
    390 F.2d 932
    GRINNELL CORPORATION v. THE UNITED STATES
    [No. 446-59.
    Decided February 16, 1968]
    
      
      William E. Jackson, for plaintiff. Weston Vernon, Jr., attorney of record. Stuart E. Keebler, Adlai S. Hardin, Jr., and MiTba/nk, Tweed, Hadley <& McOloy, of counsel. -
    
      Burton G. Boss, with whom was Assistant Attorney General Mitchell Bogovin, for defendant. Philip B. Miller, of counsel.
    
      Before CoweN, OMef Judge, Laramore, Burpee, Bavis, Collins, Skelton, and Nichols, Judges.
    
   Per Curiam:

This case was referred to Trial Commissioner Saul Richard Gamer with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57(a). The commissioner has done so in an opinion and report filed on January 27,1967. Exceptions to the commissioner’s findings of fact and recommended conclusion of law were filed by plaintiff and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner’s findings, opinion and recommended conclusion of law, with the omission of one footnote, it hereby adopts the same as modified as the basis for its judgment in this case. Therefore, plaintiff is not entitled to recover and the petition is dismissed.

Commissioner Gamer’s opinion as adopted by the court (i.e., omitting one footnote) is as follows:

After the payment of its 1954 and 1955 income taxes in regular course, plaintiff was, in 1957, assessed additional income taxes for such years which plaintiff paid, plus interest thereon. Plaintiff contested the assessments and, upon the rejection of its claims for refund of such additional payments, instituted suit here for their recovery in the amount of over $915,000, plus interest. The issue is whether certain amounts which plaintiff received during those years are taxable, under the Internal Revenue Code of 1954, as long-term capital gains resulting solely from the sale of capital assets, as claimed by plaintiff, or as ordinary income, as asserted by defendant.

An understanding of the true character of the monies here in issue requires a presentation of the events leading up to their payment to plaintiff.

Prior to 1904, one McElroy pioneered in developing and inventing certain electrical signaling devices which, when properly. attached to automatic sprinkler systems, would detect the flow of water therein. Such sprinkler systems, as installed in premises, are designed to provide an automatic flow of water to extinguish fires. However, with the McElroy electrical signaling devices attached to the system, the flow, usually signifying the presence of fire, would be detected by a device which would actuate a transmitter, to which it would be wired. The transmitter would then send, over leased telephone wires, electric signals to a remote central station where they would be recorded on specialized equipment. This station, operating on a 24-hour-a-day basis, would then, after properly interpreting the signal, take immediate steps to notify the firefighting authorities and the owner or occupant of the premises. These devices would also transmit signals when various defects or malfunctions in the system were indicated, such as loss of water pressure or freezing water temperatures, which would prevent the sprinkler system from functioning properly in the event of a fire.

At that time, the American District Telegraph Company (ADT) was already in the business of providing various types of electric protection services through central stations, including fire and burglar alarm services. On February 18, 1904, McElroy and ADT entered into a 50-year contract relating to the providing by ADT of the type of central station fire alarm service which his devices would make possible, such service being called “sprinkler supervisory and waterflow alarm service”. The arrangement was for McElroy to solicit throughout the United States, in his own name, subscribers for such service (such subscribers for the most part already having automatic sprinkler systems installed on their premises), and to have manufactured and to furnish and deliver to ADT, the actuating and transmitting devices. ADT would then install, maintain and operate the devices, provide the supervisory central station service, and collect the service charges from the McElroy subscribers. For these services, ADT would be entitled to retain 55 percent of the receipts from the customers. The contract contained provisions designed to prevent competition between the parties in their respective spheres of operation, and to prevent either party from contracting with anyone else for similar services. Shortly thereafter, McElroy formed the Automatic Fire Protection Company (AFP), of which he became president, and to which he transferred, with ADT’s consent, all of his interests in the ADT contract.

During this period the business of plaintiff (then called the General Fire Extinguisher Company) included manufacturing, selling and installing automatic sprinkler systems throughout the United States. It had the means to produce, or to cause to be produced, as well as to install, the McElroy actuating devices on such sprinkler systems.

There also existed at this time a company, the Automatic Fire Alarm Company (AFA), which was engaged in central office fire alarm operations in New York City, Boston, Massachusetts, Charlestown, Massachusetts, and Philadelphia, Pennsylvania (sometimes hereinafter referred to as the “four cities”).

On April 29,1907, there were simultaneously executed two agreements to which plaintiff was a party, as follows:

One agreement (hereinafter sometimes referred to as the first 1907 agreement) was between plaintiff, ADT, and Mc-Elroy’s company (AFP) and related to the supervisory fire alarm- business throughout the United States. Under this agreement plaintiff took over from AFP (after paying AFP $85,000) the responsibility of furnishing, and from ADT the responsibility of installing, the McElroy actuating devices. AFP was to continue to furnish the transmitters and to solicit the business in its own name. ADT was to perform the balance of the service, i.e., install the transmitters and all necessary wiring, provide the central station supervisory service, and collect the service charges from the customers. For its contribution and services under the contract, ADT was entitled to retain 50 percent of such service charges. Both plaintiff and AFP were to receive 25 percent each.

Plaintiff and AFP were required to maintain, repair and replace the devices they furnished but only up to a total expenditure of $5,000 each (exclusive of defects attributable to faulty material, poor workmanship or improper assembly) an amount which was reached within a few years after 1907. Thereafter ADT was required to assume such obligation. However, even though it was ADT who assumed the replacement obligation and bore all subsequent maintenance and repair costs with respect to such devices, plaintiff and AFP continued to receive their 25 percent shares of the subscriber service charges.

Plaintiff and AFP (but not ADT) had certain rights to cancel this agreement, in which event the 1904 McElroy-ADT agreement would be revived.

The other agreement (hereinafter sometimes referred to as the second 1907 agreement) was between the same three parties plus AFA and related to the supervisory fire alarm business in only the four cities in which AFA operated. Thus, it modified the first agreement with respect to the activities of the parties within such cities. The agreement in effect novated AFA, within the four cities, to the right, title and interest of AFP under the first agreement. In all other respects, it was substantially similar to the first agreement. Thus, in such cities it was AFA who sold, and made contracts with subscribers for, the supervisory service, and also supplied the transmitters, receiving 25 percent of the contract receipts, with plaintiff and ADT performing the same services as under the first agreement and receiving the same percentages of the receipts, i.e., 25 percent and 50 percent, respectively.

Both 1907 agreements, 'as did the 50-year February 18,1904 agreement, expired by their terms on February 18, 1954. The agreements were regarded by the parties as superseding the 1904 agreement. They too contained provisions whereby the parties agreed to cooperate and aid in the upbuilding and growth of their respective interests, which they considered as including agreements not to compete with each other in their respective spheres of operation as well as not to contract with anyone else for the services delineated by the agreements.

Through the years, the supervisory fire alarm service business covered by the 1907 agreements grew and contributed greatly to the stability and prosperity of the parties. Plaintiff, a leading seller of automatic sprinkler systems, was in a unique position to recommend and promote, by commissions to its employees and otherwise, the sale of ADT’s supervisory central station service. Not only would it be tbe supplier of the actuating devices, but it would also be the recipient of 25 percent of the contract revenues for as long as the subscriber took the service. The average life of a supervisory fire alarm service contract, including renewals, is approximately 20 years (the contracts were written for five-year terms). It was the income from this source, when its other lines of business (the manufacture of piping, pipe fittings and hangers, valves, and iron and brass foundry products) suffered, which substantially helped plaintiff to weather the depression. From 1907 through February 18, 1954, plaintiff realized gross receipts under the 1907 agreements of almost $28,000,000. And ADT became by far the largest company in the country in the central station protective business.

In 1918, ADT and AFP entered into a contract (to which plaintiff was not a party) whereby ADT took over AFP’s obligations under the first 1907 agreement in return for which AFP assigned to ADT (in consideration of payments by ADT of $900,000 a year for 10 years) a substantial portion of AFP’s 25 percent share of the customer receipts. From then on AFP practically dropped out of the picture so far as being an active participant in contract operations was concerned. The contract also provided that at the February 18, 1954 expiration date, each would fee entitled to one-half of all the service contracts then outstanding (as well as one-half of all the supervisory service materials then installed in the premises of subscribers).

Because of the relatively complex nature of the 1907 agreements and the interrelationships between the participants created thereby, the parties recognized the necessity of knowing well in advance of the February 18,1954 expiration dates what the situation would be thereafter. The agreements themselves did not spell out what, as the parties phrased it, their “terminal rights” would be in the event of a failure to renew. Accordingly, as early as 1945, plaintiff and ADT initiated discussions. They agreed to negotiate first with respect to the first 1907 agreement covering the entire United States (except the four cities) and then to use any agreement arrived at as a possible basis for negotiations (which would have to include AFA) with respect to the second 1907 agreement covering only the four cities.

Initially, the discussions were based on the assumption of a renewal or extension of the agreement upon which the parties’ profitable association over so many years had been based. The major obstacle during this stage of the negotiations was ADT’s insistence that plaintiff’s 25 percent revenue participation was too high. ADT felt it was disproportionate to plaintiff’s total investment in the business, which, according to ADT, consisted almost entirely of the actuating devices. ADT’s early suggestions of an appropriate participation were approximately four or five percent, which later, however, rose to 12y2 percent and finally to 15 percent. Plaintiff indicated it would be prepared to consider a renewal rate that would be lower than 25 percent, but not as low as 15 percent. In this connection, there was extended discussion as to the proper basis for determining plaintiff’s investment. Valuation theories based on “replacement cost”, “historic cost”, and a hypothetical selling price of the installed devices, were all discussed. The last method prompted ADT to suggest that it might actually consider purchasing the devices. Plaintiff construed this as in effect constituting a suggestion that the parties’ long association be terminated, with ADT being in sole possession of the business. Its reaction to the suggestion was distinctly negative. It stated that it considered itself as being in the supervisory fire alarm service business, that it was in such business to stay, and if it could not remain in it in the years beyond 1954 by reaching a renewal agreement with ADT, it would be obliged, by establishing its own central stations, to enter the business itself. It further stated, however, that it preferred instead to work out a satisfactory renewal arrangement.

This discussion, followed by others in which ADT continued to make suggestions which included ownership of the devices by ADT, and which were again interpreted by plaintiff as evidencing a desire by ADT to sever its relationship with plaintiff, inevitably led to a reappraisal of what the parties’ basic relationship was under the agreement and what their terminal rights would be if no renewal agreement could be consummated. Plaintiff contended that ADT was in error if it felt that plaintiff’s only relationship to the business was that of a vendor of materials, i.e., the actuating devices, which ADT could terminate by a simple purchase of such materials. Emphasizing the contract provision whereby the parties agreed to give each other aid “looking toward the up-building and growth of their respective interests”, plaintiff argued that, properly construed, the agreement created an arrangement in the nature of a partnership, a conclusion reinforced by the contract provision for plaintiff’s substantial participation in the gross revenues. And plaintiff asserted that it had contributed to the partnership relationship in many ways other than by simply supplying actuating devices, such as (1) its use of its strategic position as seller and installer of sprinkler systems to promote ADT’s supervisory service, (2) its taking special steps, when installing a sprinkler system, to coordinate the installation with the type necessary for satisfactory supervisory service, (3) its continuing research and development program for improved actuating devices, which enabled ADT to give better supervisory service, and (4) its strict observance of its obligation not to compete with ADT in the supervisory fire alarm business. Plaintiff did state, however, that if ADT decided that, upon the expiration of the 1907 agreements, it no longer desired plaintiff as a partner, plaintiff would consider selling to ADT all of the installed actuating devices outside of the four cities provided, however, and consistent with plaintiff’s determination to remain in the business at least to some extent, ADT would sell to plaintiff ADT’s entire central station business within such cities (which included electric protection service other than fire alarm service, such as burglary). On this basis, plaintiff was willing to agree, for a specified period, not to compete with ADT outside the four cities. However, ADT rejected this proposal, whereupon plaintiff, again on the supposition that ADT wished to terminate their relationship, further proposed to sell to ADT the installed devices outside the four cities if ADT would sell its equipment within the four cities which related only to the supervisory fire alarm business. Since plaintiff’s income on this basis would be more restricted, plaintiff refused, under this proposal, to continue to observe any noncompetition arrangement with ADT. This proposal too was rejected by ADT.

ADT then assured that plaintiff was misconstruing its position, that it was not unmindful of the various contributions, both tangible and intangible, that plaintiff had made to the overall welfare of the business, and that it was not contending, nor was its suggestions for the purchase of the actuating devices properly to be construed as a contention, that such physical devices constituted plaintiff’s sole contribution to the business (although ADT insisted that its own contributions to the welfare of the business, both tangible and intangible, and which, as did plaintiff’s, went beyond the letter of the 1907 agreements, were at least equal to plaintiff’s). ADT then suggested a 20-year extension of the agreement with plaintiff to participate on some basis which would be less than 25 percent but which would nevertheless reflect recognition of plaintiff’s intangible contributions. It again suggested, however, that at the end of the 20 years, ownership of the installed devices should be transferred to ADT.

The early discussions to the effect that the division of the contract revenues should bear some relationship to the amount of the parties’ financial investment in the business envisioned a determination, upon some appropriate basis, of the amount of plaintiff’s investment, and it was at that time tentatively agreed that representatives of both companies would cooperate in the computation thereof, the basic figures for which would necessarily have to come from plaintiff’s books and records. However, this plan was now frustrated by plaintiff’s refusal to open its books for the inspection of the ADT representatives. Plaintiff concluded there was no reason for it to permit ADT to inspect its books until ADT first definitely concluded whether it wanted to continue their, as characterized by plaintiff, “partnership” association, and throughout the lengthy negotiations ADT was never successful in obtaining from plaintiff the necessary book figures.

However, ADT did, on the basis of its own knowledge and experience, attempt to estimate such figures, and used such compilation in further negotiation sessions. These figures, among other things, deducted from plaintiff’s estimated total investment in the actuating devices the value (approximately $535,000) of the ADT devices which, under the 1907 agreement, ADT was committed to replace after plaintiff’s original $5,000 obligation had been met. Recognizing the difficulties, however, in determining exactly which devices, out of a total of approximately 120,000, belonged to ADT and which to plaintiff (it was felt it would take a lawsuit to determine this question) and to avoid in the future, when negotiations might possibly again take place at the expiration of such renewal agreement as the parties would possibly work out, any similar problems arising out of the dual ownership of the devices, it was agreed that plaintiff should, as the installer of all the devices (including those for ADT’s account), similarly own them all and also be responsible for all of the maintenance and repair work.

Thus, in June 1950, and after some five years of bargaining, plaintiff finally offered to enter into a contract extension of 20 years (the period which ADT had also suggested), with, however, (1) plaintiff participating in only 23^ percent of the customer receipts, (2) plaintiff purchasing the ADT replacement devices at ADT’s own valuation figure of $535,000, and (3) plaintiff thereafter assuming full responsibility for all device maintenance, repair, and placement.

Meanwhile as the negotiations proceeded, and with the question of the possibility of arriving at a renewal agreement uncertain, the parties took various steps to strengthen their positions. In 1949 plaintiff took over control of AFA, purchasing approximately 76 percent of its outstanding capital stock, thus giving it an entering wedge for direct participation in the central station business. During that same year, ADT acquired all of AFP’s remaining rights in the first 1907 agreement for $13,500,000, payable in 15 annual installments of $900,000 each, thus taking over completely AFP’s share of the contract revenues as well 'as AFP’s interests in the subscriber contracts and the installed materials. These $900,000 installments were still less than the amount of the reduced annual payments ADT had been making to AFP under the first 1907 agreement, as amended in 1913. And in April 1950, plaintiff further demonstrated its determination to remain in the central station service business by purchasing all of the outstanding common capital stock of the Holmes Electric Protective Company which, through central stations, was in the business of furnishing burglar and holdup alarm service (but not sprinkler supervisory fire alarm) in New York City, Philadelphia and Pittsburgh. This company was the largest seller of such service in the New York and Pittsburgh areas.

