Estate of Milton P. Laurent v. Comm'r

Estate of Milton P. Laurent, Sr., Deceased, Frank A. Rudman, John J. Roach, and Ruby Sandoz Laurent, Independent Executors, and Ruby S. Laurent, Petitioners, v. Commissioner of Internal Revenue, Respondent Estate of Milton P. Laurent v. Comm'r Docket Nos. 59767, 61340 United States Tax Court 34 T.C. 385; 1960 U.S. Tax Ct. LEXIS 145; 125 U.S.P.Q. (BNA) 601; May 31, 1960, Filed *145 Decisions will be entered under Rule 50. Amounts paid to inventor under an agreement transferring exclusive rights to a pending patent application, and future improvements, to the extent of its employment in "gate valves," followed by transferee's use under further application limited thereto, held, on the facts, taxable as capital gains under section 117, I.R.C. 1939, as amended. United States v. Carruthers, (C.A. 9) 219 F. 2d 21, followed. John G. Heard, Esq., for the petitioners. John J. King, Esq., for the respondent. Opper, Judge. OPPER *601 *386 Respondent determined deficiencies in income tax as follows: Docket Year Amount No. 59767 — 1951 — $ 23,761.19 59767 — 1952 — 23,354.14 61340 — 1953 — 3,140.11 *146 The sole issue is whether payments of $ 67,681.95, $ 70,828.88, and $ 63,065,95 to petitioners' decedent, hereinafter called Laurent, and petitioner Ruby Sandoz Laurent in 1951, 1952, and 1953, respectively, under a licensing agreement, are taxable as long-term capital gains or as ordinary income. The parties agree that no deficiencies remain and that any overpayments will be given effect under Rule 50. FINDINGS OF FACT. The stipulated facts are found. Petitioners' decedent, Milton P. Laurent, Sr., died on November 6, 1955. Petitioners are Laurent's wife and his estate, by its independent executors. Laurent and his wife filed joint returns on a cash method of accounting with the collector (or director) of internal revenue for the first collection district of Texas for the controversial years. Subsequent to April 15, 1941, Laurent invented a closure joint. Part of this invention involved an improved seal. On July 6, 1943, Laurent filed Patent Application Serial No. 493,673 for a patent on this invention which was titled "Closure Joint" and which related to a plug and joint structure and had for its general object the provision of an improved plug and joint arrangement for sealing*147 pressure vessels. This application was granted on January 22, 1952, resulting in the issuance of Patent No. 2,582,995. The "closure joint" as disclosed in Patent Application Serial No. 493,673 and Patent No. 2,582,995, will sometimes hereafter be called Patent 995. Patent 995 contained 17 claims. On December 21, 1953, Laurent filed Patent Application Serial No. 399,647 for the reissue of Patent 995. This application was granted and on March 23, 1954, Patent 995 was reissued as Patent No. Re.23,805. The reissued patent contained two additional claims and did not extend the life of the original patent. The closure joint (Patent 995) was intended to have wide application in all types of pressure vessels and pipelines including but not limited to gate valves, check valves, handholes, manholes, cleanout *387 openings, as well as in return bends and other special fittings subjected to internal pressure. On March 2, 1945, Laurent filed Patent Application Serial No. 580,552 which was titled "Seal for Gate Valve Bonnets." Laurent filed this application to cover more specifically the gate valve bonnet construction which was disclosed in Patent 995. This application was granted on*148 January 22, 1952, resulting in the issuance of Patent No. 2,582,996. The patent stated, in part: The invention relates to a seal for valve bonnets or caps which close the valve chamber. * * * * The present invention therefore contemplates an improvement in providing a simple and economical connection for the bonnet or cap to the valve body with greater safety factor and less weight of material used. * * * * The present invention relates generally to the invention disclosed in my prior copending application Serial Number 493,673, filed July 6, 1943, for Closure Joint, and is a continuation in part thereof. The "seal for gate valve bonnets," as disclosed in Patent Application Serial No. 580,552 and Patent No. 2,582,996, will sometimes hereafter be called Patent 996. Patent 996 contained 1 claim. Each of the 17 claims set forth in Patent 995 and each of the 19 claims set forth in Patent No. Re.23,805 "reads upon" the structural device illustrated or typified in Patent 996. Patent 996 disclosed, and claimed the use of, the seal of Patent 995 in a gate valve. On October 20, 1947, Laurent filed Patent Application Serial No. 780,987 which was titled "Closure." This application was *149 granted on January 22, 1952, resulting in the issuance of Patent No. 2,582,997. The patent stated, in part: The invention relates generally to the type of plug and joint structure disclosed in my co-pending application, * * * [for closure joint]; a combination seal and load ring disclosed herein is retained by the pressure which is being