93 U.S.P.Q. (BNA) 313">*314 18 T.C. 291">*292 These proceedings involve the income tax liabilities of petitioner Lynne Gregg for the taxable years 1943, 1944, and 1945, and of petitioner Jon Gregg for the years 1943 and 1944. The year 1942 is also involved by reason of the Current Tax Payment Act of 1943.

The petitioners have claimed overpayments of such tax for the taxable years in amounts as follows:

The respondent determined deficiencies for such years in the following amounts:

Certain of the issues raised by the pleadings have been1952 U.S. Tax Ct. LEXIS 197">*200 conceded by the parties and there remains for our determination the following:

1. Whether certain amounts received by petitioners in each of the taxable years involved, in their respective cases, constitute capital gains from the sale of a patent, or ordinary income pursuant to licensing agreements.

2. Whether petitioner Jon Gregg is entitled to deduct from gross income in the taxable year 1943 the amount of $ 10,000 allegedly paid 18 T.C. 291">*293 to Charles Gregg in that year for services allegedly rendered in 1941.

3. Whether petitioner Jon Gregg is entitled to a deduction from gross income in the taxable year 1944 in the amount of $ 7,099.84, for an alleged loss on certain worthless material.

FINDINGS OF FACT.

So much of the facts as have been stipulated are accordingly found and made a part hereof.

The petitioners in these proceedings are Jon Gregg (hereinafter sometimes referred to as the petitioner), and Lynne Gregg, his wife. They presently live in Trevose, Pennsylvania, having previously resided in various localities in New Jersey. Separate tax returns, based on the cash receipts and disbursements method of accounting, were filed for the years here under review with the collector1952 U.S. Tax Ct. LEXIS 197">*201 of internal revenue for the first collection district of Pennsylvania, at Philadelphia.

Prior to the year 1940, petitioner was variously employed as an editor, reporter and feature writer, and in other capacities not related to the field of rope soles, and was not an inventor by trade or profession. Between the latter part of 1939 and July 5, 1941, Gregg and his wife, as a result of their joint discovery, research and study, and not pursuant to the employment of either of them, perfected an idea for a method of fabricating rope soles which they concluded was novel and likely to be commercially profitable. On July 5, 1941, Gregg filed, and the United States Patent Office accepted for filing, an application (Serial No. 401179) for a patent to cover the manufacture of rope soles. On October 8, 1941, Gregg assigned to his wife all of his right, title and interest in the application for Letters Patent, and the assignment was recorded in the United States Patent Office on November 15, 1941. Pursuant to such application, U. S.Patent 2,361,938, covering a method of making outsoles was issued November 7, 1944, to "Jon Gregg * * * assigned to Lynne Gregg * * *."

By agreement executed September1952 U.S. Tax Ct. LEXIS 197">*202 19, 1942, the petitioners granted to Norwalk Tire & Rubber Company (hereinafter called Norwalk Co.) an exclusive license of their invention relating to a method of manufacturing rope soles. It was petitioner's idea, which was concurred in by the president of the Norwalk Co., that he as the inventor should assist in the production and development of the rope sole business. The Norwalk Co. desired that petitioner should render it active services in connection with the production of rope soles without being on its payroll as a direct employee and the decision was made to provide for his compensation for such services by paying him a commission. The agreed basis was that 40 per cent of the payments to the Greggs was to be considered as compensation in full for the services 18 T.C. 291">*294 rendered to the company by petitioner. The written agreement, as entered into between the parties, provided, in part, as follows:

1. The Norwalk Tire & Rubber Company, hereinafter called the company, is granted the sole and exclusive right and license to manufacture and sell in the United States the product, hereinafter referred to as "rope soles", mentioned and described in a certain patent application1952 U.S. Tax Ct. LEXIS 197">*203 now pending in the United States Patent Office heretofore filed by you and which has been93 U.S.P.Q. (BNA) 313">*315 assigned to your wife, Lynne Gregg, hereinafter referred to as Licensor.

* * * *

4. During the term of this agreement you will devote your time, so far as the manufacture and sale of rope soles is concerned, exclusively to the service of the company as well as assisting in the purchase of material for the manufacture of rope soles with a view of producing as good a product as possible at as low a manufacturing cost as possible, it being understood that you may devote such time as is necessary to aid and assist the Canadian Licensee.

