*115 Decisions will be entered under Rule 50.
1. Petitioner, a mechanical engineer, entered into a certain contract of employment with Henry Disston & Sons, Inc., whereby, for an agreed compensation, he was to perform whatever duties were assigned to him, and to develop and make suitable for use in the United States power chain saws of the Mafell type, a German product. It was also agreed that petitioner should make every effort to develop claims and apply for patents on any features on this chain saw or accessories. In the event any patents were secured on such claims, the same were to be assigned to the Disston Co. without other compensation than provided in such agreement. Held, the patents in question became the exclusive property of the Disston Co. under its employment agreement with petitioner. The percentage payments made by such company to petitioner in the taxable years involved constituted compensation taxable as ordinary income, and not gains from the sale by petitioner of capital assets.
2. The deductibility of certain attorneys' fees and other expenses paid by petitioner determined.
*101 This proceeding involves deficiencies in income tax for the years 1943, 1944, and 1945 in the amounts of $ 3,166.07, $ 105,582.25, and $ 89,301.50, respectively. Petitioner claims overpayments of $ 59,910.69 for 1943 and of $ 62.97 for 1945. The issues presented are (a) whether certain payments received by petitioner from Henry Disston & Sons, Inc., during the years 1943 to 1945, inclusive, constituted ordinary income, or were capital gain representing the consideration received for the transfer of certain patents; (b) as an alternative issue, whether or not such payments represented the consideration for the sale of petitioner's interest in a joint adventure with Henry Disston & Sons, Inc., and, as such, are to be treated as capital gain; and (c) whether petitioner is entitled to deduct certain amounts alleged to be payments for counsel fees, travel expenses, etc. The parties filed two stipulations of fact, together with certain exhibits, which are included by reference and made a part of our findings of fact. Additional facts were established by evidence received at the hearing. *117 Such of the facts hereinafter set out in our findings as are not included in the stipulations are found upon the evidence submitted.
*272 *102 FINDINGS OF FACT.
The petitioner is an American citizen, residing in Philadelphia, Pennsylvania. His returns for the years here involved were filed with the collector of internal revenue for the first district of Pennsylvania at Philadelphia, Pennsylvania.
The petitioner received a mechanical engineering degree in 1900 and worked as a mechanical engineer in Austria, Germany, and Russia. His experience was quite varied. He served with different companies, as engineer, in the manufacture of various kinds of mechanical products. He came to this country in 1913 and worked as a consulting engineer, specializing in Diesel engines and electric melting plants.
In the early part of 1916 petitioner was engaged by Henry Disston & Sons, Inc. (hereinafter referred to as the company), a Pennsylvania corporation, as chief engineer and technical advisor. In this capacity he designed and supervised the construction of a steel plant with an electric furnace, and he was also engaged in all other branches of the company's business. In 1925 or 1926 petitioner*118 was elected to the board of directors of the company, which office he held until November 1926. He was discharged as an employee of the company early in 1926 as a result of friction between him and one of the vice presidents of the company.
In 1929 petitioner went to Europe in search of machines and other mechanical devices which could be adapted for use in the American field. Among those located by petitioner was a power chain saw, in which he became particularly interested because of its labor-saving possibilities. On petitioner's return to this country in January 1932 he met the former president of the company and, as a result, entered into a contract of employment with the company and reported to it upon a number of products which he had located in his European travel which he thought the company could manufacture at a profit for the American market.
Upon returning from Europe petitioner took up the work of attempting to adapt the various products above mentioned, including the Mafell type of chain saw, to the American market. Little *273 progress was made and petitioner became dissatisfied, believing that the company should spend more money in the attempt to achieve the desired*119 result. Finally, on March 31, 1933, petitioner and the company executed mutual releases from any and all obligations arising under their previous contract and on the same day executed a new contract of employment prepared by the attorneys of the company and accepted by petitioner, who was not represented by counsel. This contract was in the form of a letter reading as follows:
*103 March 31, 1933.
Mr. Arthur N. Blum,
Philadelphia, Pa.
Dear Sir:
You are hereby employed, beginning April 1, 1933, for one month, at a salary of $ 500.00 per month. You are to perform whatever duties are assigned to you by any of the executive officers of this company, and you are to give your full time and attention to those duties. You are also to be subject to any reductions in salary that the Board of Directors or the officers of the Company may see fit to make among the employes. This contract of employment shall continue from month to month but either you or the Company have the right at the end of any calendar month to give thirty days' written notice to the other that the contract is to terminate at the expiration of thirty days from the date when the notice is given and said contract*120 shall, without further action, terminate at the expiration of the thirty days from the time the said written notice is given.
