41 T.C. 50">*50 Respondent determined a deficiency in the income tax of the petitioners for 1955 in the amount of $ 719.10. The principal issue is whether certain amounts received by petitioner Julian from the McDermott Corp. in 1955 are taxable as ordinary income from royalties or as capital gains from the sale of patents. If there was a sale of the patents, the question then arises whether and to what extent the gains represented long-term or short-term capital gains.

FINDINGS OF FACT

Petitioners Julian A. McDermott and Mildred A. McDermott are husband and 1963 U.S. Tax Ct. LEXIS 37">*38 wife residing in Elmhurst, N.Y. They filed a joint income tax return for 1955 with the district director of internal revenue at Brooklyn, N.Y.

Julian is a graduate electrical engineer and a licensed professional engineer. During World War II he did consulting work for a number of manufacturers aiding them to convert their operations to defense work. Prior to 1943 he had developed some inventions and secret processes for which two patents were issued to him in 1942 and 1943. He also purchased two patents from Samuel Feingold in 1943, assignments of which were filed with the U.S. Patent Office. A fifth patent applied for on January 16, 1950, was issued to Julian in 1952. In 1945 and 1946, Julian also filed applications for three patents which were never issued because they were either denied or withdrawn. The following schedules show the patents issued to or purchased by Julian, and the applications referred to: 41 T.C. 50">*51

The above patents and applications relate to signal lighting devices and improvements thereto.

On June 23, 1943, petitioners organized the Julian A. McDermott Corp., under the laws of New York, with an authorized capital of 200 shares of stock having no par value. The stock was issued in equal amounts to Julian and Mildred from time to time until 1945, when it was fully issued for a total paid-in capital of $ 20,000. Julian has always been president and Mildred secretary-treasurer of the corporation, and each has always owned 50 percent of the stock outstanding.

On July 28, 1943, Julian drafted and caused to be executed the following agreement:

This agreement entered into by Julian A. Mc Dermott of New York City herein referred to as Mc Dermott which term shall also mean his heirs or assigns and the Julian A. Mc Dermott Corporation of New York City herein referred to as the corporation which term shall also mean its successors or assigns.

In consideration of one dollar and other good and sufficient consideration 1963 U.S. Tax Ct. LEXIS 37">*40 receipt of which is hereby acknowledged:

Mc Dermott agrees to license the Julian A. Mc Dermott Corporation to use all patents, designs, specifications, copyrights or trademarks which are currently owned by him or may be hereafter acquired by him or invented written or designed by him. Said license is subject to the following conditions:

1. Said license is revokable by Mc Dermott either completely or as applied to any particular item on a 30 day (Thirty) written notice to said corporation.

2. The sale, sublicensingor [sic] disclosure of details details [sic] of reproduction or manufacture of any item included in this agreement other than as required for the manufacture and sale of the items described, to any third party by the Corporation or its personnel is prohibited unless specifically authorized in writing by Mc Dermott. "Manufacture" as used herein shall mean the fabrication of the devices or items by the McDermott Corporation, its subsidiaries or subcontractors for sale only thru [sic] the Corporation, its agents or 41 T.C. 50">*52 subsidiaries. Licensing or sublicensing of others to use patents or patent applications iscompletely [sic] prohibited unless authorized in writing by Mc Dermott.

3. 1963 U.S. Tax Ct. LEXIS 37">*41 The right is reserved by Mc Dermott to omit from this agreement any item which he may in the future may [sic] design, develop write or invent. However on any item which Mc Dermott wishes to omit he is tonotify [sic] the Corporation in writing of his intent. Nothing in this agreement requires McDermott to assign or license the Mc Dermott Corporation to any extent or on any item other than on the terms and conditions established herein.

