyed a reasonable degree of latitude in the exercise of their discretion as to how many containers will not be returned. Nehi Beverage Co. v. Commissioner, 16 T.C. 1114 (1951). See also Reg. 111 § 29.22(c) 1.

The Government does not here allege that the plaintiff sold the containers along with the compressed gases, or that the plaintiff did not properly account for the container deposits by first placing them in a deposit liability account and then moving them to an income account. Furthermore, the Commissioner has ruled that the cylinders need not be inventoried by the plaintiff, and are subject to an allowance for depreciation. He stated as follows:

On the basis of the facts presented, it is concluded, with respect to the first question, [depreciation] that the essential elements for treating the containers as property used in trade or business, such as retention of title, the treatment thereof as separate items on the sales invoices, and the proper reflection of the basis thereof in the books and records, are present. It is accordingly held that, under the circumstances presented, the containers here under consideration constitute depreciable business property within the meaning of section 167 of the Code. [Itev. Pul. 58-77, 1958-1 Cum. Bull. 118 at 119.]

The broad question in issue here is whether the container deposits forfeited to the plaintiff are entitled to the preferential treatment of section 117 of the 1939 Code, as amended, 26 U.S.C. §117 (1952 ed.), particularly subsections (j)(l) and (j) (2), which are as follows:

(j) (1) For the purposes of this subsection, the term “property used in the trade of business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23(1), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, * * *.
(j) (2) If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. * * *

In order for the plaintiff to come within the provisions of section H7(j) the burden is upon it to show: (1) that the cylinders were used in the trade or business; (2) were subject to an allowance for depreciation; (3) were held for more than 6 months; (4) were not included in inventory if on hand at the close of the taxable year; (5) were not held by the plaintiff primarily for sale to customers in the ordinary course of its trade or business; and (6) that the disposition of the cylinders was by “involuntary conversion,” “sales,” or “exchanges.” In the brief filed on behalf of the Government it is admitted that the plaintiff has established the first four of these requirements. The Government contends, alternatively, that the plaintiff held the cylinders primarily for sale to customers in the ordinary course of its trade and business, or that the disposition of the cylinders was not by “involuntary conversion,” “sale,” or “exchange.”

The classification of an asset as “held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” may involve a number of subsidiary decisions. Here, however, there is no question that the plaintiff is engaged in a trade or business, or that the disposition of the cylinders occurred in the ordinary course of that business. But were the cylinders held for sale? The cylinders were not products which the plaintiff manufactured and inventoried. They were required equipment for the sale and delivery of plaintiff’s refrigerant gas products as tanks, trucks, and railroad tank cars were required for the sale and delivery of other products. Plaintiff always treated the cylinders as delivery equipment and as permanent capital investments in its refrigerant-gas manufacturing plants. The stipulations show that plaintiff did not advertise for sale or in any manner try to promote the sale of these cylinders. Indeed, it appears that the plaintiff took reasonable steps to insure that the cylinders, released to the possession of its customers, would be returned. We think it must be concluded that the cylinders were not held for sale. Cf. S. E. C. Corporation v. United States, 140 F. Supp. 717 (S.D. N.Y. 1956), aff’d per curiam, 241 F. 2d 416 (2d Cir. 1957); United States v. Massey Motors, Inc., 264 F. 2d 552 (5th Cir. 1959) ; Philber Equipment Corp. v. Commissioner, 237 F. 2d 129 (3d Cir. 1956).

The particular statutory requirement of “sale or exchange” has existed since 1921 when capital gains provisions were first inserted into the income tax structure. Despite this history, complications arise in applying the phrase “sale or exchange” to the myriad transactions that occur in our free and remarkably flexible economy. The transactions before us now are normal commercial practices. These are not “legal paraphernalia which inventive genius may construct as a refuge” from taxes. Helvering v. Clifford, 309 U.S. 331 (1940). Nevertheless, the transactions are difficult to sort into classic, academic pigeonholes such as sales, consignments, and conversions. We believe, however, that whatever the outer boundaries established by “sale or exchange” and “involuntary conversion” the transactions here are certainly included.

The facts of this case are clearly distinguishable from those in Nehi Beverage Co. v. Commissioner, 16 T.C. 1114 (1951), on which the Government relies. That case involved soft drink bottles in which the deposits were held to be ordinary income to the manufacturer when customers failed to return the bottles. It was the stated theory of that case that bottles which were not returned had been broken or destroyed and were no longer in anyone’s hands; and since no property existed there could have been no transfer of property, and that the proceeds from the destroyed bottles could not be traced into payments for any new bottles.

This is an entirely different case. These were steel cylinders that were designed for a particular purpose, and were required to be inspected because of the condensed chemical commodity which they held under pressure. The cylinders involved were of great weight and strength. They were extremely durable and had a useful life of many years. Undoubtedly, when the plaintiff appropriated the deposits to its general income account the cylinders were still in existence. Clearly, they were not held for sale in the ordinary course of business but were essential to the shipment of the refrigerant commodity. The fact that the plaintiff waited 2 or 3 years before taking down the deposit rather than exercising its privilege at the end of 90 days is rather strong evidence that plaintiff preferred return of the cylinders rather than holding them for sale in the regular course of business.

