This case comes before the court on plaintiffs’ motion filed July 16, 1975, requesting that the court adopt the recommended decision of Trial Judge Joseph V. Colaianni, filed June 8, 1975, pursuant to Buie 134(h), as the basis for its judgment in this case since defendant has failed to file a notice of intention to except thereto and the *299t.imft for so filing pursuant to the rules of the court has expired. Upon consideration thereof, without oral argument, since the court agrees with the recommended decision, as hereinafter set forth, it hereby affirms and adopts the same as the basis for its judgment in this case. Therefore, it is concluded that plaintiffs are entitled to recover $32,012.56 for 1961; $56,211.67 for 1962; and $66,274.81 for 1963, along with interest for each of the years as provided by law from the date of payment, and judgment is entered for plaintiffs accordingly.
OPINION OP TKIAL JUDGE
Colaianni, Trial Judge:This is a tax refund suit that arises as a result of Mr. Charlson’s disposition of patents1 to a corporation which was formed for the specific purpose of exploiting them. The question is whether the amounts received by plaintiffs in 1961, 3 962 and 1963 from the Germane Corporation were taxable as long-term capital gains as reported on plaintiffs’ joint federal tax return, or as ordinary income as defendant contends. The parties have stipulated that if plaintiffs prevail they are entitled to recover $32,012.56 for 1961, $56,211.67 for 1962, and $66,274.81 for 1963, along with interest as provided by law from the date of payment. For reasons hereinafter set forth, it is concluded that plaintiffs are entitled to judgment against the defendant for a refund of taxes in the amounts stipulated.
Bachgroimd Facts
The facts are fully detailed in the findings of fact which accompany this opinion and will be repeated only to the extent necessary to an understanding of the result reached.
In about 1942, plaintiffs, as partners, purchased the assets of a bankrupt Minneapolis, Minnesota, machine shop. In early 1946, plaintiffs incorporated their business as the Char-Lynn Company. Plaintiffs and their daughter, Mrs. Donna Herzog, were for all relevant times the only shareholders of the corporation. Mr. Charlson is a self-educated engineer and businessman who served as president and the *300guiding light of Char-Lynn. During the early years, plaintiffs’ business was primarily a machine shop specializing in die-casting. While operating as a machine shop, the business grew from annual sales of approximately $500,000 in 1950 to $2,900,000 by 1958. Char-Lynn employed 120 persons in 1958.
Notwithstanding its growth, Mr. Charlson recognized the need, for Char-Lynn to develop a unique product line if it was to be successful. Accordingly, Char-Lynn purchased a patented pneumatic tire spreader which it redesigned and marketed until 1949. In the early 1950’s it manufactured and marketed a power pack. In 1954 or 1955 Mir. Charlson conceived, and later patented, a hydraulic valve device. ‘Production of the device did not begin until about 1951.
As a result of his continuing search for a unique product line, Mr. Charlson became aware of the market potential ' for a high-torque, low-speed hydraulic motor. Mr. Charlson sought the assistance of various hydraulic experts to design and develop such a motor, but was told that such a motor did not exist and could not be built. Charlson decided to pursue the design on his own and, after considerable reflection, in late 1955, conceived his idea for a high-torque, low-speed motor. As conceived, the motor’s key components consisted of a rotatable gerotor and a commutator valve mechanism for orbiting of the gerotor. He discussed his conception with a Mr. Harold Darr, the owner of an independent engineering consulting firm, who had assisted Mr. Charlson in the past on other projects. After considerable analysis and study, Mr. Darr concluded that the conception was sound and proceeded to build a model. Following some modifications and refinements in the design, the orbit motor was successfully reduced to practice.
A patent application on the invention was prepared and filed in the Patent Office on June 8,1956. United States Letters Patent No. 2,821,171 issued in the name of Lynn L. Charlson on January 28,1958.
Upon learning in October of 1957 of the eventual allowance of a patent on his orbit motor invention, Mr. Charlson gave serious thought to evaluating the commercial application and potential of the orbit motor. After discussions with *301Mr. Darr, wbio personally made inquiries regarding exploitation of the motor patent with companies active in the fluid power field, Mr. Charlson decided to sell his orbit motor patent when it issued. Mr. Charlson’s decision to sell his patent was based on a variety of considerations, including: a desire to keep the patent, insofar as his estate was concerned, and independent business asset isolated from any possible business reversal which Char-Lynn might suffer; a concern that Char-Lynn’s limited capabilities could not adequately exploit the patent; a desire not to increase his already heavy workload at Char-Lynn; and his fear of having to include the patent in any future sale he might make of Char-Lynn.
Having decided to sell his patent, Mr. Charlson next considered the various sale options open to him. He was obviously interested in obtaining the best and highest price from a purchaser who would be monetarily motivated to exploit the full potential of the patent. Mr. Charlson was aware that the newly patented motor did not have proven applications or marketability, and was quite revolutionary in design. Thus, he did not feel that a large manufacturing company or a professional patent licensing company would offer him a fair price. He also feared that a large company might agree to purchase the patent and then not properly exploit it. The record does not indicate that he ever considered or approached any medium-size companies.
Mr. Charlson decided to sell to a group of his business associates and personal friends, and in early 1958 approached' Ward B. Lewis, Esq., Char-Lynn’s corporate counsel, his own personal attorney, and his long-time friend, to determine if he and three other individuals would be willing to form a new corporation to purchase his patents. The three others consisted of Mr. Harold Darr, who in 1959 was still a consulting engineer but would, after suffering a heart attack, become a full-time employee of Char-Lynn in 1964; Mrs. Beverly Scott, who was at the time a highly valued and trusted administrative assistant to Mr. Charlson at Char-Lynn; and Mr. Raymond O. Jensen, who had been a friend of Mr. Charlson and an employee of Char-Lynn for many years and was then serving as its comptroller.
*302The above individuals, in addition to being trusted, longtime business associates of Mr. Charlson who had each, in his own way, contributed to the growth of Char-Lyxm, were suggested by Mr. Charlson because each possessed diverse business talents. Specifically, Mr. Lewis had proven legal experience; Mr. Darr had engineering and design capabilities; Mrs. Scott had administrative and coordinating experience ; and Mr. Jensen had a good business background. At the time he approached them, Mr. Lewis explained that there would be no restrictions or limitations of any kind on the new corporation’s ownership of the Charlson patents.
The four, partly because of their friendship with Mr. Charlson and partly because they thought it could prove to be monetarily rewarding, agreed to form the Germane Corporation to purchase the Charlson patents.
Each of the four shareholders paid for their own 300 shares of stock at the stated price of $1.00 per share. Mr. Charlson did not lend nor give any of the incorporators money to cover the purchase of their 300 shares of Germane stock. No other Germane stock beyond the initial 1,200 shares was issued during its entire existence. These individuals, except in the case of Mr. Lewis, who shortly after issuance of the stock transferred it to Mrs. Lewis, were the only shareholders of Germane during its entire existence.
Germane’s certificate of incorporation issued on September 2, 1958. At the time of incorporation, Mr. Raymond O. Jensen was Germane’s president; Mrs. Beverly Scott was vice-president and secretary; Ward B. Lewis, Esq., was vice-president and assistant secretary; and Harold N. Darr was treasurer. The above individuals constituted the only directors and office-holders of the corporation throughout its entire existence, except for Mr. Darr, who died in 1967. Upon the death of Mr. Darr, Mr. Jensen took over the position of treasurer while remaining as Germane’s president. Neither Mr. Charlson nor any member of his immediate family was ever an officer or director of Germane. Mr. Charlson never attended any of the meetings of Germane’s board of directors. Moreover, he was not an incorporator of Germane and never owned any shares of that company. The record does *303not show and defendant does not contend that Mr. Charlson made any loans to the officers or directors of Germane.
After the formation of Germane, Mr. Lewis, as Germane’s representative, and Merchant & Merchant, an independent patent law firm as Mr. Charlson’s representative, drew up a patent sales agreement to transfer all of Mr. Charlson’s rights, title and interest to 'his various patents and patent applications to Germane. Mr. Charlson did, however, retain his right to:
(1) inspect samples of orbit motors made by any of Germane’s licensees and make recommendations for quality control purposes;
(2) cancel the contract upon Germane’s failure to make the agreed to payments; and
(3) bring patent infringement suits in conjunction with Germane, but without the right to control the action.
In exchange, and as consideration for the transfer of all rights, title and interest to the various Charlson patents and applications, Germane promised to pay Mr. Charlson 80 percent of all royalties it received from the licensing of the various patents. Germane was to receive 20 percent of the royalties. The 80/20 percent arrangement was substantially similar to other arm’s-length patent sale agreements.2
Concurrent with the execution of the sales agreement, Germane granted Char-Lynn a nonexclusive license to make and use devices covered by the patents and patent applications in the United States and to sell them throughout the world. Char-Lynn manufactured approximately 100 motors in 1958. It increased its production in 1959 to about 1,000 motors. Some 1,500 motors were produced by Char-Lynn in 1960. Production doubled over the succeeding years so that *304by 1965 Char-Lynn produced about 80,000 units. The number increased to 120,000 for 1966 and approximately 200,000 by 1970. As a result of this growth, the orbit motor had, by 1965, become Char-Lynn’s most important product. In terms of dollars, the sales of the hydraulic motors increased from $177,796 in 1960 to $7,409,529 in 1968. Moreover, by 1970 Char-Lynn’s total tales amounted to approximately $19,-900,000 and it employed some 600 persons.
Germane also granted other licenses. In 1961, Danfoss A/S, a Danish corporation, was granted an exclusive license to make, use and sell devices covered by the patents in Europe. The granting of an exclusive license to Danfoss required Char-Lynn to give up its right to sell its motors throughout the world. The record clearly demonstrates that Char-Lynn had not by 1961 established a worldwide program to sell its orbit motors and it was thus willing to give up its unexercised rights. Danfoss’ need for technical assistance in setting up its production facilities for the orbit motor, and, as well, its need for an immediate supply of motors until it had the opportunity to tool up and establish its own production lines, required the assistance of both Mr. Charlson and Char-Lynn during the negotiations of the Danfoss A/S license. Germane was represented by Mr. Lewis during the negotiations.