5. In the event that the demand for rope soles exceeds the company's capacity to manufacture and, if after discussion, the company shall determine it does not desire to increase its manufacturing facilities, you are then privileged to make other manufacturing arrangements provided the same shall not conflict or be detrimental to our business, but this agreement shall nevertheless continue in full force and effect.

6. The company during the term of this agreement will pay you a commission and royalty of 7% on the net sales price of said rope soles, hereinbefore mentioned1952 U.S. Tax Ct. LEXIS 197">*204 and described, as are manufactured and sold by it during the term of this agreement, it being provided, however, that said 7% shall in no event exceed 3 cents per pair. Said commissions and royalty to be paid not later than the 15th day of the month following the date of billing. Also provided that the company will advance to you weekly, against commission and royalty, the sum of $ 150. per week. The payments of said sums to you by the company, denominated commission and royalty are divisible as follows: 60% of said payment shall be considered as royalty and 40% as compensation in full for services rendered to the company as aforesaid.

In the event that the company shall accept and manufacture under the new idea, item or material, not included in the license rights as set forth in paragraphs marked "1" and "2", submitted and conveyed to the company as set forth in paragraph marked "3" of this agreement, the compensation to be paid by the company and received by you shall be arranged at the time that the company accepts said idea, item or material, the same to be set forth in writing and signed by the company and you.

In the event that special prices are deemed advisable to procure1952 U.S. Tax Ct. LEXIS 197">*205 special business, then a special rate of commission shall be arranged, such arrangement is however to be in writing and signed by both the company and you.

7. In the event that you are unable to perform your aforesaid duties or for any reason refuse to perform or shall cease said duties, then and in any of these events you shall be entitled to only receive the amount above stated to be royalty, it being further provided that in the event of your decease, the said 60%, provided the term of this agreement has not expired, shall be paid to Lynne Gregg, the Licensor.

* * * *

10. It is understood that you at the present time have had no patent issued and that issuing of the patent relating to the product and the process and machinery used in connection therewith may or [sic] certain reasons of expediency be delayed, 18 T.C. 291">*295 and therefore, the term of this agreement is fixed as one year from the date hereof with the privilege to the company of renewals from year to year upon the same terms and conditions upon written notice to you or Lynne Gregg given at any time before the expiration of the yearly period, subject to the right of the company or yourself or the Licensor to terminate1952 U.S. Tax Ct. LEXIS 197">*206 this agreement upon sixty days' written notice of cancellation during any year of the term of this agreement.

All notices shall be given and shall be complete by sending such notice by registered mail addressed to you or Lynne Gregg, the Licensor, at Flemington, New Jersey and to the Norwalk Tire & Rubber Company at Norwalk, Connecticut, or in the alternative by personal delivery of said notice.

* * * *

12. In the event that patents shall be issued and the term of this agreement shall be for the life of the said patent, the company or yourself or the Licensor may terminate this agreement upon sixty days' notice serviced in the manner provided in paragraph "10" of this agreement, it being understood that in the event of cancellation, as provided by this paragraph or as provided in paragraph marked "10" above, all orders then on hand are to be filled by the company, all materials then on hand and contracted for the company may be used in the manufacture of rope soles and the payment of commission and royalty as provided herein shall be made notwithstanding said cancellation notice.

13. Either the company or the Licensor shall have the right to institute or bring any suit or suits that1952 U.S. Tax Ct. LEXIS 197">*207 one or the other may be advised to institute or begin for or by reason of infringement of any of the inventions or improvements93 U.S.P.Q. (BNA) 313">*316 or rights herein referred to or the letters patent thereof, and if suit shall be by the company, the company shall have the right to use the name of the Licensor as a party complainant either solely or jointly with the name of the company, it being provided, that if such suit or suits shall be instituted, brought, maintained and conducted solely at the cost and expense of either the company or the Licensor, all sums that may be received, obtained, collected or recovered in any such suit or suits, whether by judgment, settlement or otherwise, shall be the sole and exclusive property of the company or Licensor as the case may be, further provided, that if both the company and the Licensor shall jointly contribute to the expenses of said suit or suits, then the said sum received, obtained, collected or recovered, as aforesaid, shall be divided in proportion to the contribution of expense made by each party.

