*190 Decision will be entered for the respondent.
Petitioner was a party to an agreement with British companies in 1940 under which a sum was paid to petitioner, who retained one-half and paid the other half to the owner of certain British patents. Petitioner was the exclusive licensee under an agreement of December 8, 1932, under American and foreign patents, having the authorization from the owner thereof to make sublicense contracts under foreign patents in foreign countries. The licensor of petitioner, in the 1932 agreement, expressly retained title to all patents. He granted, by a separate contemporaneous contract in 1940, an exclusive prepaid license to the British companies. Held, petitioner did not sell or exchange depreciable property in 1940 under the agreement with the British companies, within the provisions of section 711 (a) (1) (B) of the Internal Revenue Code. Respondent is sustained in including the net sum received from British companies in petitioner's normal tax net income for the purpose of computing its excess profits net income. Edward C. Myers, 6 T. C. 258, distinguished.
*454 *1150 Respondent determined a deficiency in excess profits tax for the calendar year 1940 in the amount of $ 14,903.97. The only question is whether the sum of $ 48,415.23 should be excluded from excess profits net income as gain from the sale of property held more than 18 months of a character which is subject to depreciation under section 711 (a) (1) (B) of the Internal Revenue Code, as it applies to the year 1940. The question grows out of contracts made in 1940 with British companies relating to British patents taken in the name of an American *1151 inventor who gave petitioner an exclusive license in 1932 under his American and foreign patents.
Petitioner filed its returns with the collector for the twenty-third district of Pennsylvania at Pittsburgh.
FINDINGS OF FACT.
Petitioner is a Delaware corporation, with its principal office in Pittsburgh, Pennsylvania. Petitioner was organized in 1923, and it is engaged in the manufacture of munitions and tear gas equipment. In the conduct of its business petitioner owns and exploit various patents and inventions. Its outstanding stock was 3,570 shares. *192 In March 1937 Breeze Corporations, Inc., a New Jersey corporation, acquired all of the stock of petitioner except 38 shares. Breeze Corporations of New Jersey conducted a business of manufacturing airplane parts and accessories.
Plessey Co., Ltd., an English corporation, was one of the large manufacturers of accessories and small parts for airplanes.
Breeze Corporation of Great Britain, Ltd., an English corporation, was organized in 1936. Breeze Corporations of New Jersey and Plessey Co. owned 50 per cent each of the stock of the English Breeze Corporation.
Roscoe A. Coffman is an inventor of cartridge starters for airplane motors and the record owner of various patents relating to such starters, which are known in the trade as Coffman engine starters and cartridges.
On December 8, 1932, R. A. Coffman, as the licensor, and Federal Laboratories, Inc., petitioner, as the licensee, entered into an agreement in which it was stated that Coffman was the sole owner of certain United States patents and other patents, which were listed according to patent numbers. The patents related to improvements in starting motors and shells for use therewith. The agreement recited that the licensor*193 was willing to grant and the licensee was desirous of obtaining an exclusive license to manufacture, use, and sell devices and shells for the devices as set forth in the patents and patent applications listed in the agreement. The licensor, Coffman, granted to petitioner "a non-assignable and exclusive license to make, use and sell devices and shells embodying the inventions, types and designs as set forth in the aforementioned patents and patent applications." The license, unless sooner terminated, was for the full term of the letters patent. The agreement stated what failures should constitute a breach of the agreement and that the licensor should have the right to cancel the agreement upon 30 days notice if the combined royalties and full time salary to the licensor, or the royalties, after the first year should amount to less than $ 5,000 per year. It was also provided that the *1152 right of selection of patent attorneys for use with the licensee's attorneys in the prosecution or defense of infringement suits should be in the licensor, provided he paid the expense of his attorneys. The licensee agreed to pay $ 5,000 and a license fee or royalty equal to 6 per cent of*194 the licensee's retail selling price of devices sold. The agreement contained the following provision in the fifth clause:
* * * but in no event or by process of law, shall this license agreement be construed to be an assignment to said Licensee of any of said patents or applications or any part of same set forth herein or on any future applications or patents secured by the Licensor. This document is merely a license agreement and in event of termination or cancellation thereof for any reason whatsoever, the rights and titles to any and all patents or patent applications now held, or to be applied for by Licensor in the future as set forth in this agreement, and the manufacturing and sales rights given under the terms of this agreement shall automatically revert to said Licensor as his sole property. * * *
Although the grant under the agreement was in general a nonassignable and exclusive license to petitioner (which would refer to his rights under American patents), the licensor gave petitioner the right to grant sub-licenses for the manufacture, use, or sale in countries foreign to the United States on all applications for foreign patents filed or granted, as follows:
Ninth: *195 On all applications for foreign patents filed or granted as herein contemplated, Licensee shall have the right to grant sub-licenses for the manufacture, use or sale only in the country or countries respectively in which the Licensor has secured patents or filed applications for patents as provided for elsewhere herein. As to any sub-license granted in accordance herewith in any countries foreign to the United States the cash payments and royalty payments received therefrom shall be divided one-half to Licensor and one-half to Licensee, and Licensor herein shall be entitled to no other compensation thereon. On any foreign license executed by Licensee a royalty of not less than six percent (6%) on net selling price shall be provided, unless otherwise agreed to in writing by Licensor. Net selling price as herein defined. [Italics added.]
