*671 Held, no binding contract governing the sale of patents by decedent to the Davol Rubber Co. was entered into prior to March 24, 1938, the date of decedent's death.
*634 The respondent determined a deficiency of $9,529.57 in the income tax of C. William Meinecke for the period from January 1, 1938, to March 24, 1938.
The sole issue is the taxability of an alleged gain from the sale of certain patents to the Davol Rubber Co. The precise point in controversy is whether or not, prior to March 24, 1938, the date of his death, Meinecke entered into an effective agreement of sale disposing of such patents.
FINDINGS OF FACT.
The facts were stipulated and as so stipulated are adopted as our findings of fact. They are substantially as follows:
C. William Meinecke, hereinafter called the decedent, died at 5:20 a.m. on March 24, 1938. At the time of his death he was and for some years prior thereto had been a resident of East Orange, County of Essex, State of New Jersey.On April 5, 1938, the last will and testament of the decedent*672 was duly admitted to probate in the Surrogate's Court, Essex County, New Jersey, and letters testamentary thereon were issued to Edward Bose and the Trust Co. of New Jersey, as executors of said last will and testament, and the said executors thereupon duly qualified as such and at all times subsequent thereto have been and now are acting as such executors. A Federal income tax return for the period January *635 1, 1938, to March 24, 1938, for the decedent was filed by the executors of his estate with the collector of internal revenue at the fifth district of New Jersey.
In the Federal estate tax return filed under date of March 14, 1939, by the executors of the decedent's estate there was included under schedule F as miscellaneous property of the estate, the following:
| Value at date | ||
| of death | ||
| 1. Agreement between Christian William Meinecke and | ||
| Co. for purchase of patents. Amounts | ||
| payable in sums of $725.00 per month | $43,500.00 | |
| 2. Funds received from Davol Rubber Co. re following: | ||
| Royalty on goods sold in February 1938 | $1,149.85 | |
| Royalty on goods sold first 18 days of March 1938 | 928.58 | |
| Redeemed Postal Cards | 11.34 | |
| 2,089.77 |
*673 Prior to his death the decedent was the owner of certain United States letters patents for bottle closures and nipples, No. 1583019, dated May 2, 1926, and No. 1748731, dated February 25, 1930, issued to Henry A. Reisman, and also seven other foreign patents, including two Canadian patents issued to Elta Simmons and the said Reisman, respectively.
On or about April 9, 1927, the decedent and the Davol Rubber Co., a Rhode Island corporation, hereinafter called Davol, entered into a license agreement in writing wherein the decedent licensed Davol to make use of the Simmons patent. The license agreement was to run for the life of the Simmons patent and was subsequently modified so as to include the use of the Reisman patent by the licensee. During the period subsequent to April 9, 1927, Davol had used the said letters patents and had made payments of royalties to the decedent pursuant to the terms and conditions of the license agreement.
Prior to March 18, 1938, the decedent and Davol entered into negotiations contemplating the termination of the license agreement and the sale of the Simmons and Reisman patents by the decedent to Davol. On March 18, 1938, the decedent executed*674 two copies of a certain written instrument, hereinafter called the proposed agreement, and duly transmitted it to William E. Warland, his attorney. The proposed agreement described the license agreement of April 9, 1927, and recited the fact that the parties thereto desired to cancel it. The agreement then provided that the license agreement would be canceled. The decedent agreed to execute to Davol an assignment, in proper form, of his right to the patents and Davol agreed to pay to the decedent $725 per month until $43,500 should have been paid. Provisions were made for a failure to pay the monthly installments and the possible invalidity of the Simmons patent.
*636 On March 18, 1938, the decedent executed assignments to Davol of the patents heretofore mentioned in the proposed agreement and transmitted them to William E. Warland, his attorney. On March 18, 1938, the decedent duly executed a power of attorney in favor of William E. Warland.
On March 18, 1938, the decedent prepared a letter dated on that day addressed to R.I.