Germane also granted an exclusive license in 1961 to Moore Hydraulics Pty., Ltd., of Australia, hereinafter referred to as “Moore.” The license granted Moore the exclusive right to make, use and sell orbit motors in Australia and New Zealand. It appears that sales of the motors in that area did not materialize to the point where Moore could justify the tooling up costs required to produce the motors in Australia, and thus Moore has 'been satisfied to purchase motors from Char-Lynn for resale in its licensed area. During the license negotiations with Moore, Mr. Jensen represented Germane. Mr. Charlson and Char-Lynn attended the negotiations.
In the early 1960’s, Boss Gear Company had expressed an interest in obtaining a license under the Germane patents. However, as a result of Boss’ refusal to pay Germane a standard 5 percent royalty, the license negotiations failed. Boss, nonetheless, went on to manufacture a steering device *305for off-the-highway equipment, which Char-Lynn’s sales engineers felt infringed the orbit motor patent. As a result, a patent infringement suit was jointly brought by Germane, Char-Lynn, and Mr. Charlson against Ross Gear and its successor in interest, TRW, Inc. The infringement suit was settled by a cross-licensing agreement executed on August 2, 1966, which, in accordance with the terms of the agreement, granted TRW, Inc., a nonexclusive license to manufacture and sell orbit motors for use in a power steering system of specific design.
The only other Germane licensee was Lamina, Inc., hereinafter referred to as “Lamina,” a Michigan corporation whose principal business in the early 1960’s was the manufacture of lamination dies for the electrical motor industry and the manufacture of bronze bushings and wear plates for the machine tool industry and the general die industry. Lamina became interested in the orbit motor as a result of its work toward the development of a transportable, powerful drilling apparatus for use in restricted areas. The orbit motor was ideally suited for such an assignment because it did not need a separate speed reduction unit, such as was required by electric motors. As a result, on April 3,1964, Lamina was granted an exclusive license to manufacture the patented orbit motor provided that the main motor shaft was equipped with a permanently-affixed device (such as a chuck or collet) adapted to hold tools for rotary machining operations.
By subsequent negotiations, the parties ultimately agreed to a broader 1967 agreement in which Germane granted Lamina a nonexclusive license to sell the orbit motor to the machine tool industry.
A review of the licensees indicates that Char-Lynn’s operations were the broadest in scope. This is evident from the fact that two of the licensees were exclusively foreign based. Particularly, Danfoss operated solely in Europe, while Moore Hydraulics bought motors from Char-Lynn for resale in Australia and New Zealand. The Ross Gear Division of TRW was authorized to use the orbit motor in connection with a power steering system of a specific design. Only Lamina, with its license to sell the motor to the machine *306tool industry, provided potential competition to the orbit motors made and sold by Char-Lynn.
In late 1968, Mr. Charlson, for reasons of health, decided to sell Char-Lynn. He did not inform any of the Germane stockholders of his decision, but Mrs. Scott, as a result of her employment at Char-Lynn, learned of this decision in August of 1970. In the meantime, by late 1969, the shareholders of Germane had independently, and without knowledge of Mir. Charlson’s intentions, decided to sell either the Germane stock or its assets, i.e., its patents. Germane’s decision was based on a variety of considerations, including:
1. The shareholders had. aged and wanted to divorce themselves of these additional responsibilities;
2. Mr. Darr had died and that left only three directors, none of whom was technically competent, to make all of Germane’s decisions; and
3. The patents had proved to be of great value and their successful exploitation was beyond Germane’s fairly amateur capabilities.
Germane did not inform Mr. Charlson nor any of its licensees of its decision to sell. Instead, it hired an independent patent attorney, Dan Stice, Esq., who was active in the licensing of patents, to arrange a sale. As a result of Mr. Stice’s efforts, on June 30,1970, Messrs. Lewis and Stice visited the Eaton Corporation in Cleveland, Ohio. They met with two Eaton patent attorneys, who informed them of Eaton’s interest in the Germane patents.
During this period of time, Mr. Charlson was engaged in serious negotiations for the sale of Char-Lynn stock with several companies, including the Sperry Rand Company. A sale of Char-Lynn to Sperry Rand was imminent when Eaton, who was then negotiating with Germane, approached Mr. Charlson about buying Char-Lynn. Eaton notified plaintiff and his counsel, Bert B. Rand, Esq., that it had already been approached by Germane, and that it was interested in purchasing the Germane patents.
As a result of the discussions, Eaton made an offer to buy Char-Lynn which was better than Sperry Rand’s offer. In addition, Eaton agreed to pay Mr. Charlson 8 million dollars ($8,000,000) for all of his right, title and interest in the balance of the purchase price due him from Germane under *307the patent sales agreement. Eaton conld have refused to close with Germane if its negotiations with Mr. Charlson involving the sale of his residuary rights were unsuccessful. On December 28,1970, the sales between Eaton Corporation and Germane and between Eaton Corporation and Mr. Charl-son were consummated. Each party to these transactions was represented by independent counsel of its own choice.
For at least the years in question, 1961 through 1963, inclusive, plaintiffs computed their federal income tax and filed their returns on the premise that the payments they received from Germane in consideration for the transfer of the Charlson patents and applications were taxable 'as capital gains. On audit, the Internal Eevenue Service determined that the payments were not entitled to capital gains treatment and assessed deficiencies accordingly. Plaintiffs paid the assessments and upon formal disallowance of their timely-filed claims for refund, brought this action.
Issues
Defendant argues that the royalty payments from Germane to Mr. Charlson under their patent sales agreement are ordinary income rather than capital gains, because, for the purposes of 26 U.S.C. § 1235, Germane is a sham corporation and/or controlled by Mr. Charlson. Plaintiffs, on the other hand, contend that the royalties they received are entitled to capital gains treatment under 26 U.S.C. § 1235 since Mr. Charlson exercised no control over Germane and since Germane was an independent corporation which conducted its own business to advance its own interests without outside intervention or interference. Each of defendant’s contentions will now be considered.
Germane was not Controlled by Mr. Charlson
Section 1235, which deals with the sale or exchange of patents, provides in pertinent part:
(a) General. — A transfer (other than by gifts, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capi*308tal asset held for more than 6 months, regardless of whether or not payments in consideration of such transfer are—
(1) payable periodically over a period generally coterminous with the transferee’s use of the patent, or
(2) contingent on the productivity, use, or disposition of the property transferred.
*****
(d) Belated persons. — Subsection (a) shall not apply to any transfer, directly or indirectly, between persons specified within any one of the paragraphs of section 267(b); except that, in applying section 267 (b) and (c) for purposes of this section—
(1) the phrase “25 percent or more” shall be substituted for the phrase “more than 50 percent” each place it appears in section 267 (b), and
# * * * *
Thus, 26 U.S.C. § 1235 does not speak in terms of sham or controlled corporations. Instead, § 1235(a) confers capital gains treatment on a “transfer * * * of property consisting of all substantial rights to a patent * * * by any holder * * *.” However, § 1235(d) denies such treatment to transfers, “directly or indirectly,” 3 between certain related persons. In particular, a corporation in which the holder owns more than 25 percent in value of the outstanding stock, directly or indirectly (with 26 U.S.C. § 267(c) attribution rules applying), is a related person under § 1235(d).
It is clear from the facts and not disputed by defendant that Germane is not related to Charlson within the literal meaning of § 1235(d). Nor has defendant suggested that any of the rules or guidelines which define “related persons” be interpreted to cover the situation at bar. Indeed, any such interpretation would be directly contrary to the manner in which the statute has been previously applied. In Lee v. *309United States, 302 F. Supp. 945 (E.D. Wis. 1969), tbe bolder owned 24 percent of tbe stock of tbe transferee corporation but was still found to be entitled to capital gains treatment. See also B. J. Semel, 33 CCH Tax Ct. Mem. 248 (1974), a case involving 26 U.S.C. § 1239, in wbicb tbe court applied the 80 percent rule literally. Thus, even assuming that Germane was a controlled corporation, it would still be necessary to demonstrate that tbe § 1235 (d) requirements existed in order to conclude that Germane was “related” to Mr. Charlson.