In case this Company decides to manufacture and sell Chain Saws of the Mafell type, which are developed and made suitable for use in the United States through your own efforts or under your supervision, you are to be paid a commission equal to 2 1/2 percent on the net sales price, when and as the money is received from the sales of the saws, for a period of five years, providing the Company continues to manufacture and sell the saws for that length of time. If you secure a patent for and on behalf of the Company, then the commission is to continue during the life of the patent, providing the Company continues to manufacture and sell the saws for that length of time, it being understood that nothing in this letter is to bind the Company to manufacture and sell the said Mafell type of Chain Saws for any length of time.
During the period of your employment any patent taken out by you in your own name or which may be assigned to you by any other person, that covers any of the articles that you may work upon for this Company, you will assign or undertake to get*121 assigned to this Company, it being understood that any expenses incurred in obtaining such patents or assignments will be paid by the Company.
This letter contains all of the compensation that is to be paid you for all of your services to this Company. There are no other understandings or arrangements between you and this Company except as is contained in this letter.
If you approve of the terms and conditions of this letter, you will please signify your approval by signing your name after the words "Approved and Accepted."
Very truly yours,
Henry Disston & Sons, Inc.,
By: [Signed] S. Horace Disston,
Vice President.
Approved and Accepted
[Signed] Arthur N. Blum
After the execution of the above contract, petitioner's official title and duties were those of consulting engineer for the company, and he performed many routine duties. He worked on its plant and equipment and on new products submitted to the company by outside parties. Petitioner worked in the company's plant with facilities supplied by it and with assistance of its employees.
*104 In trying to adapt the Mafell type chain saw for use in the American market, petitioner got ideas for improvement of the chain *122 saw and other items. Some of the work upon these ideas which ultimately led to patentable inventions petitioner did at home and on holidays. On March 18, 1933, petitioner applied for a patent on a die for cutting puzzles and other cut-outs, and on June 27, 1935, he made application for a patent covering an improvement in plastic saw handles. Both of these applications were assigned by petitioner to the company at the time they were filed and patents were issued upon both of these inventions.
Petitioner conceived certain inventions representing improvements on the Mafell type power chain saw and inventions on other articles of a nonchain saw type. On these the company tried to induce him to file applications for patents and *274 he advised the company he would apply for patents only if a new contract were made. Finally, after extended negotiations, a new contract was entered into between petitioner and the company on January 25, 1939. This contract, in letter form, was prepared by the company's attorneys and accepted by petitioner, who was not represented by counsel. This contract provided as follows:
January 25, 1939.
Mr. Arthur N. Blum,
Philadelphia, Pa.
Dear Sir:
In accordance*123 with our discussions with you on January 5, 1939, we propose that effective as of January 1, 1939, the following modification be made in your letter of employment dated March 31, 1933.
Instead of the commission of 2 1/2% on the net sales price of Chain Saws of the Mafell type, sold, as provided for in said letter, we will pay you immediately upon acceptance of this modification of our agreement the sum of Three Thousand Dollars ($ 3,000.00), in consideration of the extra work you have done in developing a Power Chain Saw of this character.
In addition to this sum of $ 3,000.00, and instead of the 2 1/2% commission stipulated in our letter of March 31, 1933, we will pay you for a period of five (5) years, beginning with the date marking the completion of the sale of the first ten said Power Chain Saws, provided, however, that in no case will this date for the beginning of the said five year period be later than January 1, 1940, and providing also that the Company continues to manufacture and sell the said Power Chain Saws for that length of time, which decision to manufacture and sell shall be at the sole discretion of the Company, a commission of 3 1/2% on the net sales price, until*124 commissions paid to you on this basis reach a total of $ 17,000.00, at which time the rate of commission will be reduced to 3 1/4%, on the net sales price, and continue at that rate for the remainder of the said five year period.
In the event that any of the said Power Chain Saws are sold prior to the beginning of the five year period as established by the provisions of the preceding paragraph, you will also be paid a commission on them at the rate of 3 1/2% on the net sales price.
