*21 Decisions will be entered under Rule 50.
1. A partnership of which petitioners were members transferred certain patent rights by agreement conveying "an exclusive license * * * for the manufacture and sale of shoes." Held, amounts received pursuant to the agreement are royalties derived from a licensing agreement and not long-term capital gain from the sale of a capital asset, since the contract did not effect a transfer of all of the rights of the patentee, i. e., the right to make, the right to use, and the right to vend.
2. The respondent disallowed deductions for depreciation on two patents used by petitioners in their trade or business. Held, upon the evidence presented, that the right to an allowance for depreciation was established in the amount determined in respect to one patent, but that in respect to the other an amount in excess of the basis for depreciation here established having already been recovered, petitioners are not entitled to any additional allowance. Held, further, that depreciation is allowable in the amount determined in respect to the patent subject to the above-mentioned licensing agreement.
*233 *482 The respondent determined deficiencies in the Federal income taxes of petitioners as follows:
| Petitioners | 1947 | 1948 | 1949 |
| Ernest and Hilda Rollman, husband and wife | $ 785.06 | $ 1,653.21 | |
| Curt and Louise Kaufman, husband and wife | $ 51 | 455.78 | 782.76 |
| Heinz and Tania Rollman, husband and wife | 412.02 | 678.92 | |
| Walter and Ellen Kaufman, husband and wife | 51 | 507.50 | 821.63 |
The issues presented for our consideration are:
(a) Whether amounts received by The Rollmans, a partnership, from Rikol, Inc., in 1947, 1948, and 1949, pursuant to a written agreement in respect to patent rights owned by The Rollmans, represent long-term capital gain from the sale of a capital asset or ordinary income, either from royalties pursuant to a licensing agreement, or from the sale of a patent held primarily for sale to customers in the ordinary course of business. If the payments are to be treated as ordinary royalty income, a subsidiary question is presented as to what extent, if any, depreciation on the patent may be allowed.
(b) To what extent, if any, the partnership is entitled to a deduction for depreciation*23 on two other United States patents.
Other adjustments made by respondent in the notices of deficiency have been conceded by petitioners.
FINDINGS OF FACT.
All of the petitioners filed timely joint Federal income tax returns for the years *234 involved. Ernest and Hilda Rollman so filed with the then collector of internal revenue for the sixth district of California. The other petitioners filed with the then collector of internal revenue for the district of North Carolina.
Petitioners Heinz W. Rollman, Ernest E. Rollman, Curt Kaufman, and Walter Kaufman (hereinafter sometimes referred to as petitioners) are members of a partnership known as The Rollmans, presently with its principal place of business at Waynesville, North Carolina.
The Rollmans was first formed as a partnership in Brussels, Belgium, on April 13, 1936, then including as partners Hans Rollman, *483 now deceased, father of petitioners Heinz and Ernest Rollman, Heinz and Ernest, and their cousins Walter and Curt Kaufman. Prior to formation of the partnership, petitioners had lived in Germany and had been employed there in several shoe factories owned by Hans Rollman. While so employed, petitioners were trained in the*24 various production methods of leather and rubber shoe manufacture. In 1935, all of petitioners' and their families' properties, including the shoe factories, other equipment, and patents owned by them, were confiscated by the German Government. Petitioners and their families were forced to flee from Germany to Brussels, Belgium. There they formed The Rollmans to utilize their knowledge and skill in shoe manufacture on behalf of other organizations, being unable for lack of funds to reenter the shoe manufacturing business.
Petitioners and Hans Rollman, through The Rollmans, became technical advisers to the shoe industry and also embarked on a program of research to develop new processes of shoe manufacture and sale. The business of the partnership consisted largely of rendering technical assistance and "know-how" services to shoe manufacturers and of granting limited licenses to such manufacturers for the production of shoes under patents developed by The Rollmans. The business activity of The Rollmans has continued in this fashion to date.
Rajeh Patent.
On September 6, 1938, the partnership was issued a United States patent, No. 2,129,106 (hereinafter called the Rajeh patent), *25 on a previously perfected process relative to the manufacture of rubber footwear. The patent had been assigned to the partnership by Hans Rollman and Andreas Szerenyi.
In 1939, Heinz Rollman, anticipating war in Europe, secured from each of the partners of The Rollmans an assignment to himself of certain patent applications and patents, including the Rajeh patent, owned by The Rollmans, authorizing him to dispose of them and execute other appropriate agreements in respect thereto on behalf of the partnership. Heinz came to the United States to establish a business here on behalf of The Rollmans.
Heinz first attempted to arrange with Leo Weill for The Rollmans to engage in the manufacture of shoes on the basis of an exchange of the Rajeh patent for one-half of the common stock of a corporation to be organized to engage in such manufacture. For various reasons this arrangement was not consummated.
Heinz then negotiated with Rikol, Inc. (hereinafter called Rikol), a corporation controlled by Leo Weill, for the partnership's customary know-how and technical assistance service and a license under the Rajeh patent. This plan also was not completed, largely because the *484 manufacture*26 of shoes under the Rajeh patent required, in addition to special shoe machinery, a supply of uncured rubber compound which would involve the use of certain rubber machinery costing about $ 250,000. Rikol could not finance the building of a rubber plant, which would have been necessary to meet this supply, in addition to the required shoe manufacturing factory. Consequently, negotiations were undertaken between Rikol, Heinz (on behalf of The Rollmans), and the Dayton Rubber Company (hereinafter called Dayton) for Dayton to build the rubber plant, lease space to Rikol, and furnish Rikol's requirements for uncured rubber compound for manufacture under the Rajeh patent. Dayton, while interested in the venture, would not agree to make the required investment until it had investigated the limits of the claim of the Rajeh patent. Dayton also wanted to review the agreement proposed by Heinz to grant a limited license under the Rajeh patent to Rikol, since Dayton was then, at least, contemplating a possible complete transfer of all rights under the patents to Rikol in order to safeguard the proposed investment in a rubber plant. The investigation disclosed the existence of possible conflicting*27 patents owned by Ludwig H. Grunebaum and a group of persons whom he represented (hereinafter called the Grunebaum group) acquired by them after the German Government confiscated petitioners' and Hans Rollmans' outstanding United States patents in 1935. Heinz thereafter contacted the Grunebaum group to arrange for a transfer of its patent rights along with the transfer of the Rajeh patent.
