*664 1. INCOME. - Two of the petitioners, owners of certain inventions and patents, conveyed these, in the taxable year, to a newly organized corporation in exchange for 2,500 shares of stock in the corporation and $100,000 cash. This was done with the agreement by another corporation that it would purchase 3,000 shares of the new corporation's stock for $180,000 cash. This purchase was made. All of the 5,500 shares of stock were issued on the same day. Held that, as to petitioners, the transaction was not within section 112(b)(5) of the Revenue Act of 1932, nor within section 112(c)(1). Therefore the entire gain realized by petitioners on the exchange is recognized and taxable to the petitioners. Sec. 112(a), Revenue Act of 1932.
2. Id. - Petitioners agreed with a corporation that the latter should act as their agent to sell a license to use certain of petitioners' inventions and patents and that, in case the efforts of the corporation succeeded and $200,000 was secured for the license, the corporation should retain $150,000 as its compensation. The license was sold for the stated sum and, under direction from petitioners, the entire amount of $200,000 was paid by*665 the purchaser direct to the corporate agent. Held, the $50,000 portion of the total consideration, to which petitioners were entitled, was received for them by their agent and constituted a constructive receipt of income taxable to them in that year irrespective of the fact that their agent did not remit the sum to them until the following year.
3. CAPITAL GAIN. -Included among the inventions and patents exchanged by two of the petitioners in the taxable year, were certain patents issued less than two years prior to the date of exchange but the inventions, on which such patents were issued, had been reduced to actual practice and the feasibility and value of such inventions demonstrated more than two years prior to that date. There were also included certain inventions on which patent applications had been recently filed and some in respect of which no application had yet been filed, but all of the inventions involved had been reduced to actual practice and their feasibility and value demonstrated more than two years prior to the date of exchange. All of these inventions and patents, from the time of such reduction to actual practice, were the property of these two petitioners. *666 Held, such patents and inventions were capital assets. The gain realized from their sale was taxable as capital gain. The portion of the total consideration paid applicable to these particular assets is determined.
*733 The respondent has determined deficiencies in income tax for the calendar year 1932 against Samuel E. Diescher and wife in the sum of $26,123.91, and against August P. Diescher and wife in the sum of $29,417.28. The deficiency in each case arises through the increase of the petitioners' income by amounts alleged to have been received as income by a partnership composed of the petitioners, Samuel E. and August P. Diescher. The proceedings were consolidated for hearing and decision, since they involve the same issue.
FINDINGS OF FACT.
The petitioners, Samuel E. Diescher and August P. Diescher, were, during the taxable year, and for many years prior to that time, engaged in business in partnership under the name, S. Diescher & Sons. These petitioners are engineers of wide experience in the construction*667 and operation of steel mills and as inventors of various devices and processes used in the iron and steel industry. The business of the partnership is the furnishing of consulting engineering service, the inventing of processes and devices, and the patenting and licensing of the same.
On September 26, 1932, the partnership of S. Diescher & Sons was the owner of four United States patents, numbers 1280683, 1586975, 1695323, 1870209. It was also the owner of five inventions upon which applications for patents in the United States had been filed, and nine inventions for which they had not asked patents. It was also the owner of 2 foreign patents and 13 foreign patent applications. These were all in connection with the invention covered by United States patent number 1870209. The partnership was also the owner of two license agreements under which rights to use the United States patents above referred to, had been granted, in return for certain royalty payments to the Babcock & Wilcox Tube Co. and the Allegheny Steel Co.
Early in the year 1932, the partnership of S. Diescher & Sons had entered into negotiations with the Babcock & Wilcox Tube Co. *734 looking to some*668 arrangement under which the partnership could convey its patents to a corporation which would relieve the partners of the necessity for negotiating licenses and leave them free to devote their entire time to consulting engineering work and the work of development and perfection of their various inventions. The president of the Babcock & Wilcox Tube Co. recognized the value and importance of the inventions and patents held by the partnership but, in view of the financial depression then existing and affecting the steel industry, that company did not feel that it was in position to take an interest by buying stock in any corporation organized to take over the Deischer patents. Several tentative arrangements were drafted and discussed. Finally, a plan was worked out by Samuel E. Diescher which, if successful, would make possible the organization of a corporation and the transfer of the patents as desired.