The agreement also provided as follows:
Eleventh: The devices and shells or power generating units licensed hereunder shall be marketed under the name "Coffman" and shall be advertised and labeled as such. Each device and each shell container shall be *455 marked with a permanent label or name plate showing in legible letters the name "Coffman" *196 and also be inscribed with "Licensed under Patent Nos. -- and Patents Pending".
Among the patents listed in the agreement of R. A. Coffman of December 8, 1932, were United States, French, Italian, Canadian, British Empire, and German patents. The British Empire patent was Patent No. 355022, August 13, 1930.
The entire agreement of December 8, 1932, is incorporated herein by this reference.
Petitioner and Plessey Co., Ltd., entered into a license agreement dated July 3, 1937, which was to be for a period of 15 years, under *1153 which Plessey was licensed "to use, manufacture and sell" engine starters and parts and cartridges for the same under the letters patent set forth in the agreement in the territory of Great Britain, Ireland, and the British Empire except Canada. Plessey was given an exclusive license, and Plessey agreed not to export the products outside the territory except as parts of complete vehicles. The license agreement could be terminated if sales of engine starters by the Plessey Co. should be less than a stated amount per year. Plessey Co. agreed to pay petitioner a royalty of 6 per cent of the net selling price of all products manufactured and sold by Plessey.
*197 Plessey paid petitioner royalties until January 1, 1939, when it ceased to make payments. Petitioner received royalties totaling $ 16,100 from July 3, 1937, to January 1, 1939, and it paid one-half thereof to Coffman in accordance with the ninth clause of the December 8, 1932, agreement.
After negotiations which started in the latter part of 1939, which involved petitioner, Plessey, and the two Breeze corporations, an agreement dated June 19, 1940, was executed by petitioner and the New Jersey Breeze Corporations, as parties of the first part, and Plessey and the British Breeze Corporation, as the parties of the second part. The agreement is incorporated herein by this reference.
On May 21, 1940, R. A. Coffman executed a document which referred to the agreement which the American and British companies were about to enter, and to patents of which he, Coffman, was said to be the record owner, and which recited that Coffman approved the aforesaid agreement. The document executed by Coffman contains the following clause:
2. I hereby transfer and convey unto the English Companies and each of them, a full and exclusive prepaid license, without the payment of any past due or future royalties*198 in and to any and all of the patents owned by me and described in the schedules of the aforementioned deed for the territories therein defined.
Coffman's document referred to the license dated December 28, 1932, and stated that the license was in effect and that under the license of December 8, 1932, the American companies (including petitioner) had authority to enter into the contemplated agreement with the British companies.
The agreement of June 19, 1940, between the American and British companies called for a total payment of $ 384,000 by the British companies. Of that amount $ 100,000 was to be paid to petitioner, under some understanding between petitioner and New Jersey Breeze Corporations. It was paid to petitioner. Petitioner paid $ 50,000 to R. A. Coffman in accordance with the terms of the 1932 license agreement as amended under a supplemental agreement of January 30, 1940, *1154 between Coffman and petitioner. Petitioner retained $ 50,000, which gives rise to the issue presented in this proceeding.