On December 19, 1940, Heinz, acting on his own behalf and that of the partnership, entered into an agreement with *235 Rikol, which insofar as is here pertinent is set out below.
ROLLMANN, individually and as a member of the co-partnership, and GRUNEBAUM do hereby respectively grant to RIKOL, subject to the conditions hereinafter set forth, an exclusive license (except for two non-exclusive licenses now outstanding in United States Rubber Products, Inc., and Pirelli, Ltd.) for the manufacture and sale of shoes pursuant to all of the above mentioned patents and any renewals, continuations, divisions, reissues or extensions thereof. Said license shall extend to the entire territory of the United States of America, and so long as Mr. LEO WEILL, the representative of RIKOL, shall remain alive and shall *28 remain the holder of a majority of the stock of Rikol, shall likewise extend to the possessions and dependencies of the United States of America.
* * * *
It is understood that a contract shall be entered into between RIKOL, or a subsidiary or affiliated company of RIKOL, with a rubber company to supply rubber mixture and semi-vulcanized sole shells. It is understood that said contract will be negotiated by Mr. LEO WEILL, as the representative of RIKOL, in conjunction with ROLLMANN and that said contract shall be approved by ROLLMANN before its execution. Upon the execution of a contract as aforesaid, ROLLMANN agrees to place at the disposal of the management of said rubber *485 factory all of the formulas necessary for the manufacture of the rubber materials needed by RIKOL in order to fully exercise the license granted to it under the patents mentioned herein.
* * * *
The license herein granted to RIKOL shall be exclusive for the duration of this agreement with respect to the RAJEH PATENT, and shall be exclusive with respect to the ROLLMANN PATENTS, except for the non-exclusive license possessed by the United States Rubber Products, Inc. and Pirelli, Ltd., ROLLMANN and GRUNEBAUM*29 herein agreeing that except for the two non-exclusive licenses above mentioned, no other licenses will be granted with regard to said patents during the term of this agreement. ROLLMANN and GRUNEBAUM do hereby agree that the license heretofore granted to Pirelli, Ltd., and the United States Rubber Products, Inc. will not be renewed and that no other party will be substituted in place of Pirelli, Ltd. or the United States Rubber Products, Inc. in the event of a cancellation or other termination of said license or licenses. The patents hereinbefore named are licensed solely and exclusively to RIKOL (excepting United States Rubber Products, Inc. and Pirelli, Ltd.), subjct to the conditions as set forth in this agreement. * * *
RIKOL agrees that it will not grant sub-licenses with respect to the patents for which licenses are herein granted, or any improvements or developments with regard thereto; unless it shall first receive the written consent of ROLLMANN thereto; except, however, that RIKOL shall have the right to grant licenses to any corporations or other enterprises in which LEO WEILL shall directly or indirectly control a majority of the stock. In any event it is understood*30 and agreed that RIKOL shall have the right to assign the within agreement to a corporation to be formed, provided that LEO WEILL shall directly or indirectly control at least a majority of the stock of such new corporation, and upon such new corporation assuming in writing all of the terms and provisions of the within agreement on RIKOL'S part to be performed, RIKOL shall be released from any and all further liability hereunder.
Subsequently, on March 19, 1941, Leo Weill organized Wellco Shoe Corporation (hereinafter called Wellco) as contemplated by the agreement of December 19, 1940. Rikol and Wellco were both controlled by Leo Weill.
On that same date, Rikol entered into an agreement with Wellco granting Wellco an exclusive sublicense to manufacture and sell shoes pursuant to United States Patent Nos. 1,955,720 and 2,168,243, in accordance with the rights which Rikol had acquired under the agreement of December 19, 1940. The agreement, in pertinent part, is as follows:
Whereas RIKOL has heretofore entered into a certain agreement dated the 19th day of December, 1940 with Heinz Rollman and Ludwig H. Grunebaum, whereby it obtained a license with respect to the use of United States*31 Patent No. 1,955,720 dated April 17, 1934 and Patent No. 2,168,243 dated August 1, 1939 relating to shoes and the manufacture thereof; and
Whereas RIKOL, under said agreement has the right to grant a sublicense to WELLCO by reason of the fact that Leo Weill controls a majority of the stock in WELLCO; and
Whereas RIKOL is desirous of granting a sublicense and WELLCO desires to obtain a sublicense with respect to *236 the aforesaid patents subject to the terms and provisions hereinafter set forth,
*486 Now Therefore, it is mutually agreed between the parties hereto as follows:
1. RIKOL does hereby grant to WELLCO, subject to the conditions hereafter set forth, an exclusive license for the manufacture and sale of shoes pursuant to the two United States patents above mentioned, bearing Nos. 1,955,720 and 2,168,243.
No further agreements were made in the United States with respect to the Rajeh patent, or any improvements thereon, by either Rikol or The Rollmans.