In 1950, after plaintiff made its 20-year renewal offer on the bases above set forth, and with an extension agreement substantially along such lines apparently in the making, a new serious obstacle arose. ADT counsel expressed doubts concerning the validity, under the antitrust laws, of any extension or renewal of the 1907 agreements. They finally concluded, for various reasons, that the agreements already in existence, as interpreted and given effect by the parties, violated such laws and that therefore any extension thereof in the form of the proposals previously discussed would necessarily also be invalid. They accordingly refused to sanction ADT’s entering into any such renewal or extension agreement.

Plaintiff’s counsel strenuously disputed the antitrust conclusions and contentions of ADT counsel. Among other things, they argued, in an elaborate written presentation, that the proposed renewal would not constitute a prohibited type of exclusive dealing arrangement because the Clayton Act spoke in terms of a sale, a contract to sell, or a lease, whereas, in their opinion, no sale of the actuating devices was involved, because, in addition to the fact that under the parties’ long-agreed-upon interpretation of the 1907 agreement plaintiff retained title to the devices, the revenues received by plaintiff could not “in the ordinary sense of the word be considered a price for any specific devices furnished”. The revenue plaintiff received, they argued, “even taken on a job-by-job basis, is never directly related to its cost of furnishing and installing the actuating devices as a normal commercial price would be.” They pointed out that such revenues were the same whether a particular installation required simple, inexpensive devices, or more expensive types (the shelf price of such devices ranged from $15 to $85). And an additional reason which they stressed as to why the revenues bore no relationship to the costs involved of furnishing and installing the devices, which, they said, would constitute the normal basis for fixing a price, was that plaintiff’s total revenue under a subscriber’s contract was dependent upon the length of time the contract would last, a matter largely outside the control of either plaintiff or ADT. For instance, if the subscriber’s contract terminated after only one year, plaintiff’s share of the revenues might well be insufficient even to defray its out-of-pocket costs in installing, removing, and reconditioning the devices. However, if the contract lasted for 15 years or longer, “Grinnell’s total revenue might be quite substantially in excess of its costs or of what would have been a commercial price for furnishing and installing the devices.” And for the same reasons they argued that, considering “the substance and not the form”, the arrangement did not constitute a lease either since again there was “no specific term” and no “specified ‘rental’ in the ordinary sense”, the “rental” bearing “no direct relationship to either the cost or value of the items ‘leased’ ”. The “true nature of the arrangement” between plaintiff and ADT, they once more concluded, was that of a “joint venture” in the nature of “a partnership or quasi-partnership”, and “not an arrangement under which Grinnell would simply be a commercial vendor to ADT of certain equipment Grinnell was prepared to manufacture and sell”. Plaintiff’s total part in the venture was, they argued, not only to furnish and install all the devices but also “to furnish a number of additional services * * * along tbe lines of research, development, design, technical advice and assistance, promotion of central office business, and general co-operation.”

However, ADT counsel remained unconvinced and adamant.

With this development, the question then arose as to what would happen on February 18, 1954, when the existing agreements would expire, the discussion centering upon the parties’ terminal rights. Plaintiff grounded its rights on its partnership or joint venture theory, contending that McElroy was the one who originally owned the entire business, with ADT being simply employed to perform certain services, and that, by the 1907 agreement, McElroy took plaintiff in as a partner, a relationship that would continue until 1954, at which time plaintiff and McElroy (AFP) would own the entire business, each entitled to a 50 percent interest, and with ADT entitled to nothing. Since plaintiff was not a party thereto, it questioned the binding nature, as to it, of ADT’s 1913 and 1949 agreements with AFP purportedly substituting ADT for AFP as plaintiff’s partner, but argued that in any event plaintiff would still have a 50 percent interest in the entire business as of February 18,1954.

ADT rejected this analysis, and the parties seemed unable to agree on their terminal rights. Finally ADT stated that since a renewal agreement could not be made, and seemingly no terminal rights agreement could be reached, it felt that discussions were in order concerning a purchase by ADT of plaintiff’s actuating devices so as to insure the continuance of customer service without interruption on February 18, 1954. ADT’s fear was that plaintiff might, on the expiration date, attempt to remove all of its actuating devices from customer premises throughout the country. Unless a huge simultaneous removal and replacement program were coordinated, an extremely complex operation, serious service disruptions would necessarily result. However, plaintiff responded that such a sale of the devices would not resolve the problem of plaintiff’s total terminal rights under the contract which, under plaintiff’s theory, amounted to 50 percent of the entire business and its assets. negotiations, in late 1950, reach an impasse.

Shortly thereafter in 1951 ADT, guarding against the possibility of plaintiff’s removal of its actuating devices on February 18, 1954 on subscribers’ contracts covered by the 1907 agreement, as well as to enable it to handle the new business after such date, commenced preparations to manufacture and install its own devices.

Almost a year passed before the parties met again, and when they did, in late 1951, they found themselves still unable to agree. Plaintiff, again refusing to accept compensation for its actuating devices as a satisfaction of its contract terminal rights, reiterated its determination to remain in the supervisory fire alarm service business (admitting that its acquisitions of AFA and Holmes were directed to that end). It further stated that it proposed to stay in the business through the 1907 agreements because, it concluded, it was clearly entitled, as a contract right, to a continued 25 percent revenue participation from all subscriber contracts in force on February 18,1954 for the duration thereof, including any renewals. Those contracts, plaintiff contended, having been written prior to such termination date, would be covered by the agreement and be subject to the terms thereof.

Plaintiff’s last approach seemed to open up a new avenue of possible settlement. For one tiling, it would assure plaintiff, considering the relatively long terms of the subscribers’ contracts, continued substantial participation in contract revenues for an extended period of time. It would take approximately 20 years before all the subscribers’ contracts covered by the 1907 agreements would be closed out, a period of time equivalent to the length of the proposed extension or renewal agreements that had been discussed. In addition it was a reasonable and logical approach since it could hardly have been the intent of the authors of the 1907 agreements that, lacking a renewal agreement, plaintiff would nevertheless be obligated to make substantial installation investments right up to the February 18, 1954 expiration date without ever having the opportunity of recouping at least its costs.

Shortly thereafter, at a meeting on February 19,1952, ADT suggested that the parties first attempt to compose their differences with respect to subscribers’ contracts covered by the first 1907 agreement along the lines suggested by plaintiff at the last meeting, and then later take up what the parties’ relationship, if any, would be with respect to new business written after February 18,1954. On such old business ADT agreed to continued participation by plaintiff at some agreed percentage (still insisting, however, that 25 percent was too high) but on condition that the percentage should apply throughout the term of the subscriber’s contract frozen at the scale of contract revenue in effect on February 18,1954, and regardless of any subsequent rate increases or decreases. Plaintiff indicated a willingness to consider this approach, as well as a reduction of its participation to 20 percent. Thus did it seem at last that an agreement was possible.

Before finally committing itself, however, plaintiff retained eminent outside counsel to make a detailed study of the 1907 agreements, the relationships created thereby, and the terminal rights of the parties thereunder. Such counsel concluded (1) that the relationships created were those of a partnership or joint venture, and (2) that plaintiff’s rights and obligations with respect to subscribers’ contracts covered by the agreements would not abruptly terminate on February 18,1954, but would continue as long as the service contracts did, plaintiff’s obligation being to permit its actuating devices to remain in service for such periods, but with plaintiff having the correlative right to continue to receive 25 percent of the revenues from such service contracts. However, after February 18,1954, no new service contracts could be brought under the agreements. These views coincided with those of plaintiff’s regular counsel. This solution also had practical advantages. For one thing, it solved the continued-service problems that would flow from the “abrupt-termination” theory, as well as the problem of who would own the subscribers’ contracts as of February 18,1954. Under the “continuing rights and obligations” theory, such ownership problem would become unimportant because the service contracts would continue until they expired, at which time no one would care who had owned them.

Plaintiff thus finally decided that it would be willing to compose its differences with ADT on tbe general basis of the discussions had at the February 19,1952 meeting. ADT too concluded that this was a satisfactory basis of compromise. Its strong appeal to it was its solution of the problem of continuity of service with which it was so concerned. Further, plaintiff’s rate of participation would be lower than the 25 percent to which it could well lay claim. In addition, such a settlement would give ADT complete freedom with respect to new business written after February 18,1954, and thus alleviate at least this aspect of its antitrust concerns.

With an agreement in the making, an important negotiation meeting was arranged for June 16, 1952, at which the presidents of both corporations would be present. Shortly prior thereto, the president of ADT reported to its Board of Directors, at a meeting held on June 11,1952, the agreement of ADT’s president, vice president, and counsel that, with the 1907 agreement expiring, a satisfactory method of liquidating plaintiff’s equity in the business resulting from the joint venture doctrine had to be found, that a tentative agreement, as above described, had been arrived at at the 20 percent rate and covering only the service contracts in existence on February 18, 1954, and that in their opinions, such a settlement constituted the exercise of reasonable business judgment.

Thus did the parties come together on June 16, 1952 and, after another long and hard negotiating session, finally hammer out an agreement. Plaintiff formally conceded its obligation to leave the actuating devices in place, thus definitely allaying any remaining ADT fears of abrupt removal, but also claimed the correlative right to continue to receive 25 percent of the contract revenues from service contracts in effect as of February 18, 1954. ADT protested that plaintiff had already in effect offered to take only 20 percent. It argued that based on its own estimates of plaintiff’s investment (since plaintiff had consistently refused to open its books to ADT), plaintiff’s participation should fairly not exceed 12% percent, but, in an effort to bring the lengthy negotiations to a close, it would agree to pay 15 percent of the gross receipts from contracts in service on February 18,1954, frozen at the then schedule of charges. Further ADT again raised the problem that had long ago been discussed of the unsatisfactory situation arising from the dual ownership of the actuating devices, and recalled plaintiffs tentative agreement to purchase the devices which ADT had replaced and therefore owned. Finally, plaintiff offered to split the difference between its previous offer of 20 percent and ADT’s offer of 15 percent. ADT agreed provided plaintiff would purchase the ADT replacement devices at a figure to be agreed upon (the previous agreed price of $535,000, based on 1948 figures, now being out of date), with plaintiff thereafter, at its own expense, to be responsible for all required maintenance, repair, and replacement of the devices installed on subscribers’ contracts in service on February 18, 1954. Plaintiff agreed and a mutual understanding finally resulted, solemnized by the presidents of the two companies shaking hands (the meeting thereafter consequently being referred to as the “handshake meeting”), subject, however, to approval by the ADT Board of Directors (such similar approval by plaintiff’s Board evidently not being required). The attorneys for the parties were to work out the details of the agreement.

Some three weeks later ADT’s Board of Directors met to consider the matter. The Board first studied figures ADT personnel had compiled setting forth their estimate of the reasonable worth of plaintiff’s terminal equity in the contract. Such equity was calculated at 19.6 percent of the projected gross receipts for an estimated 20 remaining years, thus justifying the 17.5 percent agreement even without the two additional favorable features, i.e., the purchase of the ADT devices and the complete assumption by plaintiff of the maintenance and replacement obligation. Thereupon, the Board authorized the execution of a satisfactory agreement embodying the three components of the agreement.

Plaintiff’s counsel then immediately commenced preparing the agreement, the forms of the early drafts reflecting the three elements agreed upon. During this period, representatives of the parties met several times to iron out various details pertaining to the formal agreement, the most important of which was the determination of the price to be paid by plaintiff for the ADT replacement devices. The price finally agreed upon was $677,061.10.

Plaintiff had always treated the 25 percent revenue participation receipts under the 1907 agreements as ordinary income. However, during the drafting of the formal agreement, plaintiff’s counsel concluded that if that part of the agreement relating to the revenue participation payments were to be cast in the form of a conditional sale of the actuating devices by plaintiff to ADT (including those contemporaneously being sold by ADT to plaintiff), with the 17*4 percent receipts being considered as purchase price installment payments, such receipts would be entitled to capital gains treatment as for a sale of capital assets. Plaintiff was not concerned with title to the devices passing to ADT when the subscribers’ contracts would in due course expire. After 20 years, the average life of such contracts, the devices would have only minimal residual value any way. Plaintiff’s counsel thereupon inquired of ADT whether it would be willing to have that part of the agreement cast in such form. ADT responded that it would have no objection to the agreement’s being drawn in a form favorable to plaintiff from a tax standpoint provided its own tax position would not be prejudiced. The 25 percent revenue participation payments to plaintiff had long been established as a deductible business expense to ADT. ADT’s concern was whether the 17% percent payments, if cast in the form of installment payments on account of a conditional purchase of capital assets, would similarly be fully deductible as a depreciation allowance. It deferred committing itself until its tax counsel could examine the problem.

After consideration, ADT counsel stated that, in their opinion, full payment deductibility by ADT would be less of a problem if the transaction were cast in the form of a lease of the devices, with the 17% percent payments being considered as rental payments. Counsel felt, however, that a sale form presented more serious problems because of the fact that the payments were to continue for an indeterminate period. Counsel concluded they could not advise ADT to accept the sale form unless ADT received a satisfactory ruling from the Treasury Department.

Plaintiff’s counsel then suggested that the part of the agreement relating to the 17% percent payments be drawn in both sale and lease forms, the sale form to be executed if both plaintiff and ADT received favorable Treasury rulings, and the lease form to be executed if they did not. This procedure was agreed to and on December 29, 1952, the parties entered into a letter agreement providing for the purchase by plaintiff of the ADT replacement devices for $677,061.10, for plaintiff’s taking over the obligation of making any further replacements, and for the later execution, after obtaining Treasury rulings, of a contract in either of two annexed forms, one being for the lease (amiexed as Exhibit B) and the other for the sale (annexed as Exhibit C) by plaintiff of the devices. Both forms were substantially similar, providing, after February 18, 1954, for payments to plaintiff of 17% percent of the basic annual service charges in effect on such dates until the discontinuance of the service. The only basic difference was that plaintiff, under the lease form, and ADT, under the conditional sale form, had the duty to remove and the right to salvage the devices at the expiration of the service contracts.

About seven months later, i.e., on July 28,1953, plaintiff, by the purchase of a large block of ADT stock, became the majority and controlling stockholder of ADT.

On December 24, 1953, plaintiff, ADT, and AFA entered into agreements concerning the second 1907 agreement which were substantially the same as that of December 29,1952 between plaintiff and ADT relating to the first 1907 agreement (with plaintiff paying ADT $203,877.06 for the ADT replacement devices located in the four cities).

Although as of February 18, 1954, no Treasury rulings had as yet been sought, payments in the reduced amount of 17% percent began being made to plaintiff under interim agreements. On May 29, 1954, ADT, submitting both forms of lease and sale contracts, finally applied for the ruling. Plaintiff decided not to seek any such rulings. In October 1954, ADT received a ruling to the effect that it could deduct the full amount of the payments regardless of which form of contract was executed, and on December 2 and 15, 1954 plaintiff and ADT, on the first date, and plaintiff, ADT, and AFA, on the second, executed the conditional sale form of agreements (referred to as “the 1954 agreements”), both made effective retroactively to February 18, 1954.