sealed and is entitled to the filing date of such earlier application as to all common subject matter. * * * * It is * * * a primary object of the present invention to provide a closure assembly for an opening in return bends, pipe lines, or pressure vessels which is capable of withstanding high pressures and maintaining a seal to prevent leakage of internal pressure from such opening. The "closure," as disclosed in Patent Application Serial No. 780,987 and Patent No. 2,582,997 will sometimes hereafter be called Patent 997. Patent 997 contained 8 claims. On March 3, 1953, Laurent filed Patent Application Serial No. 340,119 which was titled "Pressure Tightened Joint." This application was granted on August 24, 1954, resulting in the issuance of *388 Patent No. 2,687,229. The "pressure tightened joint," as disclosed in Patent Application Serial*150 No. 340,119 and Patent No. 2,687,229, will sometimes hereafter be called Patent 229. Patent 229 contained 8 claims. Patent 995 is the basic, dominant, or primary patent in the following group of patents: Patent 995 (Reissued 23,805); Patent 996; Patent 997; and Patent 229. W-K-M Manufacturing Co., Inc., hereafter called W-K-M, experimented with Laurent's closure joint. On October 31, 1944, after the completion of these experiments, W-K-M and Laurent entered into an agreement which provided, in part: Whereas, Laurent is the inventor and owner of a new and useful invention in a Closure Joint, application for United States Letters Patent on which were filed July 6, 1943, being Serial No. 493,673. Whereas, W-K-M * * * desires to acquire the exclusive right to utilize the above identified invention so far as the invention may be applied to gate valves. * * * * 1. LAURENT hereby grants to W-K-M * * * a license to make, use, and sell devices embodying the [closure joint] invention disclosed in his application for United States Letters Patent, Serial No. 493,673 [Patent 995], and any improvements thereon for the life of any patent or patents which may issue. The license granted herein *151 is non-exclusive as to the entire invention, but is exclusive in so far as the invention can be applied to gate valves of the type manufactured by the W-K-M * * *. This agreement * * * shall remain in full force and effect throughout the life of any patent or patents heretofore or hereafter issued on said invention or improvements thereon or substitutes therefor. 2. W-K-M * * * for and in consideration of the above grant and license, agrees to pay over to Laurent a royalty of five per cent (5%) which five per cent is based upon the normal current sales price to the consumer of A.P.I. blind flange units of the nearest like series, said five per cent to apply on complete units and parts thereof. It is understood that an A.P.I. blind flange unit consists of "a welding neck flange, a blind flange, a ring, and bolts and nuts." For example, a 2" -- 3000# W.P. W-K-M gate valve requires a 4" opening through the bonnet end to enter the gate. Therefore, in this instance a 4" A.P.I. 3000# W.P. blind flange unit is used as a basis for figuring royalty. Smaller size or larger size valves are to be figured on a comparable basis. A schedule for the computation of royalties on valve bonnets and*152 parts therefor is attached hereto. * * * * 4. W-K-M * * * agrees to proceed with reasonable diligence with marketing the devices embodying the invention in accordance with its present facilities * * *. W-K-M * * * agrees to employ the new bonnet design on all new types and sizes of gate valves hereinafter designed whenever it is feasible and practicable to do so and to effect changes to embody the new design on its present line of gate valves within one year from the date hereof; provided, however, that failure to do so within said period of time will not be cause for cancellation but *389 will obligate W-K-M * * * to pay to Laurent the royalty hereinbefore provided for on this feature on all sizes and types of gate valves sold by it subsequent to said one year period. * * * * 6. If any of said patents on said new invention are infringed or the rights of either of the parties hereto as herein set forth adversely affected in any way, W-K-M * * * may, if it elects to do so and not otherwise, take such action as it may consider necessary or desirable to protect the rights of the parties hereto to said patents and the proper enjoyment thereof by suit or otherwise in the name of *153 either or both of the parties hereto; * * * Fred M. McManis was president of W-K-M on October 31, 1944. He negotiated the October 31, 1944, agreement on behalf of W-K-M. Laurent was not an employee of W-K-M and neither he nor his family owned more than 1 per cent of its capital stock. Laurent and W-K-M clarified and interpreted the October 31, 1944, agreement as follows: (1) In a letter dated March 4, 1947, Laurent acknowledged the fact that he had "granted to the W-K-M * * * a license under pending patent application bearing Serial No. 493673 [Patent 995]." In this letter the parties agreed to change the manner