During 1947, 1948, and 1949, The Rollmans received payments from Wellco, pursuant to the agreement of December 19, 1940, in the amounts of $ 9,417.77, $ 20,178.03, and $ 17,900.69, respectively. The partnership reported these *32 amounts on its Federal income tax returns as long-term capital gain. The respondent determined that the payments constituted ordinary income to The Rollmans and in accordance therewith adjusted petitioners' respective distributable shares of ordinary income from the partnership for the years in issue.
Depreciation.
From about mid-1936 to May 1940, The Rollmans, then located in Brussels, Belgium, worked on the development of three processes, hereinafter referred to as Paraflex, Snow Boot, and Rajeh, resulting in United States patents, No. 2,178,086, dated October 31, 1939, No. 2,357,360, dated September 5, 1944, and No. 2,129,106, dated September 6, 1938, respectively. The books and records of the Belgian partnership reflecting the development and other costs of these assets were left behind in Belgium at the time the partners came to the United States in 1940 after Germany invaded Belgium. After World War II (and prior to the trial of this proceeding) petitioners contacted the firm occupying the offices where The Rollmans had previously been located in Belgium and requested that firm to forward to the United States any records of The Rollmans in their possession. The books *33 and records of the partnership were no longer located at the premises formerly occupied by The Rollmans, and the attempt to locate them by this means was not successful. No other effort was made by the partners to trace their books and records. Petitioners assumed that the books and records had been destroyed by the Germans.
Experimentation in conjunction with the development of Paraflex, Snow Boot, and Rajeh required the use of certain machinery and equipment, including hydraulic presses and steel molds. The first hydraulic press constructed for The Rollmans for this research cost 500,000 Belgian francs, or approximately 16,667 American dollars converted at the then appropriate rate of exchange of 30 Belgian francs to 1 American dollar. Three other presses also used in this work cost The Rollmans 60,000 francs each or $ 2,000, a total of $ 6,000. *487 Use of these machines was continuous during the period 1936 through May 10, 1940, in the development and perfection of the three processes. Such use was approximately in equal proportion for each process.
Each of the presses had a useful life of approximately 20 years. They were left behind in Belgium in 1940 when the Rollmans*34 came to the United States and petitioners have never been able to recover the presses or any part of their value. No depreciation was ever claimed on the presses.
In addition to the costs of this machine equipment attributable to the development of the Paraflex, Snow Boot, and Rajeh processes, certain payments were made by The Rollmans to acquire full interest in the United States patents on Paraflex and Rajeh. The Rollmans paid Szerenyi the amounts set forth below, for Paraflex, which he owned completely, for the one-half interest in Rajeh owned by him, as inventor and co-inventor, respectively, and for his general advisory services to The Rollmans. The amounts attributable to Szerenyi's interest in Paraflex and Rajeh represent a portion of the amounts received by him under an agreement with The Rollmans, dated January 15, 1937, which covered the matter of his compensation for general advisory service as well as his interest in Paraflex and Rajeh.
The agreement in pertinent part is as follows:
ARTICLE 1 -- SZERENYI undertakes to assist ROKA [The Rollmans] in the capacity of a consulting engineer, in executing all its contractual obligations, and to guard and promote the interests*35 of ROKA to the best of his knowledge and belief.
* * * *
ARTICLE 3 -- SZERENYI transfers one invention pertaining to shoe manufacture, which was perfected by him in accordance with a suggestion by Mr. Hans Rollmann and is owned jointly by him and the partners of ROKA and is detailed in Austrian Patent Application A 100/36, with all pertinent rights to the ownership of ROKA upon conclusion of this agreement and in consideration of no other compensations then stipulated in the provisions of this agreement.
ARTICLE 4 -- Furthermore, SZERENYI transfers * * * the patents designated hereinafter and pertaining to a process for the manufacture of footwear with full rubber sole as invented by him, wherein the unvulcanised [sic] rubber in one operation is molded, vulcanized and attached to the shaft, and he furthermore undertakes to furnish his signature for the purpose of such property transfer, underneath the following: Italian Patent No. 318 470; French Patent No. 777 754; English Patent No. 429 143; Spanish Patent No. 135 583; Belgian Patent No. 406 803 and Argentine Patent Application No. 51 710. Also SZERENYI transfers to ownership by ROKA, US Patent Application No. 740 734 pertaining*36 to the same process, which was transferred to him by ROLLMAN & MAYER and is registered to the name of Mr. Hans ROLLMANN. (The patents and patent applications detailed in this Article are referred to hereinafter as PARAFLEX Patents.)
ARTICLE 5 -- ROKA shall be entitled to file patent applications on future improvements of the inventions underlying the PARAFLEX Patents. Such patents and/or patent applications shall be owned by ROKA. * * *
*488 ARTICLE 6 -- All inventions within the scope of ROKA which may be made by SZERENYI during the lifetime of this Agreement, shall become the exclusive property of ROKA without any other compensation due Mr. Szerenyi than that stipulated in this agreement. * * *
* * * *
ARTICLE 8 -- ROKA shall not be obligated to preserve the PARAFLEX Patents mentioned in Article 4 herein, if the Company states that such patents are of no interest to same. In that case ROKA shall retransfer the pertinent patents or patent applications to the ownership of Mr. SZERENYI * * *
* * * *
ARTICLE 11 -- In consideration of all obligations undertaken by Mr. SZERENYI as per this agreement, ROKA undertakes to pay him as follows:
* * * *
(b) 5 (five) % of the net yield*37 from existing or future agreements between ROKA and PIRELLI (ROPI Agreements);
(c) (5) (five) % of the net yield from agreements, possibly to be acquired by ROKA, between the ROMIKA Shoe Works, Inc., in Gusterath and the latter's licensees;
(d) 22 1/2 (twenty-two and one-half) % of the net yield from exploitation of the PARAFLEX Patents mentioned in Article 4 herein, with the exception of the PIRELLI countries, from exploitation of any future improvements of the PARAFLEX Process in accordance with Article 5, regardless whether such exploitation is based on a patent or not, with the exception of the PIRELLI territories. In the PIRELLI Territories too, Mr. SZERENYI shall be entitled to the same 22 1/2% from the net yield of the exploitation of the PARAFLEX Patents mentioned in Articles 4 and 5, in case this process is not used by PIRELLI itself;
(e) 12 1/2 (twelve and one-half) % from the net yield of the operations of ROKA, unless a different ratio of participation has been defined in (b) through (d).