In the event that any suit may be instituted against the company or the Licensor, on account of any infringement of any other patent by reason of the use1952 U.S. Tax Ct. LEXIS 197">*208 of the rights and licenses granted to the company by this agreement and the company shall undertake the defense of said action, the company shall have the right and privilege of being in sole charge of said litigation, provided however that if the company shall not undertake the defense of said litigation, then the said litigation shall be in sole charge of yourself and the Licensor. Also provided, however, that if in the sole judgment of the company it is determined that said suit cannot be successfully defended, then and in that event this agreement, notwithstanding anything herein to the contrary, may be immediately terminated by the company or the company may take such other action as it may be advised, provided said other action shall in no event affect the rights of yourself or the Licensor.

In the event that during the term of this agreement any of said patent or patents shall be declared invalid by any court in any litigation before it, then this agreement as to said patent or patents shall cease and determine and be of no further force or effect.

18 T.C. 291">*296 In all litigation affecting the license rights granted by this agreement, the company, the Licensor and you will render1952 U.S. Tax Ct. LEXIS 197">*209 such aid and assistance to the others as may be necessary to successfully prosecute or defend any action as aforesaid.

* * * *

By supplemental agreement dated June 14, 1943, the rights and privileges which Norwalk Co. acquired under the agreement of September 1942 were extended, by mutual consent with the petitioners, to Panther-Panco Rubber Co., Inc. (hereinafter sometimes called Panther-Panco). This agreement provided, in part, as follows:

* * * *

1. We agree that the Panther-Panco Rubber Co. shall have the same rights and privileges specified in Section 1, of the above mentioned agreement as ourselves and therefore we are to jointly have sole and exclusive rights with that company. All other provisions of Section 1. remain the same.

2. Section 2. of the abovementioned agreement remains the same excepting that the Panther-Panco Rubber Co., will share rights and be subject to terms and conditions of that section on the same basis as ourselves.

* * * *

4. Section 4. of the abovementioned agreement remains the same excepting that Panther-Panco Rubber Co., shares with ourselves the time and services mentioned in that section.

5. Section 5. of the abovementioned agreement remains same1952 U.S. Tax Ct. LEXIS 197">*210 excepting that both ourselves and the Panther-Panco Rubber Co., shall jointly determine whether to increase their capacity and they be unwilling jointly or severally to do so your rights under that section are as stated therein.

6. You will agree to make the exact terms of Sections 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 of the abovementioned agreement with the Panther-Panco Rubber Co., with no modification whatsoever excepting only that your address and that of Lynne Gregg as shown in Section 10, shall be changed to New Hope, Pennsylvania.

7. You will agree to make the exact terms and conditions as are contained in Sections 1, 2, 4, 5, of the abovementioned agreement with the modifications noted herein. You will submit to us copies of your agreement with the Panther-Panco Rubber Co., which we will approve in order to make us joint licensees with them.

* * * *

Pursuant to the agreements referred to above, rope soles were manufactured according to the method covered by petitioner's patent during 1942 and subsequent years by the Norwalk Co. and by Sylon, Inc., a subsidiary of the Panther-Panco. In the development, manufacturing and marketing of rope soles by the Norwalk Co. and Sylon, 1952 U.S. Tax Ct. LEXIS 197">*211 Inc., pursuant to the method covered by the patent, no sales were made by either Jon or Lynne Gregg, and no services were rendered by93 U.S.P.Q. (BNA) 313">*317 Lynne Gregg for either of the companies. Petitioner was from time to time consulted for technical advice in connection with the patented method of manufacturing rope soles. During the years 1943, 1944, and 1945 the Greggs received payments from the companies, referred to above, in accordance with the terms of the foregoing agreements in satisfaction of amounts due them, as follows: 18 T.C. 291">*297

The foregoing royalties received by Jon Gregg, together with those received from other sources, aggregated $ 28,579.06, $ 25,999.25, and $ 17,006.97 for the years 1943, 1944, and 1945, respectively, 1952 U.S. Tax Ct. LEXIS 197">*212 and were reported in petitioner's original return as ordinary income. In an amended return, such amounts were reported as capital gains and made the subject of a claim for refund. Petitioner now concedes that of the amounts thus reported, the amounts of $ 12,046.02 for 1943, $ 8,742.70 for 1944, and $ 6,734.28 for 1945, representing the amounts received from other sources, were properly reported in his original return.