The supplemental agreement of January 30, 1940, amended the "license contract dated December 8, 1932," to provide that Coffman agreed to accept a lump sum payment of*199 $ 50,000 from petitioner out of sums received by petitioner "in lieu of accrued and continued royalties" for the exclusive right under "his patents in the United Kingdom, except Canada," and "in lieu of royalties for a non-exclusive sub-license to be issued to either Plessey Company, Ltd. or Breeze Corporation of Great Britain, Ltd., for countries on the continent of Europe."
The agreement of June 19, 1940, between the two American corporations and the two British corporations related to Breeze products and to the Coffman engine starters, and it listed patents registered in the name of J. J. Mascuch of the New Jersey Breeze Corporations and patents registered in the name of Coffman. The terms of the agreement are broad and, since two groups of foreign patents are covered by the terms thereof, construction of the agreement would be necessary in order to determine whether in some instances there were assignments of particular patents, or licenses, or sublicenses. The record does not provide evidence upon which such clear distinctions throughout the agreement could be drawn definitively, but the agreement itself provided that the American companies would carry out its terms *456 by assigning*200 their respective and particular rights and interests, and that, in any case where their rights or interests were enjoyed merely by virtue of a license, they would forthwith assign all such rights either by way of a sublicense, or otherwise. The agreement provided, also, that the American companies would grant or cause to be granted nonexclusive licenses to the English companies covering the making, using, selling, and exercising of the rights in any part of the continent of Europe without any additional payment from the English companies. The agreement provided, in paragraph 7, that:
The terms of all licenses, assignments, or other documents required to carry this deed into full effect shall be agreed between the solicitors of the parties * * *.
The agreement provided for payment of $ 384,000 "to the American companies jointly." It did not contain any provision relating to any apportionment of the above total sum between New Jersey Breeze Corporations and petitioner.
The agreement recited that all of the parties had agreed mutually that as from the date of June 19, 1940, two earlier agreements, dated September 23, 1936, and July 3, 1937, were canceled and the terms of the new*201 agreement were substituted for both of the earlier agreements. The agreement of July 3, 1937, thus referred to, was the license agreement between petitioner and Plessey.
*1155 OPINION.
The Commissioner contends that the net amount of $ 48,415.23 which petitioner received in 1940 represented royalties and that, therefore, it constitutes ordinary income.
Petitioner seeks a benefit which was allowable for the year 1940 under section 711 (a) (1) (B) of the Internal Revenue Code as it applied to the year 1940. 1 Petitioner's argument is exceedingly brief, considering the nature of the agreements upon which it chiefly relies. Without citing any authorities in the law of patent assignments and licenses and without presenting any argument relating to the legal interests of petitioner in the Coffman patents or inventions, petitioner has been content to rely principally upon Edward C. Myers, 6 T.C. 258">6 T. C. 258, and Parke, Davis & Co., 31 B. T. A. 427. The argument of petitioner is simply "that such an agreement is a sale and not a license." The agreement to which petitioner refers is the June 19, 1940, agreement.
*202 Petitioner introduced in evidence three agreements signed by R. A. Coffman; the agreements of December 8, 1932, and January 30, 1940, with petitioner; and the agreement of May 21, 1940, transferring from Coffman an exclusive prepaid license to the English companies in British patents owned by Coffman. Petitioner introduced, also, the June 19, 1940, agreement of the two American and the two English corporations. Another agreement of the New Jersey Breeze Corporations with the British Breeze Corporation, dated September 23, 1936, was introduced. The materiality of the latter agreement has not been made apparent. The only officer of petitioner who testified was the secretary-treasurer. His testimony gives little light or explanation. An attorney who represented the English companies testified. His testimony is limited. The question presented must be decided from the agreements received in evidence.
*457 *1156 The record indicates that the June 19, 1940, agreement was entered into for reasons having some relation to the intercompany structure in which two American and two British companies were units. All of the stock of Breeze Corporation of Great Britain, Ltd., was owned by*203 Breeze Corporations, Inc., of New Jersey and the Plessey Co., Ltd. Petitioner was a subsidiary of the New Jersey corporation. The record indicates also that the British Air Ministry was interested in the arrangements covered by the June 1940 agreement, that $ 400,000 was loaned to Plessey by the British Government, and that Plessey purchased the British Breeze stock from New Jersey Breeze under a separate contract.