Net yield in the meaning of this agreement shall be the amount of the total revenue by ROKA from operations such as defined in (b) through (e) or from additional activities undertaken*38 with partners' approval, after deduction of expenditures disbursed by ROKA for costs, expenses and taxes of all kinds in connection with business operations.
The amount of Belgian francs 21,750 to be paid Mr. SZERENYI as expenses in accordance with Paragraph (a) of ARTICLE 11 is to be considered as such, and not as a participating share as is due Mr. SZERENYI for his activities in accordance with Paragraphs (b) through (e) in Article 11.
* * * *
ARTICLE 12 -- Net yields in accordance with Article 11 are calculated jointly by a ROKA partner and by Mr. SZERENYI, in accordance with the books. Settlements occur half-yearly, for the first time on the 31st day of December 1936.
ARTICLE 13 -- All profit shares due Mr. SZERENYI shall be made available to him in the pertinent currencies and in the countries where they were earned by and are available to ROKA.
* * * *
ARTICLE 16 -- The lifetime of this agreement shall coincide with that of the most extensive ROPI agreement. Upon giving notice of cancellation for the aforementioned ROPI agreement, ROKA shall be obliged to notify immediately Mr. SZERENYI of such development.
This agreement shall become effective as of Jan. 1, 1936.
*489 *39 ARTICLE 17 -- Upon expiration of this agreement or its termination by forces beyond control, including withdrawl [sic] of residence permission in Belgium, the ROKA Co. shall continue to pay to Mr. SERENYI [sic] or his legal successor, the participating share of 12 1/2% stipulated in Paragraph (e) of Article 11, which results from agreements entered into for the first time during the lifetime of this agreement. In such case, the provisions of Paragraphs (2) and (3) of Article 11 as well as of Articles 12 and 13 shall remain in force. Revenues resulting from agreements entered into after expiration of this agreement, shall be subject to the same conditions as stipulated in the first part of this Article, if a considerable and decisive portion of the preliminary work fell into the period of the lifetime of this agreement.
ARTICLE 18 -- If after termination of the ROPI Agreement the ROKA Co. concludes a new agreement with PIRELLI, but does not renew the agreement with Mr. SZERENYI or in case the present agreement should be earlier terminated by forces beyond control, then the ROKA Co. shall pay to Mr. SZERENYI from all footgear manufactured in the PIRELLI territories in accordance*40 with the PARAFLEX Process, 22 1/2% from the revenues obtained thereof, with consideration of the provisions of Article 11, Paragraphs 2 and 3 and Articles 12 and 13.
* * * *
ARTICLE 20 -- Upon expiration of this agreement or upon its termination through forces beyond control, an understanding shall be arrived at between ROKA and Mr. SZERENYI, whereby in accordance with Article 4, 50% of any existing PARAFLEX patents and 50% of any improvements as per Article 5, will be transferred to ownership of Mr. SZERENYI and registered in his name. Such patents throughout the PIRELLI territories shall remain in any case, property of the ROKA and shall not be subject to the aforementioned 50% partition. In the partition, however, shall be included aside from the patents, all agreements connected with exploitation of the PARAFLEX Process in accordance with Articles 4 and 5, that is, including such agreements which were concluded in countries where such patents either exist or existed.
These 50% shall be fixed according to value, not according to quantity. Costs of title transfer shall be born [sic] in equal parts by Mr. SZERENYI and ROKA.
ARTICLE 21 -- The provisions of Article 20 shall *41 be accordingly applied to the countries of the ROPI Agreements, if and when the ROPI Agreement is not renewed or if cooperation between PIRELLI and ROKA in accordance with the ROPI Agreements is terminated, in so far as there do not exist today contrary agreements with PIRELLI.
ARTICLE 22 -- If upon expiration of this Agreement a renewal of same is rejected by ROKA, all existing but not exploited patents of the inventions mentioned in Articles 3 and 6 or improvements thereon, shall be registered to SZERENYI at the expense of ROKA and shall become his property. Excepted from such transfer shall be the pertinent patents in the PIRELLI Territories or the Patents pertaining to Article 3, in such countries where ROKA in accordance with existing agreements either has ceded the ROMIKA Sponge-rubber Sole Patent or for some reason has undertaken not to exploit the Patent pertaining to article 3 or if upon this provision taking effect, this Patent is not exploited.