4. Said corporation agrees to pay Mc Dermott not less than 6% (Six percent) of theselling [sic] price of the item covered as a royalty or design fee. Additional supplementary agreements may bedrawn [sic] to establish exact rates in conformity with the extent of sales and complexity of the item. However such rates shall not exceed 15% (Fifteen percent) of the sales price under any circumstances. In the case of Trademarks Copyrights or published works which are copyrighted this fee shall not be more than 100% of the cost of the printed lable [sic], box, advertisement or literature on which it is used whether the corporation directly reproduces them or has it done thru [sic] others.

5. The accounting of the Corporations activities and liability to Mc 1963 U.S. Tax Ct. LEXIS 37">*42 Dermott under this agreement shall be made on a yearly basis as soon as possible after the close of the Corporation's business year. Payment to Mc Dermott shall be made for all liability incurred on a date not more than 70 (Seventy) days from the close of said business year. However McDermott reserves the right to require accounting and payment on a basis of his personal business year if it is different than that of the corporation.

6. Theexpense [sic] of defending said developments, designs, or other items from infringment [sic] or other unauthorized copying shall be bourne [sic] by the corporation. However this shall not be required unless the corporation has at some time made, sold or had the item reproduced. Nothing in this agreement makes Mc Dermott liable to the Corporation or to others for the Corporations use of the item.

7. Any expense incurred in filing patent applications, copyright or trade mark, or otherlegal [sic] protective measures shall be bourne [sic] by the Mc Dermott Corporation with the exception that Mc Dermott is not to charge for his services in connection with the signing or preparation of legal papers. In such cases where Mc Dermott revokes the license 1963 U.S. Tax Ct. LEXIS 37">*43 to the Corporation on any item and so notifies the Corporation and the Corporation has not used the item or manufactured or sold it Mc Dermott shall credit the Corporation with such expense and it shall be deducted from moneys due him at the next accounting period. (as applied to protective expense only.)

8. Nothing in this agreement shall prevent the Corporation from purchasing any item from Mc Dermott. However if such a condition occurs said purchasing agreement shall supercede [sic] any arrangment [sic] included herein.

9. All licensing under this agreement is on a non-exclusive basis. The word "Item" as used herein shall mean any patent, patent application, design, invention, copyright, trademark, writing or process or specification for a product or a process. This license encompasses all of these results of original thinking and all paragraphs are equally applicable.

/s/ Julian A. McDermott,

Julian A. McDermott.

/s/ Mildred McDermott,

(For the Corporation.)

/s/ Anna Eisen.

/s/ M. J. McDermott.

[Corporate Seal]

41 T.C. 50">*53 The corporation was inactive and did no manufacturing work in 1943 or the early part of 1944. During this period Julian did consulting work in other fields with other organizations, 1963 U.S. Tax Ct. LEXIS 37">*44 including the Lightolier Corp. and its subsidiary, the Corona Corp.Julian discussed with them the potentialities of his patents.

On May 26, 1944, the corporation entered into the following sublicensing agreement with the Corona Corp.:

Memorandum of Agreement made this 26 day of May, 1944 between The Julian A. McDermott Corporation, of New York City, hereinafter called the Licensor and Corona Corporation, of Jersey City, New Jersey, hereinafter called the Licensee, as follows:

1. The Licensor represents that it is the owner of certain drawings, designs and specifications for the manufacture of flashing waterlights and the component parts thereof, together with operating instructions, known by the Licensor's designation as C G 1, 2 and 3.

2. The Licensor hereby covenants and agrees with the Licensee that it will make proper application, at its own expense, for patents upon such features of the said flashing waterlights as shown by the said drawings, designs, specifications and operating instructions, as may be patentable within two months after the date of this agreement.

3. The Licensor hereby grants to the Licensee, its successor and assigns, a non-exclusive license for the life of such 1963 U.S. Tax Ct. LEXIS 37">*45 patent or patents as may be obtained by the Licensor upon the said flashing waterlight, drawings, designs, specifications and operating instructions, together with any improvements thereon or, if such patent or patents are not obtained by the Licensor, for the term of seventeen years from the date of this agreement, to make, use and sell the units shown by the said drawings, designs, specifications and operating instructions, or the component parts thereof, as hereinabove referred to, upon the following terms and conditions:

(a) The Licensee may not separately sell component parts of the said units except for repair or replacement, without specific written permission of the Licensor.