From and after February 18, 1954, the relations of the parties have been governed by the terms of the 1954 agreements, plaintiff receiving 1714 percent on all subscribers’ contracts in existence on such date, and assuming the maintenance and replacement obligation. Upon expiration or discontinuance of service under a subscriber’s contract, ADT and AFA have, as owners, been removing and retaining the actuating devices.

Plaintiff has received no revenue participation payments with respect to new supervisory service contracts entered into by ADT or AFA after February 18,1954 (although plaintiff, as majority and controlling stockholder of both companies has, of course, generally profited from such business).

It is the 17% percent receipts under the 1954 agreements for only two years, i.e., over $1,155,500 during 1954 and $1,455,000 during 1955, which are at issue in this case, plaintiff contending they constitute bona fide installment payments on account of valid contracts for the conditional sale of the actuating devices to which it is entitled (as to those devices held longer than six months) long-term capital gains treatment, and defendant contending essentially that in reality the payments constitute nothing more than a continuation of the same type of contract income, although in a reduced amount, which plaintiff had always consistently and correctly treated as ordinary income for tax purposes.

In a case such as this, where the true substance of the transaction is sought, despite the “sale” form in which it was cast, the answer is necessarily to be found in the preceding events indicating the motivating factors and the basic business and economic considerations upon which the ultimate agreement was grounded. Here, as was true in Commissioner v. Court Holding Co., 324 U.S. 331 (1945), where the question involved was by which of two parties a sale was actually made despite the formal terms of the sales contract, “ * * * the transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant.” (at 334.)

In this light, a consideration of the entire significant background of the 1954 agreements, as hereinabove detailed, requires the conclusion that the 17% percent payments do not, as plaintiff contends, solely constitute consideration for a sale of plaintiff’s ’actuating devices. That was not at all the purpose which such revenue participation payments were intended by the parties to serve. Instead, those payments were agreed to in recognition of plaintiff’s right to continue to receive a share of the receipts from all subscriber contracts written prior to, and therefore subject to the terms of, the 1907 agreements. Plaintiff’s share of the income from such subscriber contracts had always been treated by it, and obviously correctly so, as ordinary income. Its continued receipt of such income, even though in a smaller percentage (Cf. Hort v. Commissioner, 313 U.S. 28 (1941)), must necessarily also fall in the same category.

That the 17% percent payments were in actuality only a continuation, as a conceded contract right, of the sharing of the revenues from subscribers’ contracts, and not consideration for the sale of actuating devices, is made plain by the final bargain that was struck after the frustrated earlier negotiations. The long years of negotiations concerning a renewal agreement that would cover, as did the 1907 agreements, all supervisory fire alarm business written came to naught. But ADT’s decision not to become a party to such an all-embracing renewal agreement could not negate the fact that the parties had vested interests in the old contract. After contending that it would, as of the February 18,1954 termination date, own 50 percent of the business covered by such contract plaintiff, commencing with the meeting on November 14,1951, claimed (consistent with its partnership theory) a contract right to continued entitlement to 25 percent revenue participation from all subscribers’ contracts in force on such expiration date on the grounds that such subscribers’ contracts, written prior to the expiration date, would, until they expired, be subject to the terms of the 1907 agreement. This would necessarily also mean, of course, that plaintiff would be obliged to leave its actuating devices in place until service to the subscriber expired. This was a rational interpretation and obviously commended itself to ADT, for it itself advanced such approach at the next meeting of February 19,1952, provided plaintiff’s percentage participation would be lowered, as ADT had consistently argued it should be, and also provided that the percentage apply to the particular subscriber’s contract throughout its life at the revenue scale in effect thereon on February 18,1954. Plaintiff appeared amenable to this suggestion, indicating a willingness to lower its percentage participation to 20 percent. And at the final handshake meeting of June 11, 1952, after formally conceding its obligation to permit the actuating devices to remain in place on contracts in force on February 18,1954, but reaffirming its continuing right also to share in such contract revenues, the final agreement was consummated at 17% percent applied to frozen revenue scales, on further condition, however, that plaintiff purchase the ADT replacement devices and thereafter assume the entire maintenance and replacement obligations.

These were the three important and controlling negotiation sessions out of which the final agreement evolved and was consummated. Not a word was said during those sessions about a sale of any devices to ADT. Plainly, the essence of the agreement, which constituted a closing out of the old agreement, was a continuation, at a reduced rate, of plaintiff’s participation in the revenues flowing from the subscribers’ contracts covered by the 1907 agreement until such contracts all expired (an estimated 20 years). Those revenues clearly constituted a flow of ordinary income to plaintiff, as they always had. It was plaintiff itself who had consistently insisted that a sale of the devices alone would not serve to satisfy its terminal contract rights. Thus its position necessarily was that no sales price that would reasonably reflect the value of the installed devices as property would compensate for what it felt it was entitled to as a partner and as a matter of contract right.

Plaintiff argues that regardless of the agreements formulated at the handshake meeting, the parties thereafter, in further bargaining sessions, decided on a sale of the actuating devices, the consideration to consist of the already agreed upon 17% percent revenue participation, all as set forth in the 1954 agreements. The contention must be rejected. The further bargaining sessions were not designed to change the basic substance of the agreement formulated at the handshake meeting. They were held to work out the details of effectuating it. The principal open matter to be settled was the price plaintiff was to pay for the ADT replacement actuating devices. The proof is clear that the sole motivating factor in casting the agreement in the “sale” form was the long-term capital gain tax benefit plaintiff could claim as for a sale of capital assets.

When the decision to frame the agreement as a conditional sale was reached, such a transaction had no substantial business significance to the parties. It was essentially meaningless. It is true that during the early stages of the negotiations ADT had offered to purchase ifche actuating devices. But such offers were made, first, in connection with an apparent desire to effectuate an immediate termination of the parties’ relationship, and later, in addition, to prevent an abrupt termination of service on February 18, 1954. However, neither consideration played any part in the formulation of the final agreement. As to the first, plaintiff, after flatly rejecting ADT’s suggested purchase offer, made perfectly plain that it was not to be eliminated from the business by a straight sale of all its installed devices, and that its contribution to the business went beyond being a mere supplier and installer of materials. And the second consideration was of no concern whatsoever to ADT after plaintiff conceded that, under a proper contract interpretation, plaintiff would 'be obligated to leave the devices in place as long as the subscriber was, under his contract, entitled to central station service.

It is not that a bona fide sale of installed actuating devices was not capable of being made. Indeed, plaintiff did, for a fixed sum, purchase the ADT installed devices. It is simply that in view of the nature, purpose, and effect of the agreements arrived at at the handshake meeting, a subsequent conditional sale of the devices by plaintiff to ADT served no substantial business purpose. As long as the devices remained in place until service at the subscriber’s premises terminated in due course, who had title to the devices was quite unimportant. At the end of the 20-year average life of a subscriber’s contract, the salvage value of the devices, considering removal and rehabilitation costs, was minimal. Just as the solution the parties arrived at at the handshake meeting made the whole problem of who would own the service contracts as of February 18, 1954 unimportant because, if such contract continued until it expired, no one would then care who had owned it, so was the question of who would own the devices at the expiration dates of the subscribers’ contracts quite unimportant, for the devices would then have only minimal value anyway. Strong proof of the validity of this analysis is that when ADT decided to go along with plaintiff’s desire to have the agreement take the form of a sale, no additional compensation of any kind was made for its conditional “purchase” of the devices.

Further, it is difficult indeed to fit this transaction into the mold of a “sale”. Unlike the normal sale of tangible, physical property, there was here no price fixed for the property such as is usually the situation. That such a price for this particular kind of property could be fixed is plain, for the parties did in fact do so when, as a part of this very transaction, plaintiff purchased the ADT replacement devices at fixed prices. However, the “price” here involved was, instead, indefinite, and depended wholly on how long the subscriber’s contract would last. No better argument could be made in this connection than was made by plaintiff’s then counsel himself when, in addressing himself to the question of the applicability of the sale and lease provisions of the Clayton Act to the parties’ relationship under the 1907 agreements, he concluded that there was no sale because what plaintiff received could not be considered as a “price” for the devices, the revenues bearing no relationship to the cost of furnishing and installing the devices “as a normal commercial price would be.” The 25 percent revenue participation, he said, was in consideration of the many services plaintiff performed under the 1907 agreements, as well as the noncompetitive and mutual cooperation covenants it had observed. Tins part of his analysis was unquestionably sound. As was recently reiterated in Commissioner v. Brown, 380 U.S. 563, 571 (1965), “ A sale, in the ordinary sense of the word, is a transfer of property for a fixed price in money or its equivalent’, Iowa v. McFarland,, 110 U.S. 471, 478; * * And the same analysis by counsel would necessarily apply to the 1954 agreements, since the 1714 percent participation under these agreements only constituted, as stated, continued payments in consideration of plaintiff’s having performed and continuing to perform such services, for the 1954 agreements were concerned only with subscribers’ contracts covered by the 1907 agreements and upon which it was conceded that plaintiff had earned, under such 1907 agreements, the right to continued revenue participation. The test ADT applied to the reasonableness of the 17!/2 percent payments to plaintiff had nothing to do with a sales “price” of actuating devices. It was, instead, a valuation of plaintiff’s terminal equity in the contract, based on the partnership theory and plaintiff’s right thereunder to 50 percent of the total of the gross contract revenues over a 20-year period (the estimated length of the 1954 agreements). From such figures was derived plaintiff’s estimated net annual income, which was then capitalized at 10 percent. Thus, as the parties reasonably construed their rights and obligations during the closing out process of the 1907 agreements, ADT was entitled to the continued dedication of plaintiff’s actuating devices to the subscribers’ contracts, and plaintiff was entitled to continued revenue participation, until such contracts expired. Since future title to the devices, a question which plaintiff now treats as one of first importance, was thus in fact wholly unimportant in a determination of such terminal rights issue, there was no necessity whatsoever for any sale of plaintiff’s devices.

Plaintiff points out that to constitute a valid sale in law it is not necessary to have a fixed price. Instead, it argues that prices may validly be indeterminate and measured by a fixed percentage of gross receipts over periods indefinite in time, that a conditional sale of property so fashioned would be valid under state law, and that such transactions have been held to qualify as long-term sales of capital assets under the Federal income tax laws. The indeterminate price or consideration cases are for the most part those involving unlimited use of intangible property, such as patents, United States v. Dresser Industries, Inc., 324 F. 2d 56 (5th Cir. 1963); Merck & Co. v. Smith, 261 F. 2d 162 (3d Cir. 1958); Dairy Queen of Oklahoma, Inc. v. Commissioner, 250 F. 2d 503 (10th Cir. 1957); Commissioner v. Hoplcinson, 126 F. 2d 406 (2d Cir. 1942); Coplan, 28 T.C. 1189 (1957); Rose Marie Reid, 26 T.C. 622 (1956); Myers, 6 T.C. 258 (1946) ; copyrights and literary compositions, Stern v. United States, 164 F. Supp. 847 (E.D. La. 1958), afd 262 F. 2d 957 (5th Cir. 1959), cert. denied, 359 U.S. 969; trade names, Rose Marie Reid, supra; and various situations involving stock sales, Burnet v. Logan, 283 U.S. 404 (1931); Tuttle v. United States, 122 Ct. Cl. 1, 101 F. Supp. 532 (1951); Haynes v. United States, 100 Ct. Cl. 43, 50 F. Supp. 238 (1943); Marshall, 20 T.C. 979 (1953); Nicholson, 3 T.C. 596 (1944). It is often difficult to determine the value of intangible property, and what, therefore, a fair price would be. It is also true that, when there is a bona fide sale, the mere fact that the purchase price may be payable in installments over a period of time does not necessarily serve to defeat the right to capital gains treatment, Commissioner v. Brown, supra (the price of the stock involved here, however, being fixed, not indeterminate). And such installment payment technique may well serve to eliminate the “bunching” of the fruits of a capital gain in the year of the sale of the capital asset. Commissioner v. Ferrer, 304 F. 2d 125 (2d Cir. 1962).

However, such factors are only helpful as guidelines to the determination of the basic question in the individual case of whether, for Federal income tax purposes, there was in actuality a bona fide sale of true economic or valid business significance. Whether a “sale” transaction constitutes a valid transfer of property interests under state or ordinary commercial law is certainly relevant, Commissioner v. Brown, supra, but it is far from determinative of the question of how such interests are to be taxed under the Federal income tax laws. Watson v. Commissioner, 345 U.S. 544 (1953) ; Burnet v. Harmel, 287 U.S. 103 (1932). Technical property concepts are not controlling in matters of taxation, Commissioner v. P. G. Lake, Inc., 356 U.S. 260 (1958); Wilkinson v. United States, 157 Ct. Cl. 847, 304 F. 2d 469 (1962); Arnfeld v. United States, 143 Ct. Cl. 277, 163 F. Supp. 865 (1958), cert. denied, 359 U.S. 943 (1959). And the unusual nature of the consideration for the particular kind of property involved is also relevant in ascertaining, for income tax purposes, the true nature of the transaction. Lemon v. United States, 115 F. Supp. 573 (W.D. Va. 1953). Especially would this be true here where plaintiff itself took the flat position earlier in the negotiations that no sale of the tangible property here involved could rationally be considered as having taken place principally because of the indeterminate nature of the revenue participation and the consequent lack of establishment of a true “price” in the ordinary commercial sense.

For all of the reasons set forth above, it must be concluded that, considering the basic nature, purpose, and economic incidents of the 1954 agreements involved in this case, the 17y2 percent payments thereunder were not made solely, as plaintiff claims, in consideration of a conditional sale of the actuating devices. The parties actually intended that the payments should constitute compensation for other interests, i.e., plaintiff’s terminal rights in the 1907 agreements, particularly its right to receive future income therefrom. The agreements were cast in such sale form for the sole purpose of converting the right to receive future ordinary income into a long-term capital gain, and with no other significant business or economic effect. This is not permissible. Commissioner v. P. G. Lake, Inc., sufra (consideration received for “sale” of oil payment rights was essentially only a transfer of the right to receive future income) ; Roth v. Commissioner, 321 F. 2d 607 (9th Cir. 1963) (payments for “sale” of interest in a partnership whose sole asset was the right to receive a percentage of future gross revenues, the sales “price” being substantially equivalent to such revenues, treated as ordinary income, the transfer of legal title to the partnership interest having no economic significance or value); First National Bank of Kansas City v. Commissioner, 309 F. 2d 587 (8th Cir. 1962) (gain from sale of annuity policy just prior to first payment treated as ordinary income); Commissioner v. Phillips, 275 F. 2d 33 (4th Cir. 1960) (excess of cost of endowment policy “sold” just prior to maturity taxable as ordinary income); Tunnell v. United States, 259 F. 2d 916 (3d Cir. 1958) (“sale” of interest in law partnership, consisting largely of fees already earned and which would have been taxable as ordinary income); United States v. Snow, 223 F. 2d 103 (9th. Cir. 1955), cert. denied, 350 U.S. 831 (proceeds from sale of partnership interest taxable as ordinary income to extent they represented undistributed partnership earnings) ; Wilkinson v. United States, supra (purchase of right to receive future income under a contract does not convert the income into a capital asset); Arnfeld v. United States, supra (increment realized on annuity policy by a “sale” of the contract prior to maturity treated as ordinary income). The installment “conditional sale” payments were here “merely a substitute”, Hort v. Commissioner, supra, at 31, for the revenue participation payments. “Their [the arrangements’] essence is determined not by subtleties of draftsmanship but by their total effect.” Commissioner v. P. G. Lake, Inc., supra, at 266-67. The principle that a taxpayer may reduce his taxes by all methods which the law permits “does not prevent the Government from going behind the form which the transaction tabes to ascertain its reality.” Fisher v. Commissioner, 209 F. 2d 513, 515 (6th Cir. 1954), cert. denied, 347 U.S. 1014.

