*1475 Petitioner was the owner and licensor of patents covering a process of clay treating used in the refining of gasoline. In 1933 four oil companies, petitioner, and a committee acting on behalf of all of petitioner's then stockholders entered into an agreement for the sale of the capital stock of petitioner to the oil companies. Under the agreement the purchase price was to be paid to the stockholders as follows: the oil companies were to pay $500,000 down; under paragraph 27(a), (b), and (c) petitioner was to pay quarterly amounts equal to certain designated percentages of the amounts actually received by it from royalties as long as it received any royalties; and under paragraph (d) petitioner was to pay quarterly amounts representing its net income remaining after the payments under paragraph 27(a), (b), and (c) until the payments under paragraph 27(d) aggregated $500,000. Under the agreement petitioner did not transfer to its then stockholders any interest in its patent property or license agreements or in the royalties to be derived therefrom. The oil companies made the $500,000 down payment. In 1934, 1935, and 1936, the taxable years, petitioner received substantial amounts*1476 as royalties and made the payments under paragraph 27(a), (b), (c), and (d). Held, that the entire amounts which petitioner received as royalties in the taxable years should be included in its taxable income without the exclusion of the amounts which it paid to its former stockholders under paragraph 27(a), (b), and (c); held, further, that the amounts which petitioner paid to its former stockholders under paragraph 27(a), (b), and (c) constituted constructive dividends from it to the oil companies and should not be deducted as ordinary and necessary business expenses.
*624 Respondent determined deficiencies in income tax for the years 1934, 1935, and 1936 in the amounts of $15,775.90, $13,941.72, and $20,621.74, respectively. The questions are: Whether certain amounts which were paid by petitioner in the taxable years to a committee of its former stockholders, in accordance with the provisions of a contract for the purchase of its capital stock, should be excluded from its taxable income; and, if not, whether those amounts should be deducted*1477 from its taxable income as ordinary and necessary business expenses. Other adjustments made by respondent are not contested.
FINDINGS OF FACT.
Petitioner is a Delaware corporation and has its principal office in Jersey City, New Jersey. For the years 1934, 1935, and 1936 petitioner kept its books and filed its income tax returns on the *625 accrual basis. It filed its income tax returns for the years 1934, 1935, and 1936 with the collector of internal revenue for the fifth district of New Jersey.
At all times hereinafter mentioned petitioner was the owner and licensor of certain patents covering a process of clay treating used in the refining of gasoline, and its income was derived almost exclusively from royalties for license agreements to use such process.
Sometime prior to May 8, 1933, the Texas Corporation, the Standard Oil Co. of Indiana, the Standard Oil Development Co., and the Pure Oil Co. (hereinafter referred to collectively as the oil companies) entered into negotiations with petitioner and a committee of three representing the owners of a majority of petitioner's capital stock (hereinafter referred to as the stockholders' committee) to purchase all*1478 of the 100,000 shares of petitioner's capital stock which was issued and outstanding. In the course of these negotiations the oil companies made an offer to the stockholders' committee to purchase all the capital stock of petitioner on certain terms and conditions which were set forth in a proposed "Purchase and Cross License Agreement" (hereinafter referred to as the agreement).
The agreement was to be entered into between the stockholders' committee, petitioner, and each of the oil companies, and recited that petitioner was the owner of certain patents, patent applications, and inventions covering clay treating and had granted licenses to oil refiners thereunder; that each of the oil companies was the owner of transferable licensing rights under certain patents, patent applications, and inventions covering clay treating; that each of the oil companies desired to obtain licenses under all the aforesaid patents, patent applications, and inventions covering clay treating; and that the parties believed that it would be advantageous to the members of the petroleum refining industry, including the present licensees of petitioner, to be able to acquire a single license under all the*1479 aforesaid patents, patent applications, and inventions.
The agreement then provided that the stockholders' committee, on behalf of the owners of the 100,000 shares of issued and outstanding capital stock of petitioner, agreed to sell to each of the oil companies, and each of the oil companies agreed to purchase, 25,000 shares of petitioner's capital stock on the terms and conditions thereinafter set forth.
Under paragraph 26 of the agreement each of the oil companies was to pay $125,000 to the stockholders' committee on the closing date, or a total of $500,000.