Nevertheless, it is equally clear that retention of control by a bolder over an unrelated corporation can defeat capital gains treatment, if the retention prevents tbe transfer of “all substantial rights.” This is because the holder’s control over the unrelated transferee (within the meaning of § 1235) places him in essentially the same position as if all substantial rights had not been transferred. The purpose and policy of § 1235(a), as expressed in the legislative history, provides support for such an interpretation. Specifically, with the obvious intent of having a transferor’s acts speak louder than his words in establishing whether a sale of a patent has occurred, the Senate Finance Committee stated:
* * * [i]t is the intention of your committee to continue this realistic test * * * developed under prior case law * * *, whereby the entire transaction, regardless of its formalities, should be examined in its factual context to determine whether or not substantially all rights of the owner in the patent property have been released to the transferee, rather than recognizing the less relevant verbal touchstones * * * in the transfer agreement * * *.4
See also Oak Mfg. Co. v. United States, 301 F. 2d 259 (7th Cir. 1962), where the court concluded that retention of control over substantial rights by the transferor rendered the “sale” an agency agreement, which contemplated a continuing relation rather than a bona fide sale and release of rights. It should be stressed that § 1235(d) was not intended to be *310an exclusive or exhaustive statement of the impact of control over a § 1235(a) transaction, even though the concept of related person is essentially based on control.5
Both sides rely on Puschelberg v. United States, 330 F. 2d 56 (6th Cir. 1964). In that case, Puschelberg and a joint inventor were awarded a patent for a disposable blood filter. They, in turn, granted Baxter Laboratories, Inc., an independent ethical pharmaceutical house in the drug industry, an exclusive license under the patent. Baxter at the same time gave Puschelberg’s company (“Fabricated”) a nonexclusive license to manufacture the filters which Baxter would buy from it at a set price. The sales agreement also provided that if Baxter licensed anyone else, a percentage royalty based on sales would be paid to the co-inventors. The Government in that case argued that Puschelberg and his co-patentee did not transfer “all substantial rights to * * * [the] patent” to Baxter as is required by 26 U.S.C. § 1235(a), but that Puschelberg and the co-patentee retained substantial manufacturing rights. The facts in Puschelberg indicate that Baxter only granted one license, and that was to Puschel-berg’s corporation, Fabricated. However, Baxter did have the right to grant as many licenses as it desired. The Sixth Circuit was unpersuaded that any tacit agreement or retained control existed and held that the co-patentees had disposed of all their rights under the patent.6 Specifically, the court stated, at p. 61:
We do not so construe the agreement. Baxter clearly acquired the right to manufacture the filters under the *311agreement. The agreement also gave Baxter the right to have the filters manufactured for it. This did not confer upon the taxpayer any right to manufacture the filters, but merely authorized Fabricated to manufacture the filters if Baxter asked it to do so. The District Judge found that it was the understanding of both of the contracting parties that in executing the license agreement, the co-inventors were disposing of all their rights to the invention.
Puschelberg involves a legal question which is quite similar to that which defendant presents in this case. However, the case at bar is factually distinguishable from Puschelberg. Baxter Laboratories was a large, independent, well-established Delaware corporation. There was no showing that the co-inventors and Baxter had ever had any prior dealings. The assignment to Baxter and the nonexclusive license back to Fabricated were arm’s-length transactions. Moreover, the fact that Baxter did not have a need for more filters than Fabricated could produce provided a business justification for Baxter’s issuing only one license. These facts are contrasted with the facts in the case at bar where close personal friendships and business association between Mr. Charlson and Darr, Scott, Jensen, and Lewis existed for many years prior to the formation of Germane. And, although neither Darr, Scott, Jensen, nor Lewis was related in any sense to Charlson, each had either worked for Mr. Charlson or Char-Lynn at some time. These circumstances make more probable, whether pursuant to some mutual understanding or not, the existence of retained control.
However, this probability falls far short of proof. Indeed, the record shows that in late 1957 the main Charlson patent was just about to issue and plaintiff felt that he was at a disadvantage in trying to negotiate a sale of an unproven product at the highest price with the larger companies. Mr. Charlson, for the very same reason, feared that the larger companies would not proceed with the full exploitation of the patent. On the other hand, Mr. Charlson felt that Germane would be fair to him.
*312The explanation for his decision against either selling the patents to Char-Lynn 7 or haying Char-Lynn manufacture the motor under a license from him appears in the trial record. Particularly, the record clearly establishes Mr. Charl-son’s desire to reduce his workload at Char-Lynn. Mr. Charlson also explained his suggestion of Darr, Scott, Jensen, and Lewis as shareholders in Germane by the fact that they all possessed skills valuable to a small, new patent licensing corporation. However, it is also apparent that the choice of shareholders was greatly influenced by Mr. Charlson’s friendship with these people and his thought, no doubt present, that they would be less likely to do things adverse to his interests than a large unknown company would.
The trial record as a whole did not show that Mr. Charlson controlled the operation of Germane. While he or a Char-Lynn representative was present at various stages of some of the negotiations between Germane and the other licensees, this presence is explainable on the basis of either Char-Lynn’s interest as a manufacturer and licensee or of Charl-son’s own monetary interest in seeing that the best licensees were selected. Char-Lynn’s interest resulted from its sale of motors to Danfoss, Moore Hydraulics, and even Lamina for varying times until each could develop its own manufacturing facilities. In addition, Char-Lynn and Mr. Charlson were joint plaintiffs, along with Germane, in the Eoss Gear infringement suit. Char-Lynn obviously did not want the scope of its license adversely affected by the sale of motors by the others contrary to the terms of their licenses. Charlson’s participation in the licensing negotiations was advantageous to Germane because as the inventor he could explain the technical difficulties and advantages of the motor to the prospective licensees, and otherwise generally be of aid to Germane in obtaining good licensing terms. It obviously was to Germane’s and Mr. Charlson’s mutual advantage to obtain as high a royalty as possible because of their respective rights *313to 20 percent and 80 percent of the royalties collected from the licensees.
The record clearly shows that Charlson, Char-Lynn, and Germane operated quite effectively as a group and were solicitous of each other’s individual interests as well as their mutual interests, of which the financial success of the motor was by far the most important.
Finally, the patent sales agreement itself does not contain any terms which can be pointed to as evidence of Mr. Charlson’s control or domination of Germane. Charlson never exercised his retained right to supervise quality control procedures in such a way as to eviscerate Germane’s rights, as owner of the patent. Nor has defendant pointed to anything which shows that Mr. Charlson and not Germane decided the terms of the various license agreements. Indeed, the record does not establish that Mr. Charlson exercised what have come to be recognized as proprietary acts over the transferred patents. William W. Taylor, 29 CCH Tax Ct. Mem. 1488 (1970). The right of Charlson to terminate the license for nonpayment of the royalties is not a substantial retained right, Bell Intercontinental Corp. v. United States, 180 Ct. Cl. 1071, 381 F. 2d 1004 (1967); Arthur M. Young, 29 T.C. 850 (1958), and does not suggest on the facts of record a retention of control through use of a threat to terminate. The inventor-transferor’s right to bring infringement suits in conjunction with the patent purchaser is likewise not a substantial right in the absence of the additional right to control and direct the suit. This control is especially critical where the transferor’s compensation for his patent is calculated on a royalty-use percentage basis. Oak Mfg. Co. v. United States, supra. In this case, Mr. Charlson did not have the right to control or direct infringement suits. Certainly, defendant has not pointed to any action by Mr. Charlson in connection with the Eoss Gear infringement suit, which was brought by Germane, Mr. Charlson and Char-Lynn, that would support any charges of control over that suit by plaintiff.
In summary, although the many and varied business and personal relations between the shareholders of Germane and Mr. Charlson were such that they would make any patent *314sales arrangement ¡between them highly conducive to the exercise of impermissible control by the transferor over the transferee, the proof of record fails to support defendant’s charges. While such control was easily possible, the plaintiff has adequately demonstrated that it did not in fact exist. The defendant has failed to present facts to substantiate its allegation of control. By the patent sale agreement, Charlson transferred all substantial rights in his various patents and applications to Germane. Germane exercised these rights according to its own discretion, although it frequently sought, received, and followed the recommendations of Charlson.
Defendant’s argument that Germane’s license program is also evidence of Mr. Charlson’s control and domination of Germane will next be considered. As previously mentioned, the licensees, Danfoss and Moore, were exclusively foreign based and thus provided no competition to Char-Lynn’s operations in the United States. The license to the Boss Gear Division of TBW, for a particularly designed power steering system, similarly did not offer much competition to Char-Lynn. Only the license to Lamina, which authorized the sale of orbit motors to the machine tool industry, could in theory compete with Ohar-Lynn. It should first be recognized that Char-Lynn did indirectly benefit from some of the above licenses since it was called upon to supply orbit motors for the licensees until they were able to set up their own production facilities. However, this small indirect benefit hardly establishes defendant’s charge.
To the contrary, it was explained that a desired licensee, one with adequate financial backing and of medium size, never appeared and requested a license. Moreover, the trial record establishes, without contradiction by defendant, that a deficiency of a key component, the gerotor, of the orbit motor seriously limited the total number of motors which could be produced. Particularly, the record establishes that each of the licensees, with the possible exception of Danfoss, purchased gerotors from the Nichols Company. Although various efforts were made to both develop a second source and to have the Nichols Company expand its production (which was eventually done), a serious shortage of gerotors remained *315throughout Germane’s existence. The thrust of the uncon-tradicted testimony at trial established, because of the shortage of gerotors, that the granting of additional licenses would only result in a large number of licensees making the same number of orbit motors. Thus, there would not be an increase in the amount of royalties that Germane could collect and under these circumstances there was no incentive for it to actively seek licensees.
A review of Myron C. Poole, 46 T.C. 392 (1966), indicates that factors which are not present in the case at bar convinced the Tax Court of plaintiff-Poole’s nonentitlement to capital gains treatment for monies received from Eevol-vex. In Poole, the inventor of the rotating mobile home window “sold” his patent to the Eevolvex Corporation, a company which conducted substantial business activities in the sense of Moline Properties v. Commissioner, 319 U.S. 436 (1943), but which Poole completely dominated and controlled. The facts in that case show that Poole was president of Eevolvex and owned 50 percent of the stock outright with a substantial portion of the remainder being constructively held for him. Poole also owned 80 percent of the outstanding stock of Ventoura Corporation. Ventoura actually manufactured mobile homes with rotating windows. Eevolvex, which purportedly purchased the patent, licensed Ventoura on a nonexclusive basis. Thus, at times Poole signed both' parts of two-party agreements between Ventoura, Eevolvex and Poole; one part as president of Eevolvex, and the other part as Poole, the inventor, or as Poole, the president of Ventoura Corporation. The Tax Court found that:
The terms of these contracts were such that Eevolvex could never earn any significant income; it was merely a conduit to pass the royalties through to Poole. [46 T.C. at 404.]
