*2 Decision will be entered for the respondent.
Petitioner, inventor of an electrical device known as a voltmeter and owner of all of the patent rights thereto, manufactured and sold voltmeters over a period of years receiving more than 80 per cent of the gross income from such manufacture and sale in 1945. There was no showing in this record that any part of the income was attributable to the work performed by petitioner in developing his invention. The income received in 1945 was the direct consequence of manufacturing and selling operations conducted in 1945. Held, section 107 (b), I. R. C., is inapplicable.
*59 *600 Respondent determined a deficiency in petitioners' income tax for the*3 year 1945 in the amount of $ 2,632.98. The issue is whether petitioner Alfred W. Barber, who had invented a voltmeter during the *601 period 1930-1935, is entitled to the benefits of section 107 (b) of the Internal Revenue Code with respect to income derived from the manufacture and sale of voltmeters in 1945.
FINDINGS OF FACT.
The stipulation of facts filed by the parties is incorporated herein by reference.
The petitioners are individuals, husband and wife, residing in Flushing, New York. They kept their books of account and made their tax returns for the calendar year 1946 and prior years on the cash basis. Their joint income tax return for the period here involved was filed with the collector of internal revenue for the first district of New York.
Alfred W. Barber (hereinafter also referred to as "Barber" or "petitioner") is an inventor, consulting engineer and patent attorney. He holds twenty-five or thirty patents, generally in the field of electronics and radio.
Barber commenced work on the invention of an electrical meter known as a "voltmeter" about the month of October, 1930, and completed that work about the month of July, 1935. By an agreement dated March 7, *4 1934, Barber assigned his rights in and to this invention to Premier Crystal Laboratories, Inc., a New York corporation. Letters patent 2039267 covering this invention and granting the owner the exclusive right to make, use, and vend the voltmeter for a period of 17 years were issued by the United States Patent Office on April 28, 1936. The assignee never produced or sold any of the voltmeters, and Barber never received any income or royalties therefrom until 1943. On October 29, 1943, Premier Crystal Laboratories, Inc., reassigned to Barber the entire rights to and in the patent.
Barber, in and about 1943, then began to manufacture and sell the voltmeters. His gross sales and gross income from*60 their manufacture and sale for the years 1943 through 1946 were as follows:
| Year | Gross sales | Gross income |
| 1943 | $ 1,050.00 | $ 59.42 |
| 1944 | 14,686.89 | 4,552.04 |
| 1945 | 55,886.17 | 40,304.86 |
| 1946 | 4,393.00 | 1,096.35 |
| Total | $ 76,016.06 | $ 46,012.67 |
The total receipts of Barber from all sources for the year 1945 amounted to $ 102,547.50 of which $ 46,661.33 was from battery chargers and other sources.
*602 After Barber began the manufacture of the voltmeters, he expanded*5 his laboratory facilities from 325 square feet to 900 square feet and his staff of employees from one in 1943 to an average of five in 1945. In addition, Barber also tested and inspected the meters. The manufacturing operation consisted of assembling smaller parts which were purchased by Barber.
At the time that the manufacturing was begun, Barber had practically no capital with which to work. The operation was started by making two or three voltmeters and selling them and reinvesting the proceeds in order to make others. In addition to this method of financing, Barber used capital to the extent of $ 6,000 which he borrowed from a bank.
The price of voltmeters was at all times $ 150. Barber made and sold approximately 7 voltmeters in 1943; 98 in 1944; 372 in 1945; and 29 in 1946. The gross income, in 1945, from the manufacture and sale of voltmeters was more than 80 per cent of the total gross income from the manufacture and sale of the voltmeters in the year 1945, plus the gross income therefrom in previous taxable years and the 12 months immediately succeeding the close of the taxable year.
The petitioner calculated his income tax liability for 1945 by treating the gross income*6 from the manufacture and sale of the voltmeters in accordance with section 107 of the Internal Revenue Code. The Commissioner determined the deficiency in question as a result of his ruling that section 107 is inapplicable here.
OPINION.
Petitioner received $ 40,304.86 gross income in 1945 from the manufacture and sale of voltmeters, and seeks the benefit of section 107 (b) 1 of the Internal Revenue Code. There is no suggestion that the amount thus received in 1945 did not relate to operations, *603 i. e., manufacturing and selling, conducted during that year. The claim to relief under section 107 is based exclusively upon the fact that the manufactured article had been patented, and that the period of time during which petitioner conceived and developed his invention, prior to issuance of the patent, was in excess of thirty-six months.