The cylinders were not manufactured by the plaintiff; they were purchased to meet the commercial necessities of the parties. It manifestly preferred not to sell them but to guard against the necessity of replacement.

There is one further point which the Government raises. The Supreme Court has determined that the classification of assets as capital or noncapital may in some instances be governed by a standard other than the statutory definition taken literally. Assets not held for sale in the ordinary course of business in the usual statutory sense may nevertheless be classified as noncapital when an integral part of the business itself. Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 52 (1955). Prior to the Supreme Court decision in Corn Products the lower courts and the Commissioner had in certain situations applied a similar principle by means of which assets such as corporate stocks and bonds were in effect classified as noncapital under exceptions to the definition of a capital asset not contained in § 117 (a) of the statute. G.C.C. 17322, 1936-2 Cum. Bull. 151; Commissioner v. Bagley & Sewall Co., 221 F. 2d 944 (2d Cir. 1955); Tulane Hardwood Lumber Co., Inc. v. Commissioner, 24 T.C. 1146 (1955); Western Wine & Liquor Co. v. Commissioner, 18 T.C. 1090 (1952).

These cases before and after Corn Products have all dealt with assets defined in § 117(a) of the 1939 Code or its successor, § 1221 of the 1954 Code, 26 TJ.S.C. § 1221. In Bev. Bui. 58-77, 1958-1 Cum. Bull. 118, the Commissioner extended the Corn Products rule to assets of the § 117 (j) variety (so-called §1231 assets under the 1954 Code), as the depreciable containers in the case before us now. The Government urges that the ruling was correct and the gain from the disposition of the cylinders should be judged as “arising from the everyday operation of the business” and so taxed as ordinary income. No case has been cited to us where the rule in Corn Products has been extended to property under § H7(j) of the Code. It may be that gain from the disposition of property used in the trade or business may bé so closely allied to the main sources of business income that Com Products may be properly applied. We do not think it would be an appropriate application in this case.

The determining factor is the purpose for which the property was held at the time of its acquisition and during its period of use; the nature of the commodity, its weight, its practically indestructible quality and the circumstances surrounding its use and disposition. In the light of these undisputed facts, the proceeds from the disposition of the unreturned cylinders should be treated as capital gains rather than as ordinary income.

The second part of this case deals with plaintiff’s disclosure of a secret process and the treatment of income received in exchange. The plaintiff developed an electrolytic process for producing the metal sodium. The process was at first thought not to be patentable and was kept secret. However, the process was put into commercial use by the plaintiff. In 1948, Associated Ethyl Corporation, Ltd., a British corporation (hereafter referred to as Associated) sought to obtain plaintiff’s secret process. On May 15,1950, a written contract was made whereby plaintiff agreed to transfer the complete blueprints and operational characteristics of the process to Associated in consideration of the sum of $225,000. In addition, the plaintiff promised “not to assert against [Associated] any patent covering the construction or use of sodium cells, the licensing rights of which were possessed by du Pont.” Associated agreed to keep the process secret for 5 years. No restrictions were placed on plaintiff’s right to disclose the process. The contract placed no restrictions on Associated’s use of the process anywhere in the world.

On December 18, 1950, plaintiff agreed to grant similar rights to the electrolytic cell to the Ethyl Corporation, a Delaware corporation, in exchange for $400,000.

In 1952, patents did issue both in the United States and in Great Britain covering certain functional features of the electrolytic cells.

For the purposes of this case the Government concedes that the secret process was “property” within the meaning of section 117(a) of the Internal Bevenue Code; that plaintiff was not in the business of selling secret processes, and that this particular secret process was not held primarily for sale to customers in the ordinary course of trade or business.

In dispute is the question whether the disclosure of the secret process in exchange for $225,000 constituted a “sale” of the process within the meaning of section 117. Only if there was a sale is plaintiff entitled to preferential capital treatment of the gain realized on the transaction. Plaintiff maintains that merely having disclosed its secret process to another, it is somehow poorer; something has been irretrievably given away; that since money was received in exchange for this something given away, a sale of property must have occurred.

The propriety of classifying confidential disclosures of ideas as dealings in property has been under discussion in this country since the time of Jefferson, who stated:

If nature has made any one thing less susceptible than others of exclusive property, it is the action of the thinking power called an idea, * * *. Its peculiar character, too, is that no one possesses the less oecause every other possesses the whole of it. He who receives an idea from me receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. [Writings of Thomas Jefferson, Vol. 6, pp. 180-181, H. A. Washington ed. (1854).]