Under paragraph 27 of the agreement each of the oil companies and petitioner agreed that petitioner would pay to the stockholders' committee: (a) An amount equal to 50 percent of the amount actually collected by petitioner in each calendar quarterly period as *626 royalties or license fees received on account of present installed treating capacity of present licensees of petitioner; (b) an amount equal to 20 percent of the amount actually collected by petitioner in each calendar quarterly period (1) as royalties or license fees received from present licensees of petitioner on account of capacity in excess of*1480 their present installed treating capacity, (2) as royalties or license fees received from others than present licensees of petitioner, and (3) as amounts received from the oil companies as gross royalties derived from licenses which they might, after the closing date, grant under their patent rights, and as the net recoveries from infringers thereof; (c) an amount equal to 20 percent of the amount actually collected by petitioner in each calendar quarterly period as amounts recovered from infringers of patent rights and al all other amounts actually received by petitioner arising out of its business from and after the closing date after deducting therefrom all costs of collection; and (d) an amount representing the estimated net income of petitioner for each calendar quarterly period remaining after making the payments under subparagraphs (a), (b), and (c) and after paying and making due allowance for the current operating expenses of petitioner for the calendar quarterly period, subject to an annual adjustment when petitioner's books were closed and its net income determined for tax purposes. The amounts payable under subparagraphs (a), (b), and (c) were to continue as long as petitioner*1481 was in receipt of any of the amounts specified in those subparagraphs. The amounts payable under subparagraph (d) were payable only until the petitioner had paid the stockholders' committee under that subparagraph the aggregate sum of $500,000. Each of the oil companies and petitioner agreed that, if the royalty rates payable by petitioner's licensees (other than the oil companies) under the terms of their respective license agreements (except royalty rates prescribed by license agreements in effect on the closing date) were in any case less than a scale set forth in paragraph 28 of the agreement, petitioner would pay to the stockholders' committee, in addition to the above specified percentages of royalties and license fees actually collected from its licensees, additional amounts equal to the difference between the amounts collected and the percentages above specified of a theoretical royalty computed upon the scale set forth in paragraph 28. Paragraph 31 of the agreement provided that each of the oil companies from time to time was to lend to petitioner onequarter of such sums as might reasonably be required by petitioner for working capital so as to permit petitioner to make*1482 the payments provided for in paragraph 27.
The following assets of petitioner were to be reserved for the benefit of the stockholders of petitioner under paragraph 20 of *627 the agreement: (1) All cash on hand and in bank; (2) all stocks, bonds, and other securities "except securities of any character representing the ownership of rights in or to inventions and letters patent or rights therein or thereunder"; (3) all payments due or to become due for royalties actually accrued in respect of operations of licensees of petitioner up to the closing date, and all bills, notes, and accounts receivable and evidences of indebtedness in any form payable to petitioner in respect of transactions, other than licensing, actually completed up to the closing date; and (4) specific assets of petitioner including certain accounts receivable, certain notes receivable, certain monthly royalty payments payable to petitioner by a certain licensee up to and including the monthly payment due September 1, 1933, a portable storage building, an automobile, office furniture and equipment, and laboratory equipment.
Under paragraph 19 of the agreement the oil companies were to grant to petitioner*1483 irrevocable rights to grant licenses for clay treating under their patent rights, and were to pay to petitioner the gross royalties derived from licenses which they might grant under their patent rights after the closing date and the net amounts recovered from infringers thereof. Under paragraph 30 of the agreement petitioner was to grant a nontransferable license to each of the oil companies. The form of each of these licenses was incorporated in the agreement.
Paragraph 21 of the agreement provided that all of petitioner's disclosed liabilities were to be paid, or a reserve fund established therefor, on or before the closing date either from the reserved assets or from the moneys to be received by the stockholders' committee on the closing date under paragraph 26 of the agreement; and that petitioner and each of the oil companies was to have the right to set off any amounts payable to the stockholders' committee by petitioner and each of the oil companies pursuant to any of the provisions of the agreement against any liabilities of petitioner existing on the closing date, whether disclosed or undisclosed.
Under paragraph 22 of the agreement on the closing date the stockholders' *1484 committee was to deposit in escrow with the Fidelity Union Trust Co. of Newark, New Jersey, stock certificates duly endorsed in blank for transfer representing all of the 100,000 shares of outstanding capital stock of petitioner. So long as the shares remained in escrow they were to be voted by the oil companies, except that if petitioner defaulted in making any payment required by the agreement, the stockholders' committee was to have the right to vote the shares until the default was made good. Upon the completion of the payments aggregating $500,000 to be made to the stockholders' committee on the closing date under paragraph 26 of *628 the agreement and the completion of the payment to the stockholders' committee of sums aggregating the additional sum of $500,000 under subparagraph (d) of paragraph 27 of the agreement, the Fidelity Union Trust Co. was to deliver to each of the oil companies stockcertificates representing 25,000 shares of petitioner's capital stock. Upon such delivery of stock certificates to the oil companies "indefeasible title to the shares of stock represented thereby" was to vest in the oil companies. If the aggregate sum of all payments to the stockholders' *1485 committee made by petitioner under subparagraph (d) of paragraph 27 within a period of three years from the closing date were less than $500,000, the Fidelity Union Trust Co. was to give written notice to the stockholders' committee, petitioner, and the oil companies as to the amount of such deficiency, and the oil companies were to have the right within 60 days after receipt of such written notice to pay the stockholders' committee the amount of such deficiency, and, if the oil companies should fail within the 60-day period after receipt of such notice to make such payment to the stockholders' committee, the Fidelity Union Trust Co. was authorized to redeliver to the stockholders' committee all of the deposited shares. So long as the shares remained in escrow petitioner was not to sell, assign, or otherwise dispose of or encumber any of its patent rights or other patent property except by the granting of licenses thereunder, unless such sale or other disposition should be assented to in writing by all the parties.
