
    WILLIAM O’NEILL KRONNER AND LILA A. WEMP, EXECUTORS OF THE ESTATE OF ERNEST E. WEMP, DECEASED, AND LILA A. WEMP v. THE UNITED STATES
    No. 49512.
    Decided March 3, 1953.
    Defendant’s motion for new trial overruled November 3, 1953
    
      
      Mr. J. Marvin Haynes for the plaintiffs. Mr. N. Barr Miller, Mr. F. Eberhart Haynes, Mr. Oscar L. Tyree were on the briefs.
    
      Mr. J. H. Sheppard, with, whom was Mr. Acting Assistant Attorney General Ellis N. Slade, for the defendant. Mr. Lee A. Jackson and Mr. Andrew D. Sharpe were on the briefs.
   Howell, Judge,

delivered the opinion of the court:

The original plaintiffs in this proceeding were Ernest E. Wemp and Lila A. Wemp, husband and wife, of Detroit, Michigan. After the hearing before a Commissioner of this court, Ernest E. Wemp died, and Lila A. Wemp and William O’Neill Kronner, as duly qualified executors of his estate, were substituted in his stead.

This suit was instituted to. recover a portion of the income taxes paid by Mr. and Mrs. Wemp for the years 1943 through 1947. The income involved was received by the late Ernest E. Wemp, hereinafter referred to as Wemp, from the Borg-Warner Corporation of Detroit, Michigan, under a written .agreement executed September 15,1921, between Wemp and the Long Manufacturing Company, hereinafter referred to as Long, which company was later acquired by Borg-Warner. The subject matter of this agreement was the patent rights to Wemp’s invention of a new type clutch to be utilized in motor vehicles.

The question before the court in this proceeding is whether those payments received by Wemp annually under this agreement should be taxed as ordinary income, as was done, or as receipts from the sale of a long term capital asset within the provisions of section 117 of the Internal Revenue Code, 26 U. S. C. § 117 (1946). To avail themselves of the benefits of section 117, the burden is upon the taxpayers to establish (1) that the property in question is a “capital asset” as defined in section 117, (2) that there has been a “sale or exchange” of that property, and (3) that it has been held for more than six months prior to the “sale or exchange.”

The plaintiffs in their claims for refund filed with the Commissioner of Internal Bevenue, and in this suit, contend that the agreement of 1921 constituted an assignment or sale of a capital asset held for a period of more than six months with the payments received thereunder representing the purchase price, and that, therefore, those payments should be taxed at the lesser capital gain rates.

The defendant contends (1) that the patent rights covered by the agreement are not a capital asset within the provisions of section 117, (2) that even if they are, the 1921 agreement was not a sale, and (3) if it be found that a sale of a capital asset has taken place, Wemp did not hold the patent rights for the time required under section 117.

The definition of “capital assets” as it appears in section 117 (a) (1) reads as follows:

Capital Assets. — The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, of property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

Tbe applicable regulation issued thereunder reads in part:

Sec. 29.117-1 * * * The term “capital assets” includes all classes of property not specifically excluded by section 117 (a) (1).

Defendant contends that the patent rights on Wemp’s clutch invention are not a capital asset within the meaning of this definition because the patent rights constituted property held by Wemp for sale to customers in the ordinary course of his business. In urging that Wemp was engaged in the business of inventing, the defendant points to the fact that the clutch design was one of several created by Wemp prior to 1921, that after 1921 he spent his working hours in improving his clutch and obtaining patents thereon and that after he once began to receive payments under the 1921 agreement said payments represented his only substantial source of income.

Although Wemp had perfected four inventions as of 1921, the clutch design was the only one ever offered for sale, and Long was the only party Wemp ever approached. Two of his other inventions were utilized by him while operating his own business from 1903 to 1905, and the patents thereto were sold as assets of that business. His other invention proved to be commercially impractical, and the patents expired without having been used. Wemp’s activity in obtaining patents on four different inventions and the selling of only one did not serve to place him in the business of buying and selling inventions and patents. Carl G. Dreymann, 11 T. C. 153. The patents obtained by him on the improvements to his original clutch design subsequent to 1921 could hardly be ruled to have been properly held by him for “sale to customers in the ordinary course of his trade or business” since under the 1921 agreement, he parted with the right to make, sell and use said improved clutches.

The fact that in the years since 1921 the amounts received in exchange for his clutch patents represented the major portion of Wemp’s income did not place him in the inventing business. One who sells a piece of property may receive the payments therefor over a period of years. Yet he would not, because those payments represent his only income, be held to have been, engaged in the business of selling property. Such is often the case where a person sells property held for investment purposes. Fahs v. Crawford et ux, 161 F. 2d 315.

Defendant further contends in urging that Wemp was engaged in the business of inventing that all his patents secured subsequent to 1921 were not on improvements to his clutch but related to entirely different devices. In his testimony Wemp stated that all his patent applications after 1921 did not relate to improvements on his original clutch but were concerned with related parts of the motor vehicles. He explained that these devices were directed at reducing the noise level of the motor vehicles. He further stated that this problem was tied in with his clutch since the. noise levels sought to be lowered were those resulting from the operation of his clutch.

We conclude, therefore, that the patent rights on Wemp’s clutch which were the subject matter of the 1921 agreement were a capital asset within the meaning of section 117.

We next consider whether the 1921 agreement constituted a sale of the patent rights as contended by the plaintiffs, or a license as contended by the defendant. The following requirement appears in Section 117 (a) (4):

* * * Long term capital gain. — The term “long term captal gain” means gain from the sale or exchange of a capital asset held for more than 6 months, * * *;

The 1921 agreement read in part as follows:

* * * It is further agreed that the Manufacturer is hei’eby granted the sole and exclusive right to manufacture,, vend, sell, license or re-license, or in any wise use the apparatus covered by the inventions of the Inventor, for the life of the patent, when issued, or any patents which may be taken in the future, as well as upon any improvements which may be made upon said invention, the intention being that if said device shall be perfected and shall be found to be practical from a manufacturing and sales standpoint, and the Manufacturer shall elect to manufacture said device, including any improvements thereon, commercially, that the exclusive right to-, so manufacture and vend the same or license others so to. do, is hereby given to the Manufacture!'. [Italics ours.]