Justice Holmes, in an injunction proceeding to prevent a former employee of plaintiff from disclosing secret processes which he had learned while in plaintiff’s employ, in Du Pont Powder Co. v. Masland, 244 U.S. 100, 102 (1917), made the following statement:

Whether the plaintiffs have any valuable secret or not the defendant knows the facts, whatever they are, through a special confidence that he accepted. The property may be denied but the confidence cannot be. Therefore the starting point for the present matter is not property or due process of law, but that the defendant stood in confidential relations with the plaintiffs, or one of them.

We quote from Judge Learned Hand, in Cheney Bros. v. Doris Silk Corporation, 35 F. 2d 279, 280 (2d Cir. 1929), the following:

* * * a man’s property [in an idea] is limited to the chattels which embody his invention.

See also Fowle v. Park, 131 U.S. 88 (1889); Nelson v. Commissioner, 203 F. 2d 1 (6th Cir. 1953); Huckins v. United States, 5 AFTR, 2d 1222 (D.C. Fla. April 1, 1960).

Were we to accept plaintiff’s position without qualification, it would be similar to concluding that a lawyer makes a sale of property wben. be discloses an estate plan to a client, and a doctor makes a sale wben he discloses the diagnosis of bis patient’s ills. Cf. Regenstein v. Commissioner, 35 T.C. 183 (1960).

In another light, however, the transfer of a trade secret may be a transaction equivalent to a sale, in the same manner that a patent assignment is considered a sale. In each case the transferee or assignee gets more than mere information. Of greater importance, he obtains what he believes to be a competitive advantage, a means for commercial exploitation and reward.

Without question, there are important differences between patents and trade secrets. Under the Constitution a patent secures to the inventor the exclusive rights to his discovery. A form of monopoly is given in exchange for the full disclosure and public dedication of a new and useful invention. United States v. Dubilier Condenser Corp., 289 U.S. 178 (1933). Information contained in a patent is public, widely distributed, and generally known by those interested in a particular art. Inevitably the patented idea becomes common knowledge, yet the patentee retains the right to prevent the manufacture, use and sale of the invention during the life of the patent. 35 U.S.C. § 154. The patent owner may affirmatively act to prevent anyone else from using the patented invention; even to prevent such use by a second inventor who discovers the same idea entirely on his own. It follows that no disposition of a patent is complete without some transfer of this right to prevent infringement.

A trade secret is any information not generally known in a trade. It may be an unpatented invention, a formula, pattern, machine, process, customer list, customer credit list, or even news. The information is frequently in the public domain. Anyone is at liberty to discover a particular trade secret by any fair means, as by experimentation or by examination and analysis of a particular product. Moreover, upon discovery the idea may be used with impunity. A plurality of individual discoverers may have protectible, wholly separate rights in the same trade secret. However, the owner of a trade secret has no protectible rights in the idea itself any more than a lawyer has in his estate plan or a doctor in his diagnosis. Unlike an estate plan or a diagnosis, a trade secret, as a tool for commercial competition, derives much of its value from the fact of its secrecy. It is truly valuable only so long as it is a secret, for only so long does it provide an advantage over competitors. It follows that the essential element of a trade secret which permits of ownership and which distinguishes it from other forms of ideas is the right in the discoverer to prevent unauthorized disclosure of the secret. No disposition of a trade secret is complete without some transfer of this right to prevent unauthorized disclosure.

However different these concepts of trade secrets and patents may appear to be, there is an important similarity; they are both means to competitive advantage. The value in both lies in the rights they give to their owners for monopolistic exploitation. The owner of a patent can make something which no one else can make because no one else is permitted. But circumstances are frequently such that the owner of a trade secret can make something which no one else can make because no one else knows how. The patent owner has a monopoly created by law; the trade secret owner has a monopoly in fact. In both cases there exists the possibility of either limited or complete transfers of the right to the exclusive use of an idea.

A person may pay the owner of a patent for the privilege of operating under the patent without liability for infringement. This is the simple license situation. De Forest Co. v. United States, 273 U.S. 236 (1927), and is not considered a “sale” under the tax law. Parise, Davis & Co. v. Commissioner, 31 B.T.A. 427 (1934); Edward C. Myers v. Commissioner, 6 T.C. 258 (1946). Again, a person may pay the owner of a patent for the privilege of operating under the patent without liability for infringement, and in addition may pay for the residual right possessed by the patent owner, that being the right to prevent all others from operating under the patent. This is an assignment, Waterman v. Mackenzie, 138 U.S. 252 (1891); Paulus v. Buck Mfg. Co., 129 F. 594 (8th Cir. 1904), and is treated as a “sale” under the tax law. Edward C. Myers, supra; Commissioner v. Hopkinson, 126 F. 2d 406 (2d Cir. 1942). In both cases there has been a sacrifice of an exclusive market and the establishment of a potential competitor where formerly the law guaranteed there would be none. Yet unquestionably the money received from the license is ordinary income to the owner of the patent, while the money received from the assignment may be treated as capital gain.