The same regulation as stipulated in this Article, shall apply if this Agreement should be early terminated either due to forces beyond control or due to withdrawl [sic] of Mr. SZERENYI's residence permission in Belgium, with*42 the reservation however that in such a case not all, but only half of all existing but not exploited patents on the inventions referred to in Articles 3 and 6 or improvements thereon, are transferred to Mr. SZERENYI, whereby such a division shall *490 be based on anticipated values and not on numbers. Any Patents in countries reserved in Paragraph 1 of this Article shall not be considered in such a partition and shall remain exclusive property of ROKA. If existence of one or several ROKA-owned patents should for any reason depend upon preservation of a patent which by the provisions of this Agreement is to be transferred to ownership by Mr. SZERENYI, then property transfer shall be replaced by an agreement guaranteeing to Mr. Szerenyi the right of exploitation of such a patent in the same manner as if such patent had been transferred to Mr. SZERENYI. Any patent royalties which may be due Mr. SZERENYI by virtue of license agreements concluded by him for such patents, are to be ceded by him to ROKA.
ARTICLE 23 -- Upon premature termination of this agreement through forces beyond control, Mr. SZERENYI shall be entitled for the period of one year but not longer than the termination*43 of the most extensive ROPI Agreement, counted from the date of such premature termination, to his share of participation in the net profits of ROKA during this period in accordance with Article 11, and he shall be entitled on the basis of this claim, to a monthly advance payment of 1,750 Belgian francs. Likewise, upon premature termination of this Agreement, Mr. SZERENYI shall receive -- provided such termination was caused by forces beyond control -- from the net profits of ROKA resulting from earnings of the PIRELLI Co. in connection with merchandise produced by the process mentioned in Article 3 (RAJEH Process), a compensation of 12 1/2% for the duration of the most extensive ROPI agreement.
ARTICLE 24 -- No participation shall be enjoyed by Mr. SZERENYI in the revenues obtained from exploitation of the PARAFLEX patents and improvement thereon which have remained properties of ROKA, notwithstanding the regulations governing the PIRELLI territories as stipulated in Articles 18 and 19, after termination of this Agreement, nor shall ROKA be entitled to sharing in the PARAFLEX and RAJEH Patents transferred to ownership by Mr. SZERENYI.
Szerenyi received $ 20,000 (converted from Belgian*44 exchange) under this agreement from 1936 through May 1940 for his interest in Paraflex and half that much, or $ 10,000, during the same period, for his interest in Rajeh, representing approximately 20 per cent and 10 per cent, respectively, of the total amount received by Szerenyi under the agreement for this period.
OPINION.
The first issue presented is whether amounts received by The Rollmans in 1947, 1948, and 1949, pursuant to the agreement of December 19, 1940 (set out in our Findings of Fact), are ordinary income or long-term capital gain. Petitioners contend that the payments in question are based on a sale of the Rajeh patent, a capital asset, whereas respondent determined that the payments represent royalties derived from a licensing agreement. The agreement in question grants to Rikol on behalf of *237 The Rollmans "an exclusive license (except for two non-exclusive licenses now outstanding * * *) for the manufacture and sale of shoes" under the Rajeh patent throughout the United States.
*491 Whether the transfer of the patent rights (held for more than 18 months prior to transfer) resulted in capital gain or ordinary income depends on whether the patent was a capital *45 asset in the hands of the transferor, and if so, whether the transfer amounted to a sale or assignment of patent rights as distinguished from a mere license agreement. See Edward C. Myers, 6 T. C. 258 (1946); Parke, Davis & Co., 31 B. T. A. 427 (1934). We will assume arguendo that the Rajeh patent was a capital asset held by The Rollmans for the length of time required for long-term capital gain treatment, so that the practical problem reduces itself to the question of whether there was a sale or a license.
It is well established that while the name or form of an agreement does not control its nature and legal effect, A. B. Watson, 24 B. T. A. 466 (1939), affd. (C. A. 9, 1932) 62 F. 2d 35; Parke, Davis & Co., supra;Kimble Glass Co., 9 T. C. 183 (1947), the agreement must effect a transfer of all of the substantial rights of the patentee under the patent in order to constitute a sale for Federal income tax purposes. The view expressed by the United States Supreme Court in Waterman v. MacKenzie, 138 U.S. 252">138 U.S. 252 (1891),*46 in respect to the type of transfer which constitutes an assignment or sale as distinguished from a mere license is here controlling. In the Waterman case, the Court said:
Whether a transfer of a particular right or interest under a patent is an assignment or a license does not depend upon the name by which it calls itself, but upon the legal effect of its provisions. For instance, a grant of an exclusive right to make, use and vend two patented machines within a certain district, is an assignment, and gives the grantee the right to sue in his own name for an infringement within the district, because the right, although limited to making, using and vending two machines, excludes all other persons, even the patentee, from making, using or vending like machines within the district. Wilson v. Rousseau, 4 How. 646">4 How. 646, 686. On the other hand, the grant of an exclusive right under the patent within a certain district, which does not include the right to make and the right to use, and the right to sell, is not a grant of a title in the whole patent right within the district, and is therefore only a license. Such, for instance, is a grant of "the full*47 and exclusive right to make and vend" within a certain district, reserving to the grantor the right to make within the district, to be sold outside of it. Gayler v. Wilder, above cited. So is a grant of "the exclusive right to make and use," but not to sell, patented machines within a certain district. Mitchell v. Hawley, 16 Wall. 544">16 Wall. 544. So is an instrument granting "the sole right and privilege of manufacturing and selling" patented articles, and not expressly authorizing their use because, though this might carry by implication the right to use articles made under the patent by the licensee, it certainly would not authorize him to use such articles made by others. Hayward v. Andrews, 106 U.S. 672">106 U.S. 672. See also Oliver v. Rumford Chemical Works, 109 U.S. 75">109 U.S. 75.