A series of remittances from Norwalk Co. to the Greggs of payments due under the above agreement of September 19, 1942, was made on February 10, 1943, March 17, 1943, April 14, 1943, May 6, 1943, and June 15, 1943, after the deduction as withheld taxes of victory tax in the total amount of $ 561.23. On July 2, 1943, the Norwalk Co. refunded such withheld victory tax in the amount of $ 561.23 to the petitioner's wife.

In December 1940 petitioner had a discussion with his brother, Charles Gregg (hereinafter sometimes referred to as Charles), concerning the possibility of Charles coming to work for him. That discussion resulted from the dissatisfaction of the father of petitioner and Charles over the type of work the latter was doing in Connecticut. The father urged1952 U.S. Tax Ct. LEXIS 197">*213 petitioner to get Charles into business with him and petitioner was pleased to do so. At the time of the discussion, petitioner was in the business of making rubber soles in a plant located in Flemington, New Jersey. When Charles started to work for petitioner, about January 15, 1941, he was employed to work in connection with the production of rubber soles, for which work he was paid $ 50 per week. Charles worked for petitioner until approximately July 15, 1941, which was about a month after the development work on the 18 T.C. 291">*298 rope soles had been completed. During the entire period from January 15 to July 15, 1941, Charles devoted all of his regular working time to the production of the rubber soles. He worked on the process for the rope soles only on Saturdays and Sundays and at night.

The first discussion concerning the compensation Charles was to receive for working on the rope soles process took place around Christmas of 1940. There was no clear cut basis or formula established for the amount of compensation which Charles was to be paid for his work in connection with the development of the process for making the rope soles. Petitioner claimed a deduction of $ 10,0001952 U.S. Tax Ct. LEXIS 197">*214 on his original and amended income tax return for 1943 as "Proportion of earnings to Charles Gregg." The total payments made in the year 1943 by petitioner to his father for the use and benefit of Charles was $ 2,300.

In 1944 petitioner and the Well-Worth Slipper Company (hereinafter sometimes referred to as Slipper Co.) purchased some 14,000 yards of plasto-cloth from Frank Winne & Son. The plasto-cloth was a loosely woven fabric, almost a netting, but very heavy. The function of it was to form a substitute for rubber soles, since rubber was not available during the war for that purpose. After he and the Slipper Co. had purchased the cloth, petitioner had it shipped to the Lee Tire Co. at Conshohocken, Pennsylvania, for processing. The cloth was defective and when the first samples of the processed cloth reached the customer in New York the processed material was93 U.S.P.Q. (BNA) 313">*318 rejected. Petitioner stopped the processing operation and attempted to get rid of the cloth. The plasto-cloth had nothing to do with the shoe business. Petitioner did not carry that cloth regularly as stock. This venture with the cloth was an isolated transaction.

In November or December of 1944 a small quantity 1952 U.S. Tax Ct. LEXIS 197">*215 of the cloth was sold to the Homacite Company for which petitioner was paid $ 309.50. When petitioner received such payment, he did not transmit one-half of the proceeds of the sale to the Slipper Co. even though it was the owner of a one-half interest in the plasto-cloth. Petitioner did not do so because it was a trivial amount and inasmuch as the Slipper Co. was holding certain money that had come in on the venture and petitioner was holding certain money in his account, settlement was to be made subsequently.

