*183 Decision will be entered for the respondent.
Under the facts, held, that at least 80 per cent of the gross income of petitioner for the taxable years, which consisted of payments received from Australian shoe manufacturers ranging from 7 to 50 cents per pair on each pair of shoes manufactured by them, embodying certain styles and designs, was derived from royalties, and constituted personal holding company income under the provisions of section 502 (a) of the Internal Revenue Code.
*1056 Respondent*184 determined deficiencies in personal holding company surtax against petitioner in the amount of $ 2,772.96 for the fiscal year ended August 31, 1945, and in the amount of $ 9,216.39 for the fiscal year ended August 31, 1946.
*1057 The sole question is whether the income received by petitioner for the taxable years constitutes personal holding company income under the provisions of section 502 (a) of the Internal Revenue Code.
FINDINGS OF FACT.
Petitioner is a Missouri corporation, with its principal office in St. Louis, Missouri. For each of the fiscal years ended August 31, 1945 and 1946, petitioner filed corporation income and declared value excess profits tax returns and personal holding company returns with the collector of internal revenue for the first district of Missouri. Petitioner also filed an amended corporation income and declared value excess profits tax return for the fiscal year ended August 31, 1945. Petitioner keeps its books and files its returns on the accrual basis.
For the fiscal year ended August 31, 1945, 52 per cent of petitioner's outstanding capital stock was owned by Edward Greensfelder, as trustee for J. Goldberg, and48 per cent of the outstanding*185 capital stock was owned by Warren Browne. For the fiscal year ended August 31, 1946, all of the outstanding capital stock was owned by Edward Greensfelder, as trustee for J. Goldberg. In so far as the ownership of petitioner's outstanding capital stock during the taxable years is concerned, the petitioner comes within the statutory definition of a personal holding company.
On its return for the fiscal year ended August 31, 1945, the petitioner described its "Kind of Business" as licensor of shoe manufacturing and distributing rights. In the amended return for the same period petitioner described "Kind of Business" as "Procurement and resale of shoe manufacturing services and informations," and in its return for the fiscal year ended August 31, 1946, petitioner described "Kind of Business" as "Sale of information, styles, patterns to shoe manufacturers."
Edward Greensfelder, the president of petitioner, was a practicing attorney in St. Louis during the taxable years. Warren Browne, the vice president of petitioner, was an officer of the Army of the United States during the taxable years and was employed by the petitioner on a part time basis. J. Goldberg, a resident of Sydney, *186 Australia, was engaged in the business of manufacturing shoes in Sydney, Australia. During the taxable years he made two trips to the United States, one in the fall of 1944 and the other in March, 1946.
Petitioner was incorporated on September 1, 1944. On September 26, 1944, Dixon-Bartlett Co., a manufacturer of ladies' shoes, as first party, and petitioner by its president, Edward Greensfelder, as second party, entered into a written contract in which Dixon-Bartlett Co. granted and assigned to petitioner "the exclusive right, privilege and license to sell, distribute and/or manufacture, or cause to be sold, *1058 distributed and/or manufactured, for sale or distribution anywhere in Australia and New Zealand but not elsewhere, ladies' shoes using or embodying any models or styles heretofore or hereafter created, prepared or designed by or for the First Party and known as 'Hill and Dale' shoes." The agreement also contained the following provisions:
2. The First Party agrees to supply the Second Party with copies of all models or styles of ladies' shoes at any time and from time to time created, prepared or designed by or for it (whether during or between seasons) as soon as*187 the same shall be completed and until the termination of this agreement, it being understood and agreed that the Second Party shall be entitled to use the same only in connection with the manufacture, sale and/or distribution of shoes in Australia and New Zealand. Such copies of models or styles, including all samples, "pull-overs" and lasts, or models of lasts, shall be charged for by the First Party at the time of shipment and paid for by the Second Party at prices to be mutually agreed upon in addition to the royalty hereinafter provided.