(b) No sublicenses may be issued by the Licensee under this agreement without written permission of the Licensor.

(c) Any and all products manufactured or sold by the Licensee under this license shall bear the notation "Manufactured under license from Julian A. McDermott Corp." in letters at least 1/8" high. This notation shall be inscribed in the same manner as the manufacturers nameplate at the same location.

4. The Licensee shall pay to the Licensor a royalty equal to two and a half (2 1/2) percent of 1963 U.S. Tax Ct. LEXIS 37">*46 the sales price of the products manufactured and sold by it under this license, which payment or payments shall be made within ten days after payment for the same has been received by the Licensee upon shipment or shipments of the products manufactured and sold under this license; and in the event that the aggregate of the royalties paid by the Licensee to the Licensor under the terms of this agreement shall be less than two hundred ($ 200.00) dollars for any two year period, the license shall cease and terminate.

41 T.C. 50">*54 In Witness Whereof, the parties hereto have caused this instrument to be executed by their duly authorized officers the day and year first written above.

The Julian A. McDermott Corporation,

By /s/ Julian A. McDermott.

Attest: [no witness].

Corona Corporation,

By [signature illegible].

Attest:

/s/ Paul Raskin.

No prior written authorization was given by Julian, as patentee and licensor of the corporation, to the corporation to enter into this sublicensing agreement.

On July 10, 1944, the following so-called modification to agreement of July 28, 1943, was executed:

Modification to agreement of July 28th, 1943.

Between Julian A. McDermott and The Julian A. McDermott Corp.

Reference to: 1963 U.S. Tax Ct. LEXIS 37">*47 Patent licenses.

Paragraph indicated as #1 in the agreement shall read: said license is revokable by either McDermott or the corporation in whole or as applied to a particular item on a 60 day written notice from one to the other.

The first sentence of the Paragraph designated as #9 is to be revised as follows:

All licensing is to be exclusive to the McDermott corporation with the exception that whenever the corporations facilities are inadequate to manufacture, distribute or service any item McDermott may on thirty day notice to the corporation issue such additional licenses as he deems necessary; provided however that he pays the McDermott Corporation 6% of the royalties received on such an item.

/s/ Julian A. McDermott,

Julian A. McDermott.

/s/ Mildred McDermott,

(Mildred McDermott for the Corporation)

Witnessed:

/s/ Anna Eisen.

/s/ M. J. McDermott.

[Corporate Seal]

On July 24, 1944, the following so-called waiver was executed:

Waiver

In consideration of additional royalties which may accrue to me by this action and in order to validate, facilitate, and expedite sub-licensing [sic] under existent or future agreements between The Julian A. McDermott Corporation and other corporations, or third 1963 U.S. Tax Ct. LEXIS 37">*48 parties, I hereby waive my right to revoke my license agreements between myself and The Julian A. McDermott Corporation as called for under condition #1 of the agreement dated July 28, 1943 and modification of this condition as stated in the agreement of July 10th, 1944.

In addition I waive all rights to consent with regards to sub-licensing [sic] as stated as condition #2 in the agreement of July 28th, 1943. I waive all rights to license directly with third parties as called for under my agreements with the 41 T.C. 50">*55 corporation with the condition that McDermott is to receive (80%) eighty percent of the royalties received by the corporation. However the agreement of July 28th, 1943 referred to above established a minimum royalty of (6%) six percent, and this percentage may be reduced only with the written consent of McDermott.

I waive also my rights as stated in the modification agreement of July 10th, 1944 with reference to the exception embodied in the last six lines of said agreement.

Dated: the 24 of July 1944.