of computing the royalty payments by using as a basis 0.019785 of total valve sales which had been the average royalty-type payment made under the agreement. In addition, the parties agreed that no payment would be made to cover the use of the seal in the bonnets of 15,000-pound test valves and over because such seal was not used therein and it was improbable that it would ever be so used. Laurent agreed to return royalties paid on the 15,000-pound test valves. (2) In a letter dated February 16, 1950, which corrected a letter dated January 5, 1950, the parties agreed to*154 eliminate retroactively the words "of the type manufactured by the W-K-M Company, Inc.," in section 1, second sentence, of the October 31, 1944, agreement. (3) On July 8, 1954, Laurent consented to W-K-M's assignment of its rights in the October 31, 1944, agreement by an agreement which provided, in part: Whereas, said W-K-M * * * is the owner of a license dated October 31, 1944 and subsequently amended February 16, 1950, to make, use and sell devices embodying the [closure joint] invention disclosed in * * * [Patent 995] and any improvements thereon for the life of any patent or patents which may issue, said license being nonexclusive to W-K-M * * * as to the entire invention, but exclusive in so far as the invention can be applied to Gate Valves. Whereas, the aforesaid limited exclusive license agreement was subsequently extended to include the following Letters Patent granted to said M. P. Laurent and the inventions covered thereby: NO. DATE TITLE * * * [Patent 996] Jan. 22, 1952 Seal for Gate Valve Bonnets * * * [Patent 997] Jan. 22, 1952 Closure *390 Whereas, the aforesaid limited exclusive license agreement was subsequently extended to include further*155 inventions and improvements in closure joints made by said Laurent for which an application for United States Letters Patent was filed March 3, 1953, Serial No. 340,119 [Patent 229], in so far as those inventions can be applied to the bonnet construction of gate valves; and Whereas, the said W-K-M * * * desires to assign its full interest in, to and under said license agreement and in, to and under said Letters Patent and applications for Letters Patent. Now, Therefore * * * * * * Laurent hereby consents to an assignment by W-K-M * * * of all the rights and benefits flowing to said W-K-M * * * out of the said limited, exclusive license agreement with the said Laurent dated October 31, 1944 and subsequently modified in a supplemental agreement dated February 16, 1950. W-K-M could not, without infringement, manufacture gate valves as disclosed in Patent 996 unless it had rights under Patent 995. W-K-M sold gate valves to various industries including oil, gas, coal, and chemical industries. The term "gate valve" has a precise and specific meaning in the valve industry. It is a pressure vessel retaining fluid by means of and under its own pressure. In 1945 and 1948, Laurent entered *156 into the following licensing agreements relating to his closure joint (Patent 995): Name of business interest receiving license Date of agreement Thornhill-Craver Company Mar. 24, 1945 Kelley Manufacturing Company June 14, 1945 J. A. Rossiter Jan. 12, 1948 None of these agreements conveyed any rights to the seal in gate valve bonnets (Patent 996). Prior to March 24, 1945, Thornhill-Craver Company experimented with the closure joint and manufactured two closure devices which did not involve gate valves. Laurent's March 24, 1945, agreement with Thornhill-Craver Company provided, in part: [Laurent] is the owner of the entire right and interest in and to * * * [Patent 995]. * * * * This license [to make, use, and sell devices embodying the closure joint] does not convey to the Licensee [Thornhill-Craver Company] the right to embody this invention in any product or products other than * * * [couplings; couplings with blanking plugs; couplings, hose; couplings, ball joint; crosses; tees; ells; chokes, positive and adjustable; return bends; return bends with cleanout plugs; return bends, box type, with cleanout plugs; return bends, H and Y types, with cleanout plugs; manifold*157 headers with cleanout plugs]. This license to use this invention shall be exclusive as to the [aforementioned] enumerated products of Licensee and the specified closure units, and shall not extend to any other application of this invention as, for example, a valve bonnet. *391 Thornhill-Craver Company printed an advertising brochure which included the closure joint, acquired under the March 24, 1945, agreement, in its line of products. The advertising brochure stated, in part: Flex-O-Ring Self Sealing Closure Here is an entirely original design in header closure. Its mechanical features are so simple yet so sound that it can be used economically in a wide range of operating conditions. Its simplicity, eliminating mule ears, horse shoes, bull nuts, dogs, screws, etc., makes for compact design and reduced weight. * * * Flex-O-Ring self-sealing closures are available for hand-hole plates, man-ways, cylinder