Plaintiff correctly points out that the parties have in fact treated the 1954 agreements as effecting a transfer of title to the devices. When a service contract has expired in due course it is ADT, not plaintiff, who removes and, as owner, retains the device for reuse or otherwise. However, although the question as to who had title to the devices at the end of the subscriber’s contract was, as noted, considered by the parties as being of relatively little importance (the “lease” or “sale” forms were equally satisfactory, with no difference in consideration), there is no reason to invalidate the parties’ agreement in this particular respect or their apparent intent to shift such title to ADT at that time. Cf. First National Bank of Kansas City v. Commissioner, supra (that a sale is bona fide does not in itself serve to transform into capital gain what would otherwise constitute ordinary income). But, as stated, no additional consideration was paid for this title shift. If the parties felt that consideration for the shift was in some measure blended into the 17% percent, the burden is on the taxpayer to establish the value attributable to the capital assets transferred. Roth v. Commissioner, supra. Plere, the record is bare as to how much could reasonably be attributed thereto. Where part of a transaction calls for one tax treatment and another for a different kind, an allocation is required. Helvering v. Taylor, 293 U.S. 507 (1935). Lacking such allocation data, none can here be made as a basis for long-term capital gains treatment. Roth v. Commissioner supra; Commissioner v. Ferrer, supra Ditmars v. Commissioner, 302 P. 2d 481 (2d Cir. 1962). In any event, it is plaintiff’s basic contention that the entire amount of the 17y2 percent payments, allegedly being solely attributable to a sale of the devices, is entitled to capital gains treatment. As shown, the record fails to support this contention.

Defendant argues that, even conceding that there was a “sale” of the actuating devices in the sense that, at the expiration of a subscriber’s contract, legal title passed to ADT, nevertheless the I7i£ percent payments were not made solely in consideration thereof because they allegedly also represented consideration for a continued noncompetition agreement between the parties. Such an agreement, defendant contends, is necessarily to be implied as an integral part of the 1954 agreements. However, in view of the determination that the payments were in fact made in recognition of plaintiff’s right under the 1907 agreements to continue to participate in the revenues flowing from the subscribers’ contracts covered thereby until such contracts expired, it is not necessary to consider this additional contention.

In response to defendant’s contention that no sale by plaintiff of the actuating devices could in any event take place in 1954 because title to them had, as a result of the substantial payments made to plaintiff over the years, already passed to ADT and AFA during the term of the 1907 agreements, the parties have argued extensively the question of whether plaintiff retained title to the devices throughout the entire period of the 1907 agreements and whether, therefore, it had any remaining ownership interest in them to sell in 1954. This basis for the rejection of plaintiff’s claim lacks merit. No substantial support for such a passage-of-title contention can be found in the 1907 agreements, and the consistent practical interpretation of the agreements by the parties themselves over the years was otherwise. As early as 1915, ADT’s then counsel advised ADT that the devices plaintiff originally installed would belong to plaintiff throughout the entire term of the agreements (although he also concluded that the use of the devices was “devoted” to the service of the subscriber until his contract expired), and ADT conducted itself accordingly throughout. On the expiration of a service contract, it was plaintiff who, as owner, exercised control over such devices, either salvaging them or rendering them inoperable. Indeed, the transactions whereby plaintiff, for substantial fixed sums, purchased, on an immediate transfer of ownership basis, the ADT-owned replacement devices would otherwise be meaningless. The very basis for these sales was a recognition that plaintiff owned all the devices except the ADT replacement ones, and a desire by the parties to have ownership of all the devices vested in plaintiff.

In this connection, however, it is pertinent to note the lack of importance attached by the parties to the relationship between ownership of the installed devices and plaintiff’s entitlement to revenue participation because where, after plaintiff’s original replacement obligation ($5,000) was fulfilled so that further replacements were made for the account of ADT with ownership of such replacement devices being vested in ADT, plaintiff’s 25 percent revenue-participation payments nevertheless still continued undiminished. The essential reasons for vesting title to all the devices in plaintiff — outside of avoiding future arguments and possible litigation on further agreement termination dates as to exactly which of tens of thousands of devices belonged to whom — lay in practical, operational considerations concerning plaintiff’s taking over, for its own account (since it had been the actual installer of all the devices, including those installed for the accounts of ADT), the entire repair, maintenance and replacement responsibility.

For all of the reasons hereinabove set forth, the petition should be dismissed.

FINDINGS op Fact

1. Plaintiff is a Delaware corporation with its principal place of business in Providence, Khode Island. Prior to March 31, 1944, its name was General Fire Extinguisher Company.

2. Plaintiff (directly or through subsidiaries) was and is engaged in the manufacture and sale of pipe fittings, pipe hangers, valves, prefabricated piping and miscellaneous grey and malleable iron and brass foundry products. It is also engaged in the manufacture, installation and sale of automatic sprinkler systems. Certain of plaintiff’s subsidiaries were and are engaged in the so-called electric protection business, hereinafter described. In addition, during the pertinent periods herein involved, plaintiff manufactured, furnished and installed sprinkler supervisory and waterflow alarm actuating devices (hereinafter called “actuating devices”) which were installed in premises of customers of certain electric protection companies.

3. American District Telegraph Company (hereinafter called “ADT of New Jersey”) is a New Jersey corporation with its principal place of business in New York City. It is essentially a holding company whose principal assets are the stock of numerous subsidiaries which supply various types of electric protection services. On February 18,1954, ADT of New Jersey held virtually all the stock of 60 such corporations organized in the United States or Puerto Eico. ADT of New Jersey and its subsidiaries are collectively hereinafter referred to as “ADT.”

4. ADT was and is engaged in the furnishing of all types of electric protection services, including fire alarm, burglar alarm, holdup alarm, sprinkler supervisory and waterflow alarm, watchman’s supervisory services and industrial process supervision.

5. Automatic Fire Alarm Company (hereinafter called “AFA of Delaware”) is a Delaware corporation with its principal place of business in New York City. Since 1920, AFA of Delaware has held not less than 92 percent of the stock of Automatic Fire Alarm Company of New York (which, along with a subsidiary and certain other companies that later were consolidated into it, is hereinafter called “AFA”).

6. AFA was and is engaged in the electric protection business, furnishing central office fire alarm service, sprinkler supervisory and waterflow alarm service, manual fire alarm service, and other types of central office and interior fire alarm service in New York City, Boston, Massachusetts, Charlestown, Massachusetts, and Philadelphia, Pennsylvania (hereinafter called “the four cities”).

7. The sprinkler systems manufactured and sold by plaintiff, its subsidiaries, and their competitors, consist of pipes, valves, sprinkler heads, fittings and other equipment installed in premises to provide an automatic flow of water to extinguish fires.

8. Such sprinkler systems do not include equipment used for sprinkler supervisory and waterflow alarm service. They therefore do not normally transmit a fire alarm away from the premises and do not act directly to summon firefighting authorities in the event of outbreak of fire.

9. The owner or occupant of premises having a sprinkler system may contract with an electric protection company for sprinkler supervisory and waterflow alarm service (hereinafter sometimes called “supervisory fire alarm service”), such as that provided by ADT or AFA. He may so contract at the limp, a sprinkler system is installed in. the premises or at any time subsequent thereto during the life of the sprinkler system. An electric protection company furnishing such supervisory fire alarm service installs or causes to be installed devices and transmitters on or near the sprinkler system which send signals to a central station of the electric protection company, or to firefighting authorities, in the event of a fire or if the sprinkler system is not in proper operating condition. If such equipment is properly installed and operated as part of a central station sprinkler supervisory and water-flow alarm service, premiums for fire insurance protection will be reduced for the premises covered.

10. The devices and equipment used in connection with the supervisory fire alarm service operate in conjunction with but are not a part of the sprinkler systems. Sprinkler systems, if in proper working order, will operate automatically without supervisory service but will not transmit signals outside to a remote central station or to firefighting authorities. The devices and equipment can be removed from the sprinkler systems and generally are removed upon discontinuance of the supervisory service.

11. In order to supply the supervisory fire alarm service, various items of equipment are installed in connection with the subscriber’s sprinkler system. Electric wires are installed running from such equipment to telephone company wires which transmit signals from fire alarms on the subscriber’s premises to a central station maintained by the electric protection company. Personnel at the central station, operating constantly on a 24-hour-a-day basis, upon the receipt of signals recorded on specialized equipment, interpret the signals and, where the signal indicates a fire, immediately notify the firefighting authorities and Ithe owner or occupant. They will also notify the occupant or owner if a signal indicates that the system is not in proper operating condition. The electric protection company inspects and maintains the equipment necessary for the supervisory service.

12. The equipment used by electric protection companies and installed in the premises of subscribers includes actuating devices. These devices are usable only in connection with sprinkler supervisory and waterflow alarm service. Such devices transmit an electrical signal through a signal transmitter to central stations when water flows through the sprinkler system indicating a fire, or when other conditions exist indicating that the sprinkler system is not in such condition as to function properly in the event of a fire. The transmitter sends to the central station the signal which it obtains by impulse from the actuating device.

13. The actuating devices vary in size, weight, and complexity, are designed to conform to engineering specifications, and are installed by trained technicians. Such actuating devices are made principally of metal and are of rugged construction. Although different types of actuating devices vary in respect to durability, some types lasting indefinitely, their useful life may extend to 30 or even 40 years. However, for tax depreciation purposes such life was, during the period herein involved, generally calculated at about 20 years.

14. Prior to 1907, Kobert L. McElroy and certain associates pioneered in inventing and developing electrical signaling devices to be used in connection with automatic sprinkler systems in order to provide sprinkler supervisory and water-flow alarm service. The devices, for which McElroy had applied for (and subsequently obtained) patents, would detect the flow of water in an automatic sprinkler system (a condition usually signifying the presence of fire), as well as various defects or malfunctions in the system, such as loss of water pressure or freezing water temperatures. Such equipment included actuating devices. These detecting devices would be wired to transmitters, which they would actuate when necessary, and the transmitters would then send appropriate electric signals to a remote central station.

15. On February 18,1904, McElroy entered into a contract with ADT relating to the providing by ADT of central station sprinkler supervisory and waterflow alarm service on contracts with subscribers which McElroy would obtain (hereinafter sometimes called “the 1904 agreement”). Mc-Elroy agreed to solicit, throughout the United States, at certain minimum rates, the subscribers for such service, to execute the service contracts in his own name, to have manufactured, at his cost, all the devices, and to “furnish and deliver” tlie devices to ADT, in return for 45 percent of the annual service charges collected from the subscribers. ADT was to install, operate and maintain the devices and transmitters furnished by McElroy, furnish, install and maintain the wiring necessary to connect the devices and transmitters properly with each other and with its own then existing central station equipment, provide the central station supervisory service, and collect the service charges, 55 percent of which it was entitled to retain. It was provided that ADT was to be obligated only to McElroy, and was not to be regarded as a party to the service contract with the subscriber. The term of the 1904 agreement ran until February 18,1954 (50 years), and thereafter for successive five-year periods, unless either party gave notice to terminate one year in advance. Those service contracts that ADT had secured prior to February 18, 1904, were expressly excluded from the provisions of the 1904 agreement. Under certain circumstances, ADT had the right to cancel the 1904 agreement, but service contracts executed prior to cancellation were not to be affected by such cancellation. The parties further agreed that during the life of the agreement neither party would, without the consent of the other, contract with anyone else for the performance of services similar to those covered by the agreement, that neither party would enter the other’s field of operations, and each would aid the other in building up their respective interests.

16. Prior to April 21, 1905, McElroy formed the Automatic Fire Protection Company, a corporation organized under the laws of Maine (hereinafter called “AFP”), and transferred his interests under the above 1904 agreement to such company, of which McElroy was the president. By agreement of April 21,1905, between AFP and ADT, ADT consented to the sale, assignment and transfer of McElroy’s interests in the contract to AFP, and AFP agreed to be bound by all of McElroy’s undertakings as set forth in the 1904 agreement.

17. On April 29, 1907, two agreements to which plaintiff was a party were simultaneously executed, as follows:

(a) One agreement (hereinafter for convenience sometimes referred to as the first 1907 agreement) was entered into between plaintiff, ADT and AFP, and related to the supervisory fire alarm service business throughout the United States.

Under the first 1907 agreement, plaintiff, which at that time had sufficient capability of producing, or obtaining the production of, the actuating devices, as well as the means for effecting their installation, paid AFP $85,000 and took over from ADT and AFP, respectively, the responsibility of both furnishing and installing such devices. Plaintiff was to receive from ADT 25 percent “of all the rentals or charges collected or received * * * for services where the installations shall have been made under the terms of and by the parties to this contract.” AFP was to furnish (but not install) transmitters and to solicit the business in its own name, and was also to receive 25 percent of the service charges. ADT was to install the transmitters, furnish and install the wiring, and operate the equipment and the supervisory service sold by AFP, retaining the remaining 50 percent of the service charges “as and in full compensation for the material, work, labor and services furnished and performed * * * by it.” Each of the parties also agreed to “lend to the other reasonable aid looking toward the upbuilding and growth of the respective interests of the parties.” Service contracts secured before April 29, 1907, were not brought within the provisions of the first 1907 agreement.

Under the first 1907 agreement, plaintiff and AFP were required to maintain, repair and replace, as necessary, the various devices or other apparatus each of them had supplied, but this obligation was limited to the total expenditure of $5,000 each, an amount reached within a few years after 1907. When the aggregate cost of repairs, maintenance and replacement exceeded $5,000, ADT was required to assume this obligation at its own expense, and plaintiff and AFP agreed to sell to ADT any of the required materials at cost. The $5,000 limitation did not apply to replacements or repairs necessitated by reason of defective materials, poor workmanship or improper assembly of the devices when originally furnished. Prior to 1954, ADT did not manufacture the devices and had little, if any, experience in the installation of such devices. It generally hired plaintiff to install the replacement devices for which it was responsible. However, even though the cost of a replacement was borne by ADT, plaintiff and AFP continued to receive 25 percent of the service charges ADT collected from the subscribers.

Both plaintiff and AFP had the right to cancel the first 1907 agreement under certain circumstances, in which case the 1904 agreement between ADT and AFP (as McElroy’s successor) would be revived. ADT did not have this right.

(b) The other agreement (hereinafter called the second 1907 agreement) was between plaintiff, ADT, AFP, AFA, Consolidated Fire Alarm Company of New York, and Boston Automatic Fire Alarm Company of Maine (hereinafter called the “second 1907 agreement”). (The interests of the last two companies enumerated were acquired by AFA by consolidation on October 1,1948, and the term AFA will hereinafter also refer to such companies where appropriate to describe the activities of the parties under the second 1907 agreement.) While the first 1907 agreement related to the activities of the parties in connection with supervisory fire alarm service supplied by ADT throughout the United States, the second 1907 agreement related to such service supplied by ADT and AFA in the aforementioned four cities of Boston and Charlestown, Massachusetts, New York City, and Philadelphia, Pennsylvania, and modified the first 1907 agreement with respect to the activities of the parties within such cities. The agreement in effect novated AFA to the right, title and interest of AFP under the first agreement within the four cities. Thus, in such cities AFA sold the supervisory service, made the contracts with the subscribers, and supplied the transmitter devices, for all of which it received 25 percent of the contract receipts, and plaintiff and ADT performed the same functions as under the first agreement, receiving the same 25 and 50 percentages, respectively, of the receipts. Under the second 1907 agreement, ADT and AFA sometimes exchanged positions (other than selling and contracting, which remained AFA’s responsibility). The first 1907 agreement and the second 1907 agreement are sometimes referred to collectively as the 1907 agreements.

