*129 Decision will be entered under Rule 50.
Petitioner, in the years 1925 and 1927 to 1941, inclusive, made certain payments pursuant to contracts to three nonresident aliens. Held, the payments under some of these contracts were not royalties but were, in part, payments of the purchase price for certain patents and, in part, compensation for services performed without the United States and, therefore, were not subject to withholding of income tax at the source under section 143 (b) of the Internal Revenue Code and corresponding provisions of prior revenue acts; held, further, one of the contracts was only a patent license, and the payments thereunder were royalties subject to withholding.
*320 *183 This proceeding involves petitioner's liability for withholding of income taxes at the source under section 143 (b) of the Internal Revenue *184 Code*130 and corresponding provisions of prior revenue acts. The respondent has determined the following deficiencies and penalties:
| Year | Deficiency | 25% |
| penalty | ||
| 1925 | $ 300.00 | $ 75.00 |
| 1927 | 300.00 | 75.00 |
| 1928 | 750.00 | 187.50 |
| 1929 | 300.00 | 75.00 |
| 1930 | 300.00 | 75.00 |
| 1931 | 100.00 | 25.00 |
| 1932 | 100.00 | 25.00 |
| 1933 | 692.00 | 173.00 |
| 1934 | 320.00 | 79.99 |
| 1935 | $ 620.00 | $ 155.00 |
| 1936 | 880.00 | 220.00 |
| 1937 | 1,400.00 | 350.00 |
| 1938 | 1,500.00 | 375.00 |
| 1939 | 2,200.00 | 550.00 |
| 1940 | 500.00 | 125.00 |
| 1941 | 2,227.50 | 556.87 |
| Total | 12,489.50 | 3,122.36 |
Petitioner claims an overpayment for the years *131 1929 to 1941, in the total amount of $ 2,444.58.
The principal issue is whether payments made by petitioner in the taxable years to three nonresident alien individuals represented royalties for the use of patents, as contended by the respondent, or were the purchase price of patents and inventions or compensation for personal services performed without the United States, as contended by the petitioner. If this issue should be decided against the petitioner, the further question will arise as to whether the penalties for failure to file timely returns should be imposed.
FINDINGS OF FACT.
Petitioner is a corporation, organized under the laws of Illinois, with its principal office in Vineland, New Jersey. It is engaged in the manufacture of surgical glass products.
During the taxable years involved petitioner made certain payments to Felix Meyer, Jakob Dichter, and Pierre A. Favre, each of whom at all times here material was a nonresident alien not engaged in trade or business within the United States and having no office or other place of business in the United States.
Petitioner has not filed withholding tax returns on Form 1042 for the years 1925, 1927, and 1928, but as to these *132 years substitutes for returns were filed for petitioner by the respondent. In 1944 an investigation was made for the purpose of determining amounts to be withheld by the Alien Property Custodian out of funds which petitioner turned over to him as payments due to nonresident aliens, and a copy of the report of the investigation was furnished to petitioner. Subsequently, on September 14, 1944, petitioner filed with the collector at Camden, New Jersey, returns on Form 1042 for the years 1929 to 1941, inclusive. In these returns petitioner reported all payments to Meyer and Dichter which were based on production or gross sales and paid tax, penalty, and interest thereon.
On September 17, 1925, petitioner entered into a written contract *185 with Felix Meyer, a resident of Aachen, Germany. The contract recites that
* * * Kimble purchases sole rights for the manufacture and sale of all articles covered by German Patent No. 415 280 respectively by the equivalent USA application and all improvements thereto for the United States and their possessions under the following conditions.
Under paragraph 1 of the contract petitioner agreed to make fixed payments to Meyer of $ 6,000 a year*133 for a period of five years. Paragraph 2 of the contract provided for additional payments based on production during the life of the United States patent, referred to in the *321 contract as "royalties," to the extent that the aggregate amount so computed exceeded the fixed payments under paragraph 1.
Petitioner was obligated to furnish Meyer an accounting and remit the payments based on production at least once each six months. It was agreed that petitioner's records of manufacture and sales should be open to Meyer's inspection.
Meyer also agreed to sell petitioner at a set price certain machines required for the manufacture of the patented articles, to furnish at all times such information as petitioner might need in order satisfactorily to manufacture the articles and improvements, and to endeavor to secure the services of a satisfactory mechanic and train him to operate the machines.
Petitioner made the five fixed payments of $ 6,000 called for in paragraph 1 in each of the years 1925 and 1927 to 1930, inclusive. In the deficiency notice respondent determined that those payments constituted income subject to withholding of tax at the source.