(Signed) /s/ Julian A. McDermott.

Acknowledged and Accepted:

/s/ Julian A. McDermott.

/s/ Mildred McDermott,

(For the Julian A. McDermott Corp.)

On July 26, 1944, the following so-called 1963 U.S. Tax Ct. LEXIS 37">*49 waiver was executed:

Waiver

In consideration of the large volume of business anticipated and to further the use of existing patent licenses, I hereby permit the Julian A. McDermott Corp. to license the Corona Corporation of Jersey for a royalty fee of (2 1/2%) two and half percent of the sales price, only applicable to the waterlight referred to in agreement of May 26th, 1944 between the Julian A. McDermott Corporation and the Corona Corporation. The royalty fee applies only to the device indicated in drawings referred to in the Corona Corporation and the Julian A. McDermott Corporation agreement.

It is to be noted that these drawings do not cover actuating mechanisms which are to be purchased by the Corona Corporation from the Julian A. McDermott Corporation and this waiver in no way reduces the required minimum royalties on the actuating mechanism which is covered by earlier patents and designs.

Referring to my agreement with the Julian A. McDermott Corporation of July 28th, 1943, I hereby waive my rights under all limitations established in condition #2 and "use" of patent as called for in ninth line, 1st page, I interpret as meaning "to make, use, and sell the devices built under 1963 U.S. Tax Ct. LEXIS 37">*50 these patents, designs, patent applications, specifications, copyrights, or trademarks."

Dated: the 26th of July, 1944

(Signed) /s/ Julian A. McDermott.

Acknowledged and Accepted:

/s/ Julian A. McDermott.

/s/ Mildred McDermott,

(For the Julian A. McDermott Corp.)

On October 27, 1944, the following so-called "Modification" was executed:

Modification to Patent and Licensing Agreements Between Julian A. Mc Dermott and the Julian A. Mc Dermott Corporation

Oct. 27, 1944.

In consideration of the continued addition to the number of his inventions which Mc Dermott has permitted the Mc Dermott Corp. to use, it is agreed that royalties accruing to Mc Dermott on all items shall not be less than $ 10,000 (Ten Thousand) Dollars per year in total. If said royalties are less than that 41 T.C. 50">*56 amount McDermott reserves the right to withdraw all rights to patents, patent applications and copyrights on inventions or designs or similar original work now in use or on which rights are held by said corporation.

Royalties for any year shall be in default if not paid within 90 days of the close of a year. However in case of default, if Mr Mc Dermott fails to notify the corporation of his intent to withdraw all rights within 1963 U.S. Tax Ct. LEXIS 37">*51 120 days of the close of the year, then rights, shall be retained by the corporation for the current year.

In case of bankruptcy, all rights shall automatically revert to Mc Dermott.

On any new developments, up to a date six months from the date that the item is proposed to the corporation and such details that the patent office considers are necessary to constitute "reduction to practice" have been disclosed, Mc dermott [sic] may withdraw all rights from the corporation. If the corporation has spent any money on patent or legal work during this period with Mc Dermott's consent, he shall reinburse [sic] the corporation if he decides to withdraw such rights.

After the six month period, such rights may be withdrawn only due to default or bankruptcy as described herein.

Sublicensing shall be permitted with the following limitation: The financial reliability and production facilities of the sublicensor must be adequate and the Mc Dermott corporation must be responsable [sic] to see that the minimum royalties as established are paid to Mc Dermott.

This agreement is to supplement and take precedence over any previous agreements

/s/ Julian A McDermott.

/s/ Mildred McDermott.

/s/ M. J. McDermott.

/s/ 1963 U.S. Tax Ct. LEXIS 37">*52 Anna Eisen.

[Corporate Seal]

These are the only documents executed by Julian purporting to grant patent rights to the corporation. The corporation acquired no patent rights from any other source, and Julian has given no patent rights to anyone else.