* * * And I have caused such new agreement to be prepared in writing and dated as of this date and have signed the said agreement so that*675 the same will be fully binding upon me and my executors and administrator; and I herewith offer said instrument for acceptance by you provided the same is satisfactory to you and is accepted by you in writing on or before the 25th day of March 1938 and whether the same shall be so accepted by you during my lifetime or thereafter.
I also agree with you, in consideration of $1.00 paid by you to me, to keep this offer open until said 25th day of March, 1938.
The said instrument which I have signed will be forwarded to you by my attorney, Mr. William E. Warland.
I agree that the offer which I make to you, as evidenced by said instrument, may be modified by you before the acceptance thereof by making minor changes therein, such as correction of inaccuracies in the numbers of Letters Patents which are involved and any other incidental changes of like character, such changes, however, to be approved by my attorney, Mr. Warland, above mentioned, and, if accepted by you with any such changes, will be fully binding upon me as if such changes had been made prior to my execution of the instrument.
On March 19, 1938, William E. Warland prepared a letter dated on that day addressed to*676 Co., Providence, R.I.", and duly mailed it at New York City, together with the enclosures therein referred to. In that letter Warland stated that he enclosed the decedent's letter of March 18, 1938, to Davol and a copy of the proposed agreement and that Meinecke's letter gives you an option until March 25th two original copies of the proposed agreement and the assignments of the patents, in his office. He also wrote: passed on the matter you can then sign the two copies which Mr. Meinecke has signed and I will deliver all the assignments of the patents.
On March 23, 1938, Davol prepared a letter dated on that day addressed to Row, New York City Island. That letter stated that the proposed agreement was very satisfactory, suggested two superficial corrections therein and contained the sentence, the contracts to us, they will immediately be signed."
On March 24, 1938, William E. Warland prepared a letter dated on that day addressed to "Mr. Ernest I. Kilcup, care Davol Rubber Co., *637 Providence, R.I.", and duly mailed it at New York City. Enclosed were the copies of the writings and assignments of patents referred to in the letter. In this letter Warland called attention*677 to the fact of Meinecke's death, that his power of attorney was thereby terminated, and that the agreement was not signed by the company in Meinecke's lifetime. The two original copies of the proposed agreement and the assignments of ten patents :including Porto Rico Patent 2778, inadvertently omitted from the proposed agreement) were enclosed with the letter. On March 25, 1938, Davol, by Ernest I. Kilcup, as president and treasurer of Davol Rubber Co., executed the proposed agreement and inserted the date thereon
On March 25, 1938, Davol prepared a letter dated on that day addressed to "Mr. William E. Warland, Hauff & Warland, 41 Park Row, New York, N.Y. The proposed agreement referred to in that letter was enclosed therewith. The letter stated: on the matter of assignment of patents and royalty the agreement had been signed subject to the approval of the decedent's executors and trustees.
On March 28, 1938, Warland prepared a letter dated on that day addressed to "Mr. Ernest I. Kilcup, Davol Rubber Company, Providence, R.I.", and duly mailed it at New York City. That letter related to the ratification of the agreement by the decedent's executors. On the same day Warland*678 prepared a letter dated on that day addressed to N.J.", enclosing copies of the letters of March 25, 1938, from Davol and of March 28, 1938, to Davol, and referring to the prospective ratification. He duly mailed it at New York City.
On April 8, 1938, Warland wrote routine letters to the Trust Co. of New Jersey and to Davol, relating to ratification.
The proposed agreement was the result of negotiations between decedent directly and through his attorney with representatives of Davol. These negotiations were carried on by private conversations, telephone conversations, and the exchange of letters between the parties. As a result of the negotiations the parties were in substantial accord as to the terms of sale of the letters patent involved in the agreement, both as to the amount of payment, manner of payment, and the rights to be transferred. This accord was incorporated and reflected in the terms of the written agreement signed by decedent on March 18, 1938, and was on the same date, after further discussion between decedent's attorney and the attorney for Davol, amended in certain respects at the request of the representative of Davol. Such amendments in no way altered*679 the essence of the understanding and accord arrived at between the parties and incorporated in the original *638 agreement. The agreement as redrawn was also signed by the decedent on March 18, 1938.