Petitioner made certain additional payments*134 to Meyer pursuant to paragraph 2 of the contract as follows: 1929, $ 156.42; 1930, $ 116.74; 1931, $ 1,616.67; 1932, $ 1,567.28; and 1933, $ 710.01. All these payments were included in the returns filed by petitioner in 1944, and tax, penalty, and interest were paid thereon.
On or about January 1, 1933, petitioner entered into an oral agreement with Meyer whereby petitioner agreed to pay him the sum of $ 250 a month for services to be performed in continental Europe. Pursuant thereto, petitioner made payments to Meyer totaling $ 1,150 during the first five months of 1933. In the deficiency notice respondent determined that those payments constituted income subject to withholding of tax at the source. However, he now concedes that such payments were not subject to withholding.
On June 2, 1933, petitioner entered into a written contract with Meyer which superseded all previous agreements between them. That contract provides:
2. Meyer hereby agrees to assign and does hereby assign to Kimble for the United States of America and the possessions thereof including the Philippine Islands, and the Dominion of Canada, all patents and applications of Meyer *186 and the inventions of*135 Meyer relating to glass, glass manufacture, and the conversion thereof, and products made in whole or in part therefrom, and including in the above any substitute for glass, that Meyer has made or may hereafter make except the inventions covered by the following numbered United States letters patent #1860898, and excepting the following numbered Canadian patents #293486 and #303123.
Meyer also agreed to develop his inventions diligently in the field covered by the contract, to use his best efforts to keep petitioner informed as to any developments in the corresponding field by others in Europe, and to submit to petitioner any propositions which he might obtain for the sale or licensing of said developments in the United States and its possessions and in Canada. Petitioner agreed to pay Meyer as a "retainer" $ 6,000 a year for ten years and, in addition, to pay a "royalty" of 5 per cent on the first million dollars of business and 2 1/2 per cent thereafter based on petitioner's actual sales of products covered by the patents and inventions.
Under the "retainer" provision petitioner made the following payments to Meyer in the years indicated:
| 1933 | $ 3,500 |
| 1934 | 5,500 |
| 1935 | 6,000 |
| 1936 | 6,000 |
| 1937 | $ 6,000 |
| 1938 | 6,000 |
| 1939 | 12,000 |
| 1941 | 3,500 |
*136 Respondent in the deficiency notice determined that these payments constituted income subject to withholding of tax at the source.
Petitioner also made additional payments to Meyer pursuant to the "royalty" provision of the contract, all of which were included in the returns filed by petitioner in 1944, and tax, penalty, and interest were paid thereon.
On April 27, 1934, petitioner entered into a written agreement with Jakob Dichter, a resident of Berlin, Germany, whereby petitioner acquired from Dichter "an exclusive license to make, use and vend in the United States and Canada" processes, machinery and articles under various patent applications with the right to "sublicense" others. The agreement was to continue until the expiration of the last patent, United States or Canadian, falling thereunder.
In paragraph 4 of the contract petitioner agreed to pay fixed amounts in each year, beginning with $ 5,000 in 1934, and increasing a thousand dollars each year to $ 10,000 in 1939, and in any following year while the agreement was in force. In paragraph 5 petitioner agreed to pay an additional 5 per cent on the selling price of all glass articles produced by one of Dichter's processes*137 or machines. In paragraph 6 petitioner agreed to pay Dichter one-third of any savings in the cost of production of glass articles through the use of Dichter's processes or *322 machines, but no payments were ever made under that provision.
*187 Dichter agreed to develop his inventions in the field covered by the agreement, to disclose to petitioner inventions made by him and covered by the agreement, to use his best efforts to keep petitioner informed as to any developments in the corresponding field by others in Europe, and to submit to petitioner any propositions he might obtain for sale or licensing of such inventions in the United States and Canada.
Provision was also made for petitioner to furnish Dichter with a quarterly accounting and payment and to give Dichter or his representative access to petitioner's books.
Further provision was made for the termination of the agreement by petitioner upon six months notice to Dichter on or after July 1, 1939, with the option in petitioner to continue on a nonexclusive license basis thereafter; and, upon the failure of petitioner to make any of the payments called for, Dichter was to be relieved of his further obligations under the contract.
*138 Pursuant to paragraph 4 of the agreement petitioner made the following payments to Dichter in the years indicated:
| 1934 | $ 5,000 |
| 1935 | 6,000 |
| 1936 | 7,000 |
| 1937 | 8,000 |
| 1938 | $ 9,000 |
| 1939 | 10,000 |
| 1940 | 5,000 |
| 1941 | 10,000 |
In the deficiency notice respondent determined that these payments constituted income subject to withholding of tax at the source.
Petitioner also made certain payments to Dichter under paragraph 5 of the contract based on production and sales, all of which payments were included in the delinquent returns filed by petitioner in 1944, and tax, penalty, and interest were paid thereon.