3. First Party also agrees, from time to time, to furnish to the Second Party such information as it may possess as to the materials and colors of shoes which it intends to manufacture and offer for sale each season, as well as any new developments and changes regarding lasts, heels, trims and similar matters in connection therewith.
4. Second Party agrees to pay to First Party during the term of this agreement, as royalty, the sum of Fifteen (15 cents) cents per pair on each and every pair of shoes manufactured from models, styles or models of lasts supplied to it by First Party under the terms hereof, including all shoes manufactured by others*188 under licenses granted or other arrangement made by Second Party under Paragraph 6 hereof; provided, however, that in any event Second Party is to pay First Party a minimum royalty at the rate of Five thousand ($ 5,000.00) Dollars per contract year during the term of this agreement, which minimum royalty shall be paid by Second Party to First Party in equal quarterly installments of Twelve hundred and fifty ($ 1,250.00) Dollars each, commencing on January 1, 1945, and continuing quarterly thereafter. * * *
* * * *
6. It is expressly understood and agreed that Second Party shall be entitled to grant to Cinderalla Shoes Pty. Ltd. of Sydney, Australia, or to any other Australian or New Zealand manufacturer approved by First Party, the right, privilege and license to manufacture from the said models, styles or models of lasts supplied by First Party, ladies' shoes for sale and/or distribution in Australia or New Zealand by First Party, or by subsidiary companies controlled by it, and also to manufacture such shoes for sale and/or distribution by such Australian or New Zealand manufacturer itself in any part or parts of Australia or New Zealand (but not elsewhere) upon such terms and *189 conditions as may be agreed upon by Second Party and such Australian or New Zealand manufacturer; and, to that end, to make available to such Australian or New Zealand manufacturer any or all models, styles, models of lasts or other information supplied to Second Party by First Party under the terms hereof; provided that, except as in this paragraph mentioned, such models, styles, models of lasts or information shall not be sold, transferred or made available to any other person, firm or corporation without the approval of First Party; and, provided further, that in the event of the termination of any such arrangement between Second Party and an Australian or New Zealand manufacturer before the expiration of this agreement, or any extension hereof, Second Party may enter into a further arrangement *1059 along the same lines and for the same purposes with any other Australian or New Zealand manufacturer approved by First Party, and so on from time to time.
* * * *
8. It is understood that funds which Second Party expects to obtain in order to pay the royalties which it is obligated to pay hereunder will be due it from Cinderalla Shoes Pty. Ltd. of Australia and other concerns located*190 in Australia and New Zealand. * * *
On September 27, 1944, petitioner entered into a written contract with Cinderalla Shoes Pty. Ltd., of Australia (sometimes hereinafter referred to as Cinderalla), in which petitioner agreed to assist Cinderalla in the designing and styling of women's shoes to be manufactured by or for Cinderalla; to make available to Cinderalla information required as to styles, materials and colors of shoes, lasts, heels, trims, and similar matters; and not to furnish such services and information to any other person or party located in Australia or New Zealand. The contract also provided that Cinderalla should have the right during the term of the agreement to sell shoes anywhere in Australia or New Zealand, but no other place in the world. Cinderalla agreed to pay petitioner 25 cents (U. S. A. currency) per pair for each and every pair of women's shoes manufactured by Cinderalla in Australia, with a minimum guarantee of $ 8,250 (U. S. A. currency) per contract year. The parties also agreed that the information and services were to be furnished toCinderalla through a representative designated by it who was located in the United States, it being recognized*191 that petitioner was without facilities and not in a position to furnish services and information to Cinderalla in Australia.
In connection with the contract with Cinderalla, Edward Greensfelder arranged for the factory manager of Cinderalla to go through the Dixon-Bartlett factory in Baltimore, Maryland. The factory manager received instructions in regard to the manufacture of shoes from personnel of the Dixon-Bartlett factory. J. Goldberg also visited the Dixon-Bartlett factory when he was in the United States in 1944 and in 1946. He gathered information from personnel of the factory and took shoe samples with him back to Australia. Warren Browne purchased certain fashion magazines, the cost of which was paid by petitioner, and mailed them to Cinderalla. Petitioner received income in the amount of $ 5,500 for the fiscal year ended August 31, 1945, and $ 3,583 for the fiscal year ended August 31, 1946, pursuant to its contract with Cinderalla.