If you secure a patent or patents on said Power Chain Saw or any special *105 feature or improvement thereof, for and on behalf of the Company, then, beginning with the ending of the five year period provided for above, we will continue the payment of commission to you for the life of said patent or patents at the rate of 3 1/2% on the net sales price of said Power Chain Saws, providing the Company continues to manufacture and sell the said Power Chain Saws for that length of time, which decision to manufacture and sell shall be at the sole discretion of the Company.
The commission to be paid you will include not only the sale of the said Power Chain Saw itself, but also sales of all parts and accessories*125 pertaining thereto, such as Chains and Guides, and the Grinding Machine specially designed to sharpen the teeth of the saw.
It is understood that said commissions will be payable when and as the money is received from the sales of said Power Chain Saws and their accessories, and that payments will be made to you on or before the fifteenth (15th) of each month of the commission due you for the preceding calendar month on this basis.
As long as you continue in our employ you will be in charge of the organization and the development of manufacture and sales of the said Power Chain Saws and their accessories, up to the time when, in the opinion of the President of this Company, all major problems of production and sales have been solved, and the line established on a commercial basis as a going business. We may then, dependent upon the opinion of the President of this Company, decide to relieve you of the direct responsibility of supervising these functions, and transfer to the executives who may at that time be in charge of the Production and Sales Departments the responsibility for manufacturing and selling this product, and assign to you new duties.
It is further understood that you*126 will immediately make every effort to develop claims and apply for patents on any features of the said Power Chain Saw or accessories which you have developed, and which it is mutually agreed by yourself and this Company are of sufficient value to warrant the securing of a patent or patents. Should any patents be granted on any of these claims you agree that these will be assigned forthwith *275 to this Company, without any other compensation to you than that provided under this agreement.
This letter is to be considered as a supplement to our letter of March 31, 1933, as accepted by you, and does not in any way change any of its terms and conditions, except as set forth above.
If this modification of our agreement of March 31, 1933 is acceptable to you please signify your approval by signing your name in the place provided.
Very truly yours,
Henry Disston & Sons, Inc.,
By: [Signed] S. Horace Disston,
Vice president.
Approved and Accepted:
[Signed] Arthur N. Blum
After the execution of the foregoing contract petitioner made application for five patents. These applications were made in his own name and prepared and filed by the firm of patent attorneys which had long represented*127 the company.
Petitioner did not assign to the company any one of the five patent applications above referred to.
In 1940 the United States Government became very much interested *106 in the chain saw, and petitioner worked with the Army engineers at Ft. Belvoir, Virginia, in an effort to adapt the saw for military use. At that time the saw was electrically operated, but the Army engineers desired one operated with an independent portable gasoline engine. Finally, a satisfactory gasoline engine for the purpose was developed in the United States, built according to specifications prepared by petitioner, and was successfully adapted to the chain saw.
Petitioner was still dissatisfied with the policy of the company with respect to providing capital for the production of the chain saws on a large scale, and as a result of discussions with the company, an amendment to the existing contract was prepared by the company's attorneys and accepted by petitioner on March 28, 1941, reading as follows:
March 28, 1941.
Mr. Arthur N. Blum,
Hotel Normandie,
3467 Chestnut St., Philadelphia, Pa.
Dear Sir:
Referring to our recent negotiations, the following changes in the agreements*128 between you and the Company dated March 31, 1933 and January 25, 1939, have been agreed to:
1. Beginning February 20, 1941, to increase your salary from the present $ 500.00 to $ 600.00 per month, payable semimonthly, with the understanding that you will continue to participate in the Salary Adjustment Plan on equal basis as other employees of Group #3. The amount of the Salary Adjustment will be figured on the salary only and not on any commission due under any of the agreements. Your employment to be as heretofore on a monthly basis;
2. Beginning February 20, 1941, to increase your commission on the net sales price (when received) of Power Chain Saws, parts and accessories thereto, to 10%, for a period of 5 years, as of January 1, 1941; or if you obtain a patent (or patents) and assign it (or them) to this Company, said 10% commission will be payable during the life of the patent (or patents). In the event that your employment is terminated before expiration of the above periods for payment of commission, you agree that the 10% commission is reduced to 3 1/2%.
3. All other terms and conditions of our agreements dated March 31, 1933 and January 25, 1939 to remain in full force*129 and effect.
4. If you accept the terms and conditions as stated above, please signify it by signing your name after the words, "Approved and Accepted".
Very truly yours,
Henry Disston & Sons, Inc.
By: [Signed] S. Horace Disston,
President.