Compare the situation which obtains with trade secrets. A person may pay the discoverer of a trade secret for its disclosure, but in fact the disclosure which is purchased carries with it the right to use the trade secret without liability to the owner. This is the instant case. Again, a person may pay the discoverer of a trade secret for disclosure (i.e., the privilege of using the trade secret) and in addition pay for the residual right possessed by the discoverer- — the right to prevent unauthorized disclosure. And this right to prevent unauthorized disclosure is effectively, as stated above, the right to prevent anyone else from using the secret process. This is the situation in the Nelson and HuoJeins cases, supra.

Just as the grant of the naked right to operate under a patent in exchange for money results in ordinary income to the owner of the patent, so the simple disclosure and grant of the privilege of using a trade secret in exchange for money must also result in ordinary income to the discoverer of the trade secret. In both instances there has been no disposition of interest sufficient to meet the “sale” requirement of the Code. Cf. Commissioner v. P. G. Lake, Inc., 356 U.S. 260 (1958); Leubsdorf v. United States, 143 Ct. Cl. 165 (1958); Cleveland Graphite Bronze Co. v. Commissioner, 10 T.C. 974 (1948) . When a patent owner gives not only the right to operate under the patent but in addition conveys all or a part of his remaining rights in the patent (particularly the right to exclude others from using the idea) in exchange for money, the disposition is complete. The transaction satisfies the “sale” requirement of the Code, and any gain on the transaction may be entitled to capital treatment. Similarly, when the owner of a trade secret gives the right to use the secret and in addition conveys his most important remaining right, the right to prevent unauthorized disclosure (and effectively the right to prevent further use of the trade secret by others) there is a complete disposition of the trade secret. This transaction meets the “sale” requirement of the Code and any gain would be entitled to preferential capital treatment.

In the case before use the plaintiff did not transfer to Associated the right to prevent further disclosure of the secret process. In fact, Associated could do nothing to prevent the subsequent disclosure of the secret by plaintiff to Ethyl of Delaware. Because of this, we find that the disposition of the trade secret did not meet the requirements of a “sale.” Accordingly, the gain realized on the transaction must be taxed as ordinary income. Any other rule would encourage tax avoidance by providing a broad avenue for the conversion of ordinary royalty income into capital gain.

The plaintiff has cited two English cases in support of its position: Evans Medical Supplies, Ltd. v. Moriarty, 37 Tax Cases 540 (1959), and Jeffrey v. Rolls-Royce, Ltd., 1 Weekly Law Reports 720 (1960). We believe these cases may be distinguished from the case at bar. In both of the English cases the central issue was whether the disclosure of a trade secret occurred in the ordinary course of the taxpayer’s trade. Furthermore, it does not appear from these cases that English tax law distinguishes between income from the sale and income from the license of a capital asset, as does our own law.

The third element of this case concerns certain shares of plaintiff’s common stock which plaintiff purchased for the specific purpose of giving to its employees as bonuses. The shares appreciated in value between the time of purchase and the time of delivery to the employees. In filing its tax return for 1950 plaintiff noted the difference in purchase price and market price at time of delivery as realized capital gain and paid a tax accordingly. Plaintiff now claims a refund of this amount. Defendant concedes the point on the basis of our decision in Hercules Powder Co. v. United States, 149 Ct. Cl. 77.

The plaintiff is entitled to recover on the first and third claims, and is denied recovery on the second claim. Judgment will be entered to that effect. The amount of recovery will be determined pursuant to Pule 38 (c).

It is so ordered.

Dureee, Judge; Laeamoee, Judge; and Madden, Judge, concur.

Fahy, Circuit Judge,

sitting by designation, agrees with the disposition made by the court of the second and third claims, but he does not agree that plaintiff is entitled to recover on the first claim, being of the view that there was no sale of the cylinders.

FINDINGS OP PACT

The court, having considered the evidence, the stipulation of the parties, and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiff, E. I. du Pont de Nemours and Company, at all times hereafter mentioned was and is a corporation organized and existing by virtue of the laws of the State of Delaware, and having its principal place of business in Wilmington, Delaware. Plaintiff is engaged principally in the business of manufacturing and selling industrial organic chemicals and related products.

2. Plaintiff filed its Federal income and excess profits tax return (Form 1120) for the calendar year 1950 on September 14, 1951. The return disclosed a tax liability in the amount of $222,499,642.69, which sum was paid to the Collector (now known as the District Director) of Internal Eevenue at Wilmington, Delaware, as follows:

Date of Payment Amount
March 15, 1951 $67,200, 000. 00
June 15, 1951 00
September 14,1951 43,599,714.15
December 14, 1951 44,499,928. 54

3.The statute of limitations for assessing additional taxes for the calendar year 1950 was extended to September 30, 1955, and the time for filing claims for refund of overpayment of taxes for said year was extended to March 30,1956, by the filing of timely consents fixing period of limitations upon assessment of income and excess profits taxes (Form 872), the first of which was executed and filed on May 27, 1954.