On September 27, 1944, petitioner, as first party, entered into a written contract with Theodore R. Samuels and Julian G. Samuels of St. Louis, Missouri, and Dan Palter, Jacob Palter, and Vincent DeLiso of New York City, as second parties, *192 in which the second parties agreed to make available to petitioner information as to styles, materials and colors of women's shoes of the types sold in the United States*1060 under the trade names DeLiso Debs and Palter DeLiso, and also as to lasts, heels, trims, and similar matters, and that this information could be furnished by petitioner to DeLiso Debs (Australia) Pty. Ltd., an Australian corporation, pursuant to the terms of an agreement between petitioner and the Australian corporation, attached thereto and incorporated therein by reference as a part thereof. Petitioner agreed to pay the second parties 15 cents per pair for each and every pair of women's shoes manufactured by the Australian corporation, with a minimum guarantee of $ 5,000 per contract year. The contract provided that the funds which petitioner expected to obtain in order to pay the royalties which it was obligated to pay would be due it from DeLiso Debs (Australia) Pty. Ltd.
On September 27, 1944, petitioner entered into a written contract with DeLiso Debs Pty. Ltd. of Australia in which petitioner agreed to assist DeLiso Ltd. in the designing and styling of women's shoes to be manufactured by or on *193 behalf of that corporation, and to make available to that corporation information as to styles, materials, and colors of shoes to be manufactured by it, as well as information regarding lasts, heels, trims, and similar matters. The contract provided that the information and services to be furnished by petitioner were to be furnished to DeLiso Ltd. through a representative designated by it and located in the United States, inasmuch as petitioner was without the facilities and not in a position to furnish such information and services to DeLiso Ltd. in Australia. The contract also provided that petitioner would not furnish the services and information to be furnished DeLiso Ltd. to any other person or party located in Australia, and that DeLiso Ltd. had the right during the term of the agreement to sell shoes anywhere in Australia or New Zealand, but no other place in the world. DeLiso Ltd. agreed to pay petitioner 50 cents per pair for each and every pair of women's shoes manufactured by it, with a minimum guarantee of $ 8,250 per contract year.
In connection with the contract between petitioner and DeLiso Ltd., Edward Greensfelder, in behalf of petitioner, procured sample shoes *194 and other shoe materials from Samuels Shoe Co. in St. Louis and shipped them to DeLiso Ltd. in Australia. Petitioner paid $ 442.62 for these samples. Samuels Shoe Co. also shipped shoe samples and materials directly to DeLiso Ltd. of Australia. During J. Goldberg's visit to the United States in 1944 he contacted Samuels Shoe Co. and obtained sample shoes and pictures of shoes which he took back with him to Australia. Samuels, of the Samuels Shoe Co., gave J. Goldberg answers to questions concerning the shoe business. Petitioner also procured sample shoes from Monogram Slipper Co. of St. Louis and shipped them to DeLiso Ltd. of Australia. Petitioner paid $ 24.24 for these shoe samples. Warren Browne did not perform any services in connection with petitioner's contract with DeLiso Ltd. Petitioner *1061 received income in the amount of $ 6,875 for the fiscal year ended August 31, 1945, and $ 8,250 for the fiscal year ended August 31, 1946, pursuant to its contract with DeLiso Ltd.