Approved and Accepted:
[Signed] Arthur N. Blum
At the time the above amendment in the existing contract was made the five patent applications heretofore referred to were pending, and in 1941 petitioner made two applications for patents on additional inventions.
Petitioner resigned from his employment with the company on December 31, 1941, and left work on January 5, 1942. At that time *107 petitioner had seven applications for patents pending, and subsequent to his resignation he filed two additional applications for patents. Patents were issued on all of the nine applications, above referred to, during the years from 1942 to 1944, inclusive, and after the termination of petitioner's employment.
The first chain saw embodying all of petitioner's chain saw inventions was *276 successfully tested in September 1937 and the first two saws of this type were sold by the company on November 7, 1940.
Five of the patents issued to petitioner after*130 his resignation on applications filed prior to such resignation, he formally assigned to the company upon their issuance. The four additional patents issued to him upon two applications filed after the termination of his service and two prior thereto he assigned to the company by assignments prepared by him, through his attorney, and forwarded direct by him to the Patent Office. The company objected to the form of these assignments in the recitation therein that the assignments constituted a sale of the patents to the company. This dispute was finally adjusted by the filing in the Patent Office, in the case of each assignment, of a confirmation agreement executed by petitioner and the company, in which it was agreed that the assignments were sufficient in law.
The Mafell type chain saw embodying the inventions made by petitioner was very successful. Payments of percentages of net sales of saws and accessories were made to petitioner under the contract, as modified March 28, 1941, as follows:
| 1941 | $ 1,101.75 |
| 1942 | 11,821.75 |
| 1943 | 126,847.93 |
| 1944 | 188,284.79 |
| 1945 | 163,315.61 |
The company on its books, prior to January 1942, treated payments made to petitioner of percentages*131 of net sales as a merchandising expense. Payments of this character made subsequent to that time were charged on the books to the merchandising account as a sales department expense. No part of these payments was capitalized by the company, but the entire sum in each year was treated by it as a deductible expense in determining net income subject to tax.
In his 1941 and 1942 returns petitioner treated the payments made to him on the basis of percentage of net sales as ordinary income, but claimed the right to offset this by a deduction for depreciation of his contract on the basis that this was a capital asset. On his 1943 return petitioner treated these payments as ordinary income and in his 1944 and 1945 returns he treated these payments as capital gain. At the time he filed his 1944 return he filed amended returns for 1942 and 1943 and a claim for refund for 1943, claiming that the contractual *108 payments were capital gains, as representing the consideration for his sale of patents to the company.
In 1943 petitioner paid attorneys' fees in the amount of $ 800 for legal advice as to his rights under his contract with the company and expended $ 110 for traveling expenses, *132 supplies, and postage.
OPINION.
The first issue presented is whether the respondent erroneously determined that the payments made by the company to the petitioner in the taxable periods involved were compensation taxable as ordinary income. The contention of petitioner is that the payments are consideration paid for the sale and transfer of several patents constituting capital assets and are therefore taxable as long term capital gains. In the alternative, petitioner contends that the relationship between himself and the company was that of joint adventurers, and that he sold his interest in the adventure to the company, which constituted the sale of a capital asset. The answer to this controversy involves a determination of the ownership of the patents. Since petitioner's employment was covered by three specific interrelated agreements, our inquiry is narrowed to ascertaining the intent of the parties as expressed therein. Do these contracts clearly and unmistakably set forth the rights of the respective parties? We find in them no ambiguity. Moreover, viewed in the light of the circumstances surrounding the employment, the relations of the parties during the employment, the*133 specific aims sought to be achieved, and the course of conduct of the respective parties all confirm the clarity of the terms of the agreements and evidence the fact that the parties thereto clearly understood their respective rights and obligations.
The evidence establishes that the employment agreement was entire, not divisible, and combined the features of general employment and employment for solving a particular problem. Cf. . That the term "invention" was not employed is of no significance.
In , the employee agreed to "devote his time to the development of a process and machinery for the production of the front spring now used on the product of the Ford Motor Company," and the resulting device was there held to be the property of the employer.
In the instant case, one of the terms of employment was that petitioner was to *277 devote his attention to the adaptation of the chain saw which the company hoped to manufacture and sell. Petitioner's employment, to the extent that it related to a chain saw, was as much *134 a contract of specific employment to make an invention as was the *109 agreement in the case of Cf. ; certiorari denied, ; .
