Chu v. Comm'r

Lan Jen Chu and Grace Y. P. Chu, Petitioners v. Commissioner of Internal Revenue, Respondent Chu v. Comm'r Docket No. 4802-69 United States Tax Court 58 T.C. 598; 1972 U.S. Tax Ct. LEXIS 92; 175 U.S.P.Q. (BNA) 367; July 10, 1972, Filed *92 Decision will be entered under Rule 50. Held, assignment of patent application was not productive of ordinary income within the provision of sec. 1239, I.R.C. 1954; such application was not property of a character subject to depreciation within the meaning of sec. 1239(b), whether considered in the light of Estate of William F. Stahl, 52 T.C. 591, or in the light of the reversal of that decision in part by the Court of Appeals, 442 F. 2d 324 (C.A. 7). Paul J. Foley, for the petitioners. William T. Hayes, for the respondent. Raum, Judge. RAUM *367 *598 The Commissioner determined *93 deficiencies in petitioners' income tax as follows: Year Deficiency [1962] $ 43,317.95 [1963] 34,191.28 [1964] 28,236.52 [1965] 5,302.29 The only issue presented for decision is whether certain proceeds from the sale of rights to a patent application are taxable as capital gains or are to be treated as ordinary income under section 1239, I.R.C. 1954. FINDINGS OF FACT The parties have filed a stipulation of facts which, together with the accompanying exhibits, are incorporated herein by this reference. Petitioners, Lan Jen Chu and Grace Y. P. Chu, are husband and wife. They filed joint Federal income tax returns for the calendar years 1962, 1963, 1964, and 1965 with the district director of internal revenue at Boston, Mass., and resided in Lexington, Mass., at the time the petition and amended petition in this case were filed. In 1959 and at all times here pertinent, *94 Lan Jen Chu (Dr. Chu, Chu, or petitioner) was a noted authority on electromagnetic theory and antennas, and a man of numerous professional distinctions. He was born in China, and graduated from Chiao Tung University, *368 Shanghai, in 1934 with a bachelor of science degree in electrical power. He then came to the Massachusetts Institute of Technology (MIT) where he received both master of science and doctor of science degrees in 1935 and 1938, respectively. Since 1935 petitioner's academic life has been spent at MIT where he was appointed an associate professor in 1947, professor in 1952, and Edwin Sibley Webster Professor of Electrical Engineering in 1963. Dr. Chu has made several important and fundamental contributions to modern electromagnetic theory and the application of such theory *599 to antennas and microwave beam tubes. From 1940 to around 1945 or 1946 he was a consultant at MIT's Radiation Laboratory, where he was a pioneer in the development of highly sophisticated radar antenna systems. During this period he also worked at the Radio Research Laboratory at Harvard University. In 1945 he served as an expert consultant to the Secretary of War, and was sent to China*95 to head the Advisory Specialist Group to the U.S. Armed Forces in that country. Petitioner has also published many learned articles and technical reports pertaining to his field of study in various scientific journals, including publications of the Research Laboratory of Electronics at MIT. And since 1939 or 1940 he has served as an expert adviser to industry and the military under several, separate consulting contracts. He has coauthored many books in his field. As a consequence of his research achievements, he has been granted over 25 separate patents pertaining to various antennas developed by him. In June 1955, Dr. Chu formed Chu Associates, a company of which he was the sole owner and which he operated as a sole proprietorship. Chu Associates (Associates or the proprietorship) principally engaged in the invention and development of antennas and the limited production of antenna prototypes. In general Associates sold the ideas, devices, and antennas developed by it to the Government or various interested companies. Chu was assisted in the operation of the proprietorship by Ivan M. Faigen (Faigen), who had both bachelor of science and master of science degrees in electrical*96 engineering and acted as general manager of Associates. After several years of operation of the business of the proprietorship, it was decided to conduct its manufacturing activities in a separate entity. Accordingly, Chu Associates, Inc., was formed in August 1959, under Chapter 156 of the General Laws of the Commonwealth of Massachusetts for the purpose of manufacturing and selling the devices and antennas invented and developed by the proprietorship. When Chu Associates, Inc. (sometimes referred to hereinafter as the corporation), was formed, the electronics industry was a rapidly growing part of the economy, and companies which manufactured electronic communication apparatus and electronic equipment for military use were regarded as having strong growth potential. The