In late November or December, 1944, petitioner's representative submitted a sample of the cloth to the Massasoit Company (hereinafter sometimes referred to as Massasoit). Massasoit then requested a larger type sample and offered the cloth to several of its customers whom it thought might be interested in the item. Massasoit reported to petitioner's representative in mid-December 1944 that the item, in 18 T.C. 291">*299 so far as Massasoit was concerned, was a "dog" meaning that the material had no value to Massasoit, that the latter was unable to develop interest in its resale, and hence that it was not interested in petitioner's offer. During December (1944) and January, February1952 U.S. Tax Ct. LEXIS 197">*216 and March (1945) Massasoit kept the type sample on its open file and showed the sample to various prospective customers. During March, one of Massasoit's customers made a tentative offer on the material, subject to prior sale. Massasoit arranged for a shipment of 700 pounds to its prospective customer who later ordered the balance of the merchandise. Petitioner had to guarantee personally that if the cloth was unacceptable it could be returned by Massasoit without expense to it. No return was made and the transaction was completed. The shipments of the cloth to the purchaser were made on March 20 and 21, 1945.

Petitioner was in the hospital at the time his accountant came to discuss the preparation of his 1944 income tax return. At that time petitioner told the accountant to write the plasto-cloth off as a loss. Petitioner's original 1944 income tax return was signed by the accountant who prepared it for him, on February 24, 1945. Petitioner signed the return but failed to fill in the date of signing the return, as provided. The return was stamped "Received March 15, 1945 -- Coll. of Int. Rev. -- 1st Dist. Pa." Both on petitioner's original and amended income tax returns 1952 U.S. Tax Ct. LEXIS 197">*217 for the year 1944, which were filed on the cash receipts and disbursements basis, he claimed a deduction from gross income in the amount of $ 7,099.84, representing a net loss on the sale of plasto-cloth. Petitioner's amended income tax return for the year 1944 was stamped "Received March 12, 1947, Coll. of Int. Rev. -- 1st Dist. Pa."

Respondent disallowed the foregoing deduction, explaining such action in the statement attached to his notice of deficiency, as follows:

(a) The item of $ 7,099.84, alleged to represent a loss sustained in the year 1944 on certain material, has been disallowed. The facts show that such material was finally sold by you in the year 1945 at a loss of $ 2,914.13. This latter amount is allowed as a loss sustained in the year 1945.

In both his original and amended returns for 1945, petitioner reported additional income of $ 4,185.71 as partial recovery of the loss thus deducted in 1944.

OPINION.

We have three issues presented in these proceedings. The first is common to both cases and involves the treatment to be given to certain sums received by both petitioners during the taxable years here under review. Specifically, the question is whether such amounts1952 U.S. Tax Ct. LEXIS 197">*218 are to be characterized as ordinary income 18 T.C. 291">*300 taxable under section 22 (a) of the Code ¹ or as capital gains derived from the sale of a patent and taxable pursuant to sections 117 (a) and (b), Internal Revenue Code. ²

93 U.S.P.Q. (BNA) 313">*319 1952 U.S. Tax Ct. LEXIS 197">*219 During the year 1942 petitioners had pending before the United States Patent Office an application for letters patent to cover the manufacture of certain type outsoles known as rope soles. The method of fabricating this product had been conceived and developed by petitioner together with his wife. After petitioner had previously assigned the foregoing application to his wife, they together entered into an agreement with the Norwalk Co. whereby the latter was "* * * granted the sole and exclusive right and license to manufacture and sell [emphasis added] * * *" the rope sole product in the United States. This agreement was later extended to include and to grant substantially identical rights and privileges to the Panther-Panco Rubber Company, Inc. It is the income received by the Greggs under this original agreement, and the extension thereof, that we here seek to categorize for tax purposes.

The transfer of a patent results in a capital gain or loss if the patent was a capital asset in the hands of the transferor and if the transaction amounted to a sale or assignment as distinguished from a mere license agreement. See, Edward C. Myers, 6 T.C. 258.1952 U.S. Tax Ct. LEXIS 197">*220 Here, there appears to be no doubt that the patent covering the rope soles was a capital asset in Lynne Gregg's hands at the time she and petitioner entered into the agreement with the Norwalk Co. At least, respondent does not contend otherwise and all the evidence before us points in that direction. However, even though the patent be a capital asset, the sums which the Greggs received by reason thereof are not 18 T.C. 291">*301 subject to the limitations of section 117, supra, unless the transaction with the Norwalk Co., as ultimately extended to Panther-Panco, constituted a sale of the patent rather than a mere license of rights therein. Whether the transaction resulted in a sale or a license is solely a question of interpretation involving the letter agreement between the parties. The label or name borne by this instrument of transfer is not determinative. Nor is the form thereof necessarily conclusive. Cleveland Graphite Bronze Co., 10 T.C. 974, affd. 177 F.2d 200.