ends, boiler wash-out plugs, inspection ports, etc. On February 28, 1952, in accordance with his privilege under the contract, Laurent notified Thornhill-Craver Company that its rights under the March 24, 1945, agreement would be terminated in 30 days. Laurent's June 14, *158 1945, agreement with Kelley Manufacturing Company provided, in part: * * * LAURENT is the inventor and owner of a new and useful invention in a Closure Joint [Patent 995] * * * * * * * Laurent hereby gives and grants to Kelley a non-exclusive right as to the [closure joint] invention, but an exclusive right and license to make, sell, and use devices embodying the invention * * * in boiler hand hole cap assemblies and boiler man hole cap assemblies, * * * On January 12, 1948, Laurent wrote a letter to J. A. Rossiter, which stated, in part: With further reference to our conversation regarding the use of my "closure design" in connection with your separator: -- This letter will be your authority to use the "closure design" as an integral part of your unit * * * This arrangement is non-exclusive since your production is not, as yet, large enough to warrant an exclusive contract. I am not making exclusive contracts with anyone under $ 1,000.00 yearly minimum. However, anyone using this design, under a non-exclusive basis, will be given four months' notice should an exclusive contract be made with another in a competitive field. Closure units to be attached to vessels by welding, flanging, *159 rolling * * * can be procured thru Thornhill-Craver Co., who have an exclusive contract for manufacturing and selling Closures as complete units. In 1949 and 1950, Laurent and his wife created four trusts and one foundation and transferred to their respective trustees, by deeds of gift and instruments of assignment, certain property interests. Each of the respective trustees for the four trusts and one foundation received (1) an undivided one-eighth interest in the closure joint (Patent 995), seal for gate valve bonnets (Patent 996) and closure (Patent 997), and any division, reissue, and improvements thereon for the life of any patent or patents which may have issued on any of the respective subjects; (2) an undivided one-eighth interest *392 in and to certain licensing agreements made by Laurent with W-K-M (October 31, 1944), Thornhill-Craver Company (March 24, 1945), and Kelley Manufacturing Company (June 14, 1945), including an undivided one-eighth interest in any royalty to be earned under the respective licensing agreements. In his assignments of the closure joint (Patent 995), seal for gate valve bonnets (Patent 996), and closure (Patent 997) to each of the respective*160 trustees, Laurent stated: [In] consideration of One Dollar ($ 1.00) * * * [I] do sell, assign, and transfer unto the aforesaid Trustees an undivided one-eighth (1/8) interest in and to the full and exclusive right for the territory of the United States in and to said [inventions] * * *; said [inventions], [applications], and letters patent [respectively] to be held and enjoyed as to one-eighth (1/8th) thereof by the said Trustees for the benefit of the aforesaid [Trusts and one foundation] to the full end of the term for which said letters patent may be granted as fully and entirely as the same would have been held by me had * * * [these] [assignments] and [sales] not been made. For the years 1949 and 1950, Laurent and his wife filed separate gift tax returns. The following statement appeared in the returns for 1950 dated March 13, 1951: Of the three patent applications forming the bases of these gifts * * * [i.e., the closure joint (Patent 995) seal for gate valve bonnets (Patent 996) and closure (Patent 997)] claims have been allowed by the United States Patent Office on the application for Closure Joint * * *. An appeal on this application to the United States Court of Customs*161 and Patent Appeals for additional claims was denied January 27, 1951. All claims for patent * * * [in the seal for gate valve bonnets (Patent 996)] have been rejected in their entirety. * * * [In the closure (Patent 997)], three claims have been allowed and the application is still pending in the Patent Office. Of the three contracts also forming the bases of these gifts * * * only one has produced revenue and it is believed that the others will not produce any revenue. It relates to * * * [the closure joint (Patent 995)]. Royalties have been received and are being received under the W-K-M * * * contract, dated October 31, 1944. * * * A review of Patent Appeal Docket #5727 * * * will reveal that this [closure joint] invention is by no means a basic invention, and the claims allowed are restricted to the structure, in view of existing patents in this art. For this reason, a licensing agreement was entered into with * * * W-K-M * * * which was manufacturing a patented article, as such a procedure tends to strengthen a patent by its becoming one of a group. The other two applications were filed in an attempt to strengthen the original application. After the transfers to the four*162 