In addition, this agreement contained provisions covering: (1) the manufacturer was to pay Wemp a sum equal to a certain percent of the selling price of the total number of the clutches sold each year, said percent varying according to the number sold; (2) patents to be obtained in the name of the inventor at the expense of the manufacturer; (3) that at such time as the clutch was proven to be commercially satisfactory Wemp was to receive the additional sum of $250.00 per month for services to be applied in introducing the clutch to the market (he was at the time of the execution of the agreement employed by Long at a salary of $250.00 per month); (4) that these salary payments were to continue until the production of the clutches reached certain totals at which time they were to cease; (5) that if the manufacturer should at any time find the production of the clutches impractical it could cancel the contract upon notice to Wemp; (6) that Long should use its best efforts in marketing the invention and upon failing to do so, Wemp upon notice could cancel the- agreement; (7) that the inventor was to defend the manufacturer against any infringement suits and satisfy any judgment against the manufacturer as the result of such suits; (8) that any new inventions and patents in connection with the clutch which he should create during the life of the agreement were to be considered as part and parcel of the agreement and that the manufacturer might license others to manufacture and produce the invention, the fee for such licensing to be paid as agreed by Wemp and Long who were to divide said fee equally.

By April of 1922, the Long Manufacturing Company made its election under the agreement and began to manufacture, use, and sell the clutches. There were several amendments to this 1921 agreement to which reference will be made later.

Plaintiffs contend that the patent conferred upon Wemp the exclusive right to make, use, and sell his invention for the life of the patent. When Wemp executed the 1921 agreement, he granted all of these rights to Long and the payments received by Wemp thereunder represented the purchase price. Plaintiffs contend that the other provisions of the agreement summarized above did not operate to defeat a conveyance of all. the patent rights, but that they were necessary in order to insure Wemp an equitable return for the assignment of the patent rights.

In contending that no assignment occurred, the defendant points to the failure to use words clearly denoting such in the 1921 agreement, the presence of provisions in that agreement for termination thereof, and the language employed in the amended agreements which were later executed. These factors, defendant asserts, show that it was not the intention of the parties that an assignment was to take place under the 1921 agreement, and that it is the intention of the parties which is to govern.

A patent confers upon the inventor the exclusive right to manufacture, use, and sell the invention for the life of the patent. 35 IT. S. C. §40 (1946). In order to constitute a valid assignment the inventor must transfer all of these rights. The grant of anything less is a mere license which conveys no proprietary interest to the licensee. Waterman v. Mackenzie, 138 U. S. 252; United States v. General Electric Co., 272 U. S. 476.

While it is true, as defendant contends, that the intention of the parties is to govern, the best evidence of this intention is the very words used in the contract. Here Wemp had by the terms used parted with all to which his patent entitled him, i. e., the right to make, use, and sell the invention for the life of the patent.

Whether the transfer of the rights under a patent is an assignment or a license is not to depend entirely upon the name by which the agreement granting the rights is called but upon the legal effect of its provisions. Kimble Glass Company, 9 T. C. 183. Thus, the grant of the exclusive right to make, use, and vend the invention for the life of the patent has been held to be an assignment even though the instrument was described as a “license” and the parties were designated as “licensor” and “licensee.” Myers v. Commissioner, 6 T. C. 258; Parke, Davis & Co. v. Commissioner, 31 B. T. A. 427.

Clauses in these patent agreements permitting their termination by either party upon the occurrence of stated events or conditions have been construed by the courts to be conditions subsequent so as not to defeat the sale of the patent. Lamar v. Granger, 99 F. Supp. 17; Kimble Glass Company, supra.

These provisions, as well as the others that appear in the agreement, are ones which have become peculiar to the patent field. In Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U. S. 24, the court stated:

Patent property is the creature of statute law and its incidents are equally so and depend upon the construction to be given to the statutes creating it and them, * * * It is not safe therefore, in dealing with a transfer of rights under the patent law to follow implicitly the rules governing a transfer of rights in a chose in action at common law.

Recognition of this distinction must be made when construing agreements transferring patent rights. From the viewpoint of both parties, payment on a royalty basis is the only equitable method by which a fair consideration can be obtained. Provision for termination is needed on the inventor’s side since it would be his only relief if the manufacturer stifled production of his invention. A like provision is required by the manufacturer since the invention may prove to be worthless. Since there is no absolute way of insuring that the device patented is completely original, the possibility of infringement is present and the manufacturer desires protection against it.

The plaintiffs in asserting that a sale occurred under the 1921 agreement rely on Myers v. Commissioner, supra, where an agreement very similar to the one here in question was present. The Tax Court in the Myers case held that the exclusive license agreement granting to the licensee the right to make, use, and sell the invention constituted a sale of the patent rights for federal income tax purposes. The Commissioner of Internal Revenue at first acquiesced in this decision (1946-1 Cum. Bull. 3), but later withdrew this acquiescence. (Mim. 6490.1950-1 Cum. Bull. 9.) As the Revenue Bill of 1950 was passed by the House of Representatives, section 117 provided that royalty payments on inventions were not to be considered as capital gains made from the sale of capital assets for tax purposes. This exclusion was struck out in the Senate, and it did not appear in the finally adopted bill (U. S. Code Cong. Serv., 1950, p. 3140). However it is not to be inferred from this, as the plaintiffs urge, that Congress has given its sanction to the proposition that in all situations wherein an inventor grants to another his patent rights with payments to be made on a royalty basis that ipso facto the inventor has satisfied the exchange or transfer requirement of section 117.

In Eterpen Financiera Sociedad De Responsabilidad v. United States, 124 C. Cls. 20, cert. denied, 346 U. S. 813, we had before us a “license agreement” wherein the exclusive right to make, use, and vend was present, and the plaintiff contended that a sale had occurred. In that case we stated:

* * * It is true that a license to make, use, and vend a patented device gives rise to an assignment of a patent where the document granting such a license is consistent with a present intent by the owner to transfer the patent. If however, there are present in the license agreement itself, or in some closely related document which must be considered a part of the same transactions, factors which expressly negative the intent to make a transfer of the patent, the transaction cannot be held the equivalent of an assignment.