4. On March 23, 1956, plaintiff filed with the District Director of Internal Revenue at Wilmington, Delaware, a claim for refund of Federal income and excess profits taxes (Form 843) for the calendar year 1950 in the amount of $466,272.00 or such greater amount as is by law due plaintiff, plus interest as provided by law.

5. Plaintiff’s claim for refund was rejected in its entirety by registered notice of disallowance from the Commissioner of Internal Revenue dated August 9,1956.

6. (a) Plaintiff has in effect what are known as Bonus Plans “A” and “B” which were originally adopted on February 3, 1905, as amended on April 10, 1950, under which shares of plaintiff’s common stock may be transferred to certain of plaintiff’s employees.

(b) Pursuant to the provisions of the Bonus Plan “A”, plaintiff made deliveries to certain of its employees in 1950 of 3,214 shares of its common stock, which shares had been purchased on the open market prior to said deliveries, for the specific purpose of being used to make deliveries of “A” stock bonus awards. The data with respect to these awards are as follows:

No. of Fair Market Delivery Date Shares Value Date of Acquisition Cost

May 25,1950 1981 $157,241.88 May 9 to May 15,1950 $146,948.01

Oet. 23,1950 23 1,864.44 May 15, 1950 1,719.20

Dee. 31,1950 1210 101,564.38 Apr. 28,1948 to 70,163.44 May 15, 1950

(c) Under plaintiff’s Bonus Plan “A” bonuses may be awarded in acquired common stock or in cash to be invested in new common stock, or in cash, or in two or more of said forms. Since 1947 it has been the Company’s practice to make awards under the Plan partly in stock and partly in cash. The cash portion of the award provides more than sufficient funds to satisfy the tax withholding requirements and minimizes the need for the employee to sell the stock delivered to him in order to pay the balance of his individual income tax.

(d) When plaintiff rewarded employees with additional compensation by using its common stock, such stock was used in order “to further their interest in the business as stockholders” as stated in Bonus Plan “A”.

(e) Acquired common stock was used for the 1950 “A” bonus deliveries pursuant to a recommendation of plaintiff’s Treasurer that the administrative work incident to the regis tration and listing of a new issue of stock would be disproportionately great in view of the small number of shares involved.

(f) Shares of plaintiff’s common stock which were delivered to employees under the “A” Bonus Plan in 1950 were acquired solely for the purpose of enabling plaintiff to comply with the provisions of the Plan. Plaintiff delivered such shares to its employees at the times specified in the Plan.

(g) Stock acquired for purposes of delivery under the “A” Bonus Plan in 1950 bore no dividends and was not voted prior to the time when it was awarded to employees under the Plan.

(h) The decision as to whether and to what extent awards are made under Bonus Plan “A” rests within the discretion of either plaintiff’s Bonus and Salary Committee or plaintiff’s Executive Committee as provided in Paragraph VI of the Plan.

(i) In its income and excess profits tax return for 1950, plaintiff reported a short-term capital gain in the amount of $10,439.00 and a long-term capital gain in the amount of $31,401.00 on account of the delivery of shares of its common stock in 1950 to employees under Bonus Plan “A”.

(j) There is no dispute as to the correct amount of tax involved on account of the delivery of shares of acquired common stock under the “A” Bonus Plan in 1950 if it is held that taxable gain was realized or as to the correct amount of refund if it is held that no taxable gain was realized.

7. (a) During the taxable year 1950, plaintiff used certain returnable pressurized chemical delivery equipment to deliver to its customers the anhydrous ammonia, sulfur dioxide, “Freon” refrigerants and other chemical products that plaintiff manufactures and sells.

(b) Anhydrous Ammonia Delivery Equifment

(i) During 1950, plaintiff delivered anhydrous ammonia, a compressed gas, to customers in returnable cylinders. The ammonia capacity of these cylinders was either 50, 100 or 150 pounds. During 1950, the majority of these cylinders were made of steel and the balance were made of an alloy.

(ii) Plaintiff’s investment in the anhydrous ammonia pressurized cylinder approximated the price (including freight prepaid) which plaintiff charged its customers for the contents of the cylinder. During 1950, the price per 100 pounds of ammonia, when shipped in cylinders with freight prepaid, ranged from $17.00 to $21.00, depending upon the distance of the customer from plaintiff’s plant. During 1950, the average cost to plaintiff of the cylinder (based on purchases made over a number of years) in which the 100 pounds of ammonia was delivered was $12.59, if it was made of steel, and $20.43, if it was made of the alloy. During 1950, plaintiff uniformly required a deposit of $25.00 on all such cylinders, regardless of age, cost and type.