On September 27, 1944, petitioner entered into a written contract with J. Goldberg Footwear Agencies Pty. Ltd. of Sydney, Australia, wherein the petitioner agreed to assist the Goldberg company *195 in the designing and styling of women's play shoes to be manufactured by or for it, and to make available information as to styles, materials, and colors of play shoes to be manufactured by the Goldberg company; information regarding lasts, heels, trims, and similar matters; and keep it informed as to all new developments in the United States in regard to the manufacture and styling of women's play shoes. The contract also provided that the information and services to be furnished by petitioner were to be furnished to the Goldberg company through a representative, designated by it and located in the United States, inasmuch as petitioner was not in a position to furnish such information and services in Australia. Petitioner agreed not to furnish the information and services to any other person or party located in Australia or New Zealand. The Goldberg company agreed to pay petitioner a royalty of 7 cents per pair for each and every pair of women's play shoes manufactured by Goldberg company. The contract provided that the agreement should apply only to the manufacture by or for the account of the Goldberg company of women's play shoes to be sold under the name "Hi-Larks," and that*196 the information and services to be furnished by petitioner were to be used only in connection with shoes manufactured and sold under that name and the royalties to be paid by the Goldberg company were to be paid only on shoes manufactured and sold under that name.
In connection with the contract with Goldberg Footwear Agencies Pty. Ltd., J. Goldberg went to Boston in 1944 and obtained samples and sketches of types of shoes from Marge Mason, a woman shoe stylist and designer. In 1946 he also secured on behalf of Goldberg Ltd. shoe samples, sketches of shoes, and advertising materials from Monogram Slipper Co. of St. Louis. Petitioner received income in the amount of $ 3,456.95 for the fiscal year ended August 31, 1946, pursuant to its contract with Goldberg Ltd.
On September 27, 1944, petitioner entered into a written contract with J. Goldberg Footwear Agencies Pty. Ltd., the terms of which are the same as set out in the above mentioned contract covering women's play shoes, except that it refers to men's shoes and provides that Goldberg Ltd. pay petitioner a royalty of 25 cents per pair for each and every pair of men's shoes manufactured by it in Australia.
In connection with the*197 contract with J. Goldberg Footwear Agencies, Edward Greensfelder made arrangements in April, 1946, for the factory managers of the J. Goldberg Footwear Agencies Pty. Ltd. *1062 to visit the factory of Packard Shoe Co. in Boston. J. Goldberg visited the Packard Shoe Co. factory when he was in the United States in the fall of 1944 and in April, 1946, and obtained samples of men's shoes. Petitioner received income in the amount of $ 7,762.25 for the fiscal year ended August 31, 1945, and $ 19, 158.45 for the fiscal year ended August 31, 1946, pursuant to its contract with J. Goldberg Footwear Agencies Pty. Ltd. In a release dated June 14, 1946, the Packard Co. acknowledged the receipt of $ 3,000 in full settlement of claims against petitioner "on account of services rendered to said Warren Browne, Inc. in connection with the manufacture and designing of men's footwear."
Petitioner's books of account disclose that the following payments were made by it during the taxable years:
| Fiscal year ended Aug. 31, 1945 | |
| DeLiso Debs | $ 4,166.67 |
| Dixon-Bartlett Co. -- Cinderalla | 3,333.33 |
| Hi-Larks -- Mary Mason | 1,975.40 |
| Packard Co | 2,327.20 |
| Edwards Shoe Co | 1,666.67 |
| Fiscal year ended Aug. 31, 1946 | |
| DeLiso Debs | 3,333.33 |
| Edwards Shoe Co | 833.33 |
| Hi-Larks -- Mary Mason | 3,370.02 |
| Packard Co | 2,585.00 |
*198 Petitioner paid Edward Greensfelder $ 250 for professional legal service at the time it was incorporated in 1944. Petitioner did not pay any salaries to any of its officers or employees for services rendered during the fiscal year ended August 31, 1945. Petitioner's books for the fiscal year ended August 31, 1945, disclose that it had income of $ 23,594.20 and expenses of $ 18,355.54.
Petitioner paid Warren Browne $ 2,500 for the fiscal year ended August 31, 1946. Under expense items shown on its books for this fiscal year is an item of "Professional expense, Greensfelder, Hemker & Wiese, $ 3,500." Edward Greensfelder was a member of this law partnership. This amount was for all services rendered by Greensfelder to petitioner, some of which were legal services and some of which were general business services rendered by Greensfelder in directing the affairs of petitioner.