The payments in controversy all relate to commissions paid in the taxable years with respect to power chain saws of the Mafell type. All three interrelated contracts of employment, respectively dated March 31, 1933, January 25, 1939, and March 28, 1941, specifically mention the chain saw device. The employment agreements clearly indicate that both parties had in mind that in the development of a chain saw adaptable to the needs of the company, patentable claims might be discovered. The agreement under date of January 25, 1939, contains the following significant paragraph:
It is further understood that you will immediately make every effort to develop claims and apply for patents on any features of the said Power Chain Saw or accessories which you have developed, *135 and which it is mutually agreed by yourself and this Company are of sufficient value to warrant the securing of a patent or patents. Should any patents be granted on any of these claims you agree that these will be assigned forthwith to this Company, without any other compensation to you than that provided under this agreement.
The record further establishes that petitioner worked in the company's plant with facilities supplied by it and with assistance from other employees. Petitioner on prior occasions voluntarily assigned to the company other applications for patents and other patents obtained during the course of his employment. It is hardly conceivable that he would have transferred them had he not recognized that such was his duty under the various employment contracts. The fact that certain of the patents involved were granted subsequent to the time the employment contract was terminated by petitioner December 31, 1941, is immaterial. Petitioner, as we understand, makes no claim that the ideas and patentable claims were not developed during the period of employment. On brief, petitioner concedes that "a chain saw embodying petitioner's inventions was finished and tested*136 in September 1937." The evidence establishes that a number were sold in 1940.
Petitioner emphasizes the fact that the employment of petitioner could be terminated by either party upon 30 days' notice. He argues that such a provision is inconsistent with a contract to invent, since inventions are recognized as normally a slow process; that it would be manifestly unfair if an inventor could be discharged immediately upon perfecting an invention. Under this provision, however, the rights and obligations of the parties were reciprocal. Both parties were on the same footing. We think that provision has no bearing on the particular question we are to decide.
*110 Considerable evidence was presented and respective counsel on brief argue at length as to the inferences to be drawn from the manner in which the company carried the patents on its books, the treatment accorded the payments it made under the employment contract for tax purposes, and the treatment given to the payments by petitioner in his original income tax returns, wherein he returned the receipts as ordinary income rather than as capital gains. We attach no controlling significance to such evidence. It does indicate, *137 however, that both parties construed their respective pertinent rights and obligations under the agreements as we do.
Applying the established law relative to the rights of employer and inventor to the specific employment contract in question, we conclude that the patents involved were the exclusive property of the company. Petitioner's only interest therein was to receive the compensation provided in such employment agreement. No sale of patents or other capital assets was included. From such conclusion, it necessarily follows that no joint adventure existed with respect to such patents.
The respondent's determination that the entire compensation received by petitioner under the employment agreement was includible in his gross income in the respective taxable years is sustained.
Another issue presented is whether petitioner is entitled to a deduction of $ 800 paid for legal fees in connection with advice as to his rights under the employment contract in question and to the sum of $ 110 for travel expenses, supplies, and postage, which amounts were paid in the taxable year 1943. The record establishes that on petitioner's original return for that year these amounts were listed*138 in schedule G, but were not deducted on the face of the return in arriving at the net taxable income for such year. In an amended *278 return filed for 1943, such amounts were claimed by petitioner, but were disallowed by respondent. The respondent contends here that, since the only proof offered was the testimony of petitioner that such amounts had been paid by him for the purposes stated, the evidence is insufficient to overcome the presumption of correctness of his determination. We do not agree. We see no reason for not accepting the testimony of petitioner as establishing a prima facie case of deductible expenditures. The respondent did not cross-examine the petitioner with respect to such expenditures, or offer any independent proof discrediting petitioner's testimony. We have found as a fact that such payments were in fact made, and we conclude they are properly deductible in the taxable year 1943.
Petitioner also claims to be entitled to a deduction of the sum of $ 1,861.33 in the taxable year 1944 as an expenditure in connection with the assignment of the patents in question. The mention of such amount appears for the first time in petitioner's reply to the amended *111 *139 answer filed by the respondent. Whether the deductibility of this item has been properly raised as an issue, we need not now determine, since we are convinced that it is not properly deductible. On brief petitioner argues that this item is a part of his cost of the patents and is therefore deductible from their sale price. We have already concluded, however, that the patents were the exclusive property of the company and that there was no sale by petitioner of any of the patents involved herein. Therefore, there being no sale, petitioner had no cost basis from which to deduct the item of $ 1,861.33. The deduction of such amount is denied.
Decisions will be entered under Rule 50.