There is no testimony from any officer of petitioner and there is no document in evidence which directly explains the reason for the payment of $ 50,000 to petitioner out of the total sum of $ 384,000 which was paid by the English companies under the June 19, 1940, agreement. There is no evidence on the point of why $ 100,000 was set apart out of the $ 384,000 for Federal, except that $ 50,000 thereof was to be paid by Federal, petitioner, to Coffman. Counsel for petitioner merely stated at the trial that there was an agreement between Federal and its parent company that $ 100,000 was to be allocated to Federal. There is no evidence that all or part of the $ 50,000 retained by Federal was not royalties due and unpaid under the license agreement of July 3, 1937, with*204 Plessey, or that it was not in part a lump sum payment of future royalties under a new sublicense from petitioner. The officer of petitioner who appeared was not interrogated on this point, and the attorney who testified could not express any knowledge about the matter.
The question presented may not be disposed of solely under petitioner's failure of proof, however, because petitioner has offered documents upon the basis of which it seeks to bring the issue under the holding in Edward C. Myers, supra. The above mention of the state of the record is made for the purpose of pointing out that the record does not support any presumption or inferences about the $ 50,000 retained by petitioner.
If it is the theory of the petitioner that the agreement between Coffman and petitioner of December 8, 1932, was an assignment to petitioner of all of his rights under his American and foreign patents, rather than a license, we must reject that theory. After careful review of general authorities and of the authorities cited in the Myers and Parke, Davis & Co. cases, it is concluded that Coffman gave petitioner only an exclusive license, with the right to *205 make sublicenses under foreign patents, reserving to himself the legal title in all of his patents. See Hatfield v. Smith, 44 Fed. 355; Ridsdale Ellis, Patent Assignments and Licenses, 2d Ed., p. 73, par. 65. An instrument can not be construed as an assignment of patents where it expressly negatives *1157 the transfer of legal title. An assignment of an interest in an invention is a contract and, like all contracts, is to be construed so as to carry out the intention of the parties. Nicholson Pavement Co. v. Jenkins, 14 Wall. 422">14 Wall. 422. In the December 8, 1932, agreement Coffman expressly provided that the agreement was "merely a license agreement" and that it should not be construed as an assignment of any of the patents. As was said in Hatfield v. Smith, supra, it is true that an exclusive right to make, use, and sell may be an assignment and not a mere license, but the express provision in the contract retaining ownership of the patent in the "licensor" is not to be overlooked, nor is its significance to be disregarded. A licensee has no property in the patent. Moto Meter Co. v. National Gauged Equipment Co., 31 Fed. (2d) 994.*206
Petitioner could make a sale of property under the June 19, 1940, agreement only if it had obtained title to the Coffman foreign patents. It is our understanding of the legal effects of the December 8, 1932, agreement of Coffman that he did not assign his patents to petitioner. Furthermore, in clause "ninth" of that agreement, Coffman gave petitioner a right to grant sublicenses of his foreign patents for the manufacture, use, or sale in foreign areas. The license to do less than all three of the above is merely a license, Waterman v. Mackenzie, 138 U.S. 252">138 U.S. 252 (in this instance a sublicense). A sublicense can be granted only where the license expressly authorizes, and the main licensee is the agent of the licensor in negotiating a sublicense. Ridsdale Ellis, Patent Assignments and Licenses, supra, p. 770. It is our view that petitioner under the June 19, 1940, agreement could convey to the English companies or company no greater interest than it received under the Coffman agreement of December 1932 and that under that agreement petitioner could make only a sublicense. Nothing in the June 1940 agreement is in conflict with this view, *207 as far as the terms of the agreement itself show. In fact, the 1940 agreement expressly provided that where the American companies had interest only by way of licenses *458 they would transfer such interests by way of a sublicense.