We believe this to be the correct test to be applied in these situations.

In the Eterpen case the parties had executed simultaneously with the license agreement an option agreement wherein the patentee warranted that it was “the sole and exclusive owner of the entire right, title, and interest in and to all of the patents” and that it had “the full right and power to assign and transfer the same.” In deciding against the taxpayer we held that the execution of this option agreement contemporaneously with the licensing contract was a factor expressly negativing any present intent to make an assignment of the patent. We stated that if the license agreement had been an assignment the words in the option contract would have become meaningless since the taxpayer would have had nothing left to convey under the option provision. Here we have no such option provision. Under his patent the Government granted Wemp the monopoly in regard to the manufacture, sale, and use of his invention for a period of 17 years. Under the patent this was all he had, and with the 1921 agreement he transferred to Long all of these rights. His granting of the “sole and exclusive right to manufacture, vend, sell, license, or relicense or in any wise use the apparatus covered by the inventions” gave rise to the assignment of the patent and there are no factors present in the provisions which follow to contradict this assignment.

During the period from 1921 to 1940 various amendments to the 1921 agreement were executed by the parties. It is the contention of the defendant that while these later instruments were not contemporaneous as was the option contract in the Eterpen case, they should be looked to as guides in establishing the intention of the parties in respect to the original agreement. We do not here'decide the question as to just how much consideration must be given to subsequent acts of the parties in determining their intentions under a prior contract. We believe that it is sufficient for our purposes here to note that there are no express factors present in any of these subsequent agreements which alter in any way the exclusive right to make, use, and sell granted in the 1921 instrument. (See Finding 21.)

• All cases relied on by the defendant in support of its contention that no assignment occurred here are distinquishable from our situation. In Rhodes-Hochreim Mfg. Co. v. International Ticket Scale Co., 57 F. 2d 713, the agreement contained an option provision; in Kaltenbach v. United States, 66 C. Cls. 570, no exclusive right “to make, sell and use” phrase or like words was present; in Cleveland Graphite Bronze Co. v. Commissioner, 10 T. C. 974, while the right to make and sell was given, the right to use was not; and in Coffman v. United States, 119 C. Cls. 494, and Federal Laboratories v. Commissioner, 8 T. C. 1150, both of which involved the same agreement, this court in the former case held that under the Royalty Adjustment Act, 35 U. S. C. 89, the question as to license or assignment was not determinative of the issue involved, and the Tax Court in the latter found that all three rights had not been granted.

We come now to the third and final requirement which appears in section 117. Did Wemp hold this capital asset for a period of six months prior to the assignment so that the payments received may be taxed at the rates applicable to long term capital gains ? The defendant contends that he did not. It is settled law that the holding period of an invention under section 117 begins on the date on which the original invention is reduced to practical application. Diescher v. Commissioner, 36 BTA 732. The parties here are in agreement that this occurred in the fall of 1920 when Wemp first produced a working model of his new clutch. The contract with Long was executed on September 15, 1921, so that Wemp held his invention beyond the required six months. Although he first discussed his new clutch design with Long officials in September of 1920, there is nothing in the evidence which supports the defendant’s contention that a binding contract was created at that time. In September of 1920, the officials of Long had merely stated that they might be interested in the clutch if Wemp could prove it to be practical from a manufacturing, engineering, and sales standpoint. (See Finding 11.) The agreement of September 15, 1921, was not executed until an examination of the design by automotive engineers reported the clutch engineeringly sound. Even then, by the very words of the agreement, Long was not to make its final election until the clutch was shown to be practical from both the manufacturing and sales viewpoint.

Kuzmick v. Commissioner, 11 T. C. 288, relied on by the defendant, is distinguishable. In that case the inventor was held to have entered into a binding agreement respecting the patent rights to his invention prior to his having reduced it to practical application. Thus, upon his perfecting a working model the rights thereto went to the assignee. Here Wemp had for many months prior to the contract reduced his design to practical application.

Defendant urges finally that as to the holding period requirement, a distinction must be made as to the payments received in connection with the original invention and those received in connection with the improved version of the clutch. Defendant contends that since under the agreement the rights to the improvements passed immediately upon their perfection, it cannot be said that Wemp held them for any period of time. In so urging, we believe that the defendant has failed to recognize an important right which the inventor acquires when he perfects his invention. This is the right to patent any future improvements which he might make. If anyone else had created an improved version of his clutch, he would not have been able to place it on the market without infringing upon Wemp’s patent. In order to put it to use it would be necesary to secure Wemp’s consent. This right along with the others acquired with the reduction of his clutch design to practical application were held by Wemp beyond the six months required and passed under the 1921 agreement.

We hold that the 1921 agreement was a sale of a capital asset held for more than six months, and the plaintiffs are, therefore, entitled to the benefits of section 117. Entry of judgment will be suspended pending the filing of a stipulation by the parties showing the amount due the plaintiffs.

Madden, Judge; Whitaker, Judge; Littleton, Judge; and Jones, Chief Judge, concur.

FINDINGS OF FACT

The court makes findings of fact, based upon the evidence, the report of Commissioner Richard H. Akers, the stipulation of the parties, and the briefs and argument of counsel, as follows:

1. The plaintiffs named in this proceeding when the petition was filed on February 20, 1950, were “Ernest E. and Lila G. Wemp”, husband and wife, who resided in Detroit, Michigan. After the trial had been held Ernest E. Wemp died. Thereafter a motion was allowed for the substitution of the executors for the Estate of Ernest E. Wemp for the decedent, and the substitution of the letter “A” for the letter “G” as the middle initial of the decedent’s wife. For convenience, when the term “plaintiff” in the singular is used, reference is made to Ernest E. Wemp; and when the term “plaintiffs” in the plural is used, reference is made to the appropriate parties plaintiff in existence at the time such events occurred.