The partnership had, for some time, been endeavoring to sell a license agreement to the National Tube Co. covering the use of the Diescher patents for a consideration of $200,000. All of the officers of that company favored the buying of such a license except the company president. *669 Thereupon it was suggested to Isaac Harter, president of the Babcock & Wilcox Tube Co. that his company interest itself in arranging the sale of the license agreement to the National Tube Co. and that the partnership would give the Babcock & Wilcox Tube Co. $150,000 of the $200,000 paid therefor. If successful, this would give the Babcock & Wilcox Tube Co. the funds necessary to purchase stock in the corporation to be organized and to which it was planned to transfer the Diescher patents.
This proposal was accepted by the Babcock & Wilcox Tube Co. and negotiations were started by it with the National Tube Co., as a result of which an option agreement was made with that company providing for a license to the National Tube Co. to use the Diescher patents for a short period to verify the fact of their commercial advantage. Under this option the licensee agreed to pay $10,000 down and $10,000 at the end of 30 days, with the option, at the end of 60 days, on a license for the sum of $200,000, which sum was to be credited with the two payments aggregating $20,000. This option agreement was executed on July 27, 1932, between the partnership and Babcock & Wilcox Tube Co., on the one*670 hand, and the National Tube Co., on the other.
In accordance with the option agreement, the National Tube Co. began the use of the Diescher patents and made the two payments of $10,000 each, as provided.
As early as March 20, 1932, the Babcock & Wilcox Tube Co., through Harter, its vice president, had submitted a tentative plan *735 to the partnership which contemplated its purchase, for $175,000, of 3,000 shares of the stock of the new corporation to be organized, and the transfer of the Diescher patents and inventions to the corporation for 2,500 shares of stock and $100,000 in cash. The proposed plan, with slight alterations, was again presented on May 31 by the following letter from Harter:
I am giving in this letter the points of the proposed agreement for handling your disc patents that we discussed in Pittsburgh on March 19th. A plan following essentially along these lines appeals to both you and me as bing equitable and we both believe that such an association would be the sensible one to make. I cannot, however, commit our Company without consultation with others, and therefore the proposed arrangement is not a commitmen t on either side at this moment.
*671 It is proposed that a company be organized and called "The Diescher Disc Patents Corporation", to be incorporated for $550,000 of $100 par stock, in a State to be decided upon after obtaining proper legal advice. The principal functions of this corporation would be as follows:
(a) To purchase your patents and/or those of your patnership and your and their improvement patents and inventions now and later to be obtained insofar as they relate to the use of rotating guide discs instead of fixed guides in tube-making machines.
(b) To negotiate licenses with the intention of licensing at least one-half of the volume of business done in the various divisions of the tube and pipe industry in this country and abroad (at the time I wrote down my pencil memorandum on the licensing feature, the foreign natents were not at that moment noted, but later in our talk this was covered, and is mentioned in this paragraph as it logically belongs there).
(c) Such licenses, so far as possible, would grant the right to use one or a specific larger number of machines, in each case for specific designated purposes.
(d) It would employ S. Diescher & Sons as its engineers for such a period as Samuel*672 E. Diescher and August P. Diescher are active in that firm.
(e) It would attempt to market mill equipment embodying and for practicing the inventions of said patents.
(f) It would use its best efforts to purchase such of said equipment as S. Diescher & Sons so desire from Taylor-Wilson Mfg. Co., provided, however, that Taylor-Wilson Mfg. Co will meet competitive figures from firm quotations made by The Babcock & Wilcox Company.
(g) To purchase from time to time other tube making patents, with a view to strengthening its business position.
(h) To receive back the existing license of The Babcock & Wilcox Tube Company and to substitute therefor a generally non-exclusive license at rates corresponding to rates granted others for licenses for similar classes of work.
It is proposed that The Babcock & Wilcox Tube Company shall purchase three thousand shares of "The Diescher Disc Patents Corporation," and in consideration therefor pay (a) $175,000 in cash; (b) consent to the cancellation of its present license (for which it has already paid $40,000 in cash and about $75,000 in development expenses); and (c) thus place the new corporation in the advantageous position of being*673 directed by a corporation which is already engaged in the tube industry.
It is proposed that the new corporation shall pay S. Diescher & Sons $100,000 in cash and besides this that S. Diescher & Sons retains the remaining 2500 *736 shares of stock for the patents to be transferred to the new corporation. It is expected that this will leave the new corporation with $75,000 working capital.
In order to make this plan workable, the existing license to Allegheny Steel Company would either have to be cancelled, which your counsel believes would be possible, due to non-performance of its terms, or its modification would be necessary so as to at least make it entirely non-exclusive. It does not seem that this should be a particularly difficult matter.