In addition, Poole admitted to having Eevolvex cancel the license of its only other licensee when he felt it was in the best interests of Ventoura to have an exclusive license. Thus, the court concluded that “* * * Poole used his control of Eevolvex in such a way as to enhance the profits of Ven-toura — but not so as to make profits for Eevolvex.” Accordingly, using the “doctrine of step transactions,” whereby—
*316* * * tbe tas consequences of a series of transactions are ascertained, not from the form of each transaction, but from a comparison of the economic realities at the beginning and at the conclusion of the series * * * [46 T.C. at 402]
the Tax Court held that:
* * * the transfer of patents from Poole to Revolvex was not a transfer to an unrelated person, as contemplated by section 1285, because it was, in substance, an indirect transfer to Ventoura, a related person. The patents remained within essentially the same economic unit and subject to the holder’s [Poole’s] control. [46 T.C. at 408.]
In the instant case, Mr. Charlson had no interest, stock or otherwise, in Germane. Moreover, there has been no showing that Germane deliberately limited the number of licenses to benefit Mr. Charlson and/or Char-Lynn. Indeed, Germane’s ownership over the patents is evidenced from its sale of the same to Eaton Corporation after apparently taking into consideration only what was most advantageous to Germane and its shareholders.
On balance, it is concluded that the 12-year business arrangements between Germane, Char-Lynn, and Mr. Charlson were cordial and founded on long-established friendships, as well as upon mutually beneficial business interests. The dealings between the parties may have deviated appreciably from the standard business model of self-interest, coercive bargaining, and partisan frictions which the Government impliedly urges as the appropriate standard for comparison. Nonetheless, the disposition of Charlson’s patents and applications to Germane, since it did transfer all of his substantial rights under his patents and applications to Germane, was not a sale of patents within essentially the same economic group and does qualify under 26 U.S.C. § 1235 for capital gains treatment.
Germane was nota Sham Corporation
In addition to defendant’s argument that Germane was controlled by plaintiff, defendant also urges that Germane was a sham corporation and I now turn my attention to con*317sider the merits of this latter contention. Defendant’s sham corporation argument requires an approach which is fundamentally different from its “control” argument. Under the “control” argument, defendant in effect admitted the existence of Germane but insisted that it was controlled by Mr. Charlson and that no substantial rights of Charlson, within the meaning of 26 U.S.C. § 1235, were transferred to Germane under their patent sale agreement. On the other hand, under the sham corporation argument, defendant not only does not, for tax purposes, concede the existence of Germane, but, to the contrary, denies its very existence. Commissioner v. Court Holding Co., 324 U.S. 331 (1945); Higgins v. Smith, 308 U.S. 473 (1940); Gregory v. Helvering, 293 U.S. 465 (1935).
Accordingly, defendant must now urge that all of Germane’s activities, including the licenses it granted, were for all intents and purposes actually conducted and/or awarded by its individual shareholders operating as a noncorporate group. Fleshing out defendant’s sham theory, it follows that royalties received by the noncorporate group would be taxed at a rate dictated by the various individual licenses. Specifically, receipts from a nonexclusive license would be treated as ordinary income, while royalties from an exclusive license, which could perhaps qualify as a sale, might be entitled to long-term capital gain treatment.8 See Estate of Klein, 184 507 F. 2d 617 (7th Cir.1974), rev'g 61 T.C. 332 (1973), cert. denied, 421 U.S. 991 (1975); First Nat’l Bank of Princeton v. United States, 136 F. Supp. 818 (D. N.J. 1955); Vincent A. Marco, 25 T.C. 544 (1955).
A threshold problem which defendant’s sham theory encounters is its relevancy, for tax purposes, to Mr. Charlson. Indeed, the sham theory, if it is to have any vitality, must be grounded on the proposition that Mr. Charlson, as the inventor and holder of the patents, was a member of the non-corporate group which granted the licenses to Danfoss, Moore, Char-Lynn, the Boss Gear Division of TEW, and Lamina. The fallacy of defendant’s theory becomes evident after a moment’s reflection because even assuming that *318Germane is a sham corporation, Mr. Charlson is still entitled to § 1235 benefits so long as Germane is not a related or controlled sham corporation. In other words, under § 1235, Charlson can sell either to a sham or a bona fide corporation but he cannot sell to a controlled or related sham or to a controlled or related bona fide corporation. Thus, showing that Germane is a sham, without showing that Charlson is a member of the noncorporate group that remains after the corporate facade has been stripped away and without showing that the group runs afoul of the conditions of § 1235 (d), will not suffice to deprive Charlson of the capital gains benefits afforded by that section.
In this case, it is clear that Charlson was not a member of the Germane group, even though it was stated heretofore that Germane, Char-Lynn and Mr. Charlson operated quite effectively together. It has previously been amply demonstrated that Charlson did not control Germane’s activities or dictate its acts. It is, of course, recognized and acknowledged that by itself, lack of control does not establish lack of membership in the group under consideration. Indeed, Charlson could have been a member of the group without controlling it. However, the evidence of record fails to establish that Mr. Charlson was a member of a noncorporate group which owned and controlled his patents. To begin, defendant has not shown that he ever participated, or was given the opportunity to participate, in business meetings called by Germane to discuss its licensing procedures and policies. There certainly was no showing that Mr. Charlson participated in any day-to-day business meetings of Germane. Finally, aside from being Germane’s largest creditor, Mr. Charlson had no economic interest in it. It is important to reemphasize at this point that a creditor interest is fundamentally different from a profit or equity interest.
Not only does the sham corporation theory fail because of defendant’s failure to show that Mr. Charlson was a member of a noncorporate group which in reality conducted the business affairs of Germane, but it also fails for the more important reason that the trial record convincingly demonstrates that Germane was a viable entity that conducted business to advance its own interests. The trial record establishes *319that Germane did conduct substantial business activities in the sense of Moline Properties, supra, by holding and exploiting the patents through a scheme of centralized management independent of the shareholders’ personal resources and careers. See, e.g., Commissioner v. Laughton, 113 F. 2d 103 (9th Cir. 1940). Moreover, Germane’s shareholders and directors conducted its 'business with Germane’s self-interest in mind rather than with simply their own separate, individual self-interests in mind. As a result, Germane made substantial earnings and passed them along to its shareholders. Its 20 percent share of the royalties grew from about $12,725.10 in 1958, when it paid $8,100 in salaries and $2,463 in dividends, to a peak of $219,825.64 in 1969, when it paid $10,050 in salaries and $86,524.25 in dividends.
It should also be emphasized that the Germane shareholders gained no particular tax advantages by operating as a corporate business entity. At this point, it is worthwhile to compare Higgins v. Smith, supra, which involved a sale by a sole shareholder to a corporation where the shareholder sought to treat the sale as a taxable transaction between two taxable entities for purposes of recognizing a loss deduction, with Moline Properties v. Commissioner, supra, where the taxpayer-shareholder wanted the corporate form disregarded in order to avoid double taxation on the sale of assets. In this instance, Germane was a personal holding company, and, as such, was subject to a personal holding company tax for any monies it retained. 26 U.S.C. § 541, et seq. (1970). To avoid this added tax, Germane distributed its income, within the meaning of the personal holding company tax provisions, to its shareholders who would report the dividend as ordinary income. The primary result is that Germane could not be used to accumulate royalty income, taxed at corporate rates, and to shield it from the higher tax rates for individuals. The absence of any definite tax advantage to operating as a corporation tends to reinforce the facts indicated that Germane was organized and operated for business purposes and that it was not a sham.
In sum, Germane was a viable corporation which owned its own assets, conducted its own licensing, earned its own money, and distributed it as it saw fit to advance its own *320needs and interests. The facts of this case dictate that Germane was not a sham corporation.
It must, therefore, be concluded that the sales agreement between Mr. Charlson and Germane did in fact transfer all of Charlson’s substantial rights to his patents and applications in accordance with the terms of 26 U.S.C. § 1235 and plaintiffs are entitled to long-term capital gains treatment for payments received from Germane pursuant to said sales agreement. Accordingly, plaintiffs are entitled to recover $82,012.56 for 1961; $56,211.67 for 1962; and $66,274.81 for 1963, along with interest for each of the years as provided by law from the date of payment.
FINDINGS OF FACT
1. Plaintiffs on March 25, 1971, filed their timely petition pursuant to 28 U.S.C. § 1491 for recovery of income taxes which plaintiffs alleged were illegally and erroneously assessed against and collected from them for each of the years 1961, 1962 and 1963.
2. Defendant on August 4,1971, filed its answer, admitting the timeliness of the petition and all other facts on which the jurisdiction of this court is based.
3. During the years 1961,1962 and 1963, and prior thereto, Lynn L. and Beryl W. Charlson were citizens of the United States, husband and wife, residing in the city of Minneapolis, Minnesota. Their federal income tax returns for each of the above years were filed with the District Director of Internal Eevenue, St. Paul, Minnesota.
4. After working in several different jobs, Mr. Charlson, a self-educated engineer, entered into a partnership for the making of carbonators and drink dispensers. In 1941 the partnership employed Mr. Raymond O. Jensen as a bookkeeper. The partnership also used the legal services of Ward B. Lewis, Esq. Plaintiff in 1942 sold his interest in the partnership for $30,000.
5. In May of 1942 plaintiffs, as partners, purchased the assets of a bankrupt machine shop located in Minneapolis.
6. In early 1946 the machine shop was incorporated as Char-Lynn Company. The legal work to incorporate the shop was done by Ward B. Lewis, Esq., a Minneapolis attorney *321engaged in private practice. Initially, Mr. Lewis received a monthly retainer of $300; however, this was later increased and around 1957 or 1958 he was receiving a retainer of between $300 and $1,000 per month. From the early years of incorporation of the Char-Lynn Company, Mr. Lewis was retained as corporate counsel and secretary of Char-Lynn. He also served on the corporation’s board of directors.
7. Plaintiffs were the original stockholders of Char-Lynn.
8. While during the years 1951 through 1961 plaintiffs’ daughter, Donna Herzog, owned a maximum of 13.52 percent of Char-Lynn’s outstanding common stock, by 1962 plaintiffs, as a result of a gift program, had given her about 32 percent of the outstanding common shares. Mrs. Herzog’s percentage ownership was maintained until at least 1969.