(c) The 1907 agreements by their terms were to terminate on February 18,1984, as did the 1904 agreement. The agreements were regarded by the parties as superseding the 1904 agreement.

18. The McElroy-patented actuating devices furnished and installed by plaintiff under the 1907 agreements were manufactured in accordance with plaintiff’s specifications by a third party from 1907 to 1913, and thereafter by plaintiff.

19. In 1913, ADT and AFP entered into a contract pursuant to which ADT assumed all of the duties and obligations of AFP under the first 1907 agreement, in return for which AFP, in consideration of payments by ADT of $900,000 a year for 10 years, agreed to assign to ADT a substantial portion of the 25 percent of the service charges which AFP otherwise would have been entitled to receive. ADT and AFP further agreed that each would be entitled to one-half of the service contracts and one-half of all the property then installed in the premises of subscribers when the 1907 agreement terminated on February 18, 1954. Plaintiff was not a party to this agreement.

20. In 1949, ADT acquired all of AFP’s remaining rights in the sprinkler supervisory and waterflow alarm service business for a cash price of $13,500,000, payable in fifteen annual installments of $900,000 each. These annual installments were less than the annual payments ADT was then making to AFP under the first 1907 agreement, as amended in 1913. In the acquisition of AFP, as in numerous other cases where ADT acquired the property of other companies for fixed purchase prices, no attempt was made to count the number or otherwise determine the exact quantity of the various items of tangible property involved.

21. Plaintiff was not a party named in any of the service contracts and none of the subscribers ever made payments directly to plaintiff. All payments to plaintiff pursuant to the 1907 agreements were made by ADT or AFA subsequent to the billing by ADT or AFA of their subscribers. Plaintiff received a copy of every service contract and kept a complete record with respect to each service contract showing the number and type of devices to be furnished by plaintiff, and the amount of labor and transportation involved in making the installation. The service contract between ADT and the subscriber recited that title to all the installed materials was in ADT but this was not intended by ADT or plaintiff as determining, as between ADT and plaintiff, any property rights in the devices or materials installed in a subscriber’s premises.

22. Pursuant to the 1907 agreements, plaintiff furnished and installed the actuating devices and received 25 percent of the service charges (including all increases and decreases in service charges). Plaintiff received such payments so long as the subscriber continued to receive supervisory service at the premises in which plaintiff installed its actuating devices, i.e., as long as the contract, or a renewal thereof, between the subscriber and ADT or AFA remained in force. Such payments were not reduced on account of replacements of installed actuating devices by ADT or AFA. Plaintiff reported all of these amounts on its pertinent tax returns as ordinary income.

23. In accordance with the first 1907 agreement, ADT (or its predecessor in interest, i.e., AFP up to 1913) sold the supervisory service, made contracts with subscribers, supplied and installed the transmission boxes, connected all the installed equipment to its central stations by leased telephone wires, operated the central stations, supplied day-to-day service and inspection, and billed and collected the service charges for subscribers.

24. In accordance with the second 1907 agreement, which related only to the four cities, AFA sold the supervisory service, made contracts with subscribers, and supplied the transmission boxes. ADT supplied the interior wiring and the wire connections to ADT’s central stations, supplied central station service, and did the billing and collection of charges from subscribers.

25. Although, as hereinabove set forth, ADT, in certain instances governed by the second 1907 agreement, performed the activities (other than selling and contracting) otherwise carried on by AFA and vice versa, nevertheless, notwithstanding such exchange of functions by ADT and AFA, plaintiff furnished and installed the actuating devices.

26. When a service contract expired without renewal, each of the parties assumed the responsibility for the removal of the materials it had installed so that the subscribers or competitors would not be able to use them without paying for them. Where the materials (such as wiring) could not be removed, they were made as unserviceable as possible. In the case of a reduction of ADT’s or AFA’s service to a subscriber, plaintiff removed the actuating devices which were not necessary for the reduced service or rendered them unserviceable. Some actuating devices could be salvaged and reused, and during the term of the 1907 agreements plaintiff did reuse 21.6 percent of them. However, the cost of removing and salvaging these devices, which cost approximately $15 to $85 each to manufacture, for the most part approximated their salvage value. Generally, their salvage value was minimal.' ADT did not knowingly permit plaintiff to furnish it with anything but new devices and the devices usually bore the initials “ADT”, making it virtually impossible to sell them to anyone else after salvaging them. Both ADT and, prior to 1932, plaintiff claimed depreciation deductions without allowing for any salvage value and neither ADT nor plaintiff attributed any salvage value to the devices in excess of the cost of removing and salvaging them. Since 1932, plaintiff has deducted in full from ordinary income its annual expenses in the discharge of its obligation under the 1907 agreements.

27. The parties to the 1907 agreements treated and interpreted the provisions thereof to lend each other aid looking toward the upbuilding and growth of their respective interests, as embracing agreements not to compete with each other by entering the others’ fields of operations, as well as agreements not to contract with anyone else for the performance of services similar to those delineated in the agreements, as the 1904 agreement specifically provided, and which agreement was considered to be superseded by the 1907 agreements. The two agreements were considered as delineating the geographical areas in which ADT, AFA, and AFP would operate. Plaintiff supplied all the actuating devices for use in subscribers’ premises throughout the United States, whether the devices were for plaintiff’s or the other parties’ accounts. Plaintiff did not enter the supervisory fire alarm business, nor did ADT, AFA, or AFP enter the actuating device manufacturing business or purchase such devices from anyone except plaintiff. Plaintiff did not sell actuating devices to anyone except the contracting parties. In connection with its nationwide business of installing sprinkler systems, plaintiff would, by recommendation, promote the supervisory fire alarm services of the other parties to the 1907 agreements. Plaintiff encouraged its employees, through the payment of commissions and otherwise, to promote such supervisory service. It itself would benefit thereby not only because the actuating devices required for such services would be those which it furnished but, more importantly, it would receive 25 percent of the revenues produced from the subscribers’ contracts.

28. Due at least in part to the 1907 contractual arrangements and the parties’ conduct thereunder, the parties over the years greatly prospered. ADT became the largest company in the country in the central station protective business controlling around 80 percent of the supervisory fire alarm service business. From 1907 through February 18, 1954, plaintiff realized gross receipts under the 1907 agreements of almost $28,000,000. Plaintiff considered such receipts an important part of its total business. For instance, its 1950 Annual Report to its stockholders stated: “Since 1907 our Company has been interested in the business of furnishing central station fire alarm and sprinkler supervisory service and it was income from this source which substantially helped the Company in weathering the last depression * *

29. On April 14,1915, ADT was advised by its counsel that plaintiff retained title to the actuating devices which plaintiff had furnished and installed under the 1907 agreements although the use of the devices was devoted to the service of the subscriber until the expiration of the subscriber’s contract. He also advised that, upon termination of the service contracts, “each party may reclaim its own contributions to the materials” installed.

30. During the term of the 1907 agreements, ADT and AFA considered that the actuating devices furnished and installed by plaintiff, as well as those replaced by plaintiff for its own account under the $5,000 replacement obligation, remained plaintiff’s property. When a subscriber canceled its service, ADT or ANA advised plaintiff to remove its devices from the premises. Similarly, the parties recognized that the actuating devices paid for by ADT and installed during the term of the 1907 agreements in replacement of devices furnished and installed by plaintiff were the property of ADT.

31. In 1945, recognizing that the 1907 agreements would terminate by their terms on February 18, 1954, and that it would be necessary for the parties to know well in advance what the situation then would be, representatives of plaintiff and ADT commenced negotiations with regard to the arrangement, if any, which was to exist between them after February 18,1954. It was agreed to negotiate first with respect to the nationwide first 1907 agreement, and then to use any settlement arrived at thereon as a possible basis for negotiating with respect to the second 1907 agreement relating to the four cities.

32. (a) The initial negotiations were directed toward a renewal of the 1907 agreements, with renewal terms of 10 to 20 years being discussed. The principal difficulty was ADT’s insistence that plaintiff’s 25 percent participation in the revenues from subscribers’ contracts was, considering what it believed was plaintiff’s investment in the business, far too high. ADT made initial suggestions of approximately 4 or 5 percent, with later suggestions going to 12y2 percent and even as high as 15 percent. All of ADT’s suggestions were, however, considerably below the then 25 percent rate. Plaintiff indicated it would be prepared to consider some rate below 25 percent, but insisted that ADT’s top 15 percent suggestion was too low.

Discussion was then had concerning a proper basis for calculating plaintiff’s investment upon which, limited to this factor, a fair return could be computed, including whether 'the calculation should be on a replacement or historic cost basis and what, as a basis for such valuation, a hypothetical selling price of all the actuating devices installed by plaintiff would be. A suggestion by ADT that it might consider actually buying plaintiff’s devices, thus in effect terminating the parties’ long-time association and plaintiff’s participation in revenues from subscribers’ contracts, was not favorably received by plaintiff. Plaintiff stated that it had no intention of withdrawing from the supervisory Are alarm service business and if no agreement could be reached with ADT covering the years beyond 1954 whereby plaintiff maintained its share of the business, plaintiff would be prepared to go into the central station business itself, although it did prefer instead to work out a satisfactory renewal arrangement with ADT.

It was agreed that representatives of the parties would collaborate on a proper basis upon which to calculate plaintiff’s investment. The basic figures for such calculation would necessarily have to come from plaintiff’s books and records.

(b) In the meantime, plaintiff argued that ADT was acting as though the only contribution plaintiff had made to the supervisory fire alarm service business was the actuating devices, as if plaintiff were simply a vendor of materials, whereas plaintiff felt that, under a proper interpretation of the 1907 agreements, the arrangement created between the parties was in the nature of a partnership. Plaintiff concluded that the contract provision concerning the parties agreeing to give each other aid “looking toward the upbuild-ing and growth of the respective interests of the parties”, plus plaintiff’s substantial participation in the gross revenues, resulted in a partnership-like arrangement, to which plaintiff contributed in many ways, including (1) its promotion of ADT’s services, for which it was peculiarly qualified because of its nationwide business of installing sprinkler systems, (2) its coordination of sprinkler system installations with installations necessary for satisfactory supervisory fire alarm service, (3) its research and development program for improved devices, which greatly benefited ADT in that it enabled ADT to give better supervisory service, and (4) strict observance of what it believed was its obligation not to compete with ADT in operating central stations. If the future arrangement, plaintiff argued, would continue as a partnership, then the sole question was what would be a fair distribution of the partnership profits, which fairly should bear a relationship to the amounts of investment made by the partners. However, plaintiff concluded that ADT apparently wanted to terminate the partnership either on February 18, 1954, or at some future date, since all of its recent suggestions had been based on ultimate ownership by ADT of the actuating devices, with ADT thus owning the total investment. Plaintiff rejected as unreasonable ADT’s proposals based on a small revenue participation by plaintiff with the devices ultimately belonging to ADT, but with plaintiff continuing to help ADT, as in the past, by promoting the sales of ADT’s supervisory service and agreeing not to compete with it.

Plaintiff further proposed, however, that if ADT no longer desired plaintiff as a partner after the 1907 agreements expired, plaintiff would consider selling ADT all the actuating devices it owned outside the four cities, if ADT would sell to plaintiff ADT’s entire central station electric protection service business within the four cities. On this basis, plaintiff would agree not to compete with ADT for a specified period. However, ADT rejected this proposal. Plaintiff then made another proposal (on the assumption ADT wished to dissolve the partnership), i.e., to sell its actuating devices installed pursuant to the first 1907 agreement if ADT would sell its equipment in the four cities relating only to the AFA supervisory fire alarm contracts. Since plaintiff’s central station service income on this basis would be more limited, plaintiff stated that, if this plan were adopted, it would not agree to continue to observe its noncompetition arrangement with ADT. However, this sale offer too was rejected by ADT. ADT denied that it was, as plaintiff charged, unmindful of plaintiff’s various intangible contributions to the entire business and also denied that its previous proposal simply amounted to an offer to purchase the actuating devices outright on an installment basis over a period of time, as if such physical devices were plaintiff’s sole contribution to the business. It stated it recognized the intangible contributions that plaintiff had made, but contended that ADT’s contributions, both tangible and intangible, to the welfare of the business, which also went beyond the letter of the 1907 agreements, were fully equal to plaintiff’s. It suggested a 20-year extension of the agreement, at the end of which time ownership of the installed devices would be transferred to ADT. This suggestion, ADT felt, would serve to overcome plaintiff’s apparent reluctance to transfer ownership of the installed devices after only a short-term extension of the agreement.

(c) ADT was not successful in obtaining from plaintiff the necessary figures to calculate plaintiff’s investment in the supervisory fire alarm service business. Plaintiff concluded there was no reason to open its books to ADT until ADT first decided definitely whether it wanted to continue the so-called partnership arrangement or to end it. ADT, however, nevertheless attempted to estimate such figures on the basis of its own knowledge and experience, and submitted such figures to plaintiff. In connection with valuing the actuating devices, ADT deducted from such overall value an amount (almost $535,000) which it calculated represented the value of devices originally installed by plaintiff and subsequently replaced by ADT, thus reducing plaintiff’s investment by such amount. Plaintiff felt, however, that if the parties failed to agree upon an extension of the agreement, so that it would become necessary to ascertain which party owned which devices, ADT would have great difficulty in proving just which devices (out of a total of approximately 120,000) they had replaced and which therefore belonged to ADT. It felt that it would take nothing short of a lawsuit between the parties to determine the question. To avoid in the future such problems arising out of the split ownership of the devices, plaintiff suggested that, since it was the one who made the original installation of all the actuating devices, and should, therefore, also perform all the maintenance and repair work on them, plaintiff should, if and when an extension agreement was executed, purchase from ADT all of the ADT replacement devices. In this way, title to all the devices would thereafter be in plaintiff, with it then being responsible for all the maintenance and repair work on all the devices. Plaintiff felt such an arrangement would, in the future, and upon the expiration of such extension agreement as may be entered into, serve to avoid litigation involving ownership of the devices.

(d) In June 1950, plaintiff indicated its willingness to enter into a contract extension of 20 years with, plaintiff participating on the basis of 23% percent of the gross receipts and with plaintiff, upon the execution of the extension agreement, paying to ADT the figure of approximately $535,000, for the ADT replacement devices (constituting ADT’s own estimate of the value of its replacement devices), plaintiff thereafter assuming responsibility for the maintenance and repair of all the actuating devices.

33. (a) During 1949, while the negotiations with ADT were proceeding, plaintiff purchased approximately 76 percent of the outstanding capital stock of AFA.

(b) Also, during that year, ADT purchased, for $13,500,-000, all of AFP’s remaining rights under the 1907 agreements.

34. On April 21,1950, plaintiff, while its negotiations with ADT were still proceeding, also purchased all the outstanding common capital stock of the Holmes Electric Protective Company, a New York corporation. This company, together with its wholly owned subsidiaries, was engaged in the electric protection business, furnishing burglar and holdup alarm service in New York City, Philadelphia, and Pittsburgh. It was not engaged in selling fire alarm or sprinkler system supervisory and waterflow alarm service to customers. In 1950, Holmes was the largest seller of central station burglar and holdup alarm service in the New York and Pittsburgh areas. Since April 21,1950, Holmes has been a wholly owned subsidiary of plaintiff.