I am leaving today for Denver and am expecting to be East and see you in New York on Friday. Should anything interfere, I should know it by Wednesday and will telegraph.
On June 1, 1932, prior to the execution of the option agreement, but after the opening of negotiations by Babcock & Wilcox Tube Co. with National Tube Co. for the sale of a license, the following letter was sent by Harter to the petitioner, Samuel E. Diescher:
*674 Under date of March 20th I wrote you a letter covering an agreement to form a patent holding company, which we discussed, and to which as revised May 31st I now refer.
Recently you told me that in lieu of the $100,000 cash payment that you were willing to have us begin to pay you at the rate of $10,000 per month, and that the agreement would be validated if we kept on until we had paid you $100,000. You said that if we wished to stop after having made one or more of such $10,000 payments, that we could do so, but at the expense of forfeiting any thereof already paid, and in that event the company would not be formed, and we would then continue to work under our existing license.
The matter of working capital was not definitely discussed, but it was my understanding that our maximum obligation in this regard would be the $75,000 as named in our letter of March 20th, and that we would not have to put any part of that in if its equivalent could be secured from other sources, such as down money on new licensees.
You recently authorized me to talk to the National Tube Co. in regard to a license, and I am now enclosing a copy of my letter to Mr. Waterman, their President, confirming*675 the talk that I had with him last week Tuesday. It will be necessary for me to supply Mr. Waterman with a letter from you approving the proposal I am making him.
I understand that If the National Tube Company concludes to go ahead with preliminary monthly payments, that we are to receive such payments and hold the same until the two months' period has expired. If the National Tube Co. completes its down payment of $200,000, we are now agreeing to then complete the balance of our payments to the holding company concurrently with the payment by the National Tube Company of $180,000 to the holding company, and turn over to the holding company the preliminary money paid by the National Tube Co. to us. Should the National Tube Company decide not to go ahead with its final payment, thereby forfeiting what it has paid in to us, we are to have the right, if we conclude to stop paying you, to retain the foreited payments of the National Tube Company.
Upon your acceptance of the letter of March 20th, 1932, as revised May 31st, 1932, and as modifined by this letter, we will arrange to begin paying you monthly $10,000, the first payment to be made June 1st, under the terms of this letter.
*676 Finally, on or prior to September 26, 1932, the National Tube Co. advised the Babcock & Wilcox Tube Co. of their exercise of the option on a license to use the Diescher patents and that they were making payment of the balance of $180,000 required. Thereupon, *737 the Babcock & Wilcox Tube Co. informed the petitioner, Samuel E. Diescher, as follows:
We had with you certain arrangements concerning your disc patents that were substantially covered by my letters to you of March 20th, May 31st, and June 1st, 1932.
In view of the fact the National Tube Company has just notified us of its intention to take a license under these patents, it has seemed advisable to us to make some changes in our arrangements, and therefore, with your consent, we are cancelling the arrangements that we had with you as covered by the letter above referred to.
I shall therefore give in this letter a brief outline of the arrangement which we have concluded with you today, in lieu of the one cancelled by mutual consent.
It is proposed that S. Diescher & Sons will transfer all of the pertinent patents to the new company in exchange for Twenty-five Hundred (2500) shares of stock and One hundred*677 thousand ($100,000.00) Dollars in cash, the latter sum to be paid when the cash is available in the new company.
Under the option agreement between the National Tube, S. Diescher & Sons, and the Babcock & Wilcox Tube Company, the amount of Two hundred thousand ($200,000.00) Dollars is to be paid to S. Diescher & Sons and the Babcock & Wilcox Tube Company for procuring a license agreement to be entered into by the new company. It is understood that said sum of Two hundred thousand ($200,000.00) Dollars is to be regarded, if and when paid, as payment to the Babcock & Wilcox Tube Company for its services in negotiating such license agreement, and that the Babcock & Wilcox Tube Company will pay to S. Diescher & Sons the sum of Fifty thousand ($50,000.00) Dollars for their services in aiding to bring about the execution of such license agreement.
It is also proposed that if and when the complete payment of the sum of Two hundred thousand ($200,000.00) Dollars has been made by the National Tube Company to the Babcock & Wilcox Tube Company, then the Babcock & Wilcox Tube Company will subscribe for Three thousand (3,000) shares of the new company's stock, giving in full payment One*678 hundred eighty thousand ($180,000.00) Dollars, together with a cancellation of its existing license agreement.