9. Char-Lynn initially operated as a contract machine shop and as such made parts for other companies. Following-World War II, the company began to diversify into the manufacturing business. Although by late 1957 it had become a large machine shop or fabricator, the company remained a “small business.”
10. While in 1950 the annual sales of Char-Lynn were approximately $500,000, they increased to $2,400,000 in 1957 and by 1958 they had grown to $2,900,000. Char-Lynn employed about 120 people in 1958.
11. In the interest of expanding and diversifying the company, Mr. Charlson from a very early time decided it would be necessary to develop its own product.
12. To this end, Mr. Charlson purchased a patent covering a pneumatic tire spreader and after some redesign manufactured and marketed a commercial product with immediate success.
13. The tire spreader was marketed by Char-Lynn until 1949.
14. In the early 1950’s, Char-Lynn manufactured and marketed under the trademark “High-Low Pack” an un-patented power pack consisting of pump valves, a relief valve, and a reservoir. During 1954 or 1955, Mr. Charlson conceived a hydraulic valve device. This device was later patented. Production on the device did not begin until 1957.
*32215. Notwithstanding Char-Lynn’s efforts, beginning in the late 1940’s and extending until 1957, to diversify its product line, die-casting remained its dominant business.
16. Mr. Charlson’s desire to find a product upon which to build Char-Lynn’s business resulted in his awareness of the great market potential for a high-torque, low-speed hydraulic motor. As a result of his inquiries, Mr. Charlson foresaw a tremendous market for such a motor. He was convinced that a hydraulic motor having these characteristics was the most important product that a company could have, and the addition of such a motor to Char-Lynn’s product line became his prime objective.
17. Outside consulting engineers and large hydraulic companies told Mr. Charlson that such a hydraulic motor did not exist and could not be built. As a result, he decided to explore the problem personally.
18. Because of some early 1952 work on a hydraulic pump which Char-Lynn conducted on behalf of a customer, Mr. Charlson became familiar with the use of a gerotor as a displacement mechanism for hydraulic pumps. Further investigation disclosed that the gerotor was invented and patented by a Professor Hill of the Massachusetts Institute of Technology and gerotors were manufactured under license from Professor Hill by the Nichols Company of Boston, Massachusetts.
19. Mr. Charlson visited the Nichols Company within 6 months of the expiration date of Professor Hill’s patent in the hopes of buying gerotors. After unsuccessfully seeking a meeting with Professor Hill to obtain a license, the Nichols Company agreed to ship a few gerotors to Char-Lynn.
20. Following receipt of the gerotors at Char-Lynn, castings were designed as housings therefor. Upon holding the casting and rotating the gerotor, Mr. Charlson sensed that he had come upon a solution to his long-dreamed-of, high-torque, low-speed hydraulic motor.
21. Mr. Charlson was convinced that a hydraulic motor could be manufactured if a suitable commutator valve mechanism for orbiting the gerotor could be designed. He, therefore, took a gerotor home with him and put it on the side of his chair. Every evening thereafter for several years the last *323thing he would do was pick the gerotor up and orbit and rotate it in an attempt to mentally picture a suitable valve mechanism. One evening in late 1955, he conceived a new mechanism and made sketches of the concept as best he could so he would not forget it.
22. Upon awaking the nest morning, Mr. Charlson looked at the sketches he had made the evening before, recalled his mental picture and concluded that he had, subject to refinements, the design for a high-torque, low-speed hydraulic motor.
23. Mr. Charlson proceeded to meet with Mr. Harold Darr, the owner of an independent consulting firm and model shop, to discuss his conception. Mr. Charlson had previously consulted with Mr. Darr about the feasibility of building a high-torque, low-speed hydraulic motor. He, therefore, felt that Mr. Darr could build it, if he could understand the operation of the commutator valve mechanism. After considerable analysis and careful study, Mr. Darr concluded that the mechanism would work.
24. Over a period of 4 to 7 days, Mr. Darr proceeded to build a model which incorporated the commutator valve mechanism and the gerotor. After some modifications and refinements, the orbit motor invention resulted.
25. Mr. Charlson then consulted Merchant & Merchant, a Minneapolis firm which specializes in the practice of patent law, regarding obtaining patent protection for an orbit motor.
26. After conducting a patent novelty search, Merchant & Merchant recommended that a patent application be prepared for filing in the Patent Office. An application, Serial No. 590,314, was filed on June 8,1956.
27. The conception and reduction to practice of the orbit motor was done by Mr. Charlson on his own time and at his own expense. Mr. Charlson personally approached Harold Darr for design consultation and model work on the invention, and he also personally retained the patent firm of Merchant & Merchant.
28. On January 28,1958, United States Letters Patent No. 2,821,171 issued in the name of Lynn L. Charlson. In October 1957, upon learning that the Patent Office would eventually *324issue him a patent, Mr. Charlson met with Mr. Darr and they evaluated the commercial applications of the orbit motor and concluded that it had “stupendous” applications. They felt that there was a large market for a motor which could generate high torque at low speeds, without the necessity of a speed reducer.
29. Mr. Charlson did not personally make any inquiries concerning the exploitation of the orbit motor patent by companies active in the fluid power field. However, Mr. Darr did make inquiries of companies he was familiar with. In addition, Mr. Darr asked the Nichols Company, the manufacturer of the gerotor, about companies which would be best suited to market the orbit motor.
30. Mr. Charlson decided in October of 1957 to sell his orbit motor patent when it issued.
31. Mr. Oharlson’s decision to sell his patent was based on a variety of reasons, including his belief that he should keep his invention as an independent asset, separate from his company, Char-Lynn, insofar as his estate was concerned. In this manner, the potential' value of the orbit motor to Mr. Charlson or his estate would not be affected by possible adverse results of Char-Lynn’s operations. Mr. Charlson was also concerned that Char-Lynn, with its limited capabilities, would not be able to adequately exploit the full potential of the motor. In addition, Mr. Charlson was concerned if the patent was retained by him personally, that he might somehow be forced to include it in a sale of Char-Lynn. Finally, Mr. Charlson wanted to sell the patent in order to avoid adding to his own personal heavy workload at Char-Lynn.
32. Adam E. Zatarga (hereinafter referred to as “Za-targa”), a senior partner in the international accounting firm of Peat, Marwick, Mitchell & Co., was the principal accountant and tax adviser for Charlson personally and for Char-Lynn beginning in 1950. Zatarga developed a fairly close relationship with Mr. Charlson.
33. Mr. Charlson was advised by Zatarga in 1957 and by his lawyer, Ward B. Lewis, Esq. (hereinafter referred to as “Lewis”), that by selling his patents to a third party he *325would be entitled to treat the proceeds as capital gains rather than ordinary income. Mr. Charlson in late 1957 and early 1958 carefully considered the question of to whom he could sell his motor patent.
34. Zatarga further advised Mr. Charlson in 1957 that if the Charlsons would make a timely gift of 7 percent of the Char-Lynn stock to their daughter, Mrs. Donna Herzog, who at that time owned 13.5 percent of the stock, pursuant to a gift program designed to give her a 33% percent interest, that Mr. Charlson could sell his patent to Char-Lynn with the same tax results and benefits as would occur from a sale by Charlson to an unrelated party.
35. The possibility of selling his patent to Char-Lynn did not appeal to Mr. Charlson and he rejected it.
36. Mr. Charlson did not want to sell his patent to a large corporation, even though such a corporation could probably develop and exploit the patent faster than other prospective purchasers, because the orbit motor disclosed by the patent had not been developed or produced. Charlson believed that he would not receive a fair price from a large corporation for his untried orbit motor patent.
37. Mr. Charlson also considered selling his patent to a professional patent licensing and exploiting company, but decided against it.
38. At a luncheon with Mr. Lewis in early 1958, Mr. Charl-son informed Lewis that he wanted to sell his motor patent to a group of his business associates. This group was to consist of Harold Darr; Lewis; Mrs. Beverly Scott, Charlson’s secretary and administrative assistant at Char-Lynn; and Baymond O. Jensen, comptroller of Char-Lynn.
39. These individuals were selected because they were trusted, long-time business associates of Mr. Charlson and had contributed to the growth of Char-Lynn. Each of the selected individuals had diverse talents that would be helpful to a new corporation. Particularly, Lewis had proven legal experience, Darr had engineering and design capabilities, Scott had 'administrative and coordinating experience, and .Jensen had a good business background.
40. Lewis suggested that Mr. Charlson include his son-in-law, Mr. Herzog, who was employed by a small Minneapolis *326advertising agency which, was doing some business with Char-Lynn, into the group. Mr. Charlson turned down the suggestion, since he did not want any member of his family to be a part of the group.
41. Mr. Charlson suggested that Lewis contact Mrs. Scott and Messrs. Darr and Jensen to determine if they would be willing to organize and invest money in a corporation whose intended purpose was to purchase and exploit his patents. Mr. Lewis agreed to do so.
42. Mr. Lewis contacted the above individuals and they agreed to organize and invest in a corporation to purchase and exploit the Charlson patents, including his orbit motor patent. Lewis informed them that there would be no restrictions or limitations of any kind on their ownership of the Charlson patents.
43. Lewis, subsequent to obtaining the assent of Darr, Jensen and Scott, organized Germane Corporation in the State of Minnesota, and the corporation’s certificate of incorporation was issued on September 2,1958.
44. Mrs. Scott picked the name “Germane” for the new corporation.
45. At the first meeting of the board of directors of Germane Corporation, each of the four individuals paid $300 by personal check for 300 shares of Germane common stock.
46. Germane’s articles of incorporation provided for an authorized capital stock of 2,500 shares with no par value. On September 25, 1958, a total of 1,200 shares, at a stated price of $1.00 per share, were initially issued in equal portions of 300 shares each to Lewis, Darr, Jensen and Scott. Lewis told the other three investors that they might have to invest additional funds at a later date.