On May 8, 1933, the stockholders' committee sent notices to all of petitioner's stockholders advising them of the offer made by the oil companies for the purchase of*1486 the capital stock of petitioner and consenting to represent all of the stockholders in connection with the acceptance of the offer and the performance of the agreement which was to be entered into if the offer were accepted. Copies of the agreement were enclosed with the notices. In the notices the stockholders' committee summarized some of the features of the agreement and stated that the agreement provided, among other things, for: A down payment of $500,000 to the stockholders' committee; the payment to the stockholders' committee of a portion of all future receipts derived by petitioner "from its patent rights"; the payment to the stockholders' committee of the entire net income of petitioner until such payment aggregated the further sum of $500,000; and the reservation for the benefit of the present stockholders of petitioner of the entire net assets of petitioner, "except its patent property and license contracts", existing on the closing date and remaining after payment or provision for payment of petitioner's liabilities existing on that date. The stockholders' committee stated that, while it obviously could not advise as to the total price per *629 share that might*1487 be received for stock sold under the terms of the agreement, it was estimated that the proceeds of sale during the first three years of operation of the agreement would aggregate at least $14 per share; "and thereafter additional amounts from year to year as long as the business continues without substantial impairment." The stockholders' committee stated that it believed that the acceptance of the offer would be in the interests of all of the stockholders and invited all of the stockholders if they desired to accept the offer, to deposit their stock endorsed in blank with the Fidelity Union Trust Co., as agent for the stockholders' committee, under a deposit agreement dated April 27, 1933. Under the deposit agreement the stockholders were to receive transferable certificates of deposit evidencing their rights and interests as depositors thereunder.
Thereafter, all the stockholders of petitioner deposited their stock, endorsed in blank, with the Fidelity Union Trust Co. and received transferable certificates of deposit evidencing their rights and interests as depositors under the deposit agreement.
At a special meeting held on July 19, 1933, the board of directors of petitioner*1488 authorized its officers to execute the agreement on behalf of petitioner; tp do or cause to be done all things necessary to carry the agreement into effect and for the performance by the petitioner of the obligations imposed upon it thereunder; and to do or cause to be done all things necessary in order that the assets of the petitioner designated in the agreement as reserve assets might be transferred to the stockholders' committee.
On July 27, 1933, the agreement was executed by the stockholders' committee, acting on behalf of all of petitioner's stockholders, the petitioner, and the oil companies. At the time of the execution of the agreement the oil companies paid a total of $500,000 in cash to the stockholders' committee in accordance with paragraph 26 of the agreement.
In accordance with subparagraphs (a), (b), and (c) of paragraph 27 of the agreement petitioner paid the following amounts to the stockholders' committee in 1934, 1935, and 1936:
| Subparagraph | 1934 | 1935 | 1936 |
| (a) | $106,099.89 | $99,593.00 | $98,630.37 |
| (b) and (c) | 992.08 | 1,830.04 | 33,339.64 |
| Total | 107,091.97 | 101,423.04 | 131,970.01 |
From the time of the execution of the agreement*1489 on July 27, 1933, until July 29, 1938, the 100,000 shares of issued and outstanding capital stock of petitioner were held in escrow by the Fidelity Union Trust Co., in accordance with paragraph 22 of the agreement. On *630 July 29, 1938, the payments made by petitioner to the stockholders' committee in accordance with subparagraph (d) of paragraph 27 of the agreement reached a total of $500,000, and in accordance with paragraph 22 of the agreement the 100,000 shares of capital stock of petitioner were released from escrow and a certificate for 25,000 shares was delivered to each of the oil companies.
On its income tax returns for the years 1934, 1935, and 1936 petitioner reported gross income as follows:
| 1934 | 1935 | 1936 | |
| Interest | $0.55 | $400.40 | $128.08 |
| Royalties | 228,199.86 | 224,429.23 | 239,446.49 |
| Total | 228,200.41 | 224,829.63 | 239,574.57 |
On its income tax returns for the years 1934 and 1935 petitioner deducted as "royalties paid" the amounts of $107,091.97 and $101,423.04, respectively, which were paid by petitioner to the stockholders' committee in accordance with subparagraphs (a), (b), and (c) of paragraph 27 of the agreement. Respondent*1490 disallowed the deductions.
On its income tax return for the year 1936 petitioner stated in an explanatory statement that in 1936 it had collected $371,416.50 as royalties and $160.10 as interest; that under the agreement of July 27, 1933, it had received $131,970.01 of the above royalties and $32.02 of the above interest "as trustee"; that it had credited these amounts on its books to the stockholders' committee "representing the beneficial owners of the amounts" and subsequently had paid the amounts over to the committee; and that for that reason petitioner had not included these amounts in its gross income for 1936. Respondent included in gross income the amount of $131,970.01 which petitioner paid to the stockholders' committee in 1936 in accordance with subparagraphs (a), (b), and (c) of paragraph 27 of the agreement.