On September 26, 1932, the same date that the above letter was written, received, and its conditions accepted by the partnership, the latter caused the Diescher Tube Mills, Inc., to be incorporated under the laws of Delaware, the directors of which consisted of the two members of the partnership, its attorney, and two employees. The first meeting of the board of directors of the new corporation was held two days later, on the 28th September 1932, at which meeting there was presented to the corporation, an offer, by the partnership, to transfer the patents, patent applications, and inventions heretofore described, together with its interest in the license agreements with the Babcock & Wilcox Tube Co. and the Allegheny Steel Co. in consideration of the issue to the members of the partnership, or their nominees, of 2,500 shares of capital stock of the corporation and $100,000 in cash, payable when the latter was available. This offer was duly accepted by the corporation and the transfer of the specified properly was made.
*738 On September 30, 1932, the National*679 Tube Co. paid the $180,000 due the partnership and Babcock & Wilcox Tube Co., jointly, under the option agreement. The voucher covering this payment was sent by letter addressed to the partnership and Babcock & Wilcox Tube Co., jointly, and was made payable to the latter under an authorization given for the partnership by Samuel E. Diescher.
On October 1, 1932, the second meeting of the board of directors of the Diescher Tube Mills, Inc., was held, at which Babcock & Wilcox Tube Co. offered to subscribe for 3,000 shares of the capital stock of the company for the sum of $180,000. This offer was accepted and payment of that amount was made. Thereupon, on that date, stock certificates of the Diescher Tube Mills, Inc., for 2,500 shares of stock, were issued to the partnership and certificates for 3,000 shares were issued to Babcock & Wilcox Tube Co. The Diescher Tube Mills, Inc., then paid the sum of $100,000 to the partnership. Of the $200,000 paid by the National Tube Co. during the year 1932 for its license to use the Diescher patents, to $50,000 of which the partnership was entitled under its agreement with the Babcock & Wilcox Tube Co., the partmership received actual payment*680 of its share from the latter company during the year 1933.
The two petitioners, Samuel E. and August P. Diescher, in making their returns for the calendar year 1932, included in income realized by the partnership and distributable equally to each of them, only the $100,000 in cash received upon the transfer of the Diescher patents. They did not include in income of the partnership any part of the $50,000, to which they were entitled, of the payments made in 1932 by the National Tube Co. for a license of the Diescher patents. In determining the pending deficiences the respondent has treated the exchange of assets for stock, upon the organization of the Diescher Tube Mills, Inc., as a taxable transaction. He treated the assets exchanged by the partnership as having a value of $250,000 and the consideration received therefor as of the same value. In computing the tax he has allocated 20 percent of that consideration received as constituting the consideration received for capital assets and the balance of that consideration received as ordinary gain, and he has included in income of the partnership, distributable equally to these two petitioners, $50,000 due the partnership from*681 the payments made by the National Tube Co. in the taxable year.
Of the patents, patent applications, and inventions transferred by the partnership to Diescher Tube Mills, Inc., on September 28, 1932, as heretofore detailed the three patents numbered 1280683, 1586975, and 1695323 had been issued more than two years prior to that date and were owned, since issuance, by the partnership. Patent number 1870209 was issued to the partnership on August 2, 1932. The invention covered by the latter patent, together with the inventions covered *739 by the transferred patent applications numbered 627718 and 631510 and two of the inventions transferred, designated as "Case I - elongating apparatus (mandrel feeding)" and "Case L - tube making method (combination of elongator and sink mill)", were embodied in a mill constructed by the partnership at the A. M. Byers Co. in the latter part of 1929 and were successfully operated in that year. Their workability and value were thus demonstrated and they were then reduced to practice.
Based on the total value of $250,000 represented by all of the patents, patent applications and inventions transferred by the partnership on September 28, 1932, the*682 above patents, patent applications, and inventions represented proportionate values as follows:
| Patent 1280683 | $97,250 |
| Patent 1586975 | 42,750 |
| Patent 1695323 | 17,750 |
| Patent 1870209 | 67,750 |
| Patent application 627718 | |
| Patent application 631510 | |
| Invention Case I | 3,357 |
| Invention Case L | |
| Total | 228,857 |
OPINION.
