163 U.S.P.Q. (BNA) 378">*378 52 T.C. 591">*592 Respondent determined deficiencies in income tax for the calendar years 1961, 1962, and 1963 in the amounts of $ 11,206.42, $ 13,353.13, and $ 20,613.92, respectively.

The only issue for decision is whether certain income is taxable as ordinary income or as long-term capital gain.

FINDINGS OF FACT

Most of the facts have been stipulated. The stipulation and the exhibits attached thereto are incorporated herein by reference.

During the taxable years 1961, 1969 U.S. Tax Ct. LEXIS 100">*102 1962, and 1963, the late William F. Stahl (hereinafter sometimes referred to as petitioner) and Marion B. Stahl were husband and wife, residing in Kenilworth, Ill., at the time the petition herein was filed. They filed joint individual income tax returns with the district director of internal revenue at Chicago, Ill., for the year 1956 and the years 1959 through 1963. William died January 17, 1968, and by order of the Court the caption was changed to read as it now does.

Between 1941 and 1945, petitioner obtained letters patent of the United States for six inventions covering the manufacture and structure of bobbins, coils, and windings. In 1942, Everett S. Jamison, while in the employ of petitioner, assigned to petitioner an application for patent for method of making forms for windings. patent No. 2,368,025 was issued on this application on January 23, 1945, at which time petitioner acquired sole ownership of the patent. In 1950, F. V. Collins, while in the employ of Precision Paper Tube Co. (hereinafter mentioned), assigned to petitioner an application for patent for "Bobbin." patent No. 2,644,651 was issued on this application on July 7, 1953, at which time petitioner acquired 1969 U.S. Tax Ct. LEXIS 100">*103 sole ownership of the patent.

52 T.C. 591">*593 On March 4, 1952, petitioner and Collins filed with the U.S. Patent Office applications for patents as follows:

Pursuant to assignments recorded on Mar. 14, 1952, and Mar. 19, 1952, respectively, F. V. Collins assigned all of his interest in said applications to petitioner.

In 1953, N. P. Hoffstedt filed an application (No. 361,229) for patent which application was assigned to petitioner in 1953.

In 1954, petitioner filed two applications (Nos. 450,931 and 454,134) for patents concerning the making of bobbins.

163 U.S.P.Q. (BNA) 378">*379 Prior to 1946 petitioner conducted his business of manufacturing and selling square and rectangular paper tubes as a sole trader under the firm name and style of Precision Paper Tube Co. In February 1946 he incorporated the company as an Illinois corporation under the same name, which corporation (hereinafter 1969 U.S. Tax Ct. LEXIS 100">*104 referred to as Precision) continued the business of manufacturing and selling the same products. During all of the time involved in these proceedings, petitioner owned more than 99 percent of issued and outstanding stock of Precision. As a part of its business of making paper tubes, Precision also made paper bobbins, and petitioner permitted Precision to use his inventions, being the eight patents and five patent applications above mentioned, to develop machines for constructing the bobbins and manufacturing the same. Petitioner permitted Precision to use the patents and applications without payment of royalties, but Precision had paid certain attorney fees, costs, and expenses in connection with the applications and issuance of such patents.

On January 3, 1956, the board of directors of Precision held a special meeting. Among other things the minutes of this meeting stated:

The chairman then presented the question of the patents and applications for patents concerning the manufacture of bobbins, which patents and applications were the property of William F. Stahl. These patents and inventions had been used by the company for a number of years under an agreement between the company 1969 U.S. Tax Ct. LEXIS 100">*105 and William F. Stahl whereby the company was permitted the unexclusive use of such patents and inventions without the payment of royalties but had paid, under such agreement, certain attorneys' fees, costs and expenses in connection with the applications and issuance of such patents. The chairman also called to the attention of the meeting that the company was negotiating with other manufacturers for the licensing of such patents and in order to do so, the company desired to purchase and acquire these patents and applications. In the further discussion and evaluation of the patents the following resolution was unanimously adopted:

52 T.C. 591">*594 Resolved, that the company enter into an agreement of sale with William F. Stahl to acquire certain patents and issue its notes in payment thereof * * *

On January 3, 1956, petitioner and Precision executed an agreement whereby petitioner did "sell, assign and transfer" his interest in the previously mentioned eight patents and five patent applications to Precision for a stated price of $ 300,000, which amount was allocated in the agreement as follows:

None of the foregoing assignments were recorded in the Assignment Division of the U.S. Patent Office.