See Edward C. Myers, supra;Federal Laboratories, Inc., 8 T. C. 1150 (1947); Kimble Glass Co., supra;Cleveland Graphite Bronze Co., 10 T. C. 974 (1948), affirmed per curiam (C. A. 6, 1949) 177 F. 2d 200;*48 Lynne Gregg, 18 T. C. 291 (1952), affirmed per curiam on the basis of *492 the Opinion of this Court ( C. A. 3, 1953) 203 F.2d 954">203 F. 2d 954. See also Broderick v. Neale, (C. A. 10, 1953) 201 F. 2d 621. It is necessary, therefore, that the conveyance include the exclusive right to make, use, and vend the patented item throughout the United States (or some part thereof) if the transaction is to be deemed to constitute an assignment or sale. See United States v. General Electric Co., 272 U.S. 476 (1928). A conveyance of anything less would not be a sale or assignment but merely a license.
The agreement here in question conveys exclusively to Rikol only the right to manufacture and sell shoes made by Rikol under the patented process. It prevents Rikol from granting sublicenses except that Rikol shall have the right to grant licenses to other corporations or enterprises directly or indirectly controlled by Leo Weill. It permits Rikol to assign the contract only to a corporation to be formed provided the corporation is directly or indirectly controlled by Leo Weill. *49 It does not allow Rikol to license or permit the use of the patented process by other than enterprises controlled by Weill for the manufacture of shoes to be sold by Rikol or its assignee controlled by Weill. The transfer, therefore, was not a grant of all of the substantial rights of The Rollmans under the Rajeh patent. Waterman v. MacKenzie, supra;Cleveland *238 Graphite Bronze Co., supra;Lynne Gregg, supra.
Petitioners urge us to find that the parties intended to consummate a sale rather than a license on the basis of testimony of Ernest Rollman to the effect that, during the negotiations, Dayton insisted on a complete transfer of the rights of The Rollmans under the Rajeh patent in order to safeguard its proposed investment in a rubber plant. We can readily visualize such an approach by Dayton, but the contract as ultimately written is inconsistent with this objective in the material respects which we have already set forth, and we can only assume that Dayton was finally satisfied that its own interests were sufficiently protected by the agreement which was accepted and executed by the parties. *50 Upon the record, we see no reason to vary its clear and unambiguous terms.
The case before us is distinguishable from Allen v. Werner, (C. A. 5, 1951) 190 F.2d 840">190 F. 2d 840, relied on by petitioners. There the precise question presented to the Court of Appeals was whether the trial court erred in admitting and considering parol evidence in the construction of an agreement relative to the manufacture and sale of hydraulic lifting jacks under a patent. The tax question before the lower court was whether amounts received by the grantor were ordinary income or long-term capital gain from the sale of a capital asset. The dispute of the parties centered on whether the agreement conveyed the right of use in addition to the exclusive right to manufacture and sale. There the initial grant in the contract had not included *493 the right to use, but in another portion of the document it was expressly stated that the licensee contemplated manufacture, use, and sale. In such circumstances it was evident, and the lower court so held, that the terms and provisions of the written agreement were ambiguous, and that parol evidence might therefore properly be*51 admitted to resolve the ambiguity.
Petitioner argues further on the basis of the lower court's Conclusions of Law in the Werner case that as a consequence of the nature of the patented subject matter, the retention of the right of use would be inconsequential, and that for tax purposes it would be proper to disregard that factor in determining whether the patentee had effected a sale rather than a license. In essence, petitioner contends that in the case of a patent of a process for the manufacture of an article for sale, failure to grant the transferee the right to permit a third party to use the process in manufacturing the article for sale by the transferee does not result in a transfer of less than all of the substantial rights under the patent. We note that the Court of Appeals did not consider this issue in the Werner case. In the case before us we are satisfied that the right to permit use of the patented process by a third party for its own or the transferee's benefit was a substantial right and that Rikol and its assignee controlled by Weill was not granted that right by the terms of the contract. We add that a careful examination of the facts of the Waterman*52 case and of the cases decided by this Court on the authority of Waterman discloses that, in the main, patents of the type here under consideration were involved, and the factor of "use" was deemed substantial. We find no reason to hold otherwise in the instant case.
Other cases relied upon by petitioners are distinguishable on their facts.
In Commissioner v. Celanese Corp., (C. A., D. C., 1944) 140 F.2d 339">140 F. 2d 339, and Commissioner v. Hopkinson, (C. A. 2, 1942) 126 F. 2d 406, the owners of the patent rights executed agreements which contained language showing a clear and unmistakable intent to part with the whole of the patents, and in addition executed assignments of each of the patents which were recorded in the United States Patent Office. In Celanese the agreement stated that the vendors "assign and make over * * * the said processes and the full benefit thereof." The court concluded that the parties intended to effect a purchase and sale of the patents and not merely a royalty use when they used such words of outright conveyance and sale. Similarly, in Hopkinson the contract stated that the seller *53 "has granted, bargained, sold, conveyed, transferred, assigned, set over and delivered" its right in certain patents. The court there concluded that the parties' intention as shown by the language in the contract was to have the "seller" sell *494 and the "purchaser" buy the property. See also General Aniline & Film Corp. v. Commissioner, (C. A. 2, 1944) 139 F.2d 759">139 F. 2d 759.
In Kronner v. United States, (Ct. Cl., 1953) 110 F. Supp. 730">110 F. Supp. 730, the agreement, there designated as a "license," contained clear language of sale, conveying "the sole and exclusive right to manufacture, vend, sell, license, or relicense, or in anywise use * * * the invention * * * for the life of the patent." The court, despite defendant's contention, believed that the intention of the parties was best evidenced by the words used in the contract and concluded *239 that the patentee had parted with the whole of his patent rights.