All payments which were received by the stockholders' committee from petitioner, including the payments made under subparagraphs (a), (b), (c), and (d) of paragraph 27 of the agreement, were treated by the former stockholders of petitioner in filing their income tax returns as being in payment for their stock.
The payments which petitioner made to the stockholders' *1491 committee in accordance with subparagraph (d) of paragraph 27 of the agreement were treated by the oil companies as dividends which had been received by them from the petitioner and had been used, on their behalf, to satisfy the payments aggregating $500,000 required under that subparagraph. The payments aggregating $500,000 which were made by petitioner in accordance with subparagraph *631 (d) of paragraph 27 and the $500,000 payment which was made at the time of the execution of the agreement are the only payments made by petitioner under the agreement which the oil companies have charged to their investment in the capital stock of petitioner.
OPINION.
HARRON: The first question is whether the amounts which were paid by petitioner in the taxable years to the stockholders' committee in accordance with subparagraphs (a), (b), and (c) of paragraph 27 of the agreement should be excluded from its taxable income in those years.
Under subparagraph (a) of paragraph 27 of the agreement petitioner was to pay to the stockholders' committee an amount equal to 50 percent of the amount actually collected in each calendar quarterly period as royalties received on account of present*1492 installed treating capacity of present licensees of petitioner; under subparagraph (b) petitioner was to pay to the stockholders' committee an amount equal to 20 percent of the amount actually collected in each calendar quarterly period (1) as royalties received from present licensees of petitioner on account of capacity in excess of their present installed treating capacity, (2) as royalties received from others than present licensees of petitioner, and (3) as amounts received from the oil companies as gross royalties derived from licenses which they might, after the closing date, grant under their patent rights, and as the net recoveries from infringers thereof; and under subparagraph (c) petitioner was to pay to the stockholders' committee an amount equal to 20 percent of the amount actually collected in each calendar quarterly period as amounts recovered from infringers of patent rights and as all other amounts actually received by petitioner arising out of its business from and after the closing date after deducting therefrom all costs of collection. Petitioner was to continue to make the payments under subparagraphs (a), (b), and (c) as long as it was in receipt of any of the*1493 amounts specified in those subparagraphs.
In the taxable years the entire receipts of petitioner consisted of royalties, with the exception of very small amounts received as interest; the amounts received as interest were so small that, for the purposes of this opinion, it will be assumed that the entire receipts of petitioner in the taxable years consisted of royalties. Petitioner paid to the stockholders' committee in accordance with subparagraph (a) $106,099.89 in 1934, $99,593 in 1935, and $98,630.37 in 1936; and in accordance with subparagraphs (b) and (c) $992.08 in 1934, $1,830.04 in 1935, and $33,339.64 in 1936, or a total of $107,091.97 in 1934, $101,423.04 in 1935, and $131,970.01 in 1936.
*632 On its income tax returns for the years 1934 and 1935 petitioner did not exclude from its taxable income the amounts which it paid to the stockholders' committee in accordance with subparagraphs (a), (b), and (c) of paragraph 27 of the agreement, but reported in its taxable income the entire amounts which it received as royalties and then deducted the amounts which it paid to the stockholders' committee in accordance with subparagraphs (a), (b), and (c). Respondent disallowed*1494 the deductions on the ground that the amounts which petitioner paid to the stockholders' committee in accordance with subparagraphs (a), (b), and (c) constituted a distribution of profits. On its income tax return for the year 1936 petitioner excluded from its taxable income the amounts which it paid to the stockholders' committee in accordance with subparagraphs (a), (b), and (c), with the explanation that it had received such amounts "as trustee" for the stockholders' committee "representing the beneficial owners of the amounts." Respondent included the amounts which petitioner paid to the stockholders' committee in accordance with subparagraphs (a), (b), and (c) in petitioner's taxable income.