At the time of the megotiations which culminated in an agreement signed by the decedent on March 18, 1938, the decedent was approximately 80 years of age, in poor health, and was about to enter a hospital for the purpose of undergoing an operation. At that time he was desirous of permanently arranging his business affairs.
Prior to March 18, 1938, when the proposed agreement between the decedent and Davol was under consideration, Kilcup, president and treasurer of Davol, personally discussed the matter of the proposed agreement with three or four of the directors cf Davol, who were apprised of the possibility that Kilcup might execute such an agreement for Davol. No meeting of the board of directors of Davol was held and no record of the agreement was made in the minutes of the board of directors, as the bylaws of the company did not require ratification of such an agreement made by the president of the company.
No action of any kind was taken by the executors of the*680 estate of the decedent to change or alter the proposed agreement and assignments signed by him during his lifetime and the executors never ratified the agreement or assignments by endorsement on the original agreement or in a separate instrument. Davol did not require ratification by the executors of the Meinecke estate of the proposed agreement or of the assignments of the patents. Davol has at all times abided by the terms of the proposed agreement as executed and made the payments provided for therein.
The Commissioner determined that a gain of $43,500 from the sale of patents was taxable in accordance with section 42 of the Revenue Act of 1938.
OPINION.
VAN FOSSAN: The central question in this case is whether from the record of negotiations, letters, agreements, and other documents we can spell out a completed or executed contract before 5:20 a.m. of March 24, 1938, the date of decedent's death, or whether the option or offer to sell proposed by decedent did not mature into a contract until actually accepted by Davol on March 25. Or, as stated by counsel for the Government at the hearing, "The sole question is: was this agreement a binding agreement while Meinecke lived? *681 If it was, he individually was taxable on the profit made from that agreement. If the agreement did not become binding and enforceable during Meinecke's lifetime then the profit from that agreement is not taxable to Meinecke individually.
A reading of the facts leads us clearly to the conclusion that petitioner is correct in his position and that no completed or enforceable contract was entered into during decedent's lifetime. There can be *639 no question that the parties so considered it. See Commissioner v. Segall, 114 Fed.(2d) 706. In the letter of March 18, 1938, transmitting the proposed agreement to Davol, the decedent stated:
* * * I herewith offer said agreement for acceptance by you - provided the same is satisfactory to you and is accepted by you in writing on or before the 25th day of March 1938.
In this letter decedent twice referred to the proposed agreement as an offer, stating:
I agree that the offer which I make to you, as evidenced by said instrument, may be modified by you before the acceptance thereof by making minor changes therein * * * such changes, however, to be approved by my attorney, Mr. Warland, above mentioned, *682 and, if accepted by you with any such changes, will be fully binding upon me as if such changes had been made prior to my execution of the instrument.
In Warland's letter to Davol, dated March 19, the arrangement is referred to as 23 to Warland, suggesting two typographic changes, states: these two changes, if you will forward the contracts to us, they will immediately be signed."
Thus the matter stood when Meinecke died. The offer or option had not been accepted. The contracts had not been signed. Although on March 23 Davol fully intended to consummate the contracts, there existed a locus poenitentiae within which they could have changed their minds and elected not to sign and complete the contracts. The signature of Davol was affixed on March 25. At that time the offer ripened into a completed contract. Then and not before did Davol assume any enforceable obligations.
Petitioner decedent was not taxable in his lifetime on the profit arising from the contract of March 25, 1938. See Lucas v. North Texas Lumber Co.,181 U.S. 11">181 U.S. 11.
Decision will be entered under Rule 50.