(c) “Freon” Refrigerants and Sulfur Dioxide Delivery Equipment

(i) During 1950, plaintiff delivered to customers in returnable pressurized cylinders made of steel “Freon” refrigerants and sulfur dioxide, compressed gases used as refrigerants. The capacity of “Freon” cylinders ranged from 10 to 2,000 pounds. The capacity of the sulfur dioxide cylinders ranged from 25 to 150 pounds.

(ii) Plaintiff’s investment in the “Freon” and sulfur dioxide cylinders was substantial in relation to the price which plaintiff charged its customers for the contents of the returnable cylinders. During 1950, the price for 145 pounds of the principal type of “Freon” sold, when shipped in cylinders, was $47.85; the price per 70 pounds of sulfur dioxide, when shipped in cylinders, was $14.00. During 1950, the average cost to plaintiff of the cylinder in which the 145 pounds of “Freon” refrigerant was shipped was $14.30. The average cost to plaintiff of the cylinder in which the 70 pounds of sulfur dioxide was shipped was $9.24. During 1950, plaintiff uniformly required a deposit on its four sizes of “Freon” cylinders of $8.00, $9.00, $15.00, and $200.00, respectively. In 1950, the average cost of such cylinders was $6.11, $7.51, $14.30, and $149.88, respectively. During 1950, plaintiff uniformly required a deposit on its three sizes of sulfur dioxide cylinders of $9.00, $12.00, and $15.00, respectively. In 1950, the average cost of such cylinders was $6.22, $9.24, and $10.54, respectively. Plaintiff required deposits in these amounts regardless of the age, condition, or original cost of the particular cylinder shipped to the customer.

(d) Plaintiff acquired all of the pressurized cylinders here in question by purchase. They were manufactured according to I.C.C. specifications. Under the I.C.C. specifications, the manufacturer from whom plaintiff purchased the cylinders was required to place on each cylinder a symbol identifying its owner, a symbol identifying the manufacturer and indicating that it had been built and tested in accordance with I.C.C. specifications and regulations, and a serial number identifying the particular cylinder. Plaintiff, as the owner of the cylinders, is required to register each of the cylinders by serial number with the Bureau of Explosives, an arm of the Association of American Railroads officially recognized by the I.C.C. and closely associated with the safety functions of the I.C.C. Plaintiff thereupon is held responsible for periodic testing of the cylinders thus registered. Such testing is carried out under regulations of the I.C.C., which regulations constitute Exhibit G. In addition to the indicia of plaintiff’s ownership placed upon the cylinders in'compliance with administrative regulation, plaintiff’s cylinders were prominently labeled as its own property while in service by virtue of plaintiff’s name (or that of Kinetic Chemicals, Inc., a wholly owned subsidiary, whose returnable cylinders plaintiff received during 1950 upon liquidation of the former) and/or its trademark (the name Du Pont placed in an oval).

(e) When plaintiff filled the returnable cylinders with compressed gases, it complied with I.C.C. regulations by attaching to each cylinder a caution tag which bears its name as the filler of the cylinder, certifies that plaintiff has filled it properly, and provides storage regulations. The caution tag also bears plaintiff’s return address. Some tags also give the customer instructions for shipping the cylinder back to plaintiff. In other cases, plaintiff’s salesmen give each customer a “return tag,” which, contains instructions for shipping the cylinder back to plaintiff. Plaintiff agreed to bear the cost of shipping its cylinders back to its plant locations.

(f) I.C.C. regulations prohibit such cylinders from being refilled and shipped in interstate commerce unless it is done by or with the consent of the owner. Once a customer has become the owner of a cylinder, he may refill it or give his consent to another to refill it, and it may thereafter be shipped in interstate commerce without violating I.C.C. regulations. As owner of the cylinder he may also use it as a storage facility without violating I.C.C. regulations.

(g) In 1950 and at all other times, plaintiff treated all the returnable cylinders here in question as delivery equipment, and as an integral part of its capital investment. Plaintiff (and Kinetic Chemicals, Inc., a wholly owned subsidiary whose returnable containers plaintiff received upon liquidation of the former during 1950) in 1950 and in taxable years prior and subsequent thereto, has treated all of the returnable cylinders, including the returnable cylinders temporarily in the hands of customers, as depreciable assets for Federal income tax purposes, and Internal Revenue agents in auditing its income tax returns have consistently allowed plaintiff a deduction for depreciation based upon a useful life of 20 years.

(h) With respect to the returnable cylinders used by plaintiff in delivering anhydrous ammonia, “Freon” refrigerants, and sulfur dioxide, plaintiff required customers to make a deposit on the cylinders to secure the return of the cylinders. In each case the deposit required was in excess of the cost of the cylinder (as heretofore indicated) in order to provide an incentive for the customer to return the cylinder. To the extent the cylinders were returned, plaintiff avoided having to replace them with other cylinders and also avoided the resulting administrative burden that would be involved in purchasing, testing, storing and accounting for them, and in complying with Governmental regulations applicable to compressed gas cylinders transported in interstate commerce.