In its briefs petitioner contends that the amounts which it paid in the taxable years to the stockholders' committee in accordance with subparagraphs (a), (b), and (c) should be excluded from its taxable income. The substance of petitioner's argument is that the amounts which it paid in the taxable years to the stockholders' committee in accordance with subparagraphs (a), (b), and (c) were not a part of the purchase price which was to be paid for the capital stock of petitioner, but that*1495 the effect of subparagraphs (a), (b), and (c) was to transfer from petitioner to the stockholders' committee an interest in petitioner's license agreements, and that thus in the taxable years petitioner merely acted as an agent, or conduit, in collecting and paying to the stockholders' committee the royalties derived from its interest in petitioner's license agreements. On the other hand, in his briefs respondent contends that the amounts which petitioner paid in the taxable years to the stockholders' committee in accordance with subparagraphs (a), (b), and (c) were a part of the purchase price which was to be paid for the capital stock of petitioner and that the effect of subparagraphs (a), (b), and (c) was not to transfer from petitioner to the stockholders' committee any interest in petitioner's license agreements. Both parties agree that, in the final analysis, the inclusion or exclusion of the amounts in question on petitioner's taxable income depends upon whether or not, under the agreement, the payments under subparagraphs (a), (b), and (c) were a part of the purchase price which was to be paid for the capital stock of petitioner. Both parties apparently reason that, if under*1496 the agreement the payments under subparagraphs (a), (b), and (c) were a part of the purchase price, it follows that petitioner *633 was the owner of the entire amounts which it received in the taxable years as royalties and that the amounts in question should not be excluded from petitioner's taxable income; but that, if under the agreement the payments under subparagraphs (a), (b), and (c) were not a part of the purchase price, it follows that petitioner merely acted as an agent, or conduit, in collecting and paying over to the stockholders' committee the royalties derived from its interest in petitioner's license agreements, and that the amounts in question should be excluded from petitioner's taxable income. Thus the answer to the question is to be found in an interpretation of the agreement.
In our opinion, the amounts in question should not be excluded from petitioner's taxable income. A careful examination of the agreement compels the conclusion that the payments under subparagraphs (a), (b), and (c) of paragraph 27 were a part of the purchase price which was to be paid by petitioner on behalf of the oil companies to the stockholders' committee for the purchase of*1497 the capital stock of petitioner. Subparagraphs (a), (b), and (c) are contained in that part of the agreement which deals with the purchase price which was to be paid for the capital stock of petitioner. Subparagraphs (a), (b), and (c) are immediately preceded by paragraph 26, which provides for the payment of $500,000 by the oil companies on the closing date, and are immediately succeeded by subparagraph (d), which provides for the payment by petitioner of amounts representing the total estimated net income of petitioner for each calendar quarterly period remaining after making the payments under subparagraphs (a), (b), and (c) until the payments under subparagraph (d) should aggregate $500,000. Thus subparagraphs (a), (b), and (c) are flanked by provisions which admittedly deal with the purchase price which was to be paid for the capital stock of petitioner.
The conclusion that the payments under subparagraphs (a), (b), and (c) were a part of the purchase price which was to be paid for the capital stock of petitioner is strengthened by the absence of any provision in the agreement either expressly or impliedly transferring from petitioner to the stockholders' committee any interest*1498 in petitioner's patent property or license agreements. It is pointed out that prior to the execution of the agreement the then stockholders of petitioner had no interest in petitioner's patent property or license agreements. Cf. . Paragraph 20 of the agreement deals with the so-called "reserved" assets of petitioner which were to be transferred from petitioner to the stockholders' committee. Under that paragraph substantially all of the assets of petitioner, with the notable exception of its patent property and license agreements, were to be transferred from petitioner to the stockholders' committee. In view of the very careful specification *634 of the assets which were to be transferred, the failure of the parties to provide in that paragraph for the transfer from petitioner to the stockholders' committee of any interest in petitioner's patent property or license agreements appears deliberate.
The provisions of subparagraphs (a), (b), and (c) did not effect an assignment from petitioner to the stockholders' committee of any interest in petitioner's patent property or license agreements, or even in the royalties*1499 to be derived therefrom. Under subparagraphs (a), (b), and (c) petitioner simply promised to pay to the stockholders' committee amounts equal to certain designated percentages of the amounts actually received by petitioner from royalties and other sources. It is pointed out that before petitioner was obligated to pay, it had to receive, cf. ; ; and that even upon receipt, petitioner was not obligated to pay out of any designated fund. Cf. ;The test of a legal or equitable assignment has been stated to be "whether the debtor would be justified in paying the debt, or the portion contracted about, to the person claiming to be assignee." ; ; ; ; ; *1500 . Merely by reason of the provisions of subparagraphs (a), (b), and (c) no licensee or other debtor of petitioner would be justified in paying directly to the stockholders' committee any portion of the amounts which he owed to petitioner. It follows that under subparagraphs (a), (b), and (c) petitioner simply made a personal covenant to pay the various amounts specified therein and did not make a legal or equitable assignment of any interest in its patent property or license agreements, or even in the royalties to be derived therefrom. Cf.
A further examination of the agreement indicates that petitioner was to have complete control over the entire amounts which it received from royalties and other sources. A provision requiring the segregation of the amounts which petitioner subsequently was obliged to pay to the stockholders' committee under subparagraphs (a), (b), and (c) is conspicuously absent from the agreement. Cf. . Under paragraph 21 of the agreement petitioner was to have the right to set off any amounts*1501 payable under subparagraphs (a), (b), and (c) against any liabilities existing on the closing date. And under paragraph 31 of the agreement each of the oil companies from time to time was to lend to petitioner one-quarter of such sums as might reasonably be required by petitioner as working capital so as to permit petitioner to make the payments under subparagraphs (a), (b), and (c).