It is clear that Coffman received $ 50,000 in 1940 by virtue of his license agreement of December 8, 1932. Petitioner's officer who testified so stated. The supplemental agreement of January 30, 1940, between Coffman and petitioner makes this clear. It stated that the $ 50,000 would be accepted by Coffman in lieu of accrued and continued royalties under his English patents. Also, the agreement which Coffman executed on May 21, 1940, was a prepaid license agreement which indicated that the license would not carry with it any future royalties and Coffman stated, in effect, that he had been paid a sum in advance which might have been due him as royalties under the license.
*1158 The implication of the provisions of the agreement of January 30, 1940, and of Coffman's agreement of May 21, 1940, is clearly that as far as his foreign patents, and particularly those in Great Britain, were concerned, the English companies received merely licenses either *208 direct from Coffman under the May 21, 1940, document or through petitioner under clause "ninth" of the December 1932 agreement.
Upon full and careful consideration of all documents and agreements which were made part of the record, and of competent authorities on general principles of law, our conclusion is that petitioner did not sell any property interests in 1940 to any British company. Under the arrangements represented by the agreements involved in this case, the situation here was entirely different from that in Edward C. Myers, supra, and Parke, Davis & Co., supra, and it is our view that those cases do not control the question here, but are distinguishable.
After concluding that petitioner sold no property in 1940, it is unnecessary to go further, because section 711 (a) (1) (B) applies only where there is a sale or exchange of property. For example, we are not obliged to decide just what the $ 50,000 which petitioner retained represented. The evidence does not, for example, establish that the $ 50,000 had any relation to interests in the Coffman patents and inventions. If it did, there is a strong suggestion*209 from all of the documents, in evidence that it represented one-half of accrued and future royalties under sublicenses which petitioner was permitted to retain under clause "ninth" of the December 1932 agreement with Coffman. Where a taxpayer is entitled to receive royalties and he accepts a lump sum payment in lieu of royalties, he has simply accepted a definite and determined amount instead of an indefinite amount which might thereafter be earned, and such lump sum payment is income. See J. M. and M. S. Browning Co., 6 B. T. A. 914, 930.
One further point deserves comment. Petitioner has not proved anything about a right to receive depreciation allowance on any property. Section 711 (a) (1) (B) requires that the property sold be of a character which is subject to allowance for depreciation. Counsel for petitioner, at the trial, referred to some expenses totaling $ 2,140.67 which it appears petitioner regards as expense which should be capitalized and recovered by depreciation allowances over some period of time. But no evidence was offered to show what these alleged expenses were. Respondent has allowed petitioner the above amount as some sort*210 of expense in 1940, reducing the amount of the taxable income to $ 48,405.23. The matter rests there.
It is held that petitioner is not entitled to exclude $ 48,405.23 from its normal tax net income for 1940 in computing its excess profits tax net income. Respondent's determination is sustained.
Decision will be entered for the respondent.
Footnotes
1. SEC. 711. EXCESS PROFITS NET INCOME.
(a) Taxable Years Beginning After December 31, 1939. -- The excess profits net income for any taxable year beginning after December 31, 1939, shall be the normal-tax net income, as defined in section 13 (a) (2), for such year except that the following adjustments shall be made:
(1) Excess profits credit computed under income credit. -- If the excess profits credit is computed under section 713, the adjustment shall be as follows:
* * * *
(B) Long-term Gains and Losses. -- There shall be excluded long-term capital gains and losses. There shall be excluded the excess of the recognized gains from the sale, exchange, or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property held for more than eighteen months which is of a character which is subject to the allowance for depreciation provided in section 23 (l) over the recognized losses from the sale, exchange, or involuntary conversion of such property. For the purposes of this subparagraph, section 117 (h) (1) and (2) shall apply in determining the period for which the taxpayer has held property which is of a character which is subject to the allowance for depreciation provided in section 23 (l).
[Note: Section 711 was added to the Internal Revenue Code by section 201 of the Second Revenue Act of 1940; subsection (B) was amended by section 208 of the Revenue Act of 1942 and the amendment was made applicable to years beginning after December 31, 1939, but not after December 31, 1941. Section 207 (a) of the 1942 Act amended section 711 (a) (1) (B)↩, and that amendment was made applicable to years beginning after December 31, 1941.]