With respect to Parke, Davis & Co., supra, there was a grant of an undivided share of the exclusive right to make and use the invention covered by the patent. We deem it unnecessary to discuss*54 the case further than to point out that the contract granted to the transferee, in substance, the right which the agreement in the instant case fails to cover, namely, "the exclusive right, license and privilege to manufacture and have manufactured for its exclusive use * * *."
Since we have held that the transfer in the instant case was not a grant of all of the substantial rights of The Rollmans, it is unnecessary for us to consider respondent's other contention that the patent here in question was not a capital asset in the hands of The Rollmans, having been held primarily for sale to customers in the ordinary course of business.
The remaining question concerns the amount, if any, to be allowed as a deduction for depreciation on two patents known as Paraflex and Snow Boot used by petitioners in their business, and, in view of our holding on the first issue, a like question with respect to the Rajeh patent held by petitioners for the production of income. See sec. 23(l), I. R. C. 1939, and Regs. 111, sec. 29.23(l)-3.
During each of the years involved The Rollmans deducted on its partnership returns, $ 1,765 in respect to Paraflex and $ 882.50 in respect to Snow Boot. These amounts*55 claimed for depreciation were based on a useful life of 17 years of each patent and a cost of $ 30,000 for Paraflex and $ 15,000 for Snow Boot. No deduction has heretofore been taken on the Rajeh patent. Petitioners here claim depreciation allowances in the amounts above stated in respect to Paraflex and Snow Boot and an additional allowance for the years involved in respect to Rajeh on the basis of a cost of $ 25,000 to $ 50,000. Respondent's main contention is that petitioners have failed to prove their cost basis for depreciation on the three patents, and therefore, that the disallowance of the amounts claimed for depreciation should be sustained for lack of substantiation by petitioners.
Petitioners were unable to produce their books and records reflecting the various elements of cost properly attributable to the development *495 of the patents here in question. Petitioners left their books and records in Belgium when they were forced to flee that country at the time of the German invasion in 1940. Admittedly they have made little effort to locate these books and records. Nevertheless, under the circumstances of this case, we think that petitioners have fairly assumed*56 on the basis of the response to their limited inquiries that the books and records of the Belgian partnership were in all probability destroyed by the German occupation authorities. We are therefore faced with a situation where it is obvious that petitioners are entitled to an allowance for depreciation, but are unable to substantiate their cost basis in the depreciable assets by the books and records they kept reflecting the development costs of the patents in question. Such a situation is not an unusual consequence of war and we think it does not pose an unsurmountable obstacle to a reasonable allowance. We have before us the testimony of petitioners who were familiar with the circumstances of and the cost of development at the time. Obviously, precise contemporaneous records of the basis of the assets would, if available, represent the sound foundation to be desired, but, despite the passage of substantial time, we think the evidence is sufficient to warrant exercise of our discretion under the rule of Cohan v. Commissioner, (C. A. 2, 1930) 39 F.2d 540">39 F. 2d 540.
There are involved here two elements of cost. First, there is the cost of certain hydraulic*57 presses used by The Rollmans solely in connection with the development of the three patents here in question. These hydraulic presses, four in number, were purchased at various times during 1936 and were used from the time of purchase through May 10, 1940, when the Germans invaded Belgium. As a consequence of the German occupation, The Rollmans have never been able to recover the machines or any part of their value. Each of the presses purchased in 1936 had a useful life of approximately 20 years. The cost of the first press constructed for The Rollmans was 500,000 Belgian francs, which converted at the then existing rate of exchange was $ 16,667. Each of the other presses cost The Rollmans 60,000 Belgium francs or $ 2,000, as conceded by petitioners. The presses were used for approximately 4 years in the development of the patented processes here in issue and subject to depreciation. Therefore, one-fifth of the useful life of these presses entered into the development of these processes and one-fifth of the cost of the presses should be attributable to the development of these processes as a basis for depreciation. Petitioner Ernest Rollman estimates that approximately one-third*58 of the cost of the presses attributable to the cost of patents is attributable to each of the processes developed and we have so found in accordance with his testimony. See Claude Neon Lights, Inc., 35 B. T. A. 424, 442*240 (1937); John F. Canning, 29 B. T. A. 99 (1933); Buffalo Forge Co., 5 B. T. A. 947 (1926).
*496 In addition to these amounts, petitioners contend that The Rollmans incurred a further expense in connection with the acquisition of Paraflex and Rajeh, the first of which was owned completely by Szerenyi as inventor, and the second of which was owned equally by Szerenyi and Hans Rollman as co-inventors. Respondent, on the other hand, contends that any amounts paid to Szerenyi by The Rollmans were in reality his share of partnership earnings or of the earnings from a joint venture, entered into between Szerenyi and The Rollmans to exploit the Paraflex and Rajeh patents, and that such amounts were not payments by The Rollmans partnership to Szerenyi on account of his interest in these two processes which The Rollmans wished to acquire. (The controlling agreement in pertinent*59 part is set forth in the Findings of Fact.) The respondent points out in support of his contention that Szerenyi's association with the partnership was necessary for the success of the partnership business, mainly because the partnership did not otherwise have access to any great inventive ability, that Szerenyi's participation in the profits of The Rollmans was at least as much and probably greater than that of a junior partner, and that under Articles 20-23 of the agreement, provision was made for partition of the assets in case of termination of the agreement. We think, however, that the substance of these various provisions of the agreement and other circumstances pointed to by respondent are equally consistent with the petitioners' view, and that the agreement, in accordance with its terms, was one for the transfer of patent rights and for the rendering of consulting services, essentially as an employee. It must be kept in mind that individuals may arrange their business relations freely and in any manner which best suits their needs, and that no other quality than that intended should be attributed to such arrangement in the absence of some compelling consideration to prevent*60 tax avoidance and to preserve the substance of a transaction over its form.