The corporation was unable to attract outside capital and was not able to manufacture and sell signaling devices at least until some time in 1944. A Government loan as a defense industry was applied for in the latter part of 1944, but not obtained until 1945, when credit to the extent of $ 80,000 on a rotating loan basis was made available. The first units utilizing the patented devices were built by Julian in the cellar of his home. Petitioners sold their home in 1945 and used the money for the production of some of the devices.

The corporation obtained a contract in July 1945 and rented a plant and started manufacturing operations in July 1945.

The corporation filed its income tax returns on an accrual basis of accounting and petitioners filed their income tax returns on the cash basis. The royalties paid by the corporation to Julian in 1955 were computed on the basis of 1954 sales and were deducted by the corporation on its 1954 return. 1963 U.S. Tax Ct. LEXIS 37">*53 They were reported by petitioners on their 1955 return. Julian and Mildred determined the amount of royalties they would withdraw from the corporation each year.

41 T.C. 50">*57 The following schedule sets forth, for the years indicated, the gross sales of the corporation (at least 95 percent of which are from items manufactured under the patents acquired by Julian), the deductions for royalties payable to Julian, the percentage of royalties to gross sales, the total salaries paid to petitioners (the sole officers), and the net profit or loss from operations:

Mildred prepared the corporation's returns for the above years and claimed thereon the deductions for royalties payable to Julian. The return for 1953 was not available at the trial.

The corporation did not pay any dividends during the years 1950 to 1952, nor 1954 to 1956. The corporation did not indicate ownership of the patents as an asset on the balance sheet portion of its income tax return for any of the above years.

Petitioners received royalty payments from the corporation in 1955 in the amount of $ 12,660, which they reported as long-term capital gain.

OPINION

The primary issue is whether the amounts received by Julian from the corporation in 1955 constituted ordinary income or capital gains. The determination of this issue depends upon whether the series of so-called agreements, modifications, and waivers, executed by Julian in his individual capacity and by Mildred for the corporation in 1943 and 1944 amounted to a transfer to the corporation of all substantial rights to the patents which Julian owned at the time or subsequently developed.

At the outset it should be pointed out that section 1235 of the Internal Revenue Code of 19541963 U.S. Tax Ct. LEXIS 37">*55 ¹ is not applicable. That section provides for capital gains treatment upon the transfer of all substantial rights to a patent, but its application is specifically denied where the transfer is between related persons. Sec. 1235(d). Under section 267(c)(2), Julian is deemed to own 100 percent of the stock of the corporation and any transfer by Julian to the corporation would clearly be between related persons as defined in section 267(b)(2). The nonapplicability of section 1235 does not of itself, however, determine that the payments 41 T.C. 50">*58 received by Julian are ordinary income. The tax consequences are to be determined under other provisions of the law. Income Tax Regs., sec. 1.1235-1(b); Leonard Coplan, 28 T.C. 1189">28 T.C. 1189.

Another statutory provision which requires consideration is section 1239. This section denies capital gains treatment in the case of a sale or exchange between an individual and a corporation where, as here, more than 80 percent of the stock of the corporation is owned by that individual and his spouse, if the property transferred is depreciable property in the hands of the 1963 U.S. Tax Ct. LEXIS 37">*56 transferee and if the sale or exchange was made after May 3, 1951.

Assuming that there was a valid sale or transfer of the patents and patent applications involved herein, it is clear that the property rights in such patents and applications were intangible assets subject to depreciation in the hands of the transferee within the meaning of sections 1239(b) and 167(a). Income Tax Regs., sec. 1.167(a)(3); Best Lock Corporation, 31 T.C. 1217">31 T.C. 1217, 31 T.C. 1217">1234. Since, however, the documents by which it is claimed such rights were transferred to the corporation were executed in 1943 and 1944, prior to May 3, 1951, it is clear that section 1239 is not applicable to the transfer of any of the patents or patent applications involved, including patent No. 2,592,165, which was issued in 1952, but for which application accompanied by drawings and specifications was made on January 16, 1950.