*7 If the amount received by petitioner in 1945 had represented royalties upon the patent, then plainly section 107 would be applicable. Section 107 was enacted in order to relieve against the rigors of the annual system of reporting income, where a taxpayer receives a disproportionately large amount of income in one year attributable to work which he performed over a number of years. By reason of our system of graduated rates, such income might find itself in disproportionately high surtax brackets. Section 107 represents a legislative effort to correct such possible unfair treatment. 2 But the very theory of the relief granted by section 107 is that the income that is spread over a thirty-six month period is conceived to be attributable to an earning process extending over at least thirty-six months. Thus, where a taxpayer has spent three years or more in developing an invention, and thereafter receives at least the required 80 per cent income, in royalties, in one year, section 107 in effect permits him*61 to spread such royalties over a longer period. In such circumstances, the royalties received in one year represent the fruits of his efforts covering a period of over three *8 years, and he is afforded relief under the statute.
However, an entirely different situation exists in the present case. The sum which petitioner seeks to spread over thirty-six months is attributable at least in part, if not entirely, to manufacturing and selling operations carried on during a single year. During that year he had an average of about five employees, and he contributed his own efforts as well. Certainly, to the extent that the profits in question grow out of the manufacturing and selling operations, there is no foundation whatever for spreading the income over a 3-year period. It would be contrary to the basic theory of section 107, and nothing in the language of section 107 requires such result.
Of course, if it could be shown that some portion of the 1945 income from the manufacture and sale of the voltmeters was allocable to the patent, *9 then there would be a basis for the application of section 107, but only to that extent. Cf. Ramsey Accessories Manufacturing Corporation, 10 T. C. 482. However, the difficulty with petitioner's case is that he has not undertaken to show what part, if any, of the receipts really depended upon the patent. And the record before us strongly suggests that no part of the receipts was attributable to the patent.
*604 Petitioner had originally assigned the patent, reserving to himself a 10 per cent royalty. However, not a single voltmeter was ever produced or sold by the assignee. The assignee held the patent for a number of years and then reassigned it to petitioner in 1943. The demand for the voltmeters thereafter made and sold by petitioner was obviously related to the war effort, and we have no way of knowing on this record whether the price received for each voltmeter ($ 150) was computed in such manner as to include any amount as a royalty for use of the patent. For aught we know, there may have been various types of voltmeters on the market at that time, and the particular contribution made by petitioner's invention may not have rendered petitioner's*10 voltmeters more valuable than any of the other voltmeters then available. We have nothing in the record before us to justify a conclusion that the $ 150 which petitioner received for each instrument included anything on account of the patent. This is not a case like Cohan v. Commissioner, 39 F. 2d 540, 543-544 (C. A. 2), where the record was clear that some portion of the item in controversy was entitled to the treatment sought by the taxpayer, and we were instructed to use our best judgment in making an apportionment. Here, the record fails to show that any part of the amounts received by petitioner was allocable to the patent. The burden of proof was on him and we think it has not been met.
Petitioner misconceives the scope and purpose of section 107 when he argues that, under the patent laws, he was given the exclusive right "to make, use and vend" the patented article. Of course, he has the exclusive right to manufacture and sell any article upon which he holds a valid patent, and such right grows out of the patent. But when Congress used the word "patent" in section 107, it surely must have intended it to be interpreted in the context *11 in which it appeared. That context was an effort by Congress to grant relief to a taxpayer whose work has covered a number of years but whose compensation therefor is received in large part (at least 80 per cent) in one year. In the present case the income in question was directly attributable to manufacturing and selling operations which occurred in a single year, and, as we have indicated, there is nothing in the record before us to show that any part of that income was attributable to work done by the petitioner in developing his invention. The determination of the Commissioner must be upheld.
Decision will be entered for the respondent.
Footnotes
1. SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE AND BACK PAY.
* * * *
(b) Patent Copyright, Etc. -- For the purposes of this subsection, the term "artistic work or invention," in the case of an individual, means a literary, musical, or artistic composition of such individual or a patent or copyright covering an invention of or a literary, musical, or artistic composition of such individual, the work on which by such individual covered a period of thirty-six calendar months or more from the beginning to the completion of such composition or invention. If, in the taxable year, the gross income of any individual from a particular artistic work or invention by him is not less than 80 per centum of the gross income in respect of such artistic work or invention in the taxable year plus the gross income therefrom in previous taxable years and the twelve months immediately succeeding the close of the taxable year, the tax attributable to the part of such gross income of the taxable year which is not taxable as a gain from the sale or exchange of a capital asset held for more than 6 months shall not be greater than the aggregate of the taxes attributable to such part had it been received ratably over that part of the period preceding the close of the taxable year but not more than thirty-six calendar months.↩
2. See S. Rept. No. 648, 76th Cong., 1st Sess., p. 7; H. Rept. No. 2333, 77th Cong., 2d Sess., pp. 48-49, 90-91; S. Rept. No. 1683, 77th Cong., 2d Sess., pp. 108-110.↩