All shoe samples, materials, and other information concerning the manufacturing of shoes which petitioner furnished to Australian shoe manufacturers were secured by petitioner from American manufacturing and retail sources.
All of the income received by petitioner during the taxable years was received under and*199 pursuant to the aforementioned contracts *1063 with Australian shoe manufacturers. More than 80 per cent of the gross income received by it during each of the taxable years was derived from royalties.
OPINION.
Section 501 of the Internal Revenue Code provides that the term "personal holding company" means any corporation, if (a) at least 80 per cent of its gross income for the taxable year is derived from royalties, and (b) at any time during the last half of the taxable year more than 50 per cent in value of its outstanding stock is owned, directly or indirectly, by not more than five individuals.
It has been stipulated by the parties that petitioner is a personal holding company in so far as stock ownership is concerned. Their disagreement arises fromthe respondent's determination that the income of petitioner for the taxable years consisted of "royalties" and, therefore, personal holding company income within the meaning of section 502 (a) of the Internal Revenue Code. The petitioner contends that the payments it received under contracts with Australian shoe manufacturers were compensation for services rendered, and not royalties.
The term "royalties" is not defined in*200 the Internal Revenue Code. Subsection (3) of section 29.502-1 of Regulations 111 states that the term "includes amounts received for the privilege of using patents, copyrights, secret processes and formulae, good will, trade-marks, trade brands, franchises and other like property," and this Court has defined the term "as a payment or interest reserved by an owner in return for permission to use the property loaned and usually payable in proportion to use." United States Universal Joints Co., 46 B. T. A. 111, 116.
The only witness for the petitioner was its president, Edward Greensfelder. He was interrogated as to the services petitioner rendered in connection with each of the contracts with Australian manufacturers. He testified that he rendered some legal services for which his law firm was compensated; that he arranged for representatives or factory managers of Australian manufacturers to go through the plants of several American manufacturers, where they received information and materials pertaining to the manufacture of shoes; that he procured some sample shoes and other materials and shipped them to Australian manufacturers; and that he received*201 letters from them asking for information and forwarded, or arranged to have it forwarded, to them. No letters asking for or supplying information were introduced in evidence. From his testimony it clearly appears that any services rendered by petitioner's other officer, Warren Browne, were negligible and consisted of a visit to a factory and *1064 purchasing and mailing some fashion magazines to Australia. J. Goldberg was not an officer or employee of petitioner. The Australian manufacturers paid petitioner approximately $ 23,500 in 1945 and $ 35,000 in 1946. We are not convinced that these substantial payments were made for the services testified to by Greensfelder. Neither are we convinced that, if all the Australian manufacturers wanted and all that the petitioner was to supply for the consideration received was information and services, petitioner would have entered into contracts, such as that with Dixon-Bartlett Co. mentioned in our findings, wherein it acquired the right to grant to Cinderalla Shoes Pty. Ltd., or to any other Australian or New Zealand manufacturer, the right, privilege, and license to manufacture from models, styles, or models of lasts supplied by*202 Dixon-Bartlett Co. ladies' shoes for sale and/or distribution in Australia or New Zealand, and to that end, to make available to such Australian or New Zealand manufacturer any or all models, styles, models of lasts, or other information supplied by Dixon-Bartlett Co.