Whether or not parties to an agreement have undertaken thereby to engage in a joint venture is a question of their intention in entering into the agreement, to be gleaned from the terms of the agreement and the conduct of the parties in carrying out its provisions. Wm. J. Lemp Brewing Co., 18 T. C. 586 (1952). (This is the only real issue raised by respondent, we think, since it is quite clear from the terms of the agreement that there was no formal taking in of Szerenyi as another partner in The Rollmans, which business consisted of very much more than the exploitation of the Paraflex and Rajeh patents.) While the agreement between Szerenyi and The Rollmans is intricate and complex, we believe that it was not intended to and did not establish between them a working arrangement in the nature of a joint venture. The terms of the agreement are drawn in language *497 of sale and professional service with respect to the transfer of Szerenyi's patent rights and for his rendering of consulting services. The basing of Szerenyi's compensation on the net yields from certain exploitation*61 of the Paraflex and Rajeh patents and from the other operations of The Rollmans, which doubtless included possible use of these patents in connection with the technical consulting function, appears to be an appropriate means of realizing upon the value of the patent rights. An accounting likewise appears to be a proper means to insure full payment, rather than an indication of control over the venture by Szerenyi, as suggested by the respondent. Further, the coincidence of the amount of the payments (which must have accorded with the parties' estimate of the value of the patent rights transferred) with the share of the profits of The Rollmans to which a junior partner would be entitled to receive does not appear to us to be significant in the light of the other circumstances involved in this case. It should be noted that future improvements and other inventions of Szerenyi became by the terms of the agreement the property of The Rollmans alone without further compensation to Szerenyi. With respect to the provisions for retransfer of certain of the patents or patent rights upon termination of the agreement under specified circumstances, we need only point out that at least with*62 respect to the patents here in issue The Rollmans have permanently acquired them as their own under the agreement, and we think that such acquisition is consistent with the view that it is a result of the purchase of those patents and not the result of a subsequent apportioning of Szerenyi's capital contribution to a joint venture between himself and The Rollmans, as contended for by respondent. We might add that the provisions for reconveying to Szerenyi certain patents or patent rights upon termination of the particular agreement here in question might well have been intended as a means of insuring the further extension of the basic agreement for compensating Szerenyi for the transfer. The various circumstances pointed to by respondent, whether considered separately or as a whole, seem to us largely equivocal and not sufficient to counterbalance the other language of the agreement, or the actions of the parties under the agreement.
In the light of the foregoing, we hold that the payments made to Szerenyi for his interest in these two patents were made under a contract between The Rollmans and Szerenyi concerning the purchase of these interests and compensation for his activity*63 as an advisory consultant to The Rollmans.
Respondent argues further that whatever payments may have been made to Szerenyi under the agreement were made for the several Paraflex and Rajeh patents (the two processes having been patented in several countries) so transferred, and therefore, that any amount *498 to be capitalized should be apportioned among the various countries in which patents for these processes were issued. Respondent urges that if such allocation is not possible upon the record, no allowance should be made. Respondent does not make a like argument in respect to the actual development costs for creation of the process in the first instance and we need not take up the latter point.
The record is not as clear as it might be with respect to the basis of the patents for depreciation purposes. Because of this, we have, in our ultimate Findings of Fact (and see further discussion, infra), resolved any doubts in this connection against petitioners. Since The Rollmans reported income from all sources, including foreign income, we think the issue suggested by respondent has little practical significance in the instant case, and does not warrant any further reduction*64 of what we regard as a minimum basis on the whole record. It may be added that respondent has limited his argument to the issue of basis, and does not question the rate.
Petitioner Ernest Rollman testified variously that payments to Szerenyi under the contract were from $ 20,000 to $ 35,000 (converted from Belgian exchange) for his interest in Paraflex for the 4-year period, 1936 through May 1940, and half as much for his interest in Rajeh. Although the testimony is not precise, we are satisfied that substantial amounts were paid to Szerenyi for his interests in Paraflex and Rajeh. Having in mind the principles of Cohan v. Commissioner, supra, we hold that $ 20,000 was paid to Szerenyi for his interest in Paraflex and $ 10,000 for his interest in Rajeh. This determination is reflected in our Findings of Fact.
No evidence was introduced by petitioners to support other costs for steel molds and sundry tools used in the development of any of the three processes. We therefore sustain the respondent in disallowing any depreciation in relation to such items.
In the light of the foregoing, we hold that petitioners' bases for depreciation (over a useful*65 life of 17 years) during the years in question are as set out below:
| Szerenyi | |||
| Machines | Payments | Total | |
| Rajeh | $ 1,512 | $ 10,000 | $ 11,512 |
| Paraflex | 1,512 | 20,000 | 21,512 |
In respect to Snow Boot, no basis remains for depreciation. Petitioners have previously deducted $ 2,647 in depreciation on Snow Boot. We could here find a basis not in excess of $ 1,512. Petitioners have, therefore, been allowed to recover an amount in excess of the basis which they have here established and are entitled to recover no more. See sec. 113 (b) (1) (B).
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Curt E. Kaufman and Louise Kaufman, Husband and Wife, Docket No. 51974; Heinz W. Rollman and Tania Rollman, Husband and Wife, Docket No. 51975; Walter Kaufman and Ellen Kaufman, Husband and Wife, Docket No. 51976.↩