On May 10, 1928, petitioner entered into a written contract with Pierre A. Favre, a resident of Crosne, France, under which Favre granted petitioner "an exclusive, assignable and divisible license, restricted to the United States, to make, use and vend and to practice any and all inventions covered by United States Patent No. 1,631,674." In paragraph 9 of the contract petitioner agreed to pay Favre absolutely the sum of $ 2,000 a year commencing in 1931 and continuing through 1939. Under paragraph 6 petitioner agreed to pay Favre as a "royalty" one-third of the savings on cost of *139 production resulting from the use of the invention covered by the agreement, but the fixed payments under paragraph 9 were to be deducted from these payments. No payments were made to Favre under paragraph 6.
Paragraph 12 of the contract provided for a payment of $ 9,000 to Favre upon execution of the contract in final payment for the rights to operate in the United States certain machines for bottoming glass vials.
*188 During the existence of the patent petitioner was obligated to render an account to Favre each six months, showing the production of petitioner, and to make any payments that might be due under paragraph 6. In case of petitioner's failure to make any payments due under the contract, Favre reserved the right to cancel the agreement. Petitioner had the right to terminate the agreement after July 1, 1930, upon six months written notice, and also the election at any time after January 1, 1936, to surrender the exclusive rights in the patent and continue under a nonexclusive license arrangement, in which event it would be discharged from the obligation of making further $ 2,000 annual payments under paragraph 9 of the contract.
In August 1933, in consideration of*140 the payment by petitioner of an additional $ 2,000, Favre executed a written instrument releasing petitioner from all further payments under the original contract of May 10, 1928, and releasing all claims in the patent to petitioner.
Pursuant to the contract and the release petitioner paid Favre a total of $ 17,000, as follows:
| 1928 | $ 9,000 |
| 1931 | 4,000 |
| 1932 | 2,000 |
| 1933 | 2,000 |
In December 1936 petitioner submitted its agreements with Meyer and Dichter to a practicing attorney and requested his opinion as to whether payments made under such contracts were subject to withholding of tax at the source. In February 1937 the attorney, in a lengthy legal opinion, advised petitioner that no withholding was required. Relying upon such advice, petitioner filed no returns on Form 1042 until 1944, under the circumstances above stated.
OPINION.
The substance of respondent's contention is that the several agreements between the petitioner and the nonresident aliens *323 amounted to nothing more than licenses to use patents and that all payments made thereunder were "royalties," which, under the regulations, 1 constitute fixed or determinable annual or periodical income, subject to withholding*141 of tax under section 143 (b) of the *189 Internal Revenue Code2 and its predecessor provisions in earlier revenue acts.
*142 Petitioner, on the other hand, contends that all of the payments, including those based on production and sales which it reported in the delinquent returns filed in 1944, represented either the purchase price for the sale of personal property (patents), which is not subject to withholding under the regulations, 3 or compensation for personal services performed without the United States, which, by virtue of section 119 (c) (3) of the code, is not income from sources within the United States and therefore is not subject to withholding under section 143 (b). Petitioner also points out that under section 212 (a) of the code and comparable provisions of the earlier revenue acts here involved, "In the case of a nonresident alien individual gross income includes only the gross income from sources within the United States."
We think that, except for the Meyer contract of September 17, 1925, petitioner's position is correct. The contract with Dichter and the contract of June 2, 1933, with Meyer*143 both provided, in part, for the performance of personal services without the United States; and it is clear that some part of the payments made to them pursuant to the contracts was in consideration of such services. In part, the June 1933 Meyer contract superseded the oral agreement with him on January 1, 1933, to make payments for services in continental Europe, which payments the respondent has conceded are not subject to withholding. It is unnecessary, however, to determine just what portion of the payments to Meyer and Dichter under these contracts represented compensation for services, because we think the rest constituted the purchase price for the sale of property.
As to the Dichter and Favre agreements, respondent stresses the fact that they are called licenses and that the parties thereto are referred to as licensor and licensee. It is settled law, however, that the true nature of the agreement is not to be determined according to the name by which it is called. Waterman v. Mackenzie, 138 U.S. 252">138 U.S. 252. The granting of a United States patent gives the patentee, for a term of 17 years, the exclusive right to make, use, and vend the invention*144 *190 or discovery in the United States. Rev. Stat., § 4884, 35 U. S. C. § 40. When the patentee transfers all of these rights exclusively to another, even though he calls the instrument a license rather than an assignment, he transfers all that he has by virtue of the patent and the transfer amounts to a sale of the patent. Where he transfers less than all three rights to make, use, and vend for the term of the patent, or transfers them nonexclusively, the transfer is a mere license and does not convey any title in the patent itself. Waterman v. Mackenzie, supra; cf. United States v. General Electric Co., 272 U.S. 476">272 U.S. 476; Edward C. Myers, 6 T.C. 258">6 T. C. 258.