LEECH: The parties are in accord that the fair market value of the patents, patent applications, and inventions transferred by the partnership on September 28, 1932, to the Diescher Tube Mills, Inc., was $250,000 and that a consideration of that value was received upon the exchange, all of which constituted gain to the partnership. It is petitioners' contention that the only portion of this gain, recognized as taxable to them, was the $100,000 received in cash, by the partnership. Revenue Act of 1932, sec. 112(c)(1). 1 They insist that the transaction between the partnership and the newly organized corporation falls within section 112(b)(5) of the same act. 2*740 They argue that the transfer of property by the partnership to the corporation in exchange for stock and cash was a separate transaction to which only the partnership and the corporation*683 were parties, and that immediately after the transfer the partnership was in control of the corporation through the ownership of all of its then issued capital stock, which consisted of the 2,500 shares to which the partnership was entitled. They contend that the purchase of 3,000 shares by the Babcock & Wilcox Tube Co. was an entirely separate and distinct transaction which occurred three days later and, that at the time the partnership acquired its stock the Babcock & Wilcox Tube Co. had no obligation of any kind to take stock in the newly organized corporation.
*684 It is only necessary to say that the facts not only fail to support this contention, but, on the other hand, clearly show, in our opinion, that the purchase of 3,000 shares of stock in the new corporation by the Babcock & Wilcox Tube Co. was part of a single preconceived plan, adopted by the partnership, in which the first step was the transfer of the partnership assets in exchange for stock and cash in the new corporation. Under such conditions, the partnership could not be considered as in the control of the corporation since it acquired only 2,500 out of a total issue of 5,500 shares. West Texas Refining & Development Co v. Commissioner, 68 Fed.(2d) 77; Helvering v. Security Savings & Commercial Bank, 72 Fed.(2d) 874; Bassick v. Commissioner, 85 Fed.(2d) 8; Hazeltine Corporation v. Commissioner, 89 Fed.(2d) 513; Edwin L. Dana,36 B.T.A. 231">36 B.T.A. 231. The present record discloses that, on September 28, 1932, the date of the transfer by the partnership of the assets to the new corporation for stock and cash, the Babcock & Wilcox Tube Co. was definitely obligated, by its agreement, to subscribe*685 for 3,000 shares of the capital stock to be issued by the new corporation. The only condition precedent was the acceptance by the National Tube Co. of a license agreement under the so-called option detailed in our findings of fact. This condition had then been met. On September 26, two days prior to the transfer of the assets by the partnership, the National Tube Co. had notified Babcock & Wilcox Tube Co. of its exercise of the option and that it was making payment of the balance of $180,000 due thereunder. This information had been transmitted by the latter company to the partnership with the definite commitment that it would take 3,000 shares of stock. The partnership had voluntarily authorized the payment of its share of the $180,000 to the Babcock & Wilcox Tube Co. so that company might have the necessary $180,000 in cash for its purchase of stock. The certificates covering the total issue of 5,500 shares of stock were issued on the same day, October 1, 1932.
*741 It is thus clearly revealed that both of the acquisitions of stock were part of one planned transaction. Each constituted, merely, a step therein. The partnership was not in control of the corporation*686 within the purview of section 112(b)(5).
Alternatively, petitioners contend that, if the partnership can not be considered as being in control of the new corporation and its transfer of assets be deemed only an incident of a transaction in which the Babcock & Wilcox Tube Co. paid $180,000 in cash to the new corporation for stock, even then the transaction falls within section 112(b)(5), for the reason that the partnership and Babcock & Wilcox Tube Co. must be viewed as having contributed, respectively property and cash to the new corporation and immediately after the transfer were in control through ownership of all the corporate stock. Petitioners rely upon Halliburton v. Commissioner, 78 Fed.(2d) 265, and Claude Neon Lights, Inc.,35 B.T.A. 424">35 B.T.A. 424, in which it was held that money constitutes property within the meaning of the cited section. But, accepting the rule laid down in the two cited cases, the facts do not bring the exchange within section 112(b)(5), supra, because of the limitation of its application to those cases, only, where "the amount of the stock and securities received by each is substantially in proportion to his*687 interest in the property prior to the exchange." [Emphasis supplied.]
Petitioners property admit that the gain realized by the petitioners in the exchange, to the extent of the cash payments - in this instance $100,000 - is taxable in any event. Revenue Act of 1928, sec. 112(c)(1). Thus, in determining whether the concededly realized gain to petitioners, reflected by the stock received in the exchange, is recognized and thus taxable under section 112(b)(5), supra, these cash payments are ignored.