Paragraph 4 of the above January 3, 1956, agreement is as follows:

4. The full purchase price for said inventions set forth in the preceeding [sic] paragraph in the sum of $ 300,000.00 shall be evidenced by fifteen (15) promissory notes, each in the amount of $ 20,000.00, dated January 3, 1956, payable serially beginning January 3, 1957, and each year thereafter for fifteen (15) years with interest at 5% per annum after due date, the receipt of which notes is hereby acknowledged by the Seller.

To carry out the above January 3, 1956, agreement, petitioner executed and delivered a separate "Assignment of Patent" for each of the eight patents and "Assignment of Application for Patent" for each of the five patent applications in which he acknowledged receipt of the full purchase price as specified in the agreement.

On February 14, 1956, Precision entered into two contemporaneous agreements with the Buckeye Bobbin Co. of Cleveland, 1969 U.S. Tax Ct. LEXIS 100">*107 Ohio. One agreement was between Precision as lessor and Buckeye as lessee whereby the lessor leased to the lessee for a term of 20 years certain of its machines then being used by the lessor in the manufacture of bobbins. The other agreement was between Precision as licensor and Buckeye as licensee whereby the licensor granted 163 U.S.P.Q. (BNA) 378">*380 to the licensee the exclusive right and license of the said above-listed patents (except patent No. 2,343,389) and applications to make, use, and sell bobbins embodying the inventions described and claimed in said patents and 52 T.C. 591">*595 applications for the full life or term of such patents as then existent or which may be issued by reason of the applications then pending, or for the term of 20 years, whichever period first expires.

Neither petitioner nor Precision had any interest, directly or indirectly, in the Buckeye Bobbin Co. when the foregoing agreements were executed.

All claims under patent application 274,761 were rejected on November 18, 1952. Amendments were filed on May 18, 1953, August 9, 1954, and September 14, 1955. On October 28, 1955, a "Notice of Allowance" was mailed to petitioner. Said application became patent No. 2,748,014 on May 29, 1956, and 1969 U.S. Tax Ct. LEXIS 100">*108 petitioner was sole owner thereof.

All claims under patent application 274,762 were rejected on September 17, 1952. Amendments were filed on November 17, 1952, and March 17, 1954, and a Notice of Allowance was subsequently mailed to petitioner on August 4, 1955, with respect to said application. Said application became patent No. 2,736,956 on March 6, 1956, and petitioner was sole owner thereof.

Patent application 450,931 was filed on August 19, 1954. Final rejection of all claims was made on July 28, 1958, after four amendments had been filed. An appeal was taken to the Board of Appeals, where the patent examiner was reversed. A Notice of Allowance with respect thereto was issued on December 23, 1959. Said application became patent No. 2,946,096 on July 26, 1960, and petitioner was sole owner thereof.

Patent application 454,134 was filed on September 3, 1954. All claims were rejected on April 4, 1955. Amendments were filed on September 6, 1955 and June 7, 1957. All claims were rejected finally on July 2, 1957, and the applications became abandoned by operation of law on December 3, 1957.

All claims under patent application 361,229 were rejected on November 5, 1953. Amendments 1969 U.S. Tax Ct. LEXIS 100">*109 were filed on May 4, 1954, and November 7, 1955. By notice mailed to petitioner on December 2, 1955, two claims under said application were deemed to "appear allowable," and a Notice of Allowance was subsequently mailed to petitioner on July 26, 1956 with respect to said application. Said application became patent No. 2,781,985 on February 19, 1957, and petitioner was sole owner thereof.