Accordingly, we turn to general provisions of law regarding sales and exchanges. To be entitled to long-term capital gains treatment petitioners must show: (1) That the property in question constituted capital assets; (2) that there has been a "sale or exchange" of such property; and (3) that it had been held for more 1963 U.S. Tax Ct. LEXIS 37">*57 than 6 months prior to the "sale or exchange." Sec. 117(a)(4), I.R.C. 1939; Rose Marie Reid, 26 T.C. 622">26 T.C. 622; Kronner v. United States, 110 F. Supp. 730">110 F. Supp. 730 (Ct. Cl.). Respondent concedes that whatever rights Julian had in the inventions herein concerned were capital assets. He contends, however, that there was no sale or exchange and, in the alternative, that at least some of the patents and inventions were not held for more than 6 months prior to "sale or exchange."

In determining whether a sale or exchange of a patent or invention has occurred, the Court must look not only to the documents themselves, but to the "total factual complex surrounding the transaction," to determine the real intent of the parties. Switzer v. Commissioner, 226 F.2d 329 (C.A. 6, 1955), affirming a Memorandum Opinion of this Court. The transaction will be treated as a sale only if the holder of the patents intended to surrender all of his interest in the patents or inventions and such surrender did in fact occur. 26 T.C. 622">Rose Marie Reid, supra.Anything less than such a transfer is a mere license and the proceeds ordinary income. Lynne Gregg, 18 T.C. 291">18 T.C. 291, affd. 203 F.2d 954 (C.A. 3, 1953); 110 F. Supp. 730">Kronner v. United States, 41 T.C. 50">*59 .1963 U.S. Tax Ct. LEXIS 37">*58 Another general principle particularly applicable here is that the Court should closely scrutinize transactions between stockholders and their closely held corporation. Roy J. Champayne, 26 T.C. 634">26 T.C. 634; Differential Steel Car Co., 16 T.C. 413">16 T.C. 413; Granberg Equipment, Inc., 11 T.C. 704">11 T.C. 704.

Petitioners contend that the series of five documents set forth in full in our findings taken collectively constituted a sale of all substantial rights to the inventions involved. We do not agree. In our opinion the documents themselves, as well as the "total factual complex surrounding the transaction" negate such a transfer.

As was stated in Switzer v. Commissioner, supra, "Although no particular form is required for an assignment, the instrument of transfer must be unambiguous and show a clear and unmistakable intent to part with the patent."

A mere reading of the five documents in question is sufficient to show that they are not "unambiguous" and that they do not show a clear and unmistakable intent to part with the patents. The original agreement of July 28, 1943, was clearly not a transfer of all substantial rights in the patents and inventions involved. It was limited to "use" of the patents by the 1963 U.S. Tax Ct. LEXIS 37">*59 corporation. It was revocable by Julian (par. 1), nonexclusive to the corporation (par. 9), and speaks of the possible future purchasing of such "items" by the corporation from Julian (par. 8). It also reserved to Julian the right to withhold from the corporation any item he might in the future design or invent (par. 3), and provides for the payment by the corporation of expenses of defending infringements only as to items made, sold, or reproduced by the corporation. These rights retained by Julian negate the existence of a sale. Arthur M. Young, 29 T.C. 850">29 T.C. 850, affd. 269 F.2d 89 (C.A. 2, 1959); 18 T.C. 291">Lynne Gregg, supra.

The modification of July 10, 1944, provided for revocation by the corporation as well as by Julian. It also purported to make all licensing exclusive to the corporation but nevertheless provided that whenever the corporation's facilities were inadequate to manufacture, distribute, or service any item, Julian, on 30 days' notice, could issue such additional licenses as he deemed necessary. Cf. 18 T.C. 291">Lynne Gregg, supra at 302.