(i) In some of plaintiff’s price lists, order acceptance forms, sales contracts or sales invoices covering the products sold in the aforementioned cylinders during 1950, there appears the following provision relative to plaintiff’s returnable containers:

All returnable containers used in connection with shipments of Seller’s products are the property of the Seller and are loaned to the Buyer. Buyer shall use such containers only for reasonable storage of Seller’s products originally delivered therein and shall return such containers in good condition within days from date of original shipment. Buyer shall make a deposit as security for the return of such containers equal to Seller’s current price therefor at the time of shipments, such deposit to be paid without discount, when the invoice for the contents is paid. Upon return of such containers as above provided, with transportation charges prepaid to Seller’s original shipping point, Seller shall credit Buyer with amount of said deposit; but if Buyer fails to return said containers in good condition and within the specified time, Seller may refuse to accept same and may retain said deposit.

(j) In the rest of the order acceptance forms, price lists, sales contracts or sales invoices covering such products in 1950, the above provision was abbreviated as follows:

Keturnable containers remain the property of Seller; the deposit charge to buyer will be refunded if containers are returned in good condition within after date of shipment.

(k) In both cases, there was the same understanding between plaintiff and the customer: If the customer returned the cylinder in good condition within the period stipulated in the document, plaintiff was obligated to return to the customer his deposit; but, if the customer should fail to return the cylinder within the period stipulated, plaintiff had the option either to retain the cylinder as its property and continue the customer’s deposit as collateral for the return of the cylinder, or, to regard the cylinder as the customer’s property and to appropriate the deposit to its own use.

(l) In actual practice and long after the expiration of the period stipulated in the contractual and other documents, plaintiff chose to exercise its option to retain title to the returnable cylinders and, upon their subsequent return to plaintiff, to return to the customer bis deposit. Furthermore, it was plaintiff’s practice to retain title to cylinders damaged while in customer’s hands.

(m) When plaintiff billed the customer for the chemical products sold in all the aforesaid returnable cylinders, it stated separately the price of the chemical product and the amount of the deposit, and described the deposit as “Beturnable Container Deposit.” In accounting for the aforesaid cylinders, when plaintiff shipped a cylinder to a customer it made no change in its container account. Plaintiff placed the amount of the customer’s deposit in a deposit liability account. When the customer returned the cylinder, plaintiff either returned to him the amount of the deposit or gave him credit in that amount, and the balance of plaintiff’s deposit liability account was reduced accordingly.

(n) During 1950, plaintiff’s records revealed that particular customers had not returned 22,328 “Freon” cylinders and 2,742 sulfur dioxide cylinders although more than 3 years had elapsed since date of shipment. Each of these cylinders was individually ascertainable in plaintiff’s records. With respect to those cylinders, plaintiff determined to exercise its option to appropriate to its own use the deposits applicable thereto, and to treat the particular cylinders thenceforth as the property of the customer. Plaintiff (and the corporation whose returnable containers plaintiff received during 1950 upon liquidation of the former) consistently followed this practice in years prior to and subsequent to 1950. Accordingly, at the end of 1950 plaintiff removed these particular “Freon” and sulfur dioxide cylinders from its container investment account, and transferred an amount representing the deposits applicable to such containers from its deposit liability account to an income account. In its income and excess profits tax return for 1950 plaintiff deducted from the amount transferred from its deposit liability account to its income account, an amount representing the adjusted basis of the containers thus removed from its container investment account and reported the difference of $141,758.00 as long-term capital gain from the “Sale of Containers.”

(o) During 1950, plaintiff’s records revealed that 19,998 of its anhydrous ammonia cylinders had not been returned. In years prior to 1946 plaintiff’s anhydrous ammonia, cylinder records would reveal that particular customers had failed to return particular cylinders within the period stipulated in the contract. During those years, at year-end, it was plaintiff’s regular practice to determine those cylinders that remained in customers’ hands more than 5 years after date of shipment. With respect to such cylinders, plaintiff regularly exercised its option to appropriate to its own use the deposits applicable thereto, and to treat the particular cylinders thenceforth as the property of the customer. Accordingly, at year-end, plaintiff would remove those particular cylinders from its container investment account, and would transfer an amount representing the deposits applicable thereto from its special liability account to an income account. Beginning in 1946, plaintiff’s ammonia cylinder records no longer revealed the particular cylinders that had remained in particular customers’ hands more than 5 years after date of shipment. For years beginning in 1946, and at year-end, plaintiff determined the number of its ammonia cylinders remaining in the hands of customers more than 5 years after shipment based upon its deposit appropriation experience for the 10-year period ended December 31, 1945. Accordingly, at year-end plaintiff would remove a certain number of cylinders from its container investment acount on the basis of experience, and would transfer an amount representing the deposits applicable thereto from its deposit liability account to an income account.