The subject of our only inquiry is the recognition of the gain admittedly realized in the receipt of stock by the partnership in the exchange. All such gain was recognized and taxed under all the Federal income taxing statutes preceding that of 1921. That continuees to be the general rule. Revenue Act of 1932, sec. 112(a). The Revenue Act of 1921, in section 202, contenterparts of which appear in every revenue act since that of 1921, creates an exception to that general rule. This exception postpones the recognition and consequent immediate taxation of the realized gain contained in the stock received. However, such exceptions are construed strictly against the taxpayer*688 and, the petitioners, to entitle themselves to the benefit of such exception, must clearly and unmistakably establish their right to its benefits. Tucker v. Ferguson,22 Wall. 527">22 Wall. 527; Ryan v. Carter,93 U.S. 78">93 U.S. 78; Thomas E. Bashan Co. v. Lucas, 21 Fed.(2d) 550; affd., 30 Fed.(2d) 97. Thus, the Revenue Act of 1932, controlling here, section 112(b)(5), supra, as modified by section 112(b) *742 (1), supra, postpones the recognition of such gain for tax purposes, except in the amount of cash received, when and only when, "the stock and securities received" by the partnership and the Babcock & Wilcox Tube Co. were "substantially in proportion to * * * [their interests] in the property prior to the exchange."
That is to say, the provisions postponing the recognition of gain realized by the receipt of the stock by the partnership here, become effective only if section 112(b)(5), supra, would apply, except for the receipt, by the partnership, of the $100,000, cash, in addition to the stock. But here, the record is emphatically clear that, in one inseparable transaction (Cf. *689 United Carbon Co.,32 B.T.A. 1000">32 B.T.A. 1000; reversed, 90 Fed.(2d) 43), the partnership exchanged "property" which constituted the entire ownership of certain patents and inventions admittedly worth $250,000, for 2,500 shares of stock in the Diescher Tube Mills, Inc., worth $150,000, plus $100,000, cash; while the Babcock & Wilcox Tube Co. exchanged "property" in the form of $180,000, cash (Halliburton v. Commissioner, supra;Claude Neon Lights, Inc., supra), for the other 3,000 issued shares of stock in the Diescher Tube Mills, worth $180,000. Thus, under either the decision of the Board in United Carbon Co., supra, or the opinion of the Circuit Court of Appeals for the Fourth Circuit, supra, reversing that decision of the Board, "the stock and securities received" by the partnership and the Babcock & Wilcox Tube Co. were not "substantially in proportion to [their interests] in the property prior to the exchange." Consequently, the present exchange fails in two respects to meet the conditions bringing it within the provisions of section 112(b)(5), supra - in that, first, money was received in addition to stock, *690 and, second, that the stock received by the Babcock & Wilcox Tube Co. and the partnership was not substantially in proportion to their prior interests in the property exchanged. It follows that the entire gain realized by the partnership in the exchange is recognized and taxable. Revenue Act of 1932, sec. 112(a).
Having concluded that the transaction under which the partnership transferred property to the Diescher Tube Mills, Inc., was a taxable transaction and that the entire gain of $250,000 was subject to tax, it becomes necessary to determine what portion of the taxable profit, if any, resulted from the sale or exchange of property held by the taxpayer for more than two years, excepting that held primarily for sale in the course of the taxpayer's trade or business, and thus constitute capital gain. Revenue Act of 1932, sec. 101. In determining the deficiency, respondent allocated 20 percent of the total gain of $250,000, to the sale of capital assets. How this allocation was computed does not appear.
Coincident with the filing of his brief, the respondent moved for an increase in the deficiency, alleging that no part of the profit, in *743 question, is capital*691 gain but, on the contrary, is all taxable as ordinary income. This contention of the respondent has no merit. He argues that the patents were held by the partnership primarily for sale in the course of its business. As to this, the record discloses nothing, in our opinion, indicating that the partnership has ever been in the business of buying and selling patents or in developing inventions for patent and sale. So far as we know, the patents involved here are the first which the partnership has ever sold, although it has been in business for many years. All of the other transactions having to do with the patents of the partnership have been connected with the licensing of their use. The basic patent involved in the exchange between the partnership and the newly organized corporation, and which represents the largest individual value among the patents and inventions exchanged, had been owned for many years by the partnership. During that time its use by other companies had been granted under license agreements. It is evident that the patents and inventions here in dispute did not constitute stock in trade, held for sale by the partnership in the course of its business.