3,5. (a) At about such 1950 stage in the negotiations, ADT’s counsel began to have doubts concerning the validity, under the antitrust laws, of any extension or renewal of the 1907 agreements. Early in 1950, its attorneys so advised ADT. Their fear was that the agreements already in existence violated such laws, and that therefore any extension thereof in the forms previously discussed would necessarily also be invalid. At a negotiation meeting in June 1950 between representatives of ADT and plaintiff, counsel for ADT stated that, because of such possible illegality, they would not approve any extension or renewal of the 1907 agreements. Counsel for plaintiff, however, did not agree that the 1907 agreements violated the antitrust laws and pressed for specific reasons for ADT’s conclusion. ADT’s counsel then referred to the so-called “mutual assistance” clause, pursuant to which the parties had, among other things, refrained from competing with each other, as well as the provision for plaintiff’s being the exclusive supplier of all the actuating devices required for the installation of the ADT supervisory service systems. They claimed that what was involved was a contract whereby ADT would acquire exclusively from plaintiff for an abnormally long period ADT’s requirements for the devices and that, since ADT controlled around 80 percent of the supervisory fire alarm service business in the country, the result would be to withdraw from competition for such period the supplying of 80 percent of the market for the devices. In addition, ADT counsel felt that plaintiff could afford to underbid on sprinkler installation contracts because it could, if the subscriber also took supervisory service (which plaintiff recommended), more than make up the underbid by its receipt of 25 percent of customer revenues on the customer’s ADT contract. Thus a sprinkler competitor of plaintiff’s could claim that the 1907 agreements enabled plaintiff to compete unfairly.

(b) Plaintiff’s counsel disputed all these contentions. They argued, among other things, that a proposed renewal would not constitute the type of exclusive dealing arrangement prohibited by the antitrust laws because Section 3 of the Clayton Act spoke in terms of a sale, a contract to sell, or a lease. No sale, they argued, would be involved in an extension because, in accordance with the parties’ long-standing interpretation of the 1907 agreements, no title to the actuating devices passes to the customer or to ADT. Should there be any doubt with respect thereto, they said, it could be specifically expressed in the renewal agreement, and the provision could even be made to apply in the future to the replacement devices, which under the 1907 agreements, were in fact sold by plaintiff to ADT. As shown, plaintiff had already indicated its willingness to repurchase from ADT all such replacement devices so that plaintiff would be the one vested with the ownership of all the devices. As set forth in a letter dated July 20,1950, to ADT’s counsel, plaintiff’s counsel further argued that “no sale is involved” because “Nothing that could in the ordinary sense of the word be considered a price for any specific devices furnished is received by Grinnell since the revenue Grinnell receives, even taken on a j ob-by-j ob basis, is never directly related to its cost of furnishing and installing the actuating devices as a normal commercial price would be.” For instance, plaintiff’s counsel pointed out, plaintiff’s revenues were the same whether a particular installation required a simple, inexpensive actuating device, or a more expensive type. Similarly, where a service contract was canceled after only a year, so that plaintiff would be required to remove and recondition the actuating devices that had been installed, the 25 percent of the revenues it had received might not even be sufficient to defray its out-of-pocket costs, whereas where a subscriber’s contract remained in force for 15 or more years (contracts were written on a five-year basis, with renewal options), “Grinnell’s total revenue might be quite substantially in excess of its costs or of what would have been a commercial price for furnishing and installing the devices.” And in the same communication, the attorneys argued that, considering “the substance, and not the form”, the arrangement similarly did not constitute a lease since there was “no specific term: it may be for a brief period only or it may be for the life of the devices furnished, depending on circumstances beyond the control of either the ADT or Grinnell.” Furthermore, they stated, there was no “specified ‘rental’ in the ordinary sense”, the “observations * * * made above relating to price if the arrangement were to be considered a sale” being “equally applicable here. The revenue received by Grinnell if considered as ‘rental’ bears no direct relationship to either the cost or value of the items ‘leased’.” Thus, they argued, the “true nature of the arrangement is that of a joint venture between Grinnell and ADT in the business of furnishing central office sprinkler supervisory and valve alarm service”, with plaintiff’s part being to furnish and install (and under the proposed renewal agreement, to repair and replace where necessary) all the actuating devices, as well as “to furnish a number of additional services * * * along the lines of research, development, design, technical advice and assistance, promotion, of central office business, and general co-operation.” And, after outlining ADT’s part, they stated “The associates then share in agreed proportions in the gross revenue from the venture, each party assuming all of its own expenses. In fact it was agreed at an early stage in the present negotiations that the nature of the proposed extension agreement we were contemplating was a continuation of what both companies have consistently regarded as a partnership or quasi-partnership status and not an arrangement under which Grinnell would simply be a commercial vendor to ADT of certain equipment Grinnell was prepared to manufacture and sell.” They therefore concluded that, considering this “somewhat unusual case”, the validity of the arrangement depended on “the entire arrangement” and that “individual clauses” could not be discussed “independently of one another and out of their context” unless “a specific provision is clearly illegal in and of itself * * *.”

36. Despite plaintiff’s further indication of a willingness to modify the proposed extension arrangement so that ADT would not be obliged to purchase any specified amount of the required devices from plaintiff, as well as to eliminate any provisions which would serve to prevent competition between the parties, ADT counsel advised plaintiff’s counsel in November 1950 they had definitely concluded that no extension agreement that would be satisfactory to plaintiff could be negotiated without violating the antitrust laws. Accordingly, the question then arose as to what would happen on February 18,1954, when the 1907 agreements would, by their terms, expire. The agreements themselves did not set forth what the interests of the parties would be upon expiration.

In this connection, plaintiff then again pressed its partnership or joint venture theory, contending that as of February 18,1954, it would be entitled to 50 percent of the entire supervisory fire alarm service business. It theorized as follows: McElroy was the original developer of the central station sprinkler supervisoiy business. In 1904 he contracted with ADT, which had central stations, to operate the business, McElroy, as owner and developer of the business, soliciting and writing the contracts, and furnishing and installing the actuating devices and the transmitters, and ADT simply being hired to do the wiring, lease the telephone circuits, and supervise or operate the contracts from its central offices. For such services, ADT was to retain 55 percent of the customer receipts. In 1907, however, McElroy (i.e., the Automatic Fire Protection Company) arranged with plaintiff for plaintiff to furnish and install, as a partner of McElroy’s, the actuating devices, with McElroy (AFP) and ADT continuing to perform the balance of the functions, as under the 1904 agreement, except that ADT was to retain only 50 percent of the receipts, and plaintiff and McElroy (AFP) 25 percent each. Since the 1907 agreement recited that ADT’s 50 percent was “in full compensation for the material, work, labor and services furnished and performed or to be furnished and performed by it”, plaintiff contended that this showed plaintiff and McElroy (AFP) then owned the business and ADT was simply hired to perform certain services for specified compensation. Thus, in 1954, plaintiff and McElroy (AFP) would still continue to be the owners of the business, each entitled to 50 percent. Plaintiff conceded that subsequently, in 1913 and 1949, ADT purchased McEl-roy’s (AFP’s) interests and undertook to perform all of his obligations. However, plaintiff argued that it was not a party to these arrangements and therefore questioned their validity insofar as they purported to make ADT, without plaintiff’s consent, a partner of plaintiff’s in place of McEl-roy (AFP). In any event, plaintiff contended that at the very least, it and ADT, as AFP’s successor, would jointly own the business in 1954, with ADT’s contractual arrangement to operate the contracts for 50 percent of the revenues then terminating. This theory would result in plaintiff and ADT having an undivided partnership interest in the entire business and equipment, including the actuating devices and the subscribers’ contracts.

■ ADT rejected this interpretation of the parties’ various arrangements, but plaintiff argued that if a court also ultimately decided against the theory, then plaintiff clearly would have exclusive ownership of the devices.

ADT then stated that since it seemed that no agreement could be reached, discussions were in order concerning a purchase by ADT of the devices so as to insure the continuance of customer service without interruption. If plaintiff removed the devices upon termination of the agreements in 1954, ADT would have to replace them and ADT preferred simply to buy plaintiff’s devices which were already in place. However, plaintiff responded that a sale of the devices would not resolve the problem of plaintiff’s total terminal rights under the contract because of plaintiff’s claim that in 1954 it would become a co-owner of the entire supervisory fire alarm service business and all its assets.

Thus, in late 1950, the negotiations reached an impasse.

37. Because of ADT’s decision not to enter into a renewal agreement, and because of its concern that plaintiff might remove its actuating devices when the agreements would expire on February 18,1954, ADT, in 1951, began preparations to manufacture and install its own actuating devices. ADT recognized that removal of the actuating devices by plaintiff would create serious problems in furnishing continuous supervisory service. Many thousands of actuating devices would have to be manufactured or purchased to replace those removed and the simultaneous removal and reinstallation of devices would have to be coordinated on a countrywide basis. Thus, despite the manufacturing preparations it was making as a precautionary measure, ADT was nevertheless exceedingly anxious to work out a solution to the entire problem that would preclude removal of the actuating devices by plaintiff. ADT felt certain it could obtain injunctive relief against a concerted attempt by plaintiff to remove the devices all over the country on February 18,1954, but it preferred to avoid such court action which would not, in any event, serve as a permanent solution of the problem. In addition, ADT would have to provide for the installation of the devices on new business obtained after February 18, 1954 and which would not be covered by the 1907 agreements.

38. After the lapse of approximately a year, during which no important negotiations took place, the parties met again in October 1951. Plaintiff reiterated that, lacking an agreement between the parties, it would be obliged to take such steps as were necessary to enable it to continue in the sprinkler supervisory fire alarm service business. It stated that its acquisitions of the AFA and Holmes companies were pointed to such. end. Extensive discussion again took place concerning the basic nature of the parties’ (i.e., McElroy (AFP), plaintiff, and ADT) relationship under the 1904 and 1907 agreements, with plaintiff again espousing the partnership theory (i.e., McElroy and plaintiff were partners and owners of the business, and ADT originally merely being their agent or employee, but subsequently succeeding to McElroy’s partnership interest), and its belief that, as partners, plaintiff and ADT would not be violating the antitrust laws, but with ADT again rejecting such theory. ADT claimed, on the other hand, that, as a result of the 1907 agreements as well as its 1913 agreement with McElroy (AFP), ADT was the sole owner of the business, with plaintiff being the one who was the employee, i.e., only a supplier of material. No agreement could be reached as to the proper interpretation of the 1907 agreements. However, after plaintiff reiterated its determination to maintain its position as a partner and to share in the supervisory fire alarm service business to at least some extent, and ADT its position that it could not see how an agreement could be worked out that would be satisfactory to plaintiff and which would not violate the antitrust laws, it was nevertheless finally agreed that plaintiff’s attorneys would draft and submit to ADT for consideration a form of new contract which plaintiff’s attorneys felt confident would be proper under the antitrust laws.

39. Counsel for the parties again conferred on November 14,1951, with the debate concerning the antitrust aspects of the plaintiff-ADT relationship continuing. However, neither side changed its views. Plaintiff’s counsel then stated plaintiff’s position to be that its terminal rights in the 1907 agreements could not be satisfied by merely compensating it for its actuating devices. Plaintiff stated that, if the parties reached no agreement by February 18, 1954, it would be plaintiff’s position that (a) since ADT itself felt that ADT held a monopolistic position in the ownership of central stations, ADT would, if plaintiff competitively solicited central station business, have to make its stations available to plaintiff (or to anyone else contracting to provide for central station protective service), and (b) plaintiff would claim, as a contract right, continued entitlement to 25 percent revenue participation from all contracts in force on February 18, 1954, for the duration (including any renewals) thereof, since those contracts, having been written prior to such termination date of the 1907 agreements would still, in plaintiff’s Opinion, be subject to the terms thereof.

While ADT counsel felt that any new agreement should provide that ADT should be free to obtain the devices from any source (or to manufacture them itself), they nevertheless stated that they considered that ADT would be safe in contracting with plaintiff for plaintiff’s continuing, for five years, to install supervisory devices on plaintiff’s sprinkler systems on the basis of participation in contract revenues, provided ADT could make the same arrangement with any other sprinkler company. (Other sprinkler companies were complaining that plaintiff, through its arrangements with ADT, had a lucrative source of revenue from sprinkler system operations which was not open to them.)

40. The parties again conferred on February 19, 1952, at which meeting ADT suggested that, since it was the total problem of a future continuing relationship that was the stumbling block, it would appear best first to attempt agreement only with respect to subscribers’ contracts covered by the existing 1907 agreement. This was, in effect, a further consideration of the claim plaintiff had made at the November 14, 1951 meeting (finding 39) that, even though no further agreement could be worked out, plaintiff would nevertheless be entitled to continued participation to the extent of 25 percent in the revenues from service contracts in force on February 18, 1954 for the duration of any such contracts or any renewals thereof. ADT suggested such continued participation by plaintiff, at some agreed percentage (but still contending that 25 percent was too high) with the understanding, however, that the percentage would be based on the scale of contract revenue in effect on February 18,1954, regardless of any subsequent rate increases or decreases. If such an agreement could be reached with respect to service contracts written under the expiring 1907 agreements, ADT suggested that the parties could then later consider the question. of any continuing relationship with respect to new business written after February 18,1954 and which would not be covered by the 1907 agreement.

Plaintiff indicated willingness to consider this approach, as well as to reduce its participation from the 23% percent it had previously offered to 20 percent.

41. (a) During this period, plaintiff consulted eminent outside counsel concerning the relationships created by the 1907 agreements and what plaintiff’s terminal rights were thereunder if no new agreements could be formulated. After reviewing the contracts, their background, and the manner in which the parties themselves had in practice interpreted the agreements, such counsel agreed that the relationships created were those of a partnership or a joint venture in the nature of a partnership. The counsel who was retained after the February 19, 1952 meeting to consider also the specific question of plaintiff’s rights and obligations after February 18, 1954 concerning service contracts then in effect advised that plaintiff had an implied obligation to permit its actuating devices to remain in service as long as central office service was rendered at the particular location, including renewals.

All these opinions coincided with those of plaintiff’s own counsel. It was felt that the “abrupt termination” theory would result in the unreasonable conclusion that plaintiff would, right up to February 18,1954, be obliged, as a contract obligation, to furnish and install actuating devices, and then, almost immediately thereafter, be obliged to remove them, with plaintiff having received little return for its contribution. Also, the rejection of the “abrupt termination” theory would, in addition to the safety and other problems arising out of the shutting off of protective services on customers’ premises, solve the problem of who owned the service contracts as of February 18, 1954, concerning which the 1907 agreements were also silent. Under the “continuing obligations and rights” theory, this problem would become unimportant because the service contract would continue until it expired, at which time no one would care who had owned it.

Thus, plaintiff concluded that February 18, 1954 marked the end of the period within which service contracts came under the terms of the 1907 agreements but that as to such contracts existing as of such, date, the rights and obligations of the parties remained fixed and continued after 1954 Accordingly, plaintiff would have the continuing obligation on such contracts to leave its devices in place for the duration of service at such location, ADT would be obliged to render central station service for the same period, and plaintiff would have the right of continued participation in the revenues at the 25 percent rate. However, after February 18, 1954, no new service contracts could be brought under the 1907 agreements.

(b) A meeting between plaintiff and ADT was scheduled for June 16, 1952, and the above conclusions of plaintiff became formulated prior thereto and in preparation therefor.