*635 Moreover, under the agreement petitioner was to have substantially complete control over its patent property and license agreements, at least subsequent to the release of the stock from escrow and the consequent passage of title thereto to the oil companies. It should be emphasized that passage of title to the stock was dependent upon the $500,000 payment to be made by the oil companies under paragraph 26 and the further payments aggregating $500,000 to be made by petitioner under subparagraph (d) of paragraph 27, and not upon the payments to be made by petitioner under subparagraphs (a), (b), and (c). Prior to passage of title to the stock petitioner had the right to sell, assign, or otherwise dispose of or encumber any of its patent property only with the written consent of all the*1502 other parties to the agreement. However, after passage of title to the stock petitioner apparently had the right to dispose of or encumber any of its patent property without the consent of the other parties to the agreement even though petitioner was still under obligation to make the payments under subparagraphs (a), (b), and (c). Moreover, petitioner at all times had substantially complete control over the granting of licenses. The only limitations upon petitioner's control over the granting of licenses were that under paragraph 30 of the agreement petitioner was to grant licenses to the oil companies in accordance with certain prescribed forms and that under paragraph 29 of the agreement petitioner was not to grant licenses containing a privilege to grant sublicenses except with the written consent of the other parties to the agreement. The scale of royalty rates set forth in paragraph 28 was not an actual limitation upon petitioner's control over the granting of licenses. Under subparagraph (e) of paragraph 27, if the royalty rates payable by petitioner's licensees (other than the oil companies) under the terms of their respective license agreements (except royalty rates prescribed*1503 by license agreements in effect on the closing date) were in any case less than the scale of royalty retes set forth in paragraph 28, petitioner was to pay to the stockholders' committee, in addition to the payments under subparagraphs (a), (b), and (c), additional amounts equal to the specified percentages of the difference between the amounts actually collected and the amounts which would have been collected if the royalty rates had been the same as those set forth in paragraph 28. It is thus apparent that petitioner was not required under subparagraph (e) of paragraph 27 to incorporate the scale of royalty rates set forth in paragraph 28 in the licenses which it granted subsequent to the execution of the agreement.
The conclusion that the payments under subparagraphs (a), (b), and (c) were a part of the purchase price for the stock and that petitioner did not transfer any interest in its patent property or license agreements or in the royalties derived therefrom finds support in *636 the interpretation of the agreement which was made by the stockholders' committee immediately prior to the execution of the agreement. In the notices which the stockholders' committee sent*1504 out to the then stockholders of petitioner the committee stated that it obviously could not advise "as to the total price per share" which might be received for stock sold under the terms of the agreement, but that it was estimated that the proceeds of sale during the first three years of operation of the agreement would aggregate at least $14 per share "and thereafter additional amounts from year to year as long as the business continues without substantial impairment." Thus it was clearly the understanding of the stockholders' committee that the payments under subparagraphs (a), (b), and (c), which were to continue after the first three years of operation of the agreement, were a part of the purchase price of the stock. Furthermore, in the notices the stockholders' committee stated that the agreement provided for the reservation for the benefit of the then stockholders of petitioner of the entire net assets of petitioner, "except its patent property and license contracts." Thus it was also the understanding of the stockholders' committee that petitioner was not to transfer any interest in its patent property and license agreements to the stockholders. The action of the former stockholders*1505 of petitioner subsequent to the execution of the agreement was in conformity with the understanding of the agreement expressed by the stockholders' committee in the notices. In filing their income tax returns for the years subsequent to the execution of the agreement the former stockholders of petitioner treated the payments made by petitioner under subparagraphs (a), (b), and (c) as being in payment of their stock. Even petitioner in filing its income tax returns for 1934 and 1935 did not exclude from its taxable income the payments made by it under subparagraphs (a), (b), and (c). Little weight is to be attached to the fact that the oil companies did not charge the payments made by petitioner under subparagraphs (a), (b), and (c) to their investment in the stock of petitioner.