trusts and one foundation, Laurent and his wife were entitled to only three-eighths of the amounts payable under the October 31, 1944, agreement with W-K-M. From 1953 through 1957 Laurent (or his executors) and the trustees of the four trusts and one foundation entered into the following licensing agreements: *393 Name of business interest Date of receiving license agreement S. Morgan Smith July 31, 1953 S. Morgan Smith July 31, 1953 Peerless Manufacturing Oct. 6, 1953 Russel A. Myers Nov. 9, 1953 Key Company Nov. 17, 1953 Key Company Nov. 17, 1953 Black, Sivalls & Bryson Feb. 18, 1954 Black, Sivalls & Bryson Apr. 6, 1954 Oil Center Tool Dec. 7, 1954 F. A. Rudman Feb. 4, 1955 W-K-M of Delaware Mar. 16, 1955 National Supply Apr. 1, 1955 Modern Manufacture Jan. 2, 1957 Name of business interest Patents 1 referred to Type of license receiving license in agreement referred to in preface of agreement S. Morgan Smith 995, 997 Nonexclusive S. Morgan Smith 995, 996, 997 Nonexclusive Peerless Manufacturing 995, 997, 229 Nonexclusive Russel A. Myers 995, 997 Exclusive Key Company 995, 997, 229 Exclusive Key Company 995,997, 229 Nonexclusive Black, Sivalls & Bryson 995, 997, 229 Nonexclusive Black, Sivalls & Bryson 995, 996, 997, 229 Exclusive Oil Center Tool 995 (Re.23,805), 997, 229 Nonexclusive F. A. Rudman — 229 — Nonexclusive W-K-M of Delaware 995 (Re.23,805), 996, 997, 229 Nonexclusive National Supply 995 (Re.23,805), 997, 229 Nonexclusive Modern Manufacture 995 (Re.23,805), 997, 229 Nonexclusive *163 With respect to these agreements, each stated that Laurent and the trustees owned the patents specifically referred to therein, and none conveyed any rights to the seal in gate valve bonnets (Patent 996). On January 12, 1952, Laurent and the respective trustees of the four trusts and one foundation granted to W-K-M International Corporation, a New York corporation, hereafter called International, the exclusive license to make, use, and sell gate valves embodying the closure joint (Patent 995), seal for gate valve bonnets (Patent 996), and closure (Patent 997) in certain foreign countries. International agreed to pay Laurent and the trustees a 2 per cent royalty based on the selling price of gate valves. In addition, the agreement stated, in part: LAURENT is the sole inventor and co-owner with the above * * * trustees of a new and useful invention in a Closure Joint, applications for * * * Patents * * * bearing Serial No. 493,673 [Patent 995], * * * Serial No. 580,552 [Patent 996], and * * * Serial No. 780,987 [Patent 997] * * * On March 16, 1955, Laurent and the respective trustees*164 of the four trusts and one foundation entered into a licensing agreement with W-K-M Manufacturing Company, Inc. (successor in interest to W-K-M and International), a Delaware corporation, hereafter called W-K-M of Delaware. The agreement designated Laurent and the trustees as licensors and W-K-M of Delaware as licensee. The agreement was executed for the purpose of combining into a single instrument the rights previously granted to W-K-M by Laurent under the October 31, 1944, agreement, to clarify some questions which had been raised by the parties as to those rights, and to reflect changed conditions and present agreements. It provided, in part: Whereas, LICENSORS are the owners of Letters Patent * * * listed in Appendix A attached hereto and made a part hereof; and Whereas, LICENSORS have heretofore granted to predecessors of LICENSEE certain limited exclusive rights in the United States under the inventions of the aforesaid * * * [patents], as originally set forth in a certain agreement, executed the 31st day of October 1944, between * * * LAURENT and W-K-M *394 * * * and in various subsequent amendments made to said agreement, said exclusive rights being limited to the*165 employment of said inventions of said * * * [patents] in so far as the inventions may be applied to the bonnet sections of Gate Valves; * * * * * * * 1. The aforesaid original agreement executed the 31st day of October 1944 and the aforesaid licensee agreement executed the 12th day of January 1952 [with International], including all subsequent amendments made thereto in writing, orally or otherwise are hereby terminated fully and entirely in all their respective provisions * * * 2. LICENSORS hereby grant to LICENSEE, * * * a right and license to make, have made, use and sell in the United States of America, its territories and possessions, and in all foreign countries in which LICENSORS now or hereafter may have the right to grant such licenses, the inventions * * * [listed in Appendix A] and any improvements thereon or substitutes therefor made or acquired by Laurent or acquired by the aforesaid Trusts and Foundation. The right and license herein granted is limited specifically to the application of said inventions only to the bonnet sections of Gate Valves and replacement parts therefor and as so limited is exclusive to LICENSEE and includes the right by LICENSEE to grant similar*166 rights and licenses to others under the same terms