corporation itself had the capability of manufacturing all types of antennas, and did do a certain amount of military-related work as hereinafter set forth. At this time there were also several other individuals as well as corporations involved in antenna research, development, and manufacture, and certain other antenna experts of Dr. Chu's eminence conducted antenna-related businesses of their own. The agreement*97 of association and articles of organization of Chu *600 Associates, Inc., which were filed with the Department of Corporations and Taxation of the Commonwealth of Massachusetts (Department of Corporations) on August 6, 1959, provided for total authorized capital stock of 1,000 common shares without par value. At the time of incorporation only 90 of the shares were subscribed for -- 80 shares by Chu and 10 shares by Faigen -- and such shares were in fact issued to petitioner and Faigen in those amounts for $ 200 per share, also on August 6, 1959. The articles of organization noted that a meeting of the incorporators was held on August 6, 1959, and further specified that the total amount of capital stock "now to be issued" was 100 shares to be paid for "IN CASH." However, the only shares of stock of the corporation issued prior to December 15, 1959, were the 90 shares of no-par common stock issued to petitioner and Faigen on August 6, 1959, as noted hereinabove. In respect of these 90 shares of outstanding stock, the corporation's income tax return for the period August 7, 1959, to September 30, 1959, disclosed paid-in capital of $ 18,000. At the August 6, 1959, meeting of the*98 incorporators, certain bylaws were adopted for the corporation. Such bylaws provided that the voting of shares was to be done on the basis of one vote per share of stock. Under the bylaws Chu, who was the majority stockholder, the president, and a director of the corporation, had the power to exercise control over Chu Associates, Inc. On December 15, 1959, at a joint meeting of the board of directors and stockholders of the corporation, a resolution was adopted to "declare a stock split by declaring a stock dividend of an additional share of no par common *369 stock for each share" of stock outstanding, and accordingly to issue an additional 80 shares to petitioner and an additional 10 shares to Faigen. At the same meeting, a second and subsequent resolution was also adopted, which provided as follows: VOTED: To issue in addition to the shares of no par common stock already outstanding, 110 additional shares so as to make the number issued and outstanding 200 shares of no par common stock, of which 90 shares shall be issued to accomplish the stock split in accordance with the preceding vote, and the balance shall be issued to subscribers for $ 100.00 per share. Pursuant to these resolutions, *99 the stock transfer book of the corporation disclosed that stock certificate Nos. 3 through 14 were issued and were dated December 15, 1959, in respect of the additional 110 shares of stock of the corporation, as follows: Certificate No. Shares [3] Lan Jen Chu [4] Ivan M. Faigen [10] 5-14 Others (employees of the corporation and consultants) [20] Total [110] *601 The record contains no further independent evidence that all of the 20 shares embodied in certificates 5 through 14 were in fact issued and paid for on or before December 18, 1959. It was not until April 15, 1960, that the corporation filed an "Issue Of Capital Stock" certificate with the Department of Corporations in connection with the issuance of the additional 110 shares of stock, although such certificate was required to be filed within 30 days after the vote authorizing the issue of the stock. Also, the corporation's balance sheet, which was a part of its income tax return filed on December 19, 1960, for the taxable year ending September 30, 1960, disclosed paid-in capital as of the end of that taxable year in the total amount of just $ 19,800. Such amount was only $ 1,800 more than*100 the stated paid-in capital as of September 30, 1959, indicating that only 18 of the 20 shares authorized for issue at $ 100 per share by the December 15, 1959, resolution referred to hereinabove were, in fact, paid for by the close of the taxable year ending September 30, 1960. Shortly after it filed the above-mentioned tax return, the corporation filed a certificate of condition with the Department of Corporations in January 1961, in which was included a balance sheet also as of September 30, 1960. This balance sheet was similar in all material respects to the one included in the corporation's tax return for the taxable year ending September 30, 1960, except for the inclusion of an additional $ 200 in accounts receivable and an additional $ 200 to paid-in capital, which was stated to be $ 20,000. The corporation's balance sheet as set forth in its tax return for the period October 