Therefore, *692 our inquiry is which, if any, of the patents and inventions exchanged constitute property held by the partnership for more than two years. There is no question about three of the patents, as set out in the findings of fact. As to certain others among the inventions, patents had not been applied for at the time of the transfer or had not been issued two years prior to that time. However, some of these inventions, we have found, were developed and perfected more than two years prior to their transfer to the Diescher Tube Mills, Inc., and these inventions had been embodied in a mill constructed and operated by the petitioners at the A. M. Byers Co. plant, in which their feasibility and value were demonstrated. They were thus reduced to practice more than two years prior to their exchange.
Under the common law, the property of the inventor, to make, use and vend, was recognized. The patents issued under statute are merely the grant of the right to exclude others from that use for a period of 17 years. The inventor's property right in his invention does not come into being upon his obtaining of a patent but exists prior to that time upon his reduction of an original invention to*693 actual practice. Crown Die & Tool Co. v. Nye Tool & Machine Works,261 U.S. 24">261 U.S. 24; Six Wheel Corporation v. Sterling Motor Truck Co., 50 Fed.(2d) 568. As the court said in the last cited case:
From the foregoing, it will be seen that the irreducible quantum of the inventor's right in the res [the invention], even under the common law, is that of making, using and vending. The Federal Constitution and the statutes passed thereunder simply make that right exclusive. The statutes certainly do not curtail the natural right; they enlarge it.
*744 We think, therefore, that petitioners had a property right in each of the inventions which they had reduced to practice. These rights represented something of exchangeable value which the partnership possessed since it was able to exchange them for a valuable consideration. See Gayler v. Wilder, 10 Howard, 477; Individual Drinking Cup Co. v. Osmun-Cook Co., 220 Fed.(2d) 335; Hershey Manufacturing Co.,14 B.T.A. 867">14 B.T.A. 867; affd., *694 43 Fed.(2d) 298; George Washington, Sr.,36 B.T.A. 74">36 B.T.A. 74. That answers the only question presented here. So, we conclude that these particular patents and inventions perfected and demonstrated more than two years prior to September 28, 1932, constituted property owned by the partnership for more than two years.
The only remaining question with respect to this exchange is what part of the total gain of $250,000 represents the consideration applicable to these several patents and inventions. This we have found in our findings of fact. It is urged by the respondent that there is no basis in the record for determining a value for any one of the patents or inventions. This position falls because it is admitted that, collectively, these assets represent a total value of $250,000 so that it is necessary, only, to determine the relative value of the individual patents and inventions to arrive at the value of each. Samuel E. Diescher is an eminent engineer, familiar in detail with the patents and inventions and their comparative importance. He testified to this relative value. His testimony is, we think, competent and it stands uncontradicted.
The only*695 remaining issue is whether the partnership realized income for the year 1932, represented by its share, amounting to $50,000, of the payment of $180,000 made by the National Tube Co. on September 28, 1932. This payment was actually received then by the Babcock & Wilcox Tube Co. and $50,000, the share due the partnership, was paid over to the partnership during the year 1933. Since the partnership was on a cash basis, the petitioners contend that this payment was income to it, in the latter year
This $50,000 was a portion of the total consideration paid by the National Tube Co. for its license to use the Diescher patents. The total consideration was $200,000, of which $150,000 constituted the consideration which the Babcock & Wilcox Tube Co. received for negotiating the sale of the license. The evidence convinces us that the Babcock & Wilcox Tube Co. was the agent of the partnership in negotiating the sale of this license. The $50,000, due the partnership in the transaction, in fact, was the net consideration received by it for a license to use its patents. That fact is not changed by the agreement with the Babcock & Wilcox Tube Co. that this sum be designated a commission due*696 the partnership for assisting its agent *745 in negotiating a sale of its property. It would seem ridiculous to conclude that the total consideration paid by a purchaser of property consisted of two commissions for negotiating the sale and that nothing was received for the property.
This sum of $50,000 was due the partnership and it lay within its power to receive the payment in the year 1932. It was not then physically in possession of the amount paid, only because it voluntarily directed the National Tube Co. to pay the total consideration to its agent, Babcock & Wilcox Tube Co. The latter company received the payment in 1932, as agent for the partnership, and for its account. The partnership voluntarily authorized this payment to its agent for the purpose of securing to the latter sufficient funds to pay for the 3,000 shares of stock of the newly organized corporation, for which this agent had individually subscribed. We therefore find that the partnership constructively received this payment of $50,000, in 1932, loaned it then to the Babcock & Wilcox Tube Co. for the temporary use of that company, and received repayment of that loan in the following year. *697 Maryland Casualty Co. v. United States,52 Ct.Cls. 201; modified on another point, 251 U.S. 342">251 U.S. 342; F. H. Wilson,12 B.T.A. 403">12 B.T.A. 403; Estate of C. W. Crews,8 B.T.A. 301">8 B.T.A. 301; A. W. Henn,20 B.T.A. 1133">20 B.T.A. 1133; Louis Reizenstein, Trustee,9 B.T.A. 1184">9 B.T.A. 1184; L. & M. Holding Co.,3 B.T.A. 601">3 B.T.A. 601; Julia A. Strauss,2 B.T.A. 598">2 B.T.A. 598; Frank E. Best,26 B.T.A. 1070">26 B.T.A. 1070; 21 B.T.A. 1264">21 B.T.A. 1264.