A patent is a franchise which consists of the three-fold right to exclude all others from making, from using and from vending the thing patented without 1952 U.S. Tax Ct. LEXIS 197">*221 permission of the patentee. Bloomer v. McQuewan, 14 How. 539">14 How. 539. Any portion of the rights granted may be sold or transferred to another with varying legal effects. In one of the leading authorities dealing with the transfer of patents, Waterman v. Mackenzie, 138 U.S. 252">138 U.S. 252, the Supreme Court said, inter alia:

Whether a transfer of a particular right or interest under a patent is an assignment or a license does not depend upon the name by which it calls itself, but upon the legal effect of its provisions. For instance, a grant of an exclusive right to make, use, and vend two patented machines within a certain district, is an assignment, and gives the grantee the right to sue in his own name for an infringement within the district, because the right, although limited to making, using and vending two machines, excludes all other persons, even the patentee, from making, using or vending like machines within the district. Wilson v. Rousseau, 4 How. 646">4 How. 646, 4 How. 646">686. On the other hand, the grant of an exclusive right under the patent within a certain district, which does not include the right1952 U.S. Tax Ct. LEXIS 197">*222 to make, and the right to use, and the right to sell, is not a grant of a title in the whole patent right within the district, and is therefore only a license. Such, for instance, is a grant of "the full and exclusive right to make and vend" within a certain district, reserving to the grantor the right to make within the district, to be sold outside of it. Gayler v. Wilder, above cited. So is a grant of "the exclusive right to make and use," but not to sell, patented machines within a certain district. Mitchell v. Hawley, 16 Wall. 544. So is an instrument granting "the sole right and privilege of manufacturing and selling" patented articles, and not expressly authorizing their use, because, though this might carry by implication the right to use articles made under the patent by the licensee, it certainly would not authorize him to use such articles made by others. Hayward v. Andrews, 106 U.S. 672">106 U.S. 672. See also Oliver v. Rumford Chemical Works, 109 U.S. 75">109 U.S. 75.

After setting forth the above factors as criteria for determining the ultimate legal effect of an agreement involving1952 U.S. Tax Ct. LEXIS 197">*223 the transfer of an interest or right under a patent, the Supreme Court went on to hold that a grant of "* * * the sole93 U.S.P.Q. (BNA) 313">*320 and exclusive right and license to manufacture and sell * * *" the patented product throughout the nation without an express authorization for the use thereof, does not constitute an assignment or sale. Rather, the court said that such a grant is but a license and gives the licensee no right in his own name to sue a third person at law or in equity for an infringement of the patent. 18 T.C. 291">*302 138 U.S. 252">Waterman v. Mackenzie, supra;Edward C. Myers, supra.The rationale of the Waterman case has subsequently been followed and reiterated on numerous occasions. For one such instance see, e. g., United States v. General Electric Co., 272 U.S. 476">272 U.S. 476, wherein it was said that in order for a transaction to constitute an assignment or a sale there must be a conveyance of, "* * * (1) the exclusive right to make, use and vend the invention throughout the United States, or, (2) an undivided part or share of that exclusive right, or (3) the exclusive right under the patent within and through1952 U.S. Tax Ct. LEXIS 197">*224 a specific part of the United States. * * *" See also, Cleveland Graphite Bronze Co., supra, at p. 988. It is settled law that anything short of the foregoing is not a sale or assignment but rather a license which gives the licensee no title to the patent. 138 U.S. 252">Waterman v. Mackenzie, supra;272 U.S. 476">United States v. General Electric Co., supra;Gayler v. Wilder, 10 How. 477">10 How. 477; Moore v. Marsh, 7 Wall. 515; Crown Co. v. Nye Tool Works, 261 U.S. 24">261 U.S. 24.