2.Within the time required by law, the plaintiffs filed with the Collector of Internal Revenue at Detroit, Michigan, joint individual income tax returns for the calendar years 1943 to 1947, inclusive. The following table sets forth a summary of the information included in those returns:

The taxes described in those returns were paid in installments prior to or on the dates fixed by the Internal Revenue Code for making installment payments due on income tax returns.

3.The plaintiffs filed claims for refund of income taxes paid for the calendar years 1943 to 1947, inclusive, on the dates and in the amounts stated below:

Year Date Claim Filed Amount

1943-February 20, 1947_ $35, 502.74

1944_February 20, 1947_ 35,099.75

1945_February 20, 1947_ 37, 850. 66

1946_September 24, 1947__ 36,734.95

1947_May 25, 1949_ 52,307.47

4.One of the grounds for refund stated in the above claims for refund was that the payments received annually from Long Manufacturing Division of Borg-Warner Corporation, Detroit, Michigan, were taxed as ordinary income, whereas those payments should have been taxed as proceeds from the sale of a capital asset. The only question involved in this proceeding is whether those payments received annually from that company should be taxed as ordinary income or as proceeds from the sale of a capital asset.

5. With respect to the grounds set forth in the claims for refund and now in issue in this proceeding, the Commissioner of Internal Revenue notified the plaintiffs by registered mail, on the dates indicated below, that the claims for refund for the years 1943 to 1946, inclusive, had been rejected:

Date of Notification
Year of Refection
1943_March 9,1960
1944_January 16, 1950
1945_March 9,1950
1946_February 7,1950

With respect to the claim for refund for 1947, claiming that the annual payments received from the Borg-Warner Corporation should be taxed as proceeds from the sale of a capital asset, this claim had been on file with the Commissioner of Internal Revenue for more than six months on the date that the plaintiffs filed their petition with this Court on February 20, 1950.

6. In 1901, after graduating from Oxford High School, Oxford, Michigan, the plaintiff was employed by the Ensley Bellaire Company, Oxford, Michigan, which company was engaged in operating a bean elevator. It was his duty to maintain the elevator machinery in good operating order. He had studied mechanical engineering at the Michigan Agricultural College for two years. While he was employed by the bean elevator company he made two inventions. The first invention related to a brass sleeve, which reduced the wear and tear on a bean picking machine, and a patent was issued to him thereon on September 8, 1903. The second invention related to a bean cleaning and polishing machine, which raised the standards of beans of a low commercial grade to a higher grade, and a patent was issued to him thereon on January 16, 1906. In 1903 he ceased worldng for Ensley Bellaire Company, purchased a lot next to the bean elevator, erected a small building and carried on a business of manufacturing his bean cleaning and polishing machine and a business of repairing rubber separating rolls with his brass sleeve invention. In 1905 he sold his business,-including the two inventions, to A. T. Ferrell Company ■of Saginaw, West Side, Michigan. After the sale he was employed by the Ferrell Company which was engaged in •the business of manufacturing bean handling machinery •and machinery for handling peas and clover, as general .superintendent of the machine shop, where he remained until 1906.

7. For about two years thereafter the plaintiff operated a garage at Oxford, Michigan. In the fall of 1908 he moved to Pontiac, Michigan, and became actively interested in automotive engineering. He accepted a position with the Welch Motor Car Company of Pontiac, Michigan, as layout man. He remained with that company for about a year and was then employed by the Eapid Motor Vehicle Company, which was a subsidiary of the General Motors Corporation, truck manufacturers, and which later became known as the General Motors Truck Company. He was employed as a tool designer and later became a layout man and chassis layout man. He next became chief draftsman and finally became assistant chief engineer. He remained with that division of General Motors until about 1912. In 1912 he was transferred as chief engineer to Randolph Motor Truck Company, another subsidiary of General Motors Corporation. He remained with that company for only a few months as it was sold back to other interests. He was then transferred to the Research Division of General Motors Corporation as a junior engineer. He remained with the Research Division for about six months and then returned to the General Motors Truck Company at Pontiac, Michigan, as acting chief engineer. When an older man was brought in and made chief engineer, the plaintiff resigned in 1913.

8. After resigning from the General Motors Truck Company, the plaintiff conceived the idea of a vehicle suspension system for automobiles. . He developed a hand model of this system and interested four individuals in it who contributed a total of $4,800 to be used in connection with developing this idea. These parties were to have an interest in the invention with the plaintiff. The invention did not prove commercially practical, but if it had proved practical the parties had intended to manufacture it and sell it as an accessory for Model-T Fords. The patents which were issued on the suspension invention expired without having been used.

9. In the fall of 1914, the plaintiff was employed as chief engineer of the Denby Motor Truck Company, Detroit, Michigan. Beginning in 1916, and during World War I, along with a number of other engineers from other truck companies, the plaintiff spent the greater part of the next eighteen months in Washington, D. C., working on a standardized truck program for the United States Army. He resigned from the 'Denby Motor Truck Company in the summer of 1919 to accept a position as chief engineer of Graham Brothers Company of Evansville, Indiana, where he was in charge of the design of a one and one-half ton truck. He remained with the Graham Company until the summer of 1920. He resigned from that company because the flu epidemic of the winter of 1919-1920, together with the extremely hot weather of Evansville, Indiana, combined to ruin his wife’s health and he was forced to return to Detroit so that she could be placed in a hospital for an operation.

10. The plaintiff conceived his first idea about an improved friction clutch construction from the testing of the Class B truck in connection with the United States Army truck program during World War I. He did not place the idea in the form of a design until the spring of 1920. In July 1920, Stuart C. Barnes, a lawyer of Detroit, Michigan, was employed to prepare and file a patent application on the friction clutch invention. The application for the patent was filed on September 13, 1920, and the patent thereon was issued to the plaintiff October 28, 1924. It was possible to make a working drawing from the original design which was reproduced in the patent application, and shortly after the summer of 1920 a working model was made from the design.