47. The stock subscription payment of the Germane shareholders was given to Scott who opened the bank account with the checks received.
48. In 1958 the stock originally issued to Lewis was reissued to his wife, Susan E. Lewis, as trustee.
49. When Darr died in 1967, the shares of stock held by his estate were repurchased by Germane in accordance with article IV, section 2, of Germane’s bylaws.
*32750. The Germane board of directors at its meeting of November 18, 1968, repealed article IY, section 2 of the Germane bylaws.
51. At all times since incorporation of Germane in 1958 until its dissolution in 1971, the following persons constituted the only directors and officeholders of that company: Raymond O. Jensen, president; Beverly G. Scott, vice-president and secretary; Ward B. Lewis, Esq., vice-president and assistant secretary; and Harold W. Darr, treasurer (while alive).
52. After the incorporation of Germane, Mr. Lewis continued full-time in the private practice of law in Minneapolis, and remained as Char-Lynn’s corporate counsel as well as Mr. Charlson’s personal attorney.
53. In 1958 Darr was fully engaged in his independent design business in Minneapolis and served about a dozen different companies in the same manner.
After Darr’s death in 1967, Jensen took over the position as treasurer of Germane while remaining as that company’s president.
54. None of the Germane officers or directors were or are related by blood or marriage to Charlson, his wife Beryl, or their ancestors or descendants.
55. Mr. Charlson never saw the articles of incorporation or bylaws of Germane. Moreover, he never saw any documents or records of Germane at any time during that corporation’s existence.
56. Mr. Charlson never owned any Germane stock. Furthermore, none of the stockholders of Germane during its existence ever held stock for Charlson, his wife, or their ancestors or descendants, or as nominees for them.
57. Neither Mr. Charlson nor his wife ever served as an officer, director, or employee of Germane.
58. Neither Charlson nor his wife ever contributed or loaned money to Germane, either directly or indirectly; and neither Germane nor the shareholders of Germane ever paid Charlson or his wife any money other than the money they were entitled to as purchase price for the patents sold to Germane.
*32859. Germane executed a written patent sale agreement with Charlson on or before September 25, 1958. The agreement was made retroactively effective to January 28, 1958, the date upon which the patent was issued.
60. Lewis, representing Germane, and Merchant & Merchant, an independent patent law firm representing Charlson, drew up the patent sales agreement which transferred all of Charlson’s right, title and interest to his various patents and patent applications to Germane. There were many price discussions during the course of the sales transaction.
61. Under the patent sale agreement, Charlson sold the following patents and patent applications then owned by him to Germane:
United States Patent 2,800,922 issued July 30,1957;
Canadian Patent 550,525 issued December 24,1957;
United States Patent 2,821,171 issued January 28,1958;
Canadian application S.N. 712,960 filed August 15,1956;
Great Britain Patent 787,499 issued August 24, 1956;
French Patent 1,157,539 issued September 3, 1956;
German application C 14 947 Ia/88b filed June 5, 1957 ;
Italian Patent 559,416 issued March 21,1957 ;
Swedish application 7890/56 filed August 28,1956;
Australian Patent 211,118 issued September 6,1956;
Brazilian application 96689 filed August 27,1957;
Japanese application 20302/1957 filed August 17, 1957;
United States application S.N. 691,458 filed 'October 21, 1957; and
Canadian application (counterpart of U.S. application 691,458).
United States Letters Patent No. 2,821,171, which covered the Charlson motor, was the principal patent transferred under this agreement.
62. The patent sale agreement expressly recited that Charlson transferred “his entire interest” in the patents and patent applications sold.
63. Germane promised to pay Charlson 80 percent of the annual royalties it received from licensing as the purchase price for the patents. Accountings were to be made quarterly.
64. Paragraph 6 of the patent sale agreement provided that Germane should “exercise proper quality control” to insure suitable manufacture of the motor and other devices *329covered by tbe patents which, were transferred under this agreement. Germane agreed to—
* * * submit upon request samples of said devices to Charlson for inspection and * * * [to] 'adhere to recommendations with regard to maintaining proper quality control.
In the event of an infringement suit, the patent sale agreement provided—
* * * the parties may mutually agree jointly to prosecute the alleged infringement, and the manner in which the expense of such prosecution shall be shared. However, in the event such agreement is not reached, either party hereto may be permitted to prosecute and in the event such prosecution is successful, the monies received as a result of such prosecution may be retained as his own property by the party financing such prosecution. [Patent sale agreement, para. 8.]
A similar provision governed the defense of infringement suits. A provision governing termination of the agreement allowed Charlson the “right to cancel and to terminate” the patent sale upon default of Germane to make the required payments to Charlson. Germane had a right to cure the default. (Patent sale agreement, para. 9.)
65. Charlson did not, either before or after the sale of the patent, enter into an understanding with Germane, its shareholders, directors, officers, or employees, that he would control the decisions of Germane with regard to licensing the motor patent.
66. Charlson never attended the formal or informal meetings of Germane shareholders or directors. However, Charlson was aware from time to time of license applications pending before Germane.
67. The four members of Germane decided upon licensing applications and other business matters themselves. Sometimes they would individually or in small groups discuss license inquiries of Germane with Charlson; they respected and oftentimes followed his business and technical advice.
68. Salaries were paid by Germane to its officers and employees, including a Mr. Dojde, its patent attorney. Only Germane shareholders ever received the profits of Germane.
*33069. As a result of its operations, Germane reported the following transactions for the tax year indicated for purposes of the federal corporate income and personal holding company taxes:
70. Minutes were kept by Lewis of Germane’s directors’ meetings. The corporate minutes were retained at Lewis’ law office. The ledger and other financial books of Germane were kept by Jensen and were in his custody.
71. Darr was in charge of finding licensees for Germane. He also served as Germane’s engineer-technician and monitored its various licensing arrangements, chiefly that with Char-Lynn, to insure that manufacturing was being carried out in accordance with the teaching of the patent.
72. Mrs. Scott kept all administrative records of Germane, except the financial records and corporate minutes book. She also handled the payroll, wrote and signed checks, and answered correspondence.
73. Germane was not a full-time job. Mrs. Scott and Jensen each devoted about 15 hours per week on the average to Germane business. Darr played a minimal part in the functioning of Germane. Lewis maintained his private practice in addition to handling Germane’s legal matters.
74. At the time of the patent sale, Charlson did not impose as a condition of sale, implied or otherwise, that Germane grant Char-Lynn a license to manufacture the orbit motor. Nor did Germane’s directors and officers understand this to be a condition of sale.
*33175. Mr. Lewis bad mentioned to the other members of Germane, at a preincorporation meeting, that Char-Lynn was willing to take a license if Germane wished to give one.
76. At the time of sale, Germane granted Char-Lynn a nonexclusive license to manufacture motors in the United States and to sell them worldwide. The directors of Germane decided that Char-Lynn was a logical choice for a licensee, because of its experience and financial stability. The fact that Mr. Charlson, Char-Lynn’s president, was the inventor of the orbit motor was also an important consideration.
77. At no time did Mr. Charlson dictate that Germane should or should not grant a license to a certain company. Charlson did supply business and technical advice to Germane upon request, and Germane valued this advice.
78. No applicant was ever denied a license by Germane because it might possibly compete with Char-Lynn. Germane licensed two potential, though not significant, competitors of Char-Lynn in the United States. These were Lamina Corporation and Ross Gear Company (later acquired by TRW, Inc.).
79. Germane did not actively engage in the solicitation of licenses prior to 1964, because the motor was unproven in marketability and demand.
80. Germane did receive mail inquiries from interested parties about licenses. Some of the inquiries were mistakenly addressed to Char-Lynn. When this happened, Mrs. Scott would accept the mail on behalf of Germane for consideration and processing.
81. Germane did not conduct a brochure advertising campaign to obtain licensees. The record shows that Germane was ■unfamiliar with the intricacies of obtaining patent licensees.
82. Decisions to license were made by the Germane board of directors. The granting of a license required approval of a majority of the board of directors. Charlson never participated in these decisions.
83. The decisions to license were made according to certain criteria. Germane did not want to license a large company, because it might shelve the patent and work around it or otherwise take advantage of Germane. Germane was interested in medium-size companies with a good financial back*332ing. Germane also did not want to grant licenses which, would merely result in more licenses sharing the same existing motor market. The fact that the Nichols Company’s (the only successful manufacturer of gerotors) production was substantially consumed by Char-Lynn also was a limiting factor in the number of licensees. Germane’s practice to some extent involved protection of existing licensees.
84. Following its licensing of Char-Lynn, Germane entered into a license agreement with Danfoss A/S, a Danish corporation. Danfoss was one of the larger companies in Denmark, had marketing organizations throughout Europe, was well financed, and was interested in diversifying into the hydraulics business.
85. Danfoss originally directed its license inquiries to Ohar-Lynn. Mr. Charlson, as president of Char-Lynn, forwarded these requests to Germane. At the same time Mr. Charlson wrote to advise Danfoss that the patents were held by a separate company and that he was informing Germane of Danfoss’ inquiries.
86. A Danfoss representative, Ame Enmark, visited the Char-Lynn plant in the summer of 1961, but did not see Charlson, who was out of town.
87. Charlson spoke with Char-Lynn employees, Messrs. Firth and McDermott, who met with the Danfoss representative. McDermott felt that since Char-Lynn had a worldwide nonexclusive license from Germane, that Danfoss should be licensed only if Char-Lynn could not handle Danfoss’ market. On the other hand, McDermott felt that if Char-Lynn was incapable of supplying motors for the European market that Char-Lynn should attempt to share in the profits from that market through an arrangement with Danfoss. Charlson believed the European market was beyond the capacity of Char-Lynn. McDermott also observed that Char-Lynn and Danfoss could exchange technical improvements each made on the motor.