Petitioner points to the fact that under paragraph 22 the passage of title to the stock to the oil companies was conditioned only upon the completion of the $500,000 payment which was to be made by the oil companies on the closing date under paragraph 26 and the payments aggregating $500,000 which were to be made by petitioner over a period of years under subparagraph (d) of paragraph 27 and not upon*1506 the completion of the payments which were to be made by petitioner under subparagraphs (a), (b), and (c). Petitioner argues that this fact conclusively shows that the payments which were to be made by it under subparagraphs (a), (b), and (c) were not a part of the purchase price of the stock. There is little merit in this argument. The parties to a sale can provide, and frequently do provide, *637 for the passage of title before payment of all or even any part of the purchase price. ; certiorari denied, . Petitioner also points to the fact that in paragraph 22 the time of the passage of title to the stock is referred to as the consummation of the sale and argues that this fact also shows that the payments which were to be made by it under subparagraphs (a), (b), and (c) were not a part of the purchase price of the stock. This argument, too, possesses but little merit. The consummation of a sale depends not upon the payment of the purchase price but upon the passage of title; and a sale is consummated when title passes, even though the purchase price is not yet paid. *1507
Petitioner urges that two considerations of "logic and normal business practice" support its contention that the payments which were to be made by it under subparagraphs (a), (b), and (c) were not a part of the purchase price of the stock. The substance of the first of the two considerations urged by petitioner is that, if the continuing payments under subparagraphs (a), (b), and (c) were a part of the purchase price of the stock, then the oil companies would never be in a position to ascertain the cost of the stock as long as the payments continued. This first consideration is entitled to but little weight. The ascertainment of the cost of the stock to the oil companies was simply a matter of adding the payments made by petitioner under subparagraphs (a), (b), and (c) to the rest of the consideration which had been paid for the stock. Apparently the former stockholders in filing their returns for the taxable years were able to compute the gain realized from the sale of the stock even though they treated the payments made by petitioner under subparagraphs (a), (b), and (c) as a part of the purchase price. It should be emphasized*1508 that somewhat similar provisions for continuing payments of the purchase price are not uncommon in contracts of sale. Cf. The substance of the second of the two considerations urged by petitioner is that, if the continuing payments under subparagraphs (a), (b), and (c) were a part of the purchase price of the stock, then this would mean that the stockholders' committee had adopted the "unheard-of practice" of protecting the stockholders by a carefully drawn escrow agreement against a default in the early assured payments of the purchase price and not protecting the stockholders against a default in the later, doubtful payments. This second consideration is entitled, similarly, to but little weight. It is sufficient to point out that the promise of petitioner to make the payments under subparagraphs (a), (b), and (c) was guaranteed by the Texas Corporation, the Standard Oil Co. of Indiana, the Standard Oil Development Co., and the Pure Oil Co. The guarantee of these oil companies would seem *638 to constitute substantial protection against a default by petitioner in the payments under subparagraphs (a), (b), and (c).
*1509 As further support of its contention that the payments under subparagraphs (a), (b), and (c) were not a part of the purchase price of the stock, petitioner argues that these payments did not benefit the oil companies, the purchasers of the stock. This argument is unfounded. In promising to make the payments under subparagraphs (a), (b), and (c) of paragraph 27, as well as the payments under subparagraph (d), petitioner was acting on behalf of the oil companies. If provision had not been made in the agreement for the payments under subparagraphs (a), (b), and (c), provision would have had to have been made for some other form of consideration for the stock. In the event of a default in the payments under subparagraphs (a), (b), and (c), even though title to the stock had passed to the oil companies, the stockholders' committee could proceed not only against petitioner but also against the oil companies on their guarantees. The conclusion is inescapable that the payments under subparagraphs (a), (b), and (c) directly benefited the oil companies.
The above interpretation of the agreement compels the conclusion that petitioner was the sole owner of the entire amounts of royalties*1510 which it received in the taxable years, as well as the sole owner of the patent property and license agreements which produced the royalties in question. It follows that the entire amounts of royalties which petitioner received in the taxable years should be included in its taxable income without the exclusion of the amounts which it later paid to the stockholders' committee in the taxable years under subparagraphs (a), (b), and (c) of paragraph 27 of the agreement. Cf. ; ; ; ;
In our opinion the cases cited by petitioner in its briefs are distinguishable. Proceeding on the assumption that the stockholders' committee had the beneficial interest in a part of the royalties which petitioner received in the taxable years, petitioner cites the following cases as enunciating the principle "that the purpose of the income tax laws is to tax income to the person having the beneficial interest therein and not to the mere collector or conduit*1511 of income belonging to another": ;; ; affd., ; ; 112 ; ; ; ; ; *639 ; ; ; ; . The assumption on which petitioner proceeds in citing these cases is unsound because in fact petitioner was not a mere collector or conduit, but had the entire beneficial interest in the royalties which it received in the*1512 taxable years. Petitioner relies in particular upon ;; and In , the taxpayer was organized for the purpose of taking over the assets and assuming the liabilities of the Central Life Assurance Society; the taxpayer was organized to do only a participating life insurance business, while its predecessor was organized to do both a participating and a nonparticipating life insurance business; under the transfer agreement the taxpayer was to maintain a separate department for the nonparticipating life insurance business and was to pay to the stockholders of its predecessor any earnings from the nonparticipating business for a period of twenty-two years, within which period it was estimated that the entire nonparticipating business would be liquidated; and after the transfer the earnings of the nonparticipating business were segregated by petitioner and handled in a separate department. *1513 As the Circuit Court stated: "These earnings never became the absolute property of petitioner, and it could lawfully do with them but one thing, which was to pay them over in accordance with the contract. It secured no beneficial interest whatsoever from them. There was as complete segregation of these earnings as could possibly be made under the circumstances." In , the original owner of certain securities transferred the securities to the taxpayer in accordance with an agreement under which the original owner expressly reserved for life the right to the income from the securities. The Circuit Court stated that by assenting to the reservation the taxpayer became a trustee for the original owner and was required to account to the original owner for the income received from the securities. In , certain outside attorneys obtained personal injury cases and then turned them over to the taxpayer, an attorney, for handling under agreements to divide the fees. The Board pointed out that the taxpayer and the outside attorneys had joint interests in the cases and in the fees collected by the taxpayer. *1514 On the assumption that subparagraphs (a), (b), and (c) of paragraph 27 of the agreement effected an assignment from the petitioner to the stockholders' committee of a part of the royalties which petitioner received in the taxable years, petitioner cites the *640 following cases as supporting the principle that "assigned rents and royalties are taxable to the assignee and not to the assignor." ; ; ; ; and ; petitioner relies especially on In all of these cases the taxpayers actually effected assignments. In view of the conclusion that subparagraphs (a), (b), and (c) did not effect a legal or equitable assignment of any interest in petitioner's patent property or license agreements or even in the royalties to be derived therefrom, these cases are obviously inapplicable.