11. After the plaintiff had completed the drawing of the invention and had filed his application for a patent, he showed it to the Long Manufacturing Company, Detroit, Michigan, a manufacturer of automotive radiators. The plaintiff believed that his invention was commercially practical, and, as there had been many clutch troubles during that period, he thought that a good market might be established for his invention. After explaining the technical operation of the clutch to them, the officials of the Long Manufacturing Company stated that they were quite interested in the invention, and if the plaintiff could show that it was practical from a manufacturing, engineering, and sales standpoint, the Long Company might be interested in manufacturing and selling the clutch. A written contract was not made at the time the plaintiff discussed his invention with the Long Manufacturing Company in September 1920, but it was understood that if the plaintiff could demonstrate that the clutch was practical from a manufacturing, selling, and engineering standpoint, the plaintiff and the Long Manufacturing Company would negotiate a contract whereby that company could manufacture and sell the clutch.

12. Thereafter, on September 20, 1920, the plaintiff began working in the plant of the Long Manufacturing Company on a working model in order to demonstrate to that company that the invention was practical. The Long Company agreed to pay the plaintiff $250 a month while he was making a clutch in accordance with the original drawing. By September 1921 progress had been made to the point where both the Long Manufacturing Company and the plaintiff were well satisfied that the invention was practical from an engineering standpoint, but they had not been able to determine that it was practical from a manufacturing and sales standpoint. Inspection of the plaintiff’s invention by engineers of automobile companies resulted in the consensus that the clutch would be more commercially salable if it were made in the form of a plate clutch instead of a cone clutch as the plaintiff had originally designed it. Thereafter a plate clutch embracing the plaintiff’s invention was designed, constructed, and installed in a test car as shown in the next succeeding finding. By September 1921 automobile engineers had decided that from an engineering standpoint this clutch was sound.

13. The principal feature of the plaintiff’s friction clutch invention was “a rolling-in type of engagement”. This feature of the invention is described in Patent No. 1,513,202, application for which was filed on September 13, 1920:

This action is a progressive one and is in effect a rocking action so that the entire width of the clutch facing sort of rocks into engagement with the surface of the female clutch member. This progressively and evenly augments the gripping area to absolutely prevent any grabbing action and makes the engagement an easy and gradual one.

The first working model of the friction clutch, which was in the. form of a cone clutch, was installed in a Nash car which was furnished by the Long Company. When, as set out in the preceding finding, this installation was shown to the engineers of the automobile companies, they suggested that the plaintiff’s friction clutch would be more commercially salable if it were made in the form of a plate clutch. The plaintiff’s friction clutch was then built in a plate type clutch and installed in the same Nash car, and by September 1921 the Long Company and the plaintiff had decided that the friction clutch invention was sound from an engineering standpoint. On May 19, 1921, the plaintiff filed an application for a patent with his friction clutch invention used in the plate type clutch. The first application filed by the plaintiff on September 15, 1920, exemplified his friction clutch in a cone type clutch and embraced the basic idea of the rolling-in type of engagement. The second application, which was filed on May 19, 1921, was a specific, application for an improvement in the basic application. A few years after the plaintiff had applied for patents exemplifying his friction clutch in cone and plate type clutches, he applied for a patent exemplifying the invention in a single plate type clutch. The plaintiff thus received three patents which employed the rolling-in type of engagement and they are all specific instances of the generic invention. All of these patents in respect to the friction clutch invention have long since expired, but from time to time the plaintiff has made improvements to the friction clutch invention and has applied for patents and has been issued patents on the improvements, all of which are listed in Schedule A of the agreement of December 30, 1938, hereinafter referred to.

14. As the clutch was ready to be shown and introduced to the trade, a written agreement, dated September 15,1921, was entered into between the plaintiff and the Long Company in which the plaintiff is designated as the “inventor” and the company as the “manufacturer”. In substance the agreement provided that the plaintiff had represented to the manufacturer that he had discovered a new and novel design and method of the manufacture of an automobile clutch and had filed applications for patents thereon; that the manufacturer believed that the clutch by reason of its revolutionary character was not at that time in appropriate form to be marketed but required further experimentation; that both parties were desirous of fully developing the device, and if satisfied with its performance, of arranging for the marketing thereof, and that for these purposes the plaintiff desired to cooperate with the manufacturer and grant it certain rights, licenses, and privileges in consideration of payments to be made by the manufacturer. Under that agreement and in furtherance of the purposes outlined above, it was agreed that the manufacturer would hire the inventor from month to month at a salary of $250 monthly from and after September 15, 1920. The agreement then provided that:

In consideration of such hiring the Inventor agrees to devote such time as may be necessary to build sample devices in accordance with the invention of the said Inventor as directed by the Manufacturer, and devote such time as the Manufacturer shall deem necessary for properly testing and working out the principles involved in said invention. It is further agreed that the Manufacturer is hereby granted the sole and exclusive right to manufacture, vend, sell, license or re-license, or in any wise use the apparatus covered by the inventions of the Inventor, for the life of the patent, when issued, or any patents which may be taken in the future, as well as upon any improvements which may be made upon said invention, the intention being that if said device shall be perfected and shall be found to be practical, from a manufacturing and sales standpoint, and the Manufacturer shall elect to manufacture said device, including any improvements thereon, commercially, that the exclusive right to so manufacture and vend the same, or license others so to do, is hereby given to the Manufacturer.