88. Lewis, representing Germane, visited Danfoss in Denmark. Danfoss wanted to meet and talk to Mr. Charlson before a license was negotiated.
89. After visiting Danfoss, Lewis met with the Germane board of directors and also with Mr. Charlson. Danfoss *333wanted the exclusive right to make, use, and sell the motors in Europe and was concerned that Char-Lynn might either erect a factory in Europe or sell motors in Europe. Germane consulted Mr. Charlson on this point, and Char-Lynn agreed to relinquish any rights to manufacture, use, and sell in Europe.
90. In the fall of 1981, the president of Danfoss, Mads Clausen, visited Char-Lynn and Mr. Charlson.
91. In November 1961, Messrs. Lewis and Charlson visited Danfoss in Denmark. Germane and Danfoss entered into a licensing agreement. Char-Lynn and Danfoss entered into a sales agreement, providing that, during the period required by Danfoss to tool up, Char-Lynn would sell motors to Danfoss for distribution in the European market.
92. This licensing agreement contained a quality control provision similar to that in the patent sale. However, in this agreement Germane would exercise the supervision, not Charlson.
93. In order to provide technical assistance to Danfoss under the exclusive sales agreement, Char-Lynn sent Mr. McDermott to Denmark. In addition, Mr. Charlson made several trips to Danfoss to give technical assistance.
94. Mr. Charlson and Germane shared a common interest in the success of Danfoss, since they were to divide the royalties received in accordance with the 80-20 percent split agreed upon at the time of Mr. Charlson’s sale of his patents to Germane.
95. After establishing its own production facilities, Dan-foss returned 2,000 motors to Char-Lynn since they were no longer needed as inventory.
96. During the time that Germane owned the Charlson patents, Danfoss paid Germane $901,289.10 in royalties on motors manufactured in Denmark.
97. In November 1961, Germane granted Moore Hydraulics Pty., Ltd., a license to make, use, and sell the orbit motor for the territories of New Zealand and Australia. The license was substantially similar to the Danfoss license, except no minimum royalty payment was imposed.
98. Mr. Jensen executed the patent licensing agreement on behalf of Germane. Charlson executed a motor sales agree-*334merit on behalf of Char-Lynn which was similar to the one executed with Danfoss. All negotiations had been handled by Messrs. Jensen, Charlson, and Mrs. Scott.
99. Moore Hydraulics never manufactured motors, because it did not believe the potential market would justify the estimated capital expenditures. Instead, it sold motors that it received under a Char-Lynn sales agreement which was executed concurrently with the Germane license.
100. Germane did negotiate with Eoss Gear Company for a United States license. However, no agreement was ever executed because of Eoss Gear Company’s refusal to pay Germane a 5 percent royalty.
101. In a later year, Eoss Gear Company, which had by then been acquired by TEW, Inc., manufactured a steering device which Char-Lynn felt infringed the orbit motor patent. Germane, Char-Lynn, and Charlson filed a joint infringement suit. The suit was settled by the licensing of TEW, Inc., under the patent to make a steering device of a specified design.
102. In 1963, Viking Pump Company applied for a license from Germane. The license was refused because of Viking’s small size and lack of manufacturing capability.
103. In April 1964, Lamina, Inc., entered into a licensing agreement with Germane. The license permitted Lamina to manufacture a motor smaller than Char-Lynn was currently building, and restricted its use to drilling equipment which Lamina made. In particular, Lamina wanted to make portable drills that were small and could drill holes in inaccessible areas without excessive straining by a single individual. The license permitted the manufacture of 3-4 horsepower motors for this purpose only. Char-Lynn made physically larger motors in the 0-10 horsepower range.
104. Mr. Charlson was not only present at the April licensing conference with Lamina, but did most of the talking and was the dominant voice.
105. About the time of the April 1964 license, Char-Lynn’s marketing division was concerned that Lamina might compete with Char-Lynn’s market. Mr. Charlson wanted Germane to grant a broad license, 'because he wanted a manufacturer in the machine tool industry. Germane granted a *335restrictive license, because it did not want two licensees sharing 10 percent of the market area while 90 percent of the potential market remained unoccupied. Germane felt that permitting Lamina to share the market which 'Char-Lynn was currently exploiting would only result in price cutting and thus reduce Germane’s profits.
106. The Lamina motor could not compete with the Char-Lynn motor if Lamina obeyed the terms of its license. However, the transcript shows that Lamina could not profitably make motors under the technical restrictions imposed.
107. Under the April license, Lamina manufactured two small motors for use on its portable drill. The smaller “A” motor was 1% inches in diameter and generated 0-4 horsepower ; the larger “B” motor was 2% inches in diameter and generated 0-5 horsepower. The Lamina “A” and “B” motors could put out as much as 10 horsepower, however, at that level the heat generated by the motors was excessive. In order to cope with the excessive heat, a suitable heat exchanger was needed for Lamina motors that operated in these hyper-horsepower ranges. Additional design differences existed between the Char-Lynn 10 horsepower motor and the Lamina motors when they operated at 10 horsepower. Lamina’s motors ranged from $195 to $300 as opposed to about $85 for the Char-Lynn motor.
108. Lamina’s drill did not sell very well. Lamina customers began asking if they might purchase the motor only. Such sales, although not authorized by the April 1964 agreement, were informally permitted for a time.
109. Luring the period when Lamina was making motor sales, it requested from Germane and Char-Lynn a broader license to manufacture and sell. In particular, it wanted the severe restrictions on motor specifications in the April 1964 agreement revised.
110. The criterion used by Germane in denying these requests, except in cases of emergency or an improvement in motor design, was whether a Char-Lynn motor could do the job.
111. Luring the period when Lamina was making direct motor sales under the April 1964 agreement, Char-Lynn licensed Lamina to use the “Orbit” trademark and the Char-*336Lynn market distributors in hopes of improving Lamina’s sales. Char-Lynn reserved the right to terminate the agreement, if the Lamina motor did not meet Char-Lynn standards.
112. In 1967 McDermott came across a trade journal in which Lamina was advertising its motors, contrary to the informal agreement with Mr. Charlson, for general application. These sales were discovered to be cutting into the Char-Lynn market.
113. Charlson was disturbed that the Lamina motor was not up to Char-Lynn standards. Charlson pointed out to Lamina that Lamina’s advertisements would lead the reader to believe that the smaller Lamina motor with the trademark “Orbit” could be used at the same relatively low pressures as the Char-Lynn motor. In actuality, the operation of the Lamina motor required extremely high pressure and a heat exchanger to remove the excessive heat that was generated by the motor during operation.
114. Mr. Charlson revoked his informal agreement with Lamina pertaining to direct sales of the orbit motor.
115. Mr. Charlson directed Mr. McDermott, Char-Lynn’s product manager for hydraulic motors, and Doyle, patent counsel of Germane and Char-Lynn, to draft a new license agreement between Germane and Lamina. The agreement would permit Lamina to manufacture hydraulic motors outside the range of the Char-Lynn motor. The horsepower output of a hydraulic motor depends, among other things, upon the rate of flow of the oil through the motor and the amount of pressure used to drive the oil through the motor. McDermott drafted the paragraphs 2 and 3 specifications of a draft of a license agreement with restrictions upon the pressure and the oil flow rate, which would have limited Lamina to a fractional motor of about % horsepower for each gallon of oil passing through the motor. A motor manufactured by Lamina under these specifications would not have been competitive with the Char-Lynn hydraulic motor and would have been restricted to very special applications.
116. Mr. Doyle acted as house patent counsel for both Char-Lynn and Germane in these negotiations. He peri*337odically billed Char-Lynn for work he did on behalf of Germane. Germane then reimbursed Char-Lynn for such legal fees. Doyle saw no conflict of interest in his position.
117. In October 1967 Char-Lynn submitted to Lamina a list of operating specifications for a hydraulic motor from the specifications drafted by McDermott. Char-Lynn stated that it was willing to accept these characteristics as a change from the original license agreement between Lamina and Germane. Lamina protested that the high pressure and extremely low volume limitations would prevent it from selling any motors built under the proposed specifications.
118. In November 1967 Lamina officials met with Charlson, Doyle, and Jensen at the new Eaton Prairie plant of Char-Lynn to' discuss a new license to manufacture and sell motors that would not be restricted to drilling apparatus.
119. The conference discussions focused on the operating characteristics of the motor to be manufactured and sold by Lamina which would be acceptable to all concerned.
120. Charlson was the dominant figure at this conference and did most of the talking.
121. These negotiations produced no agreement.
122. In December 1967 Mr. Richardson, a hydraulic specialist for Lamina, visited the new Eaton Prairie plant of Char-Lynn in an effort to obtain a workable license for Lamina. Mr. Charlson told Mr. Richardson that he was not in a position to grant a license. Mr. Richardson next met with Mrs. Scott. After 4 days at Eaton Prairie, Mr. Richardson was notified by Mrs. Scott that Germane would tender a workable license to Lamina.
123. Mr. Charlson again asked Messrs. McDermott and Doyle to collaborate in formulating restrictions on Lamina’s new license. The restrictions finally agreed upon in the new license, accepted by Lamina, were considerably less confining and allowed Lamina to produce a 5-6 horsepower motor, which would give significant competition to the Char-Lynn motor. Their second agreement was consummated in December 1967.
124. Mr. Lewis did not participate in the negotiations or drafting of this second license. Jensen and Doyle represented Germane.
*338125. As desired by Charlson, this second licensing for Lamina was broader than the prior 1964 license and encouraged Lamina to manufacture and sell its motors in the machine tool field. Char-Lynn sold primarily in the agricultural equipment market.
126. Germane and Char-Lynn permitted Lamina to sell its old and very large inventory of hydraulic motors which were manufactured in violation of the restrictions of the 1964 license and still not permitted by the 1967 license. These motors could be sold only to customers of Lamina where the Char-Lynn motor could not be used.