In the waiver dated July 24, 1944, Julian waived his right to revoke but left undisturbed the corporation's right to revoke as provided in the modification 1963 U.S. Tax Ct. LEXIS 37">*60 of July 10, 1944. This might be considered a condition subsequent beyond the control of Julian, were it not for the fact that Julian and his wife owned all the stock of the corporation and consequently had control of its actions. The right of the corporation to revoke does not appear to have been disturbed by any of the subsequent documents. This, of itself, is sufficient to indicate Julian did not relinquish all control over his inventions.

41 T.C. 50">*60 The waiver of July 24, 1944, does appear to have waived the condition contained in the original agreement requiring Julian's consent to sublicensing by the corporation and to Julian's right to sublicense third parties, including the exception based upon the inadequacy of the corporation's facilities embodied in the modification of July 10, 1944. However, the modification of October 27, 1944, imposed a further condition upon the right of the corporation to sublicense based upon the financial reliability and adequacy of production facilities of the sublicensor.

The waiver of July 26, 1944, was a belated consent to the sublicense granted the Corona Corp. on May 26, 1944. It also defined the word "use" employed in the original agreement to mean 1963 U.S. Tax Ct. LEXIS 37">*61 "make, use, and sell."

Lastly, by the final modification of October 27, 1944, Julian retained the right to "withdraw all rights from the corporation" relating to "new developments," for a period of 6 months from the date the item was proposed to the corporation or details disclosed relating to "reduction to practice."

Considered separately or as a whole the five documents in question did not constitute a sale or exchange of all substantial rights to the patents and inventions involved.

The above conclusion, based on an analysis of the documents themselves, is sufficient to dispose of this case. Additionally, however, it is to be noted that the so-called agreement, waivers, and modifications were signed, or approved and accepted, by Mildred for the corporation. While the signature of a contract with the name of an individual, adding the word "for" a named corporation, may be binding on the corporation (7 Fletcher, Cyclopedia Corporations, sec. 3032; Sun Printing & Publishing Assn. v. Moore, 183 U.S. 642">183 U.S. 642), as a general rule, unless expressly conferred, a secretary or a treasurer of a corporation has no authority to make any contracts on its behalf and in its name (2 Fletcher, Cyclopedia 1963 U.S. Tax Ct. LEXIS 37">*62 Corporations, secs. 637, 654; Klein v. Louis Barnett Sons, 158 N.Y.S. 627">158 N.Y.S. 627; Greene v. Iroquois Hotel & Apt. Co., 84 N.Y.S. 591">84 N.Y.S. 591). In the absence of any showing that Mildred was authorized to contract for the corporation, it is extremely doubtful that the documents in question were of any binding effect for any purpose for want of mutuality.

Aside from the inadequacies of the documents themselves, the "total factual complex" surrounding the transactions indicate a lack of any real intent on the part of either or both of the petitioners to surrender to the corporation all of Julian's interest in the patents or inventions. The documents show a studied effort to retain control. Julian's expressed view that "rights to the patents did not transfer" upon execution of the various documents but only when the corporation first began to use the invention indicates he did not consider or intend the 41 T.C. 50">*61 documents as a sale. While his statement, as a conclusion of law, is open to question, it does indicate his intention to retain control and his disregard of the agreements. His view was also apparently shared by Mildred as evidenced by her testimony that patent No. 2,221,867 was transferred to the 1963 U.S. Tax Ct. LEXIS 37">*63 corporation on October 27, 1944; that patent No. 2,298,003, patent No. 2,305,096, and patent No. 2,310,149 were transferred on March 27, 1945; and that application No. 138838, on which patent No. 2,592,165 later issued was transferred on May 1, 1950; that application No. 676617 filed June 14, 1946, was transferred January 14, 1947; and that application No. 707737 filed November 4, 1946, was transferred on June 4, 1947.