The agreement further provided that when the manufacturer determined that the device was practical and marketable and evidenced its willingness to proceed with the manufacture thereof, the manufacturer should pay to the inventor as royalty upon such devices and improvements thereon a sum equivalent to three percent on the selling price of all such devices sold up to 50,000 clutches, two percent upon clutches sold between 50,000 and 100,000, and one percent on all clutches sold in excess of 100,000; that the royalty payments should be based upon clutches sold annually rather than cumulatively; that the patents should be obtained in the name of the plaintiff at the expense of the manufacturer; that, at such time as the parties agreed that the clutch was commercially satisfactory, the plaintiff should be paid the further sum of $250 per month, making his total salary $500 per month during such time only as was devoted by the manufacturer to introducing the clutch to the market in which effort the plaintiff agreed to assist; that the additional $250 per month should be paid only until such time as contracts were secured for the production of 10,000 or more clutches, whereupon such payments should cease; that when additional orders or contracts were secured for the production of 20,000 or more clutches, the original salary of the plaintiff of $250 per month should be suspended and royalties substituted therefor; that if at any time the manufacturer should determine and give notice to the inventor that in its opinion the device was not practical or salable, the manufacturer should have the right to cancel the contract and upon notice to the inventor all rights under contract should terminate as to both parties; that the inventor should at his own expense defend his application for patent on the clutch or any other patents issued in his name against infringement and also to defend the manufacturer against any such suit and to pay, satisfy and discharge any judgment against the manufacturer .in such actions; that any new inventions, patents or improvements in connection with the plaintiff’s clutch which should be discovered by the inventor during the life of the agreement should be considered a part of the agreement with the royalties specified in the agreement being applicable thereto; that the manufacturer might license others to manufacture and produce the device, in which event the license fee to be paid should be agreed upon by the parties to the present agreement and be divided between the manufacturer and the inventor in the portion of fifty percent to each; and that the manufacturer would use its best endeavor to market the plaintiff’s device, failing in which after a reasonable time the inventor should have the right of canceling and terminating the agreement.

The exclusive right to manufacture, vend and use his invention, as set out in the foregoing agreement of September 15, 1921, was granted by the plaintiff to the Long Manufacturing Company at the insistence of the Long Manufacturing Company, the plaintiff being advised that unless the rights granted were exclusive the company would not be interested in the invention.

15. The Long Manufacturing Company did not give the plaintiff written notice that it was electing to manufacture, use and sell his friction clutch invention under the terms of the agreement of September 15, 1921. However, on December 24, 1921, Long Manufacturing Company received an order for clutches from the Paige Motor Car Company of Detroit for .its production requirements for 1922 on the model known as the Jewett car. Early in 1922 the Long Company cleared out a large portion of the first floor of the plant and put in machinery and equipment necessary for production of the plaintiff’s clutches. By April 1922 the Long Company began to manufacture, use and sell the apparatus covered by the invention, and in May 1922 the plaintiff received his first royalty payments, and on the latter date the two fixed monthly payments of $250 each ceased and were never renewed. At that time the plaintiff became aware that the Long Manufacturing Company had made an election under the agreement because it had begun to manufacture, use and sell the apparatus covered by the invention.

16. Under date of January 2, 1926, the agreement dated September 15, 1921, was amended to provide for the payment of royalties, retroactive to 1925, on the basis of dollar volume instead of on the basis of the number of units sold. The amendment also granted additional protection to the manufacturer by providing that in the event any infringement suit were filed against it with respect to the plaintiff’s clutch invention, the manufacturer might withhold fifty percent of the royalties due the plaintiff until the final determination of the suit, whereupon such fund could be used to satisfy any judgment obtained, the balance being payable to the plaintiff. The other provisions of the agreement of September 15, 1921, remained in full force and effect.

17. In 1928 Borg-Warner Corporation, which manufactured various parts for automobiles, acquired all of the capital stock of the Long Manufacturing Company, which thereafter became a wholly-owned subsidiary of Borg-Warner. After this acquisition and up to December 31, 1934, the Long Manufacturing Company continued to manufacture, use and sell the plaintiff’s friction clutch invention and to pay royalties to him under the agreement of September 15, 1921, as amended by the agreement of January 2,1926. During the period 1928-1934, two wholly owned subsidiaries of Borg-Warner other than the Long Company also manufactured clutches, but such clutches were not manufactured under the plaintiff’s patents. In December 1934, Borg-Warner Corporation decided that all of its subsidiaries, including the three subsidiaries which had been manufacturing clutches, should be merged into it. Under an agreement dated December 27, 1934, and two assignments dated December 31, 1934, Long Manufacturing Company transferred to the Borg-Warner Corporation all of its assets, including its interest in the plaintiff’s inventions acquired through the agreement with the plaintiff of September 15, 1921, as amended by the agreement of January 2, 1926.’

The aforesaid assignments listed forty-five United States patents and nine Canadian patents issued to the plaintiff and twenty-four patent applications filed by him in the United States, in which the Long Company believed it had acquired an interest by reason of its agreement with the plaintiff and its amendment hereinbefore referred to. The agreements recited that all of the foregoing patents and patent applications related to clutches and were the inventions of Ernest E. Wemp. One of the assignments also referred to a license acquired by the plaintiff from third parties relating to a free-wheeling device as to which license the Long Company believed it was a sub-licensee by virtue of the aforesaid agreement with the plaintiff as amended.

18. After all of Borg-Warner’s subsidiaries had been merged into Borg-Warner Corporation, that corporation approached the plaintiff and stated that it desired that all of the rights as they had existed prior to the merger under the agreement of September 15, 1921, as amended by the agreement of January 2, 1926, should be continued. Borg-Warner pointed out to the plaintiff that while the Borg and Beck Division and the Bockford Machine and Drilling Division had existed as separate corporations, these subsidiaries and the parent company itself as separate corporations could have contested the validity of claims made in the patents which had been secured by the plaintiff on his inventions, and that this could not have been done by the Long Manufacturing Company while it was operating as a separate corporation. In order to preserve the rights of all the parties as they had existed before the merger, an agreement dated April 22, 1935, was executed by the plaintiff and the Borg-Warner Corporation reading as follows:

WheREAs, the Long Manufacturing Company, a Michigan corporation (hereinafter sometimes referred to as “Long”) and Wemp entered into an agreement dated September 21, 1921, whereby Wemp granted to Long the exclusive right and license to manufacture, use and sell clutches or parts thereof embodying inventions or improvements thereof covered by patents and applications for patents, the subject matter of said agreement in accordance with the terms thereof and which agreement was amended by the parties by an agreement dated January 2, 1926 (which agreement as amended being sometimes hereinafter referred to as “license agreement”), which license agreement and amended agreement is made a part hereof by reference; and,
WheReas, Long, prior to. December 31, 1934, was a wholly-owned subsidiary of Borg-Warner and as of December 31, 1934 Long transferred, assigned, and conveyed title to all of its assets, real and personal, including the business and good will, to Borg-Warner, among which assets was the license agreement hereinabove referred to, and prior to such transfer the name of Long was changed to that of “The L. M. Company”; and,
WheReas, since said transfer Borg-Warner has allocated all of the assets applicable to said Long business and as shown upon the books of said Company as of December 31, 1934, to the Long Manufacturing Company Division of the Borg-Warner Corporation (hereinafter sometimes referred to as “Long Division”) and the operations in the Long plants since December 31, 1934 have been and are carried on substantially in the same manner and with the same assets as before; and,
Whereas, in this connection it is deemed desirable to obtain Wemp’s written consent to the assignment by Long to Borg-Warner of said license agreement, to the end that the rights of Wemp will remain substantially the same under said license agreement as before the transfer of the assets to Borg-Warner;
Now, Therefore, in consideration of the premises and in consideration of One Dollar and other valuable consideration in hand paid by each of the parties to the other, the receipt of which is hereby severally acknowledged, and in consideration of the mutual covenants and agreements herein contained, the parties hereto mutually covenant and agree with each other as follows:
1. Wemp hereby consents to, ratifies and confirms the assignment of said license agreement by Long to Borg-Warner and Borg-Warner agrees to keep and perform the covenants and agreements to be kept and performed by Long in accordance with the terms of said license agreement, subject, however, to the following terms and provisions:
(a) The manufacture and sale of clutches or part or parts thereof embodying any of the inventions covered by the patents, the subject matter of said license agreement, shall be conducted in and through the plants and organization of the said Long Division located at Detroit, Michigan, in the manner provided for in said license agreement.
(b) Borg-Warner shall have and enjoy and exercise all the rights of said Long in and under the said license agreement, which license agreement is hereby reaffirmed and continued in full force and effect.
2. The rights and liabilities of the parties hereto are not hereby enlarged, extended or limited, except as provided in paragraph 1 (a) hereof on account of the assignment of said license agreement to Borg-Warner but will remain and continue to be the same as they existed prior to December 81, 1934, and Borg-Warner to have the same right to contest the validity of, or any claim of infringement of, any of said patents or claims thereof the subject matter of said license agreement with respect to any clutches now or hereafter manufactured and sold through subsidiaries, divisions, and plants of Borg-Warner other than the Long plant and/or Long Division, as aforesaid, to the same extent as if Borg-Warner had not acquired title to all of the assets of Long.
3. The parties hereto agree to and hereby do mutually release each other from any and all claims which may have arisen prior to the date hereof by reason of any infringement by either party or its licensees of patents owned or controlled by either party hereto, particularly any and all patents coming within the scope of the license agreement.
4. The covenants and agreements herein contained shall be obligatory upon the respective parties hereto and upon the executors and assigns of Borg-Warner and upon the heirs, executors, administrators, and assigns of Wemp.

19. As Borg-Warner and the plaintiff were about to sign the agreement of April 22, 1935, it was discovered that this agreement alone would not preserve the rights of the various divisions as they had existed prior to the merger. As the amended agreement limited the manufacture to the Long Division in Detroit, the rights pertaining to foreign patents would have been lost to the Borg-Warner Corporation. As the parties had intended that all the rights should be preserved as they had previously existed, a memorandum agreement, also dated April 22, 1935, was signed simultaneously with the other agreement. That collateral agreement read as follows:

Mr. Wemp agrees to make application for letters patent on all his clutch inventions embodied in U. S. letters patents and applications therefor and any improvements thereon in the future in all foreign countries, except Canada, as requested by Borg-Warner Corp., and to assign such applications to Borg-Warner; Borg-Warner Corp. to bear all costs in connection with said applications and procuring the letters patent. _
_ Mr. Wemp agrees to make application for Canadian letters patent and to give Long Mfg. Co. Ltd. an exclusive license containing the same terms and conditions as the present so-called Wemp Agreement with a royalty as provided below; Long Mfg. Co. Ltd. to bear all costs in connection with said applications and procuring the letters patent.
Long Mfg. Co. Ltd. agrees to pay Mr. Wemp an annual royalty on all clutches manufactured under the Wemp patents in Canada determined as follows:
1935-No royalties
1936- 1% of sales price
1937 and subsequent years during life of patents. 1%% of sales price
The above agreement will be embodied in formal instruments to be prepared.

20. By an instrument dated July 24, 1935, the plaintiff and the Borg-Warner Corporation executed an assignment agreement reading as follows:

Whereas, Borg-WarNer is the exclusive licensee throughout the entire territory of the United States of America under certain United States patent rights owned by Wemp and relating to clutches of the type generally applicable for use in the power drive mechanism of motor vehicles and the like, and
Whereas, Borg-WarNer is desirous of acquiring the entire right, title and interest in and to all Letters Patent in countries foreign to the United States, except the Dominion of Canada, based upon the improvements, inventions, applications for Letters Patent and Letters Patent of the said United States patent rights, now or hereafter made or acquired by Wemp, and
Whereas, Wemp, as licensor to Borg-Warner, has in the past received and is at present the recipient of substantial royalty payments from Borg-Warner by virtue of its commercial exploitation, throughout the territory of the United States, of the said United States patent rights, and Wemp is therefore desirous of assigning to Borg-Warner all patent rights in all countries foreign to the United States, except the Dominion of Canada, based upon his said United States patent rights relating to clutches, as aforesaid,
Now, TheRefoke, in consideration of One. Dollar ($1.00) in hand paid and of other good and valuable consideration by Borg-Warner to Wemp, the receipt of which is hereby acknowledged, Wemp agrees to assign, transfer and set over, and does hereby sell, assign, transfer and set over to and unto Borg-Warner, its successors and assigns, the entire right, title and interest in and to the said improvements, inventions, applications for Letters Patent and Letters Patent made or acquired, or hereafter made or acquired, based upon the said United States patent rights, in all countries foreign to the United States, except the Dominion of Canada.
Wemp further agrees that he will execute and deliver on the request of Borg-Warner all lawful papers including applications, additions, renewals, assignments, powers of attorney, oaths, affidavits, depositions, etc., necessary to secure to Borg-Warner the said patent rights in countries foreign to the United States, except the Dominion of Canada, and generally to do everything possible to aid Borg-Warner, its successors and assigns, in obtaining and enforcing proper protection of the said improvements, inventions, applications for Letters Patent and Letters Patent, embodied in and contemplated by the herein contained assignment.
The herein contained agreement to assign to Borg-Warner patent rights in countries foreign to the United States, except the Dominion of Canada, based upon patent rights of the United States hereafter made or acquired by Wemp shall remain in full force and effect so long as Borg-Warner is a licensee under the said United States patent rights, or Wemp is associated with or employed by Borg-Warner or a division of Borg-Warner.