1, 1960, through December 31, 1960 -- which was filed in connection with changing its taxable year from a fiscal to the calendar year -- reflected stated paid-in capital in the amount of $ 19,800 at the beginning of that taxable period (October 1, 1960) and $ 20,000 at the end of the period (December *101 31, 1960). The $ 20,000 in paid-in capital disclosed on these balance sheets consisted of the original capital of $ 18,000 and the $ 2,000 in subsequent capital arising out of the issue of the 20 shares of stock for $ 100 per share, as authorized at the December 15, 1959, joint meeting of the board of directors and stockholders of Chu Associates, Inc. All of the stock of the corporation was subject to a restriction on transfer specified in the agreement of association, the articles of organization, as well as the bylaws, pursuant to which a shareholder, desiring to sell his stock, was required first to offer the stock to the corporation. This restriction was printed on the back of all the stock certificates issued by the corporation which were dated December 15, 1959, or prior thereto, but no such restriction was printed on certificates bearing a subsequent date. The minute book of the corporation disclosed that the board of directors voted on January 17, 1961, to waive *602 the restriction on transfer in respect of 96 shares of stock owned by petitioner, and such transfer was thereupon made by petitioner to his children or to trusts for their benefit. A motion made at the *102 joint meeting of the stockholders and board of directors on May 5, 1965, to similarly waive the restriction on the transfer of one share of stock owned by an employee, who was leaving the employ of the corporation, failed to carry. Associates, the proprietorship owned by Dr. Chu, and Chu Associates, Inc., conducted their respective operations -- research and the development of antennas by the proprietorship and the manufacturing thereof by the corporation -- in separate, specially constructed facilities on the same parcel of land in Boxborough, Mass., which was leased from the Oakmont Corp. The stock of the Oakmont Corp. was owned by certain trusts for the benefit of Chu's children. The premises occupied by the corporation covered approximately 24,000-27,000 square feet, or about 3 times the area occupied by Associates. The manufacturing *370 corporation also employed more personnel than the proprietorship. The staffs of the two entities were different except that Dr. Chu and Faigen served as president and vice president, respectively, and directors of the corporation as well as managing the proprietorship. Both Associates and the corporation shared the same accounting office, but *103 each maintained a separate set of books and records. The corporation relied to a significant extent on Dr. Chu, not only in the acquisition of contracts for the manufacture of antennas but also in their execution. His participation was important in the day-to-day solution of specific technical problems which arose. However, during 1959 and 1960 Dr. Chu's work as an expert consultant, which involved a considerable amount of travel, was at its peak, and, in his absence, the corporation continued to operate under Faigen's supervision. In addition to Chu and Faigen there were also several other persons of specialized skills, including another professor of electrical engineering, an electrical engineer, a mechanical engineer, an auditor and comptroller, a patent attorney, and corporate counsel, who were associated with the corporation as advisers, employees, or shareholders. Although the corporation was created specifically to produce antenna systems developed by Associates, at least during the period of time around December 1959, no contract existed under which the corporation had an automatic right, exclusive or otherwise, to thus manufacture antenna designs created by the proprietorship. *104 As a result of certain of the proprietorship's antenna research and development, Chu and Faigen filed an application for letters patent with the U.S. Patent Office (Patent Office) on June 26, 1956, in *603 respect of a radio-frequency-energy transmission-line system and antenna invented by them. Chu and Faigen were aware that it was not unusual in the submission of such an application that there could be a number of rejections before the language of the application was sufficiently clarified or narrowed, and allowance of a patent granted by the Patent Office. The application itself embodied 18 separate claims. As explained in the introductory segment, or what the applicants referred to as the "specification" portion of the application, the principal device sought to be patented was a completely enclosed antenna in which was housed a novel transmission-line system consisting of a balanced and unbalanced line. The invention was said to be less "cumbersome" and "costly" than