Further evidence of petitioners' disregard of the agreements is indicated by the execution of the sublicensing agreement between the corporation and Corona Corp. on May 26, 1944, without prior written consent of Julian and petitioners' disregard of the minimum royalty provisions. It is evident from the above that Julian treated the corporation as his alter ego and that he did not deal with the corporation at arm's length.

It might further be noted that even if it should be held that the documents in question constituted a sale of patent rights it would have no application to the patent and applications issued or applied for subsequent to 1944. Agreements to assign all future inventions, unlimited as to subject matter and time, have in general been held to be invalid. 1963 U.S. Tax Ct. LEXIS 37">*64 Rigsdale Ellis, Patent Assignments, sec. 133 (3d ed. 1955); Guth v. Minnesota Mining & Mfg. Co., 72 F.2d 385 (C.A. 7); Aspinwall Mfg. Co. v. Gill, 32 F. 697">32 F. 697 (D.N.J.). Cf. Ellis, Patent Licenses (a companion volume to Rigsdale Ellis, Patent Assignments), sec. 3 (3d ed. 1958). Also, unless clearly expressed in the agreement, or based upon employer-employee relationship, an assignment of specified issued patents does not transfer later improvements or modifications of the inventions set out in such issued patents. Rigsdale Ellis, Patent Assignments, secs. 126, 127; General Time Corp. v. Padua Alarm Systems, 199 F.2d 351 (C.A. 2); Monsanto Chemical Works v. Jaeger, 31 F.2d 188 (W.D. Pa.).

In the original agreement dated July 28, 1943, involved herein, Julian agreed to license the corporation "to use all patents * * * currently owned * * * or * * * hereafter acquired * * * or invented * * * by him." This provision was not changed by any of the later modifications or waivers, except to define the word "use." The agreement is unlimited as to subject matter and time and, on the authorities cited above, is therefore invalid insofar as subsequent patents or inventions are concerned. It 1963 U.S. Tax Ct. LEXIS 37">*65 is to be presumed that the corporation made use of the latest inventions and improvements made available to it and petitioners have not shown that the amounts paid to Julian by the corporation in 1955 were not derived from the use of the later inventions, or 41 T.C. 50">*62 to what extent, if any, they resulted from the use made of patents owned by Julian as of July 28, 1943. In the absence of such a showing and in view of the invalidity of the agreement to effect a sale of the later inventions, the amounts involved must necessarily be considered as ordinary income. Neither Carl G. Dreymann, 11 T.C. 153">11 T.C. 153, nor the authorities cited and quoted therein relating to the question of the "validity" of the agreement require a different conclusion. The Dreymann case involved an oral agreement by petitioner therein to give his daughter a one-half interest in a moistureproofing process, not yet perfected or patented, in return for her assisting him in perfecting it. It was held the daughter acquired an undivided one-half equitable interest in the property from the moment the process was reduced to practice and the royalty income realized from such interest was not taxable to the petitioner. In Littlefield v. Perry, 88 U.S. 205">88 U.S. 205, 1963 U.S. Tax Ct. LEXIS 37">*66 cited in the Dreymann case, the Court stated: "The assignment in this case, by its express terms, covers all improvements in the original patent or invention described in the application of 1852." (Emphasis supplied.) Conway v. White, 9 F.2d 863, quoted in the Dreymann case, involved an agreement contained in an employment contract to transfer to the employer "all inventions and discoveries made by" the employee "during the term of his employment, which in any way may affect any articles manufactured by" the employer "and used or capable of being used in the business of" the employer. As the Court itself stated: "It [the contract] was not an agreement to assign in gross the defendant's future labor as an inventor, but only the inventions and discoveries made during the term of his employment, and which in any way might affect the articles manufactured by the company, and which were used or capable of being used in the business."

We hold that the amounts received by Julian from the corporation in 1955 constituted ordinary income and not capital gain. In view of our holding on the first issue it is not necessary to discuss the second stated issue.

Decision will be entered for the respondent. 1963 U.S. Tax Ct. LEXIS 37">*67