21. In December 1935 the plaintiff discovered that the other two clutch divisions of Borg-Warner Corporation, that is, Borg and Beck of Chicago and Eockford Machine and Drilling Division of Eockford, had been manufacturing and selling clutches since the date of the April 22, 1935, agreement, which the plaintiff claimed infringed the patents on his clutch invention. During the week preceding Christmas of 1938, the plaintiff went to Chicago and negotiated a settlement for the infringement. An agreement was reached for the payment of back royalties and it was agreed that the two divisions which had been infringing would continue to manufacture and sell clutches, but not under a state of infringement. As the other two Borg-Warner divisions were to pay royalties on the clutches manufactured by them, Borg-Warner requested the plaintiff to consider a reduction in the royalty rates. New royalty rates were negotiated. In order to place these agreements in effect .it was necessary to enter into another written agreement. As the September 15, 1921, agreement, up to the date when these negotiations started, had been amended four times, which meant there were five agreements in existence, it was decided that all of the agreements should be consolidated into one instrument. This was done by an agreement dated December 30, 1938, but effective as of January 1,1939. The agreement of December 30, 1938, effective as of January 1, 1939, which superseded the September 15, 1921, agreement and the four amendments thereto, did not change the original license agreement of September 15, 1921, in respect to the exclusive right of Borg-Warner (the successor of Long Manufacturing Company) to manufacture, use and sell the plaintiff’s friction clutch invention and improvements thereon, but continued the same in the consolidated agreement.

22. By an agreement dated December 27, 1940, effective as of January 1, 1941, the license in respect to Canadian manufacture, which had originally belonged to Long Manufacturing Company, but had been granted in April 1935 to Long Manufacturing Company, Ltd., a wholly owned subsidiary of Borg-Warner, was restored to Borg-Warner Corporation. After the execution of this agreement, all royalty payments made thereafter by Borg-Warner were made under the amended consolidated agreement of December 30, 1938. Attached to and made a part of that agreement was a schedule entitled “Schedule B” in which were listed the Canadian patents and patent applications referred to in the agreement.

23. During the years 1943 to 1947, inclusive, the plaintiff received the royalty payments under the agreements herein-before referred to and included in a joint return the following amounts as ordinary income for the respective years:

The above royalty payments were received by the plaintiff from the Long Manufacturing Division of Borg-Warner Corporation for the exclusive right to manufacture, use and sell the plaintiff’s friction clutch invention and improvements thereon as listed in Schedules A and B of the agreement of December 30, 1938, as amended December 27, 1940.

24. Under the agreement of December 30,1938, as amended by the agreement of December 27, 1940, the plaintiff agreed to continue, without additional compensation, rendering services as consulting engineer to Long Division as in the past, and also to render similar consulting services to any of the other divisions of Borg-Warner so long as Borg-Warner should have an exclusive license. The plaintiff has rendered consulting and advisory service to the Long Division only in connection with his invention and improvements thereon, but he has never received any compensation or salary on account of these services. The plaintiff has never rendered any consulting services to either of the other two clutch divisions of Borg-Warner. The plaintiff’s advisory and consultation services were incidental to the exclusive license agreement, and were undertaken by the plaintiff so as to secure more royalties on his friction clutch invention. The plaintiff has never had a Social Security number and he has never paid any Social Security taxes. Borg-Warner Corporation has a pension plan for its employees but the plaintiff has never been included in the plan.

25. Beginning with 1901, when the plaintiff was first employed and including all his employments up to the summer of 1920 when he had his first discussion with Long Manufacturing Company in respect to his invention, none of the companies had employed him to do any inventing work. With the exception of the friction clutch invention, Wemp never sought to dispose of any of his inventions for a consideration. The friction clutch invention was offered only to the Long Manufacturing Company. The plaintiff has never bought inventions from other persons or corporations for the purpose of carrying on a business of buying and selling inventions. The plaintiff did not include any of his inventions, applications for patents or patents in an inventory.

CONCLUSION OF LAW

Upon the foregoing findings of fact and stipulation of the parties, which are made a part of the judgment herein, the court concludes that as a matter of law the plaintiff is entitled to recover.

The entry of judgment is suspended to await the filing of a stipulation by the parties showing the amount to which the plaintiff is entitled.

In accordance with the above opinion and order of the court, and on a stipulation by the parties, on April 7, 1953, judgment for the plaintiffs was entered for the following amounts with interest as provided by law: 1943, $35,377.23; 1944, $36,015.09; 1945, $38,859.09; 1946, $36,735.90; 1947, $52,307.41. 
      
       In a recent ease, Bloch v. United States, 2 Cir., 200 F. 2d 63, the question of the tax status of payments received under an agreement transferring patent rights was in issue The situation there wherein the court held that the royalty payments represented taxable Income received by a nonresident alien under section 211 (a)-, 26 U. S. C. 211, must be distinguished from our case here wherein a resident citizen and section 117 are involved. The court in the Bloch case recognized such distinction in referring to a prior decision of that court, Rohmer v. Commissioner, 153 F. 2d 61 at 65, where that point was set forth. In Herwig v. United States, 122 C. Cls. 493, we called attention to this distinction. In the Bloch case the court was governed by Commissioner v. Wodehouse, 337 U. S. 369, where the Supreme Court ruled that it was the statutory interpretation of section 211 (a) which was determinative of the issue and not whether a sale or license was present.
     