The deficiencies in each of these two proceedings have been determined against husband and wife. The reason for this procedure, apparently, is that a joint return was filed in each instance. The deficiency in each proceeding arises upon the receipt of income by a partnership wholly owned by the two petitioners, Samuel E. Diescher and August P. Diescher. No income of the respective wives of these petitioners is involved. Accordingly, as to them no deficiencies exist. With respect to the petitioners Samuel E. Diescher and August P. Diescher.
Reviewed by the Board.
Judgment will be entered under Rule 50.
ARUNDELL, dissenting: On the first issue*698 it is my opinion that the exchange of property for cash and stock of the new corporation comes within subsections (b)(5) and (c)(1) of section 112 of the Revenue Act of 1932 and that the recognizable gain to the partnership should be limited to the cash received by it. The transaction, in brief, was this: The partnership transferred property worth $250,000 to the new corporation for stock worth $150,000 and $100,000 cash; the other stockholder paid in cash to the new corporation in *746 the amount of $180,000 and got stock in the same amount. These two transferors, one transferring property consisting of patents, patent applications, and inventions, and the other transferring property in the form of cash (Halliburton v. Commissioner, 78 Fed.(2d) 265) were in control of the new corporation immediately thereafter. So far they are within the first clause of section 112(b)(5). But, says the majority opinion, they are excluded from that section by reason of the last clause requiring that the stock and securities received by each transferor be substantially in proportion to his interest in the property prior to the exchange. It is said that this requirement*699 is not met for this reason: The partnership transferor took out of the new corporation stock worth less than the assets it put in by $100,000, whereas the other transferor took out stock equal in value to the property (cash) that it put in. Wherefore, it is said, the required before-and-after equal proportions are destroyed. This view, it seems to me, disregards subsection (c)(1) which I think was designed to meet the very situation presented here. It is not at all uncommon in the creation of corporations and in corporate adjustments that some of the parties to the transaction receive cash in addition to stock and securities, and subsections (b)(5) and (c)(1) together provide for this and include such situations in the non-recognition provisions after taking due account of the cash or "other property" received by recognizing gain on them. It is after the cash or other property is subjected to recognition that the determination is to be made as to whether the before-and-after proportions are maintained. That is, the cash or other property must be considered as being paid for an equivalent portion of the property transferred, and then the remainder of the property transferred is*700 taken as the basis for measuring the proportions of the transferors before and after the exchange. To hold otherwise would be to say that the cash or other property was a gift, which of course is not the fact, and if it were it would not be recognized as a gain. So, in the present case the $100,000 cash should be set off against an equivalent amount of the property transferred by the partnership - and this the partnership admits comes within the recognition provisions. The $100,000 worth of property so set off against the cash should not again be used for measuring the proportions under subsection (b)(5). That property, like the cash, should be excluded from further consideration; to borrow the words of the majority opinion, the "cash payments are ignored." Excluding $100,000 worth of property transferred, the partnership transferred the remainder of the property of a value of $150,000 for $150,000 worth of stock and the other transferor transferred property (cash) of the value of $180,000 for $180,000 worth of stock. Thus each of the *747 two transferors received stock exactly in proportion to the property transferred. This view carries out the intent of the two subsections*701 when read together, as they must be because of the reference in (c)(1) to (b)(5).
I think the view here expressed is entirely consistent with the holding of the Circuit Court of Appeals for the Fourth Circuit in United Carbon Co. v. Commissioner, 90 Fed.(2d) 43.
BLACK agrees with this dissent.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
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(c) GAIN FROM EXCHANGES NOT SOLELY IN KIND. -
(1) If an exchange would be within the provisions of subsection (b)(1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. ↩
2. (b) EXCHANGES SOLELY IN KIND. -
* * *
(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ↩