We are satisfied from the evidence that what the Australian manufacturers wanted was the exclusive privilege or license to manufacture certain styles and designs of American shoes in the territory comprising Australia and New Zealand. If the agreements between petitioner and those manufacturers had specifically provided for the transfer of such a privilege or license, and essential information and materials necessary to the manufacture of the particular styles and designs of shoes in which they were interested, the petitioner could not logically contend that all it furnished was services, and we do not think the agreements here involved, when effect is given to their substance rather than to their form, warrant the conclusion that the payments made by the Australian manufacturers and received by petitioner were only for services. The agreements provided that petitioner would assist in the designing and styling of shoes*203 to be manufactured in Australia and New Zealand and make available to the particular Australian manufacturer involved information required as to styles, materials, and colors of shoes to be manufactured, as well as information regarding lasts, heels, trims, and similar matters, and that those services and information would not be furnished to any other person or party located in Australia or New Zealand. Our construction of these provisions is that they granted to the Australian manufacturer the exclusive privilege and license to manufacture shoes embodying certain designs and styles, and that this was the principal thing of value received. We are not concerned with the fact that the petitioner acquired the right to grant this exclusive privilege and license by contract in two instances and in some undisclosed manner in the case of the Marge Mason (women's) shoes and Packard (men's) shoes. The contracts with the Australian manufacturers indicate that *1065 the right was acquired in some manner, and, as a result, petitioner was able to assure each manufacturer that the information and materials essential to the manufacture of the particular designs and styles of shoes in which*204 each manufacturer was interested would not be furnished to any other Australian manufacturer. This conclusion is clearly shown by the written contracts between petitioner and two of the American manufacturers and the assignment of the rights thereunder by petitioner to its Australian clients. While the evidence fails to reveal written contracts as to the Marge Mason and Packard shoes, yet in both instances substantial sums were paid by petitioner in both taxable years to each of these American manufacturers, and in turn substantial sums were received by petitioner from its Australian clients, and the consideration paid and received, together with all other circumstances in the case, clearly indicates that these two transactions were of the same general nature as those covered by the written contracts.
Each contract provided that the payments to petitioner were to be measured, except in instances where the minimum guarantee provided for therein was applicable, by the number of pairs of shoes manufactured, and they ranged from 7 to 50 cents per pair. The contracts clearly contemplated payments in proportion to use, and, if no services were involved, all of these payments would fall*205 within the definition of the term "royalties" contained in United States Universal Joints Co., supra. In the cited case, where the taxpayer proved that similar payments were made in part for the right to manufacture and use a patented joint and in part for technical services rendered by its officers, and that more than 20 per cent of the payments were for technical services, this tribunal held that the taxpayer was not a personal holding company during the taxable year involved. In Lane-Wells Co., 43 B. T. A. 463; affd., 134 Fed. (2d) 977; certiorari denied, on this issue, 320 U.S. 741">320 U.S. 741, however, where the taxpayer failed to present evidence showing what part, if any, of payments received in connection with the assignment of an exclusive license agreement to other companies was for engineering services, our holding was that all of the payments were royalties and that the taxpayer was a personal holding company.
In the instant proceeding the petitioner was not engaged in the business of manufacturing or designing shoes and its officers were not qualified to render any*206 technical services to Australian shoe manufacturers. We think it is reasonable to assume that as shoe manufacturers they knew how to manufacture shoes, and, once they acquired the privilege or license to manufacture American type shoes embodying certain designs or styles in their territory, the only service they expected of petitioner was that it make available to them information as to American production methods and information and materials essential to the manufacture of the particular designs and *1066 styles of shoes involved, such as sample shoes, lasts, materials and colors, trims, and similar matters. The contracts provided that the information and materials were to be furnished to a representative of each Australian manufacturer in the United States, and during the two years here involved the petitioner's services consisted of referring several representatives of these manufacturers to the American manufacturers or designers involved, where they received the information and materials desired, and, in a few instances, sending sample shoes and other data to Australia. Petitioner has not proved to our satisfaction that more than 20 per cent of the payments it received*207 during each of the taxable years should be allocated or was allocable to services which it rendered. Neither has it proved that at least 80 per cent of these payments should not be allocated or was not allocable to the use of the exclusive privilege or license which each Australian manufacturer acquired to manufacture shoes using or embodying certain models or styles. Under these circumstances the respondent's determination that at least 80 per cent of petitioner's gross income for the taxable years was derived from royalties, and that petitioner was a personal holding company, must be approved.
Decision will be entered for the respondent.