similar previous antenna systems, and also less subject to atmospheric conditions. The patent application described in some detail the features which especially distinguished Chu and Faigen's invention from*105 prior art in these respects. The novel design of the antenna, and transmission-line system eliminated the necessity of phase- and impedance-correcting devices used in prior-art systems and otherwise managed to effect a connection between the unbalanced and balanced transmission lines without the use of compensatory structures previously found necessary. These results and the precise manner in which they were achieved were the subject of detailed correspondence reflecting differences of opinion between the Patent Office and Chu and Faigen's patent attorneys. The first 13 claims made in the patent application concerned the principal antenna structure and radio-frequency-energy transmission system for which Chu and Faigen sought a patent. These 13 claims have been fairly characterized as representing the "heart" of the patent application. Claims 14-18 of the application pertained specifically to an alternative structure of the invention which was preferable only if more than two antenna units were to be "stacked" one on top of another. By a letter dated July 5, 1957, the Patent Office informed Rines & Rines, the patent attorneys acting on behalf of Chu and Faigen, that claims 1-13*106 were unallowable because of certain prior existing patents, including the Bliss patent, but that claims 14 - 18, on the other hand, "[appeared] allowable." On December 9, 1957, Rines & Rines thereupon filed amendment A to the patent application suggesting certain clarifying language in the first 13 claims. In the explanatory remarks which were a part of amendment A Chu and Faigen's patent attorneys took exception to the Patent Office's position that prior art and previous patents anticipated the invention in question. They noted that the Bliss patent referred to in respect of claims 1-6, 8, and 13, in the Patent Office's July *604 5, 1957, rejection letter, could not achieve the applicant's results without the use of compensating stubs and other devices. The stated reason for the incapacity of the Bliss patent to achieve these results, was that it displayed "unsymmetrical loading at the two ends of the [balanced transmission] line, * * * and * * * [a] long exposure of the outer conductor * * * of the coaxial [unbalanced transmission] line," which thereby distinguished the Bliss patent in respect of the two principal features of the applicants' invention. In respect of the*107 amendments proposed to clarify the novel structure of Chu and Faigen's device the accompanying remarks noted: In order even more clearly to give significance to this all-important means recited in claims 1, 2, 6, 7, 8 and 9, these claims *371 have been amended to recite the applicants' symmetry and similar loading looking up and down the balanced line from the intermediate feed point -- a concept entirely lacking from the Bliss patent, as above shown, and that contributes to the production of the applicants' novel results. Similar amendments have also been incorporated into claims 3, 4, 5 and 10 to 13, even though these claims are quite specific to the position of the applicants' coaxial-line outer conductor * * * entirely within the hollow of and contiguous with the inner wall * * * of [one of the balanced transmission-line] * * * [conductors] * * *, giving rise to the prevention of balanced-line field influence, before described. This, of course, is to be contrasted with the exposed outer conductor of the coaxial line * * * in the Bliss patent. In response to amendment A the Patent Office notified Rines & Rines by a letter dated August 11, 1958, that claims 1-11 and 13 were rejected*108 as amended and that claims 12 and 14-18 appeared allowable. The notice of rejection reiterated that the prior Bliss patent anticipated certain features of the application and further noted that the "broad statement" of the rejected claims was responsible in part in this respect. In response to this second rejection letter, Rines & Rines on January 21, 1959, filed amendment B to the patent application with the Patent Office. The remarks accompanying the modifications presented in amendment B noted that the Patent Office "appears to appreciate the significance of the applicants' invention," and that the rejections of claims 1-11 and 13 were based on the applicants' "broad statement" of their claims. The applicants disputed that the Bliss patent specified a point of connection between the balanced and unbalanced transmission lines which was "substantially electrically symmetrically disposed with respect to its [the balanced line's] ends," which was a feature of their invention. Nonetheless, the applicants proposed certain amendments to specify the means by which they