and conditions as herein contained. For the purpose of this Agreement, the term "bonnet sections" is defined as the closure through which the operating mechanism is assembled or to which it is attached, as typefied [sic] by * * * [Patent 996]. * * * * 3. LICENSEE * * * agrees to pay to LICENSORS a royalty for each and every Gate Valve manufactured and sold by or for LICENSEE * * * which employs any of said inventions in the bonnet section thereof and for replacement parts therefor covered by claims in said patents or by allowed claims in patent applications coming within the terms of this Agreement. The amount of royalty shall be the Net Sales Price in dollars of the Gate Valve multiplied by the decimal fraction 0.019785. * * * Gate valves subject to royalty hereunder shall mean a complete gate valve comprising all parts required for its normal functioning including parts necessary for normal hand operation. No royalty shall be payable for any attachment or accessory, termed "Auxiliary Elements," not an integral part of the gate valve nor required for its normal function. * * * * * * * 5. On or before the twentieth (20th) *167 day of each month during the term of this Agreement, LICENSEE shall furnish to LICENSORS a statement of all sales made by it or its licensees during the preceding month of Gate Valves and replacement parts embodying any of the inventions licensed hereunder. * * * * * * * 8. LICENSEE agrees that it will continue, throughout the life of this Agreement, to employ said inventions in the bonnet sections of its present lines of *395 Gate Valves and that it will incorporate said inventions in any other lines of Gate Valves hereafter manufactured and sold by or for LICENSEE wherever it is feasible and practicable to do so * * * * * * * APPENDIX A DATE CODE PATENT NO. ISSUED COUNTRY NO. * * * * 995 1-22-52 United States — 1 — Re. 23,805 3-23-54 United States — 1 — * * * 996 1-22-52 United States — 2 — * * * 997 1-22-52 United States — 3 — * * * 229 8-24-54 United States — 4 — * * * * After Laurent's death in 1955, there were filed for his estate an "Inventory, Appraisement and List of Claims" in the*168 Probate Court of Harris County, Texas, and a Federal estate tax return. Among the assets listed in both the probate inventory and the Federal estate tax return were the following: Flex-Ring and Float-Ring Patent Group, non-exclusive to W-K-M Co., and other companies: (1) * * * [Patent] 995 * * * Re 23,805 * * * (Flex-Ring Closure Joints) (2) * * * [Patent] 996 * * * (Seal for Gate Valve Bonnets) (3) * * * [Patent] 997 * * * (Closure [Flex-Ring]) (4) * * * [Patent] 229 * * * (Pressure Tightened Joint) (5) #2,760,673, issued 8-28-56 (Seal for Vacuum Vessels [Flex-Float]) Total Value of three-eighths interest owned by decedent and wife $ 175,000 On April 8, 1954, Laurent and the respective trusteees of the four trusts and one foundation incorporated the Flex-Float Engineering Co. under the laws of Texas. Laurent subscribed and paid for three-eighths of the capital stock and each of the respective trustees subscribed and paid for one-eighth of the capital stock. The purpose of the corporation was to render engineering services, if requested, to any parties seeking to secure rights to use the Flex Ring or the Float Ring. Other purposes for which the corporation*169 was formed, as set forth in its charter, were as follows: To design, purchase, sell, and manufacture steel, iron, and other metal products; to design, sell, construct, and erect engineering and architecture structures; and *396 to contract for the construction and erection of such structures, as authorized by subdivision 45 of art. 1302, Tex. Rev. Civ. Stat. (1925), as amended. According to the records of W-K-M, Laurent assigned to W-K-M, and its successors, the following patents and patent application pursuant to an employment contract between W-K-M and Laurent executed on December 20, 1928, and pursuant to a contract between W-K-M and Laurent dated May 28, 1935: Patent No. Title Date issued 1,969,375 Rotary gate valve Aug. 7, 1934. 2,002,780 Gate valve May 28, 1935. Re. 20, 101 Gate valve (reissue of 2,002,780) Sept. 8, 1936. 2,065,227 Well flowing device Dec. 22, 1936. 2,071,637 Slip Feb. 23, 1937. 2,136,111 Brake Nov. 8, 1938. 2,148,628 Gate valve Feb. 28, 1939. 2,161,175 Valve June 6, 1939. 2,166,304 Valve operating mechanism July 18, 1939. 2,193,971 Pipe coating device Mar. 19, 1940. 2,479,124 Gate valve Aug. 16, 1949. 2,537,470 Gate valve Jan. 9, 1951. 2,541,968 Gate valve Feb. 13, 1951. 2,565.244 Plug valve Aug. 21, 1951. 2,583,512 Gate valve Jan. 22, 1952. 2,612,340 Rotary plug valve Sept. 30, 1952. 2,666,615 Gate valve Jan. 19, 1954. 2,670,752 Double disc gate valve having means to eliminate pressure lock Mar. 2, 1954. 