The purchase price for the aforementioned patent and patent application assignments was evidenced by 15 promissory notes, each in the principal amount of $ 20,000, executed by Precision and made payable to petitioner. Said notes, which matured one each year for 15 years commencing on January 3, 1957, were in substantially the same form (except for the maturity date) and bore interest at 5 percent per annum after maturity until paid, although no interest, in fact, was paid on delinquent notes.

52 T.C. 591">*596 Precision made no payments on the aforementioned notes prior to 1959. Commencing in 1959, the following amounts were paid to petitioner in partial payment thereof:

Precision could not afford to make payments on the notes prior to 1959.

The 1969 U.S. Tax Ct. LEXIS 100">*110 foregoing amounts were reported in petitioner and his wife's joint income tax returns for 1959 through 1963 as long-term capital gains from the sale of "Patents" in 1956. They did not report the sale to Precision in 1956 of the patents and patent applications in their joint income tax return for that year.

On October 19, 1961, a revenue agent examined petitioner's and his wife's joint income tax returns for 1959 and 1960 and did not make any change in the long-term capital gains reported for those years.

Subsequent to the examination for 1959 and 1960, an examination was made of the 1961 return by another agent. Petitioner's accountant, Robert D. Shearer, conducted the examination with this agent and again no change was made regarding the long-term capital gain as reported.

Following this examination of the 1961 return, a third revenue agent made an examination of the 1962 and 1963 joint returns of petitioner and his wife. That examination resulted in no change in the method of reporting the moneys received by petitioner from the notes of Precision.

On November 2, 1964, still another revenue agent submitted a report covering the joint returns of petitioner and his wife for the years 1969 U.S. Tax Ct. LEXIS 100">*111 1960 through 1963, in which report he proposed an overassessment for 1960 and deficiencies for the other 3 years. In this report the agent stated in part:

Principal cause of change is treatment of collection on notes, which is 163 U.S.P.Q. (BNA) 378">*381 deemed to be ordinary income, not as gain from sale of assets held more than six months.

The inventions made or owned by petitioner were always and solely made for his or Precision's own business in order to improve either methods of manufacture or improve the quality of products. Petitioner never licensed or permitted any other person or corporation to use the patents or patent applications, nor, except for the sale to Precision, did he ever sell any patents or patent applications.

Precision claimed deductions for depreciation of the patents based upon the cost allocated to each and the remaining life of each. No depreciation was claimed with respect to the patent applications until they ripened into patents.

52 T.C. 591">*597 The statutory notice of deficiency herein adjusted petitioner's and his wife's reported taxable income as follows:

Adjustment 1969 U.S. Tax Ct. LEXIS 100">*112 (b) is accepted and not contested. Adjustment (c) is a correlative of adjustment (a), and disposition of the latter will govern the disposition of the former.

OPINION

The issue for decision is primarily a question of law. Petitioners contend that the amounts received by petitioner during the years in question should be treated as long-term capital gain taxable in the respective years of receipt, whereas respondent contends that such amounts should be treated in those years as ordinary income. As will appear later, we resolve the issue partly for petitioners and partly for respondent.

The principal thrust of the petitioners' argument lies in their contention that the payments received by petitioner during the taxable years in question from Precision as partial payment on certain notes, which notes represented the purchase price paid by Precision in 1956 for eight patents and five patent applications, constitute a partial "retirement" of such notes. ¹ Consequently, petitioners argue in their brief, since the notes qualified as capital assets in their hands, they are entitled to the benefits of the special provisions of section 1232 of the Internal Revenue Code of 1954² which treats 1969 U.S. Tax Ct. LEXIS 100">*113 said amounts as received in exchange for the notes thus entitling the proceeds to capital gains treatment.