Both parties cite *1515 . In the Perkins case the owners of certain oil and gas leases on undeveloped lands providing for a royalty of one-eighth assigned the leases to the taxpayer. The assignment provided for the payment to the assignors of $395,000, to be paid out of one-fourth of the oil produced from the lands and to be paid directly to the assignors by the purchasers of the oil produced from the lands. Thereafter taxpayer produced oil from the lands. The purchasers of the oil made payments directly and proportionately to the assignors, to the taxpayer, and to the owner of the royalty reserved in the lease. The Supreme Court held that the assignors had reserved an "economic interest" in the oil in place and that the sums paid to the assignors by the purchasers of the oil should be excluded from the taxpayer's gross income. Since the situation present in the Perkins case is essentially different from the situation present here, the principles enunciated in the Perkins case are not considered applicable here. Cf. *1516
Petitioner contends that, even if the amounts which it paid to the stockholders' committee in the taxable years under subparagraphs (a), (b), and (c) are not to be excluded from its taxable income, it is entitled to deduct such amounts in the taxable years as ordinary and necessary expenses paid during those years in carrying on its business under section 23(a) of the Revenue Acts of 1934 and 1936, the pertinent provisions of which are set forth in the margin. 1 On its income tax returns for the years 1934 and 1935 petitioner deducted the amounts which it paid to the stockholders' committee under subparagraphs *641 (a), (b), and (c) as royalties paid, and on its income tax return for the year 1936 petitioner excluded the amounts which it paid to the stockholders' committee under subparagraphs (a), (b), and (c) from its taxable income. In the statement attached to the deficiency notice respondent determined that the payments which petitioner made to the stockholders' committee in the taxable years under subparagraphs (a), (b), and (c) constituted distributions of profits and as such were not proper deductions from taxable*1517 income.
Respondent's determination that the amounts which petitioner paid to the stockholders' committee in the taxable years under subparagraphs (a), (b), and (c) were not proper deductions must be sustained. Even though the stock of petitioner was held in escrow during the taxable years, the oil companies had the right to vote the stock and were in substance the sole stockholders of petitioner. *1518 . The payments under subparagraphs (a), (b), and (c) were made by petitioner for the benefit of its sole stockholders, the oil companies, and benefited the oil companies in proportion to their interests in the stock of petitioner. ;; ; affd., . Thus, the payments under subparagraphs (a), (b), and (c) constituted constructive distributions from petitioner to its sole stockholders, the oil companies. ;;Respondent determined that the distributions were paid out of profits, and petitioner introduced no evidence to show that the distributions were not so paid. Cf. ;*1519 Therefore, in the final analysis, the payments under subparagraphs (a), (b), and (c) constituted constructive dividends from petitioner to its stockholders, the oil companies. ;;It should be noted that the payments which petitioner made to the stockholders' committee under subparagraph (d) of paragraph 27 of the agreement were treated by the oil companies as dividends which had been received constructively by them from the petitioner. The payments under subparagraphs (a), (b), and (c) should likewise be treated as dividends constructively received by the oil companies from the petitioner. It follows that respondent correctly determined that the payments under subparagraphs (a), (b), and (c) were not proper deductions from petitioner's taxable income.
The cases which petitioner has cited in support of its contention that the payments under subparagraphs (a), (b), and (c) are deductible as ordinary and necessary business expenses are distinguishable. *642 In *1520 , the making of the monthly payments there in question by the transferor corporation "was a definite condition without which the corporation could have no receipts." ; ; and Richard P. Hallowell, 2nd,, deal solely with questions of inclusion in taxable income, and not with questions of deduction from taxable income.
Decision will be entered for the respondent.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) EXPENSES. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business; including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for the purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. ↩