2,747,600 Valve lubricating system May 29, 1956. Application Application date S. N. 387,670 Automatic valve sealing and/or lubricating system Oct. 22, 1953. *170 These assignments were recorded in the United States Patent Office. The Digest of Assignment Records of the United States Patent Office up to and including February 27, 1959, does not indicate an assignment of any interest in Patent 995 (Re.23,805), Patent 996, Patent 997, and Patent 229. During the years in issue W-K-M, or its successor in interest, paid to Laurent and his wife their three-eighths undivided interest under the October 31, 1944, agreement (as subsequently clarified and interpreted), as follows: Year Amount — 1951 — $ 67,681.95 — 1952 — 70,828.88 — 1953 — 63,065.95 During the same period, W-K-M sent monthly statements to Laurent which indicated, among other things, that these amounts were Laurent's share of the royalties on valve bonnets. Laurent and his wife reported these amounts on Schedule C (Income from Business) of their respective returns as ordinary income from royalties. They listed them as "W-K-M Company -- Royalty on Bonnets" on their 1951 and 1952 returns, and "W-K-M Company -- Bonnet Royalty" on their 1953 return. *397 Laurent understood the precise meaning of the word "gate valve." OPINION. The single issue presented here is one which "often*171 becomes a factual question to be decided according to the facts and circumstances of each case and the peculiarities inherent in each patent." Lawrence v. United States, (C.A. 5) 242 F. 2d 542, 545. While it thus necessarily follows that other cases may involve varying factual situations, it is nevertheless true that the principles announced in several of them are dispositive of our problem. Decedent transferred certain rights under a patent application already on file, which were nonexclusive as to the entire sweep of the application but were exclusive throughout the United States to make, use, and sell to the extent that the conception involved was susceptible of employment in the manufacture of gate valves. A short time after this *602 transfer decedent filed a further application limited to use in gate valves, and from time to time thereafter and prior to the years now before us, the parties expressly or by their conduct defined and construed the underlying agreement so that by the critical date it became apparent that the transferee had all the rights in the patent to the extent of their use for the manufacture of gate valves; and had no other rights, *172 if any, which existed in the devices covered by the original patent. The patents themselves were not in existence when the instant tax years began but were issued during that period. It seems to us that on the authority of United States v. Carruthers, (C.A. 9) 219 F. 2d 21, respondent cannot succeed. At least it must be said that the present transfer covered exclusive rights for the gate valve industry and we have found as a fact, at respondent's request, that decedent understood the precise meaning of the word "gate valve." In the Carruthers case, the court said (p. 24): Both parties point to Waterman v. Mackenzie, 138 U.S. 252, 11 S. Ct. 334, 34 L. Ed. 923 as the classic case in this field. * * * Counsel for appellant admitted that under the Waterman decision it is not necessary that the patentee transfer all his rights in the patents for the result to be an assignment. Clearly, the transfer can be limited in area. However, in oral argument on appeal it was urged that even though there could be an assignment to a specified area, for the transfer to be an assignment under the Waterman*173 decision it must be of "whole" patent rights to that limited area; and, a transfer to an industry (even though unlimited in area) must receive different tax treatment. The cases cited by appellant do not, in our view, support the argument tendered in this paragraph. Counsel for appellant admitted in oral argument that no case holds that a transfer of a patent for use in an industry would not, for that reason, be a sale within the meaning of § 117. *398 Appellant's chief argument in this case is that this transfer is to an industry rather than to a geographical area and consequently does not strictly comply with the Waterman test; therefore the transfer was a license and not an assignment. For example, it was argued that a transfer of an "exclusive right to make, use and vend the invention on the Pacific Coast" would be an assignment and that the proceeds would receive capital gains treatment; whereas, a transfer of an "exclusive right to make, use and vend the invention in the tuna industry" would be a license and the proceeds would be taxable as ordinary income. No explanation has been attempted by appellant, nor has it proffered any policy argument as*174 to why a transfer enveloping an industry should be given such different tax treatment from a transfer encompassing an area. We are not convinced that it would be reasonable or necessary for this court, in the tax case now before us, to strictly and literally apply the text announced in an infringment [sic] suit in the nineteenth century. We think that this is particularly true when the court in the Waterman case was not presented with an industry-wide transfer. Furthermore, if the Waterman test is applied, we believe the taxpayers would pass this test. * * * * "Whole," in the Waterman test apparently means the inclusive rights to "make, use and sell." In the case at bar the transfer did include the rights to make, use and sell and would therefore appear to meet the test of "whole" patents laid down in the Waterman case. But in any event we think respondent's contention has, in fact, placed him in a dilemma. Either the original patent application was one which could be considered to cover other areas in addition to gate valves, or it was not. If the former, this case would be similar to Merck & Co. v. Smith, (C.A. 3) 261 F. 2d 162, 163, 165.