42. On June 11,1952, a meeting of the Board of Directors of ADT was held at which the subject of the first 1907 agreement was discussed. As set forth in the minutes, ADT’s president reported: (1) “respecting negotiations” with plaintiff “looking toward composure of that company’s reversionary rights in” such agreement; (2) that, based on the advice of ADT’s attorneys, “there is necessity to terminate this collaborative effort at contract expiration, but necessity, also, to discover some satisfactory manner of liquidating Grinnell’s equity in the business at 2/18/54 which comes to it through the joint-venture doctrine”; (3) that ADT had agreed with plaintiff “in principle” that plaintiff “shall be entitled to participate in gross receipts from * * * installations in service on 2/18/54 until termination of service under the then existing contracts or any extension or renewal thereof * * *” but that ADT itself would, after February 18, 1954, handle all new business itself “without assistance from Grinnell and without ■ entitling that Company to any participation in gross collections”; (4) that, under “the above tentative arrangement”, plaintiff had “asked for 20% participation in gross * * * annual service charges in force on 2/18/54” and that it appeared that “settlement with Grinnell, at not in excess of the basis indicated, would constitute the exercise of reasonable business judgment.”

43. On June 16,1952, representatives of plaintiff and ADT held another conference. ADT contended that, based on its own computations (since plaintiff bad not opened its books to ADT), plaintiff’s participation in contract receipts should not exceed 12% percent, but, to bring the long negotiations to a close, ADT would agree on 15 percent of gross receipts from contracts in service on February 18, 1954 on a fixed basis, as previously discussed. Plaintiff conceded that, on the basis of its attorneys’ conclusions, it would be obliged to leave its actuating devices in service on contracts in effect as of February 18, 1954 but stated that it had the correlative right to continued participation of 25 percent of the proceeds of such contracts as long as they continued in effect. However, ADT rejoined that these conclusions were only what had already been agreed to in principle since the early part of the year except that plaintiff was now reverting to 25 percent instead of the 20 percent figure it had previously offered. However, plaintiff responded it was not necessarily insisting on 25 percent but merely pointing out what it considered were its legal terminal rights under the 1907 contract.

There was then renewed discussion concerning the problem that had been discussed in the late 1940’s and early 1950’s concerning the split ownership of the actuating devices and whether plaintiff should, under the new proposal being discussed, purchase the ADT replacement devices, as it had previously tentatively agreed in connection with the early negotiations envisioning a renewal agreement that would also cover new business. Plaintiff doubted the need for now going through with such a purchase arrangement, but ADT felt it would still be best for plaintiff to make all the replacements and do all the maintenance and repair work on the devices, even though plaintiff’s obligation would now be limited only to contracts in existence on February 18,1954.

Finally, plaintiff offered to split the difference between plaintiff’s offer of 20 percent participation in receipts and ADT’s offer of 15 percent, and ADT agreed provided plaintiff would purchase the ADT replacement devices at a price to be subsequently agreed upon (the previous suggested price of $535,000 having been based on 1948 figures, with ADT’s current estimates now going as high, as $1,000,000) and would thereafter, at its own expense, maintain, repair, and make all future replacements required on the devices on subscribers’ contracts in service on February 18,1954. Plaintiff so agreed and, subject to ADT Board approval, a mutual understanding was at last arrived at (the presidents of the two companies shaking hands to evidence their mutual agreement, this meeting sometimes therefore being referred to as the “handshake meeting”).

It was agreed that the attorneys would work out the details of the agreement which, it was planned, would be executed prior to the commencement of negotiations with AFA on the second 1907 agreement. Plaintiff desired this order of events because the ADT agreement resulted from hard, arm’s-length bargaining between independent entities and could well serve as a precedent on the AFA matter. Since plaintiff was the majority stockholder of AFA (now around 89 percent), it wanted to obviate complaints by minority interests that any agreement arrived at between AFA and plaintiff was not fair to AFA.

44. Prior to presentation of the agreement reached at the June 16, 1952 meeting to the ADT Board of Directors for approval, there were compiled, in order to justify the 17% percent compromise figure from ADT’s point of view, figures to indicate the estimated worth of plaintiff’s terminal equity in the first 1907 agreement. For this purpose, such equity in the business was calculated on a 50 percent basis, which gave recognition to the “partnership” theory which plaintiff had espoused and under which plaintiff allegedly was entitled, as ADT’s partner under the 1907 agreement, to 50 percent of all the service contracts in effect as of February 18, 1954. ADT estimated that, considering renewals, it would take approximately 20 years for the service contracts in effect on February 18, 1954 to work themselves out, for experience showed that this was the average life of a subscriber’s contract. Accordingly, ADT would be paying plaintiff 17% percent of the gross receipts arising from subscribers’ contracts in effect on February 18, 1954 for approximately 20 years after February 18,1954. It was estimated that the gross receipts from such contracts would, over a 20-year period, and although diminishing annually, average over $6,200,000 per year, with plaintiff’s 50 percent terminal equity therein being worth over $3,100,000. Assuming that plaintiff’s operating profit ratio of gross revenue was similar to ADT’s, i.e., approximately 31 percent, plaintiff’s annual net income (before Federal taxes) would thus be approximately $966,000, which, capitalized at 10 percent, would give a value to plaintiff’s terminal equity of approximately $9,660,000. Since, however, this amount would be paid in installments over a 20-year period, interest at five percent, computed quarterly on unpaid balances (assuming equal installment payments) was added, such interest payments for 20 years totaling over $4,890,000. Adding such interest payments to the principal amount gave a total worth of plaintiff’s terminal equity of approximately $14,550,000. The projected total receipts from the service contracts over a 20-year period (on a diminishing basis) was estimated at over $74,000,000. Thus, the total worth of plaintiff’s terminal equity ($14,550,000) was calculated at 19.6 percent of the projected gross contract receipts ($74,000,-000). Since this was more than the 1714 percent compromise, it was felt that such compromise figure was a satisfactory one for ADT. On this basis alone, and without giving any consideration to the further advantages to ADT resulting from plaintiff’s purchase of the ADT’s replacement devices, as well as plaintiff’s assumption thereafter of the obligation to furnish and install all future replacements of such devices, ADT’s president felt the 'arrangement was, so far as ADT was concerned, an attractive one. •

In addition, the method of settlement (i.e., no obligation to pay any fixed annual amounts) was also satisfactory because it meant that ADT was not making any investment that it risked losing in the event the devices became technologically obsolete overnight. Consequently, the president recommended the approval of the agreement which had been negotiated.

45. On July 9, 1952, ADT’s Board of Directors met and authorized ADT’s president “to accept the offer of the Grinnell Corporation reported to the meeting by the Chairman, subject to the execution and delivery of an agreement satisfactory in form * * The offer as reported by the chairman constituted “an offer on the part of Grinnell to relinquish its interest under said [1907] agreement, at expiration on February 28, 1954, in consideration of”

(1) ADT’s paying plaintiff 17% percent of the gross annual receipts from supervisory service contracts in service on February 18,1954, on a fixed basis, the payments to continue for the lives of the installations and with plaintiff, at the termination of any installation, being entitled to the devices,

(2) the purchase by plaintiff of the ADT replacement devices, the price therefor to be subject to further negotiation, and (8) the assumption by plaintiff of the obligation to provide in the future all replacement devices on the service contracts in effect on February 18, 1954.

46. The arrangement was for plaintiff’s counsel to prepare the first draft or drafts of the agreement which he commenced in July 1952. Such early drafts were in form specifically designed to carry out the three elements of the agreement, i.e., (a) the payment to plaintiff of the 17% percent of the gross receipts, (b) the purchase by plaintiff of the ADT replacement devices, and (c) the furnishing and installation by plaintiff of all required replacements. During this period the representatives of plaintiff and ADT met several times to discuss various matters and details pertaining to the formal agreement, the most important of which was the resolution of the open question as to the amount plaintiff was to pay for ADT’s replacement devices. This amount was ultimately agreed upon at $677,061.10. At no time during this period did these representatives change, or contemplate changing, the substance of the agreement previously arrived at and subsequently approved by both parties insofar as the three basic elements were concerned.

47. At the time of the handshake meeting and thereafter, the parties knew with reasonable accuracy the number of actuating devices installed on subscribers’ contracts then in effect (approximately 120,000) and had the means, through their records, with which to determine the number more accurately.

48. During the latter part of July 1952, plaintiff’s counsel concluded that if that part of the agreement relating to the payment by ADT to plaintiff of 17% percent of the gross revenues were cast in the form of installment payments by ADT for the purchase, on a conditional sale basis, of all of plaintiff’s actuating devices in service on February 18,1954 (including the ADT replacement devices which ADT would have previously sold to plaintiff), plaintiff would then be in a position to claim capital gains treatment for such payments instead of the ordinary income treatment it had always accorded to its revenue participation receipts from ADT. Plaintiff’s counsel asked ADT’s counsel whether ADT would be willing to have the agreement cast in such form, and was advised that ADT was willing to proceed on a basis that would be advantageous to plaintiff from a tax standpoint provided ADT’s own tax position would not be prejudiced. The percentage revenue payments by ADT to plaintiff had always been treated as a deductible business expense, and ADT wanted to make certain that, if the payments were cast in the form of installment payments on account of a conditional purchase of the devices, it would be allowed a depreciation deduction in the full amount of the payments. Since the parties were in agreement that the revenue participation payments would continue until the service contracts would expire in their normal course, a period which was estimated at approximately 20 years (the average life of a service contract) , neither party attached any significant importance to the question of who would have title to the devices at the expiration of the service contract. As hereinabove noted, the residual value of the devices as they would be removed from subscribers’ premises over the course of many years was normally minimal, possibly not even exceeding the cost of removal.

ADT’s counsel requested time to further explore, through its tax counsel, the tax consequences to it of plaintiff’s proposal.

49. Counsel for the parties next discussed the matter at a meeting on or about October 15,1952, at which time ADT counsel stated that if the transaction were cast in the form of a lease of the devices, with the 17)4 percent payments being considered as rental payments, full payment deductibility would be less of a problem, but, since the payments were to continue for an indeterminate period he was not so certain of such a result if the agreement were drawn in the form of a sale. He therefore stated he could not advise ADT to accept such sale form unless it received a satisfactory ruling from the Treasury Department. He even felt some doubt as to the full deductibility of lease-rental payments because of the possibility that the devices would, at the discontinuance of service, have no further useful life.

Counsel for plaintiff then proposed that the agreement be prepared in two forms, i.e., in both sale and lease forms, the sale agreement to be executed if plaintiff and ADT obtained favorable rulings from the Treasury Department, and the lease agreement to be executed if they did not. Shortly thereafter, this method of proceeding was accepted by plaintiff and ADT.

50. (a) On December 29, 1952, plaintiff and ADT agreed in writing (the agreement taking the form of a letter from ADT which was “confirmed” by plaintiff), as follows: (a) plaintiff agreed to purchase the ADT replacement actuating devices for $677,061.10 ; (b) plaintiff thereafter assumed, for the balance of the first 1907 agreement, the obligation of furnishing at its own expense all necessary replacement devices and of removing all such devices upon the discontinuance of service under subscriber contracts; (c) provision was made with respect to the accounting (i.e., cash or accrual) basis of the 25 percent monthly payments to plaintiff for the balance of the agreement; '(d) plaintiff agreed to apply to the Treasury Department for a ruling concerning the tax treatment of the payments which would be made to it by ADT under an agreement which was in the form of a conditional sale of the actuating devices (the form of which was attached to the letter agreement as Exhibit C) and ADT also agreed to seek such a ruling as to the deduction by it of such payments, the parties then agreeing to execute an agreement substantially in such form if each received favorable rulings, and if not, to execute an agreement substantially in the form of a lease of such devices (the form of which was attached as Exhibit B)-

(b) Exhibit C annexed to the letter agreement was in the form of a contract, effective February 18, 1954, providing for a conditional sale of the actuating devices for a consideration of 17.5 percent of the basic annual service charges in effect on February 18, 1954, until the discontinuance - of the service, and Exhibit B was in the form of a contract effective the same date, providing for a lease of the devices for a rental of 17.5 percent of such charges.

(c) The only basic difference between the lease form and the conditional sales form, apart from the fact that one used the word “lease” and the other the word “sale”, was that plaintiff, under the lease form, and ADT, under the conditional sales form, at the expiration of the service contracts in effect on February 18,1954, had both the right to salvage, and the duty to remove, the devices. However, as set forth above, at the end of a 20-year average service contract, the cost of removing the devices was normally approximately equal to the salvage value of the devices, and the parties assigned no additional value to plaintiff’s transfer of the ownership of the devices. The parties did not intend that, substantively, there would be any real difference between the two forms of contract, except for taxes.

Under the conditional sales form, plaintiff retained title to the devices until all of the payments were made under the service contract and, in the event of default, plaintiff could foreclose and sell the devices to pay any deficiencies. In addition, the purchase price due plaintiff was reduced by the amount of any sales taxes imposed.

ADT retained such rights as it had under the terms of any service contract to cancel such contract in its own uncontrolled discretion and, in such event, no further amounts of either the rentals (the lease form) or the purchase price installments (the conditional sales form) would become due. However, the conditional sales form provided that the devices would be deemed fully paid for and become the property of ADT upon termination of supervisory service under a service contract, although ADT was obligated to exercise good faith efforts to bring about a renewal. A service contract would be considered as renewed if there was a resumption of supervisory service at an installation within six months of termination and removal of the devices.

51. The total outstanding capital stock of plaintiff from 1945 through 1956 was 500,000 shares. The stock was publicly held by 3,526 to 4,445 stockholders of record. AFA of Delaware owned 56,237 shares, or approximately 9.1 percent, of the outstanding capital stock of plaintiff. No other stockholder was the record owner of over 5 percent of such stock.

52. Since about 1946, ADT of New Jersey has held five shares of the stock of plaintiff, purchased in a nominee’s name, in order to obtain plaintiff’s annual reports. Plaintiff’s records relating to costs of actuating devices furnished under the 1907 agreements were not disclosed to ADT prior to the execution of the 1954 agreements.

53. The total outstanding capital stock of AFA of Delaware since 1949 has been 63,862 shares, including treasury shares. Since March 28, 1949, plaintiff has owned more than 50 percent of the capital stock of AFA of Delaware.

54. The total outstanding capital stock of ADT of New Jersey since 1950 has been 651,030 shares. On July 28,1953, plaintiff purchased 405,426 shares of capital stock of ADT of New Jersey from The Western Union Telegraph Company for $12,500,000, which stock had been acquired by Western Union in 1910. Prior to July 28,1953, plaintiff did not own any of the capital stock of ADT of New Jersey. Since 1955 plaintiff has owned not less than 451,978 shares of capital stock of ADT of New Jersey.

55. Negotiations by plaintiff for the purchase of the 405,426 shares of capital stock of ADT of New Jersey then owned by Western Union commenced on May 28, 1953, on which date representatives of plaintiff met with Mr. Walter P. Marshall, president of Western Union. No person other than Mr. Marshall was authorized to negotiate on behalf of Western Union for the sale of such stock. Prior to May 1953, no inquiry of Mr. Marshall or of any employee of Western Union had been made by any representative of plaintiff concerning the purchase of such stock.

56. The meeting on May 28, 1953, was brought about by William J. Glickauf of the Apple-Cole Company who wrote, on May 4, 1953, to J. D. Fleming, president of plaintiff, informing Mr. Fleming of his negotiations on behalf of a client with Mr. Marshall for the purchase of the stock of ADT of New Jersey owned by Western Union, and inquiring whether plaintiff would be interested in purchasing certain divisions of ADT of New Jersey. After further communication between Mr. Glickauf and Messrs. Marshall and Fleming, the meeting on May 28, 1953, was arranged.