In the agreements with both Dichter and Favre petitioner was granted an exclusive and transferable license "to make, use and vend" the inventions covered by the patents and patent applications *324 included, throughout the territory in which such patents were effective, and for the life of the patents. These contracts are much the same as that involved in the Myers case, supra, and, as in that*145 case, they amount to a sale of the patents and patent applications involved.
The June 2, 1933, agreement with Felix Meyer unquestionably is an outright sale. Meyer expressly assigned to petitioner all his United States and Canadian patents and patent applications, with three stated exceptions. Compare the contracts involved in General Aniline & Film Corporation v. Commissioner, 139 Fed. (2d) 759, and in Commissioner v. Celanese Corporation, 140 Fed. (2d) 339.
The fact that, in addition to the fixed payments, other payments based on a percentage of profits or on production were called for under the contracts does not change the result. It is not infrequent that patents are sold under such terms, or even where the entire consideration is based on a percentage of income during the life of the patents. See, for example, Associated Patentees, Inc., 4 T. C. 979; Littlefield v. Perry, 21 Wall. 205">21 Wall. 205; and the Celanese case, supra. And in such cases the percentage payments, though in many respects like royalties payable under a license, are no less*146 payments of purchase price for the patent than are fixed or lump sums.
Respondent also emphasizes the rights which both the petitioner and the nonresident aliens had to terminate the contracts under certain conditions, or for petitioner to continue under a nonexclusive license arrangement. The retention of these rights, however, does not negative sales of the patents. These are much like provisions appearing in the contracts involved in the Myers and Celanese cases which were held to be mere conditions subsequent, not interfering with the passage of ownership from the patentee to the other contracting party.
Finally, the Celanese case answers in the negative the argument that, even though there may be sales of the patents, periodic payments therefor fall within the scope of the withholding statute wherever the *191 seller of the invention still has an "economic" interest in its successful exploitation.
That leaves for consideration the earlier Meyer contract dated September 17, 1925. Unlike the Dichter and Favre agreements, this contract did not convey to petitioner all three of the exclusive patent rights, i. e., to make, to use, and to vend. Only the rights *147 to manufacture and to sell are mentioned. Under the rule of the Waterman case, the agreement therefore appears to be a mere license. Parke, Davis & Co., 31 B. T. A. 427, we think, is so different factually that it does not support petitioner's contention that the instant contract amounted to a sale of the patent. There is no extrinsic evidence to show that the parties intended a sale rather than a license; and, on the basis of the written document alone, we conclude that only a license was effected. Furthermore, we do not think this contract contemplated the performance of personal services without the United States, as did the later agreements with Meyer. It follows that the payments under this contract in the years 1925 and 1927 to 1933, inclusive, were subject to withholding.
As to the delinquency penalties, the record affords no basis for a finding of reasonable cause for failure to file returns for any year prior to 1936. Therefore, the penalties as to the payments under the 1925 Meyer contract were properly imposed. In view of our holding that payments under the other contracts were not subject to withholding, the question of penalties*148 as to those payments becomes moot.
Decision will be entered under Rule 50.
Footnotes
1. Treasury Regulations 103:
"Sec. 19.143-2. Fixed or determinable annual or periodical income. -- Only fixed or determinable annual or periodical income is subject to withholding. The Internal Revenue Code specifically includes in such income, interest, dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations and emoluments. But other kinds of income are included, as, for instance, royalties.
* * * *
"* * * The income derived from the sale in the United States of property, whether real or personal, is not fixed or determinable annual or periodical income."
The provisions of earlier regulations in force throughout the period here involved were substantially the same.↩
2. SEC. 143. WITHHOLDING OF TAX AT SOURCE.
* * * *
(b) Nonresident Aliens. -- All persons, in whatever capacity acting, * * * having the control, receipt, custody, disposal, or payment of interest * * *, dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income (but only to the extent that any of the above items constitutes gross income from sources within the United States), of any nonresident alien * * * not engaged in trade or business within the United States and not having any office or place of business therein * * * shall * * * deduct and withhold from such annual or periodical gains, profits, and income a tax equal to 27 1/2 per centum thereof * * *.
[See also section 221 (a) of the Revenue Acts of 1924 and 1926; section 144 (b), Revenue Act of 1928, and section 143 (b) of the Revenue Acts of 1932, 1934, 1936 and 1938, which were substantially the same as the above. Cf. section 119 (a) (4), I. R. C.↩]
3. See footnote 1, supra↩.