*175 There -- [two] employees of Sharp & Dohme in 1939 invented and reduced to practice certain chemical compounds colloquially called sulfa drugs * * *. Later a patent issued from the patent office. While the patent application was pending [the patentee] * * * entered into an agreement * * * granting * * * the exclusive right to make, use and sell * * * sulfadiazine * * *. Sulfadiazine was one of the claims in the generic patent * * * * * * * * * * One generic patent was issued to the original patentee. But there were species claims and the species were separate inventions. A single patent may issue for two or more separate inventions as said in Special Equipment Co. v. Coe, 1945, 324 U.S. 370. * * * In holding that the transfer of the sulfadiazine rights was a sale entitled *603 to capital gains treatment, the court said: The analogies point in this direction. One who owns a single invention patent may "sell" its use in a particular territory or industry, United States v. Carruthers, 9 Cir., 1955, 219 F. 2d 21, or for one industrial use only, First National Bank of Princeton v. United States, D.C.D.N.J. 1955, 136 F. Supp. 818, 823-824.*176 * * * * * * While the immediate point in this case is evidently novel we think all the analogies permit the type of transfer that the taxpayer made here to be treated as a sale. See also Kavanagh v. Evans, (C.A. 6) 188 F. 2d 234. *399 If, on the other hand, no substantial use for the underlying patent existed except in the gate valve field, then by his transfer of rights under the application exclusive in their relation to gate valves, decedent actually parted with all substantial rights under the underlying patent. See United States v. Carruthers, supra at 25. If so, even on respondent's theory, this would be an exclusive transfer of the "whole" patent and lead to the same result. And it seems to be recognized by the parties that no income was ever received or likely to be received by decedent except from the original W-K-M agreement. These conclusions are as unassailable whether we presume that the subsequent application was an improvement patent to which the assignee was entitled by the reference to "improvements" under the original agreement, or whether it was a restrictive application limited, as in*177 the Merck case, to the use of the underlying patent in the manufacture of a specific product. Even if the improvements envisaged in the second application were not covered by the original assignment, the parties by their subsequent conduct made it clear that the assignee's rights therein were exclusive, and any payments made for rights under the subsequent patent would hence be entitled to capital gains treatment also. Best Lock Corporation, 31 T.C. 1217. And, of course, it is not significant that the patents had not yet been issued when the original assignment was made, nor, indeed when the critical tax period commenced. The same result would be required if the device had merely been conceived and there had not even been an application for one or more patents. See Edward C. Myers, 6 T.C. 258, 265; F. H. Philbrick, 27 T.C. 346, 356. There are apparently no other requirements of section 117 upon which respondent relies for his contentions, 1 and we observe none. Accordingly, we decide the issue in petitioners' favor. To compute amounts under claimed overpayments, *178 Decisions will be entered under Rule 50. Footnotes *. CODE NO. 1 -- Flex Ring Closure. CODE NO. 2 -- Flex Ring Closure Applied to Valve Bonnet. CODE NO. 3 -- Split Ring Flex Ring Closure. CODE NO. 4 -- Float Ring.↩ 1. No reference other than to Patents 995↩ (Re.23,805), 996, 997, and 229 is made in this listing. 1. SEC. 117. CAPITAL GAINS AND LOSSES. [I.R.C. 1939, as amended by Pub. L. No. 629, 84th Cong., 2d Sess. (June 29, 1956).] (q) Transfer of Patent Rights. -- (1) General rule. -- A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 6 months, regardless of whether or not payments in consideration of such transfer are -- (A) payable periodically over a period generally coterminous with the transferee's use of the patent, or (B) contingent on the productivity, use, or disposition of the property transferred. * * * * (4) Applicability. -- This subsection shall apply with respect to any amount received, or payment made, pursuant to a transfer described in paragraph (1) in any taxable year beginning after May 31, 1950, regardless of the taxable year in which such transfer occurred.↩