At the outset we can quickly dispose of this main thrust of the petitioner as we have no difficulty in holding that section 1232 has no application 52 T.C. 591">*598 to the facts before us. Section 117 (f) of the Internal Revenue Code of 1939, the 1969 U.S. Tax Ct. LEXIS 100">*114 predecessor to section 1232, was limited in its scope to awarding capital gain treatment to the proceeds from the retirement of bonds or other evidences of indebtedness which were issued in registered form or with coupons attached. On the occasion of reenacting section 117 (f) into the 1954 Code as section 1232, amendments were made and the reach of the provision lengthened. However, a review of the legislative history of such amendments fails to reveal any intent on the part of Congress to include within the expanded scope payments made in satisfaction of notes issued as evidence of an obligation to pay a prescribed purchase price. ^{31969 U.S. Tax Ct. LEXIS 100">*115} Such notes obviously have no 163 U.S.P.Q. (BNA) 378">*382 independent significance other than as evidence of an agreed purchase price for property sold. To accept petitioner's theory would mean that, through the simple expedient of accepting notes in lieu of cash, a taxpayer could always insure the receipt of capital gain from the sale of property. ⁴ Cf. Pinellas Ice Co. v. Commissioner, 287 U.S. 462">287 U.S. 462 (1933). Surely Congress never intended such a bizarre result.

Furthermore, it is not inconsistent with the above holding to agree with respondent that the receipt of notes in 1956 did not, under the circumstances then existing, require the reporting of any income. ⁵ Payment on the notes was in reality dependent upon the success of the licensee of the patent in using the patents and this success, in turn, depended upon the vagaries of the business involved. In the language of the Supreme Court 1969 U.S. Tax Ct. LEXIS 100">*116 in Burnet v. Logan, 283 U.S. 404">283 U.S. 404, 283 U.S. 404">413 (1931), "the promise of future money payments [was] wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty." The Supreme Court went on to hold, as we now hold with respect to the notes here involved, that no fair market value could have been assigned to the promise to pay at the time of its receipt. Indeed in the case before us no payments were in fact made on the notes for almost 3 years following their issuance and it was almost 7 years before the payments became current. Hence no gain or loss could have been computed in the year of receipt and hence the transaction could not have been deemed closed. Stephen H. Dorsey, 49 T.C. 606">49 T.C. 606 (1968); Susan J. 52 T.C. 591">*599 , 9 T.C. 364">9 T.C. 364 (1947); Ayrton Metal Co. v. Commissioner, 299 F.2d 741 (C.A. 2, 1962).

It is our opinion that the plain substance of the transaction was a sale of the patents and patent applications in 1956 for $ 300,000 to be paid in installments of $ 20,000 per year for 15 years beginning on January 3, 1957, and, as provided in paragraph 4 of the January 1969 U.S. Tax Ct. LEXIS 100">*117 3, 1956 agreement of sale, the 15 promissory notes were given as evidence of the "full purchase price for said inventions." It follows then that we conclude that the payments in issue merely represent amounts paid toward the liquidation of the installment obligation to pay a prescribed purchase price.

Having made our determination with respect to the nature of the payments, we are still left with the question of whether the payments should be classified as the receipt of capital gain or ordinary income. Interestingly enough both parties agreed in their brief that the eight patents qualified as "capital assets" in the hands of the petitioner, and hence, as will be evident later, we need not decide the validity of the agreement.

Preliminarily to making our decision with respect to this question, it is appropriate to note that this Court has recently held that patents qualify as depreciable property. George N. Soffron, 35 T.C. 787">35 T.C. 787, 35 T.C. 787">790-791; and United States Mineral Products Co., 52 T.C. 177">52 T.C. 177 (1969). We so hold again. In the United States Mineral Products Co. case, it was said:

A patent is intangible property whose value is protected by a Government-imposed monopoly for a period of time 1969 U.S. Tax Ct. LEXIS 100">*118 over which its development costs are normally depreciable. Section 1.167(a)-3, Income Tax Regs. Because it constitutes depreciable property when used in the operation of a business, it does not qualify as a capital asset under section 1221, but, if held for more than 6 months, its sale or exchange may result in capital gain under section 1231. * * *