In the instant case, although the contract granted the right to manufacture and sell the products, this exclusive right was variously conditioned in that if the demand for the products exceeded Norwalk's capacity and Norwalk did not wish to increase its facilities, petitioner could make other commitments and arrangements not damaging to Norwalk. The term of the agreement was for 1 year, subject to renewals of 1 year each, or to cancelation on 60 days' notice by either party. Suits for infringement could be brought either by the Greggs or by Norwalk. These1952 U.S. Tax Ct. LEXIS 197">*225 facts are all indicative of a license, not a sale and transfer of title. In the face of these and other facts incompatible with an idea of sale, and on reading the authoritative cases, we are led to conclude that the relationship between the parties was that of licensor and licensee, not that of an agreement of sale. We affirm the respondent and hold that the payments in question were royalties, taxable to petitioners as ordinary income and not taxable as capital gain.

The next issue is whether petitioner is entitled to deduct $ 10,000 from his gross income for the taxable year 1943 as representing an ordinary and necessary expense in the form of compensation to his brother, Charles Gregg, for services allegedly rendered in 1941 in connection with the development of the patent here involved.

In 1941 petitioner was engaged in manufacturing rubber soles at a plant located in Flemington, New Jersey. At the same time, he was in the process of developing a rope sole to be subsequently covered by the patent here involved. At the behest of his father, petitioner hired Charles to work in the Flemington plant at a salary of $ 50 per week. Charles was thus employed from January 15, 1941, 1952 U.S. Tax Ct. LEXIS 197">*226 to July 15, 1941, during which period his regular working time was wholly 18 T.C. 291">*303 devoted to manufacture of rubber soles at this plant. He worked on the development of the rope soles only in his spare time, i. e., on Saturdays, Sundays, and at night. Petitioner claimed the deduction of $ 10,000 on his original and amended returns for 1943 as compensation paid in that year for such services rendered by Charles in 1941.

We have found as a fact, and petitioner concedes, that he paid only $ 2,300 to his father in 1943 for the use and benefit of Charles. Petitioner now takes the position on brief that such sum, being reasonable, was a proper, ordinary, and necessary expense of doing business and that as such, it is clearly allowable as a deduction for the year 1943.

Petitioner has testified that for 6 months in 1941 Charles rendered certain developmental services outside his regular working hours in connection with the patent here involved. This testimony stands uncontradicted and we have no reason to disbelieve it. There is, however, no substantial evidence that the sum which we have found was paid petitioner's father on behalf of Charles was, in fact, a reasonable amount for the1952 U.S. Tax Ct. LEXIS 197">*227 6 months of part time services that were actually rendered within the meaning of section 23 (a) (1) (A), Internal Revenue Code. ³

The $ 2,300 so paid for such part time services represents a rate of pay approximately twice that paid Charles for his regular full time services. Therefore, we have applied the rule of Cohan v. Commissioner, 39 F.2d 540, and, having93 U.S.P.Q. (BNA) 313">*321 done the best we can with the evidence at hand, have concluded that $ 1,300 is the reasonable amount to be allowed as the deduction in 1943 for the services rendered by Charles. Accordingly, we so hold.

Petitioner1952 U.S. Tax Ct. LEXIS 197">*228 has argued on brief that the remainder of the $ 10,000, although not paid in 1943, was, nevertheless, paid in 1944 and should be allowed as a deduction in that year. What we have said above appertaining to the deduction in 1943 of the amount paid to Charles, and its reasonableness, is equally apposite here. However, even if we disregard that fact, the short answer to petitioner's claim is that the issue as it relates to the taxable year 1944 has not been properly raised in the pleadings. On numerous occasions we have held that we will not, and cannot, consider issues which have not been pleaded. Samuel E. Hirsch, 16 T.C. 1275. Consequently, we must decline to pursue the question further.

18 T.C. 291">*304 There remains the issue which involves the determination of the appropriate year in which a deduction is allowable to petitioner for an admitted loss sustained on certain plasto-cloth material purchased by him and another in 1944. The question is purely one of fact. Those pertinent thereto have been fully set out above in our findings of fact and we see no purpose in repeating them here. Suffice it to say that the identifiable event definitely fixing1952 U.S. Tax Ct. LEXIS 197">*229 the year in which the loss occurred was the sale of the material in March 1945 at a loss of $ 2,914.13. Respondent allowed such sum as a loss deduction in 1945. Respondent's action as to this issue is sustained.

Decisions will be entered under Rule 50.