57. Plaintiff was a party to two agreements dated December 24, 1953, one with ADT and the other with ADT and AFA, both agreements relating to the relations of the parties under the second 1907 agreement covering the four cities. The transactions effected by these agreements are of the same nature and substance as the transactions effected by the agreement of December 29, 1952, between plaintiff and ADT.

58. Pursuant to the agreement dated December 24, 1953, between plaintiff and ADT, ADT sold to plaintiff for $203,877.06, approximately 1,600 replacement devices owned by ADT and installed in subscribers’ premises located within the four cities.

59. As of February 18, 1954, neither plaintiff nor ADT had as yet applied for a Treasury Department ruling. As of such date the parties informally agreed that, until the receipt of the ruling, the following arrangements with respect to the actuating devices would tentatively apply, subject to appropriate adjustments following receipt of the ruling: (a) plaintiff agreed to remove all actuating devices following termination of the service contract; (b) all removed devices (whether because of service termination or normal device replacement) would be shipped to plaintiff for disposition; and (c) plaintiff could junk any device which, in its judgment, was fit only for scrap. After February 18,1954, plaintiff received only 1714 percent of the service charges collected from subscribers under contracts made before February 18,1954 under the 1907 agreements.

60. On May 29, 1954, ADT applied to the Treasury Department for a ruling. Plaintiff decided not to apply for such a ruling.

61. On or about October 21,1954, ADT received a Treasury Department ruling so dated which concluded that ADT would be entitled to deduct the amounts paid to plaintiff no matter which form of the contract was executed. In the event the conditional sale form was executed, the ruling permitted depreciation deductions equal to the 17y2 percent payments provided therein to be made to plaintiff. This ruling was satisfactory to ADT.

62. On December 2, 1954, plaintiff executed and transmitted to ADT an agreement previously executed by ADT which was substantially in the form of Exhibit C (the conditional sale form) attached to the agreement of December 29, 1952 (relating to the service contracts covered by the first 1907 agreement). By the transmittal letter dated December 2, 1954, from plaintiff to ADT, plaintiff waived the condition, under the agreement of December 29,1952, that the sale agreement would be executed only if plaintiff, as well as ADT, obtained a prior ruling from the Treasury Department. Plaintiff thereafter delivered to ADT all the devices it had removed in the interim and ADT reimbursed plaintiff for the costs of removal. Thereafter, ADT removed and disposed of the devices at the expiration of the service contracts.

63. On December 14,1954, plaintiff and ADT entered into an agreement which confirmed the interim understanding (finding 59) as to 'the arrangements with respect to the actuating devices that would tentatively apply pending the receipt of the Treasury Department ruling.

64. On December 15, 1954, plaintiff executed and transmitted to ADT and AFA an agreement which had been previously executed by ADT and AFA (relating to the service contracts covered by the second 1907 agreement (i.e., those located in the four cities)). The agreement was similar in all significant respects to the contract between plaintiff and ADT executed on December 2,1954, relating to the first 1907 agreement. The agreements of December 2, 1954 and December 15, 1954, are herein referred to collectively as “the 1954 agreements.”

65. The 1954 agreements by their terms provided in pertinent part as follows:

(a) Plaintiff sold to ADT and AFA, as of February 18, 1954, all the actuating devices owned by plaintiff and installed in subscribers’ premises under subscriber service contracts in force on February 18, 1954. (Under the lease form, the devices were leased.)

(b) Plaintiff was obligated to maintain the actuating devices in good condition and to furnish such replacement devices as were required. Unless notification to the contrary was given by any of the parties, plaintiff’s maintenance and replacement obligation was to terminate on February 18, 1959, and the 17% percent payments by ADT and AFA were to toe thenceforth reduced by an amount proportionate to plaintiff’s maintenance and replacement costs during the preceding five years. ADT and AFA had the right to check plaintiff’s books to verify such costs. (These provisions were the same in the lease form.)

(c) As the purchase price for the 'actuating devices, ADT and AFA agreed to make installment payments to plaintiff at the rate of 17% percent of the basic annual service charges under subscriber service contracts (as specified on lists) in force on February 18, 1954. The payments remained the same regardless of whether ADT and AFA raised or lowered their service charges to subscribers and whether the subscribers increased the amount of supervisory service at their premises. The amount of the payment changed only upon termination of, or reduction in, the amount of service provided on February 18, 1954. Successive reductions and increases in service after a first reduction would also be reflected in the adjusted annual service charges, except that the adjusted annual charge could not exceed the original annual charge. Such payments from such contracts were to continue (including renewals) until discontinuance of supervisory service under the contracts. (The provisions were similar under the lease form except that the devices were “leased” and the payments were described as “rental for the Actuating Devices leased.”)

(d) Upon the discontinuance of supervisory service under any subscriber service contract, ADT or AFA was entitled to remove the actuating devices installed in connection therewith, and the devices were deemed fully paid for. (Under the lease form plaintiff was obligated to remove and dispose of the devices.)

(e) Plaintiff retained security title to each actuating device until full payment for such device had been made.

66. Pursuant to the terms of the 1954 agreements, lists of the supervisory service contracts between ADT and AFA and their respective subscribers in force on February 18, 1954, were agreed upon by the parties. Such lists showed the location by cities of the premises covered by each contract, each subscriber’s name, the identification number for each contract, the billing period annually, quarterly, etc.) for each contract, and the annual service charge in force on February 18, 1954, under each contract. The information contained on such lists is also shown on cards maintained by plaintiff.

67. Payments to plaintiff under the 1954 agreements have been as follows:

(a) Where any subscriber for service supplied by ADT or AFA on February 18, 1954, continued such service without change, payments annually to plaintiff have been equal to 17% percent of the service charge in force on February 18, 1954, for as long as the subscriber contract or a renewal thereof remained in force (except that, as hereinafter set forth, the rate payable to plaintiff after February 18, 1959 was 17.2 percent).

(b) Where, subsequent to February 18, 1954, ADT or AFA increased or decreased service charges, but not service, to any subscriber supplied by ADT or AFA on February 18, 1954, plaintiff has not received increased or decreased annual payments. In such case, the annual payments to plaintiff were computed on the basis of the service charge in force on February 18,1954.

(c) Where a subscriber’s contract, on February 18, 1954, was subsequently amended to provide for an amount of service greater than that in force on February 18, 1954, plaintiff has not receiyed an increase in annual payments. In such case, the annual payments to plaintiff were computed on the basis of the service charge in effect on February 18, 1954.

(d) Where, subsequent to February 18, 1954, a subscriber contracted for an amount of service less than that provided on February 18, 1954, and did not thereafter increase the service as thus reduced, the annual payments to plaintiff were reduced in accordance with the reduced service, such reduction in service charge being made at the appropriate dollar amount for each unit discontinued.

(e) Where, subsequent to February 18, 1954, a subscriber contracted for an amount of service greater than that in force after a reduction in service, the annual payments to plaintiff were computed on the basis of the reduced service increased by the appropriate dollar amount for each unit of increased service, the service charge, however, not exceeding that in force on February 18,1954.

(f) Where ADT or AFA entered into a new supervisory service contract with a subscriber after February 18, 1954, plaintiff received no payments in respect thereto.

68. On February 18, 1959, plaintiff’s maintenance and replacement obligation terminated and ADT and AFA thereafter assumed such responsibility. The installment payments were consequently reduced to 17.2 percent of the basic annual service charges under subscriber contracts in force on February 18,1954.

69. In 1958, ADT and AFA, for and at the expense of plaintiff, made identification of all actuating devices installed in subscribers’ premises as of February 18, 1954, by affixing thereto distinctive tags or markers. Tags with different symbols indicated the time periods during which the actuating devices were installed. One type of tag indicated devices installed by plaintiff on or before August 16, 1953 (i.e., six months before February 18, 1954), another type indicating the devices installed between August 17, 1953 and May 31, 1954 outside the four cities and from August 17, 1953 to June 13,1954 in the four cities, and still another type indicating those installed on and after June 1,1954 outside the four cities and on and after June 14, 1954 in the four cities.

70. Upon the discontinuance or reduction of supervisory fire alarm service under subscriber service contracts, ADT has removed the actuating devices from the subscriber’s premises and has retained them as their owner. Approximately 71 percent of such actuating devices so removed prior to October 31,1958, were reused by ADT. However, the record does not show what the relationship was between the salvage value and the costs of removal and rehabilitation for reuse.

71. Pursuant to the 1954 agreements, plaintiff received $1,155,516.37 in 1954 and $1,455,098.63 in 1955. Such amounts were reported in plaintiff’s 1954 and 1955 tax returns as long-term capital gains.

72. At all material times herein, plaintiff computed its taxable income for Federal income tax purposes on the accrual method of accounting and on the calendar year basis, and it filed its Federal income tax returns with, and paid its Federal income taxes to, the District Director of Internal Revenue at Providence, Rhode Island. Plaintiff’s returns for 1954 and 1955 were both duly filed on their respective due dates, as extended.

73. Upon the audit of plaintiff’s 1954 and 1955 Federal income tax returns, the District Director treated the amounts received under the 1954 agreements as ordinary income, determined deficiencies, and, in 1957, assessed additional taxes for 1954 of $350,208.52, plus interest of $54,451.39, and for 1955 of $466,104.13, plus interest of $44,400.82, which deficiency assessments were paid by plaintiff. The Director took the position that the 1954 agreements were agreements which in effect merely perpetuated plaintiff’s right to receive ordinary income.

74. In 1957, 1958, and 1959, plaintiff duly filed claims for refund in which plaintiff contended, among other things, that the 1954 agreements constituted bona fide sales of property used in plaintiff’s trade or business, entitling gains realized from the disposition thereof to be taxable as long-term capital gains. The refund claims were rejected by the District Director in 1958 and 1959 and this proceeding was timely commenced.

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 plaintiff is not entitled to recover and the petition is dismissed. 
      
       Two other companies, the Consolidated Fire Alarm Company of New York and the Boston Automatic Fire Alarm Company were also parties, but their presence as such is unimportant for present purposes. Their interests were subsequently acquired by AFA by consolidation.
     
      
       under this second 1907 agreement, ADT and AFA sometimes exchanged or reversed positions, except for the service-selling activity, which AFA always performed.
     
      
       ADT counsel pointed to the noncompetitive arrangement between the parties, as well as their dealing exclusively with each other. They were fearful that ADT, controlling, as it did, about 80 percent of the country’s supervisory fire alarm service business (and therefore itself very probably, constituting a monopoly) was, in acquiring the actuating devices exclusively from plaintiff, withdrawing from competition for an abnormally long period the supply of 80 percent of the market for the devices. Furthermore, they felt that the tie-in between plaintiff’s sprinkler business and its interest in the supervisory fire alarm service business gave plaintiff a source of revenue not available to its competitors. Plaintiff could, they argued, well be in a position to underbid on sprinkler installation contracts because it could, if the subscriber also took ADT’s supervisory service, which plaintiff recommended and promoted, make up the underbid by its sharing in the receipts under the ADT contract. Plaintiff’s competitors had complained that plaintiff’s relationship with ADT had enabled plaintiff to compete unfairly.
      At least insofar as ADT counsel’s fears were based upon monopoly considerations, they turned out to be well grounded. See United States v. Grinnell Corp., et al., 384 U.S. 663 (1906).
     
      
       The plan was to have the agreement executed prior to commencing negotiations with AFA on the second 1907 agreement pertaining to the four cities. By this time plaintiff owned almost 90 percent of the stock of AFA. If the plaintiff-ADT agreement, resulting from arm’s-length bargaining, were to serve as a precedent, plaintiff would be protected from charges of unfairness in dealing with AFA.
     
      
       The figures were based on the assumption of the validity of plaintiff’s “partnership” theory entitling plaintiff to a 50 percent interest in all of the service contracts in effect on February 18,1954, which, it was estimated, would, on an overaU basis, continue for 20 years thereafter. The average annual gross receipts, on a 20-year diminishing basis, was estimated at $6,200,000, with plaintiff’s 50 percent interest thus being equal to $3,100,000 gross, and $966,000 net, which, capitalized at 10 percent, resulted in a terminal equity value of $9,660,000. Since such value was to be paid in installments over the 20-year period, interest at 5 percent, computed quarterly on unpaid balances, added almost $4,900,000, thus giving a total value of $14,550,000 to plaintiff’s terminal equity. This was 19.6 percent of estimated 20-year gross receipts of $74,000,000.
     
      
       Counsel even entertained some doubts as to tbe fuU deductibility of such lease-rental payments because of tbe fact that the devices would probably have no further useful life at the discontinuance of service.
     
      
      
         The agreements contained provisions whereby the parties conld terminate such obligation at the end of five years, with an appropriate adjustment, however, to be made in the payments. On February 18, 1959, such obligation was terminated, and, in accordance with the contract adjustment formula, the installment payments were thereafter reduced to 17.2 percent.
     
      
      
         E.g., at least for five years, with an appropriate adjustment downward in the revenue participation payments thereafter if such obligation was not continued. See n. 7.
     
      
       As shown, it is also true that at that time, plaintiff made certain offers to sell some of its devices provided ADT would, however, sell certain of its central station facilities and provided also certain noncompetition agreements would be observed. However, ADT rejected these offers.
     
      
       During the term of the 1907 agreements, plaintiff salvaged and reused only 21.6 percent of the actuating devices on subscribers’ contracts which had expired or where service was reduced. However, the cost of removing and salvaging the devices generally approximated their salvage value. Devices considered not worth removing were simply left in place but rendered unserviceable. Under the 1954 agreements, ADT apparently instituted a more active salvage program, salvaging (at least up to October 81, 1958) and reusing approximately 71 percent of the devices it removed. However, the record does not show what the relation was between the salvage value and the removal and rehabilitation costs.
     
      
       Paragraph 152 of a comprehensive pretrial stipulation filed In this case provides that ■“* ■ * i* the parties agree that the sole Issue involved In this litigation Is whether monies received by plaintiff from ADT and APA pursuant to the agreements * * * constitute, in their entirety, payments by reason of sales by plaintiff to ADT and APA of Installed actuating devices.” Paragraph 155 Is to the same effect referring to the “monies received by the plaintiff pursuant to such agreements” being “solely In payment for and In respect of sales of the Installed actuating devices * * (Italics supplied.)
     
      
       By paragraph 155 of the stipulation the parties stipulated that if there was a valid sale of the actuating devices for which the 17.5 percent payments constituted the sole consideration, then the devices met the requirements of “property used in the trade or business” as defined in section 1231(b) of the 1951 Code. By the stipulation, and at the pretrial conference, the parties also agreed upon the issues involved in the case. In effect these stipulations constituted an agreement that the devices did not consist of stock in trade and were not held primarily for sale to customers in the ordinary course of business. Section 1221 excludes such property from the definition of “capital assets” and section 1231 (b) excludes it from the definition of “property used in the trade or business.” (26 U.S.C. §§ 1221, 1231 (1958 ed.).)
      Despite this situation, defendant thereafter took the position that even if the compensation plaintiff received be deemed the proceeds of a sale rather than the continuation of its revenue participation arrangement, such compensation represented the proceeds of sales of plaintiff’s stock in trade and were sales made in the ordinary course of plaintiff’s business, thus falling in the ordinary income category anyway.
      IHowever, plaintiff protested that, because of the stipulation and the pretrial agreements, it had not introduced any evidence bearing on this capital asset question. Because of such prejudice, it urged that defendant be held to its stipulation and pretrial agreements.
      Defendant has now withdrawn this additional contention.
     
      
       Originally there were three companies in the AKA group, one operating in New York City, one in Boston and Charlestown, Massachusetts, and one in Philadelphia. One Richards was president of all three. APA is sometimes referred to as the Richards Company.
     