Given this depreciable character of patents, it follows that we agree with respondent to the extent that he contends that section 1239 of the Code applies to the sales proceeds received for the patents. ^{61969 U.S. Tax Ct. LEXIS 100">*120} That section provides that 163 U.S.P.Q. (BNA) 378">*383 any gain, received by an individual upon the sale 52 T.C. 591">*600 of "property which in the hands of the transferee is property of a character which is subject to the allowance for depreciation" and such transferee is a controlled corporation, shall be treated, in effect, as ordinary income. Since at all times the petitioner owned in excess of 99 percent of the stock of the purchaser-transferee, Precision, he clearly met the 80-percent ownership requirement for determining control contained in paragraph (a) (2). Furthermore there is no question that the patents were depreciable property in the hands of Precision. See sec. 1969 U.S. Tax Ct. LEXIS 100">*119 1.167(a)-3 and (a)-6, Income Tax Regs.; and 52 T.C. 177">United States Mineral Products Co., supra.It follows, therefore, that any gain from such sale is to be treated as "ordinary income" under section 1239(a). Since the selling price of the patents was $ 140,000, we hold consequently that 140/300 or 46 2/3 percent of the amounts received by petitioner in 1961, 1962, and 1963 is taxable as ordinary income. Sec. 1239 (a).

Respondent contends that the same decision should be made with respect to the proceeds from the sale of the five patent applications. With this contention we do not agree. The sale of the patent applications was not a sale of depreciable property. Hershey Manufacturing Co., 14 B.T.A. 867">14 B.T.A. 867, affd. 43 F.2d 298 (C.A. 10, 1930); 52 T.C. 177">United States Mineral Products Co., supra.In the latter case we also said:

A patent application is an assignable property right (Saunders v. Commissioner, 29 F.2d 834 (C.A. 3, 1928)), but not a depreciable asset. When the patent is issued depreciation may be taken over its life. Hershey Manufacturing Co., 14 B.T.A. 867">14 B.T.A. 867 (1928), affd. 43 F.2d 298 (C.A. 10, 1930). We hold that the application constituted a capital asset which was sold. See Samuel E. Diescher, 36 B.T.A. 732">36 B.T.A. 732 (1937), affd. 110 F.2d 90 (C.A. 3, 1940), certiorari denied 310 U.S. 650">310 U.S. 650 (1940).

Nor was the sale of the patent applications a sale of property "of a character" which is subject to the 1969 U.S. Tax Ct. LEXIS 100">*121 allowance for depreciation within the purview of section 1239(b). Patent applications by their very nature are not assets which are subject to being "redepreciated" and hence are not within the intendment of Congress. ⁷ We find that section 1239 has no applicability to the proceeds from the sale of said applications.

We view the patent applications as capital assets as that term is defined in section 1221, 52 T.C. 177">United States Mineral Products Co., supra, and hold that under section 1223(3) ^{81969 U.S. Tax Ct. LEXIS 100">*122} the gain from the sale should therefore be treated as long-term capital gain. Since the selling price of the patent applications was $ 160,000, we hold further that 160/300 52 T.C. 591">*601 or 53 1/3 percent of the amounts received by petitioner in 1961, 1962, and 1963 is taxable as long-term capital gain. Secs. 1221 and 1222 (3).

In their briefs the parties have touched upon such points as recasting the taxable effect of the transaction to the year 1956; the possible application of part II of subchapter Q of chapter 1 of subtitle A, embracing sections 1311 through 1315; and whether respondent is now estopped to make the adjustments that are involved herein. In view of what we have previously said herein we do not deem it necessary to discuss these points further, other than to say on the matter of any claim of estoppel, which presumably, if made, would be based upon the various audits of petitioners' returns, that such claim would be unfounded.

The deficiencies should be recomputed in accordance with this opinion.

Decision will be entered under Rule 50.