(p) In 1950, plaintiff completed a study which revealed that its deposit appropriation experience (for the 10 years prior to 1946) as to cylinders remaining in the hands of customers more than 5 years after date of shipment had not been borne out in the intervening years, and that the number of such containers had significantly increased. Accordingly, at the end of 1950 plaintiff, based upon this new experience, removed a number of ammonia cylinders from its container investment account, and transferred the amount representing the deposits applicable to such containers from its deposit liability account to its income account. In its income and excess profits tax return for 1950, plaintiff deducted from the amount thus transferred from its deposit liability account to its income account, an amount representing tbe adjusted basis of the containers thus transferred from its container investment account and reported the difference of $300,517.00 as long-term capital gain from the “Sale of Containers.”

(q) All of the returnable cylinders here at issue had been held by plaintiff for more than six months.

8. (a) On May 15, 1950, plaintiff entered into a contract with Associated Ethyl Corporation, Ltd. The contract was based on a resolution of plaintiff’s Executive Committee dated April 12, 1950, which resolution authorized the conveyance to Associated Ethyl Corporation, Ltd., of plaintiff’s type “F” electrolytic sodium cell secret process.

(b) The type “F” electrolytic cell which is the subject of the contract between plaintiff and Associated Ethyl Corporation, Ltd., dated May 15, 1950, was reduced to practice and actually put into commercial use by plaintiff prior to 1949.

(c) Pursuant to said agreement, dated May 15, 1950, plaintiff transferred the complete blueprints and operation characteristics of the type “F” electrolytic cell covering said secret process and design to Associated Ethyl Corporation, Ltd., during the year 1950, and received therefor from Associated Ethyl Corporation, Ltd., the amount of $225,000 on May 22, 1950.

(d) The secret process covered by the agreement of May 15,1950, between plaintiff and Associated Ethyl Corporation, Ltd., discloses the detailed construction and operating characteristics of an improved electrolytic cell for the production of sodium. The cell, which is a highly intricate structure both from the standpoint of construction and operation, is useful only for the production of sodium, is not sold on the open market, and plaintiff knows of no instance .where such cells have been produced for sale on the open market. On the other hand, the sodium produced by the type “F” electrolytic cell is not patented or patentable and is sold on the open market.

(e) At the time of the agreement of May 15,1950, between plaintiff and Associated Ethyl Corporation, Ltd., plaintiff had pending in the United States Patent Office, U.S. Patent Application Serial No. 89864, filed April 27, 1949, and U.S. Patent Application Serial No. 12286, filed October 8, 1949, covering those features considered to be patentable in the basic cell design, but said applications did not cover certain other highly desirable features considered unpatentable relating to both cell construction and cell operation that were, however, unique to the type “F” electrolytic cell and that were transferred by the agreement of May 15, 1950.

(f) At the time the contract dated May 15, 1950, was entered into between plaintiff and Associated Ethyl Corporation, Ltd., plaintiff held no patents in the United Kingdom covering said type “F” electrolytic cell, nor had application for patents been filed in the United Kingdom covering said type “F” electrolytic cell.

At the time of the transfer of the secret process from plaintiff to Associated Ethyl Corporation, Ltd., plaintiff had no intention of obtaining British patents on the above applications. It was the sole intent of the negotiators to transfer the then existing secret information on a lump-sum basis, and in negotiating the transfer they placed no value upon any patent rights.

9. On December 18, 1950, plaintiff entered into a similar contract with the Ethyl Corporation (of Delaware) whereby plaintiff disclosed the construction details and operating characteristics of the type “F” electrolytic cell in exchange for $400,000.00.

(g) Letters patent on U.S. Patent Application Serial No. 89864 were issued by the United States Patent Office on April 8, 1952, resulting in Patent No. 2,592,483. Letters patent on U.S. Patent Application Serial No. 12286 were issued by the United States Patent Office on December 9, 1952, resulting in Patent No. 2,621,155.

Plaintiff applied for letters patent on April 27, 1952, covering the same features as U.S. Patent Application Serial No. 89864, from Great Britain and British Patent No. 668691 ■was issued on July 9,1952. Plaintiff applied for letters patent on May 17,1952, covering the same features as U.S. Patent Application Serial No. 12286, from Great Britain and British Patent No. 675418 was issued on October 29, 1952.

(h) Patented features were in essence features relating to the function of the type “F” electrolytic cell although the unpatentable portions of the secret process, if disclosed, could be used to produce sodium without infringing such patents.

(i) Plaintiff was not in the business of selling its patents or secret processes nor were they held by plaintiff primarily for sale to its customers in the ordinary course of its trade or business.

10. Plaintiff is, and always has been, the sole and absolute owner of the claims herein asserted. It has made no transfer or assignment of said claims or any part thereof or of any interest therein.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38(c).

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due thereunder, it was ordered on August 2,1961, that judgment for plaintiff be entered for $165,145.83, with interest thereon as provided by law. 
      
       See Creed and Bangs, “Know-How” Licensing and Capital Cains, 4 Patent, Trademark and Copyright J. Research and Education 93 (1960).
     