127. Mr. Doyle personally evaluated Lamina’s requests to sell or referred them to the sales or engineering department of Char-Lynn. He considered the waiver requests as closely related to the sales rights of Char-Lynn as well as to the licensing rights of Germane.
128. Most of the requests by Bichardson submitted to Doyle involved either machine tool use or special applications where physical space limitations precluded the use of a Char-Lynn motor. Such requests were granted. Some design changes requested by Lamina on its motor within the authorized power limitations under the 1967 license were also approved.
129. Beginning in 1958 and until its sale in 1970, Char-Lynn manufactured only one model of motor which could be varied to produce between 0 and 10 horsepower. Production of the patented orbit motor required the use of a gerotor. Char-Lynn would vary the width (as opposed to diameter) of the gerotor to produce motors of different horsepower.
130. Char-Lynn purchased its gerotors from the Nichols Company of Boston. The Nichols Company was the only commercial source of suitable gerotors in the United States, and it manufactured only the so-called “H” gerotor in significant quantities. Char-Lynn used the “H” gerotor in its motors.
131. No other company could manufacture gerotors to the required tolerances in sufficient quantities. Gerotors with the required tolerances are very difficult to make efficiently. Char-Lynn could not efficiently make them, although it tried. A Japanese company said it could make suitable gerotors, and *339Germane considered granting them a license to manufacture the entire motor. However, the Japanese gerotor proved to be inferior and usable in low pressure pumps, but not in a high pressure motor.
132. TEW, Inc., and Lamina also purchased gerotors from the Nichols Company. Lamina, however, purchased a smaller size gerotor than TEW, Inc., or Char-Lynn.
133. At the time Germane bought the patent from Charl-son in 1958, and many times thereafter, Nichols represented to one or more of Germane’s directors and shareholders that it would be able to supply all quantities needed by prospective licensees, because it was building new plants and bringing in new machinery.
134. However, serious and unforeseen problems in obtaining an adequate supply of gerotors from Nichols developed. Char-Lynn, Nichols’ largest customer, had difficulty in obtaining an adequate supply of “H” gerotors because of production shortages at Nichols or poor delivery schedules by Nichols. Lamina experienced similar difficulties with the gerotors it purchased.
135. Nichols complained about Char-Lynn’s practices in the ordering of gerotors. First, there would not be enough gerotors and Nichols would go into full production schedules ; then half-way through the year, Char-Lynn would say it did not need any more.
136. In 1967 Nichols expanded by opening a new plant in Portland, Maine. It doubled Nichols’ capacity. However, the supply problems continued with the “H” gerotors.
137. Char-Lynn never supplied more than 2 to 5 percent of the potential market due to the lack of gerotors. Moreover, because of the inability to obtain different size gerotors, Char-Lynn’s production was limited to manufacturing motors using the “H” gerotor.
138. In the period 1964-1970, Germane did not actively solicit licenses because of the shortage of gerotors.
139. In the latter part of 1968, after Charlson had developed a serious disease, Charlson and his wife decided to sell Char-Lynn.
140. Charlson never informed any of the Germane directors of his decision to sell Char-Lynn. Mrs. Scott, through *340her position at Char-Lynn, became aware that Charlson was considering selling out.
141. Charlson hoped that Germane would continue to consider the opportunities for expanding its licensing program.
142. In late 1969, Germane’s shareholders decided to sell Germane, either through a sale of assets or a sale of stock.
143. The Germane shareholders did not inform Charlson that they were seeking to sell their interest, nor did they inform any of Germane’s licensees.
144. Germane employed and paid Dan Stice, a patent attorney, to represent Germane in finding a buyer and negotiating the sale of Germane.
145. Stice reviewed Germane’s patent portfolio and was aware that Char-Lynn was the principal licensee of Germane.
146. In February 1970 Lewis and Stice visited New York City to confer with parties interested in the purchase of Germane. A topic raised at this conference was whether the prospective purchasers would grant licenses to businesses in competition with Char-Lynn. The prospective purchasers indicated that they could not, for tax and antitrust reasons, guarantee in writing that such a license would not issue.
147. Stice contacted Eaton Corporation, a possible purchaser. In July 1970 Lewis and Stice visited Eaton Corporation in Cleveland, Ohio. Eaton Corporation expressed considerable interest in Germane’s patents.
148. Eaton Corporation eventually acquired Germane. Neither Charlson nor Char-Lynn in any way participated in these negotiations.
149. In August 1970 Mrs. Scott became aware of Charl-son’s intention to sell Char-Lynn.
150. In December 1970 Charlson was engaged in very serious negotiations for the sale of Char-Lynn stock. Included among the prospective purchasers was Sperry Land Company, to whom Charlson had made a tentative decision to sell his stock.
151. When Mr.. Charlson was on the verge of consummating the sale to Sperry Rand Company, he was approached by Eaton Corporation, who was still negotiating with Germane, with an offer to purchase Char-Lynn.
*341152. Because of Eaton’s interest in acquiring Mr. Charl-son’s rights to the remaining purchase price payments due to him under the original patent sales agreement with Germane, and, as well, Char-Lynn, Eaton’s offer to Mr. Charlson was better than Sperry Rand’s.
153. The sale of Char-Lynn was negotiated in part by Mr. Doyle. The sale of Charlson’s residuary rights was handled by Mr. Bert B. Rand, Charlson’s private counsel.
154. Eaton Corporation purchased the stock of Char-Lynn and Charlson’s residuary rights. The residuary rights alone cost Eaton Corporation about $8 million.
155. The transactions between Eaton Corporation and Germane and between Eaton Corporation and Char-Lynn and Charlson were closed at the same time in December 1970.
156. Eaton Corporation could have refused to close with Germane, if Charlson decided not to sell his residuary rights.
157. Pursuant to the terms of the patent sale agreement between Germane and Charlson, Germane computed and paid over the following amounts to Charlson for the years in issue: 1961 — $68,032.74; 1962 — $99,623.72; and 1963 — $124,896.56.
158. In filing their joint federal income tax returns for the years 1961, 1962 and 1963 (prepared by Peat, Marwick, Mitchell & Co.), Charlson and his wife reported these payments from Germane as long-term capital gain.
159. On or about November 9,1966, Charlson and his wife paid to the Internal Revenue Service the sums of $32,012.56 in payment for an asserted deficiency for the year 1981 (including interest), $56,211.67 in payment of an asserted deficiency for the year 1962 (including interest), and $66,274.81 in payment of an asserted deficiency for the year 1963 (including interest).
160. On or about September 13, 1968, Charlson and his wife filed with the Internal Revenue Service their timely refund claims for taxes unlawfully assessed for the following years and for the following amounts: 1961 — $25,164.40; 1962— $46,374.03; and 1963 — $57,523.38.
181. These claims for refund were rejected on or about March 26, 1969, with the Internal Revenue Service taking the position that the payments should be taxed at ordinary income rates and not at capital gains rates. The Internal *342Revenue Service based its position on the decision of the Tax Court in Myron C. Poole, 46 T.C. 392 (1966).
162. The parties to this action have stipulated that should Charlson prevail, he is entitled to recover the amounts set forth in finding 160, supra.
CONCLUSION OF LAW
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are entitled to recovery of $32,012.56 for 1961; $56,211.67 for 1962; and $66,274.81 for 1963, along with interest for each of the years as provided by law from the date of payment.
Although Mr. Charlson disposed of a number of patents and applications in the same transaction, united States Letters Patent No. 2,821,171, entitled “Fluid Pressure Device and Valve,” is by and far the most important one.
In Van Dale Corp., 59 T.C. 390, 396 (1972), tile patent sale agreement provided for the owner to receive 90 percent of the royalties earned by the patents while the purchasing company was to retain 10 percent. The court, commenting on this agreement, states :
“We note first that respondent has not contended that the consideration paid by NSP to acquire the patents was less than what would have been paid by a corporation with no ties at all to petitioner. In fact, the terms existing between petitioner and NSP [NSP to receive 90 percent of the royalties earned and plaintiff to retain 10 percent] were basically identical to those offered by university [another patent holding company] to acquire petitioner’s patents.”
This phrase was made a part of 26 U.S.C. § 1235(d) as a result of an amendment effective September 3, 1058. The patent sales agreement, although executed about 'September 25, 1958, was effective January 28, 1958, when an oral agreement between the parties was reached. This intervening amendment does not affect the analysis of plaintiff’s liability, since, for reasons stated in Myron C. Poole, 46 T.C. 392 (1966), the amendment is simply declaratory of prior law.
S. Rep. No. 1622, 83d Cong., 23 Sess., pp. 439-40 (1954).
Id., pp. 440-41, and H.R. Rep. No. 1337, 83 d Cong., 2d Sess., p. A280 (1954) :
“* * » The sale oí a patent between an Individual and a corporation more than 50 percent In value of the outstanding stock of which Is owned, directly or Indirectly, by or for such individual would not * * * be entitled to capital gain treatment under this section. It is not considered that this limitation will in any way narrow the opportunity of Inventors to dispose of their patents through normal business channels; on the other hand, this limitation should prevent possible abuses arising from the sale of patents within essentially the same economic group." [Emphasis added.]
Indeed, the court agreed with the District Court’s conclusion that all substantial rights under the patent, as defined by Waterman v. MacKenzie, 138 U.S. 252 (1891), were transferred and that, accordingly, an assignment of the patent had taken place.
Char-Lynn at the time of sale in 1958 was partially owned by Charlson’s daughter. It was Charlson’s impression then that with a timely gift of stock to his daughter, Char-Lynn would become unrelated to him for purposes of caxjital gains treatment on a sale. Whether or not this impression is actually correct does not matter. Charlson’s belief in it shows that he thought he had a viable choice to make and lends credibility to his given reasons for a sale to Germane.
Provided, of course, that the noncorporate group could meet the conditions of 26 U.S.C. § 1221 or § 1235.