accomplished this electrically symmetrical disposition of the point of connection between the unbalanced and balanced*109 transmission lines. *605 On September 14, 1959, the Patent Office sent to Rines & Rines a third notice of rejection. Claims 1, 2, and 6-9 were rejected for the "convenient functional language" and for being "vague and indefinite." Claims 1-13 were variously rejected as "misdescriptive," as well as in light of certain prior patents because it was not "apparent" that any "unexpected results" would be achieved by the instrument described in the application. Although, as noted hereinabove, certain of the patent claims 1-13, which Chu and Faigen regarded as the heart of the application, had been rejected by the Patent Office on three occasions, Chu and Faigen nonetheless expected that the entire application would eventually be approved. They were familiar with the prior art and developments in the field, and had confidence in the patentability of their basic design. Before any further action was taken with respect to the patent application, Chu, on December 18, 1959, assigned his 11/12 interest therein to Chu Associates, Inc., and Robert H. Rines, who was the assignee of Faigen's interest in the application, assigned his 1/12 interest to the corporation. The assignment agreement, *110 which is here in question, provided in part as follows: The Company agrees to pay to the said Lan Jen Chu and Robert H. Rines, their heirs, legal representatives and assigns, in the respective proportions of 11/12ths and 1/12th, the following sums as purchase-price installments for the United States patent rights above set-forth: A. $ 2,000.00 upon the execution of this assignment. B. $ 60,000.00 during the calendar year, 1960. C. Fifteen (15%) percent of the gross selling price of each and every transmission line system and antenna, manufactured and sold by the Company in each calendar year thereafter, until the expiration of the said United States patent rights; but in no calendar year, less than the sum of $ 15,000.00. The minimum aggregate amount thus to be paid for the patent application rights was $ 317,000 over the life of the patent. The assignment agreement was signed on behalf of Chu Associates, Inc., by Faigen as the corporation's vice president. At the time of the assignment the corporation had received certain assurances of a contract to produce $ 400,000-$ 500,000 of these antenna systems for use by the U.S. Air Force. The record does not disclose the amount of *111 anticipated profits to be derived from such possible contract. After the assignment of the patent application to the corporation and on March 8, 1960, Rines & Rines filed amendment C to the application in response to the Patent Office's notice of September 14, 1959, described hereinabove. Amendment C presented certain language to be incorporated in each of the claims 1-13. According to the remarks *606 accompanying the amendment, the modifications both further clarified the means by which the *372 outer conductor of the unbalanced coaxial line was prevented from influencing the radio-frequency field between the conductors of the balanced line, and recited with more precise reference the location of the point of "electrical symmetry." The Patent Office, on September 7, 1960, mailed to Rines & Rines a "Notice of Allowance" of all 18 claims made in the patent application as modified by amendment C. On May 30, 1961, letters patent were issued in respect of the radio-frequency-energy transmission-line system and antenna. In addition to this patent issued by the U.S. Patent Office, Chu and Faigen also obtained a Canadian patent on the same invention, and licensed construction rights thereunder*112 to a Canadian firm which proceeded to produce antenna systems. Pursuant to the U.S. patent, Chu Associates, Inc., itself produced under contract various antenna systems, including antennas for the Sage Defense Network, the U.S. Navy and Air Force, for use on Polaris submarines as well as in the Green Pine Northern Area Extended UHF network. At the time of the trial herein, the corporation was under contract to produce such antenna systems for certain helicopter assault ships as well. Each of these antenna systems manufactured by the corporation was made according to the particular requirements and specifications of the various production contracts. Also, all of the antenna systems manufactured by the corporation under the patent involved claims 1-13, and Chu Associates, Inc., has never utilized the alternative antenna configurations described in claims 14-18 of the patent. Dr. Chu was under no contractual obligations in respect of his employment with or management of Chu Associates, Inc., although he had expressed to Faigen that he had no desire to be in someone else's employ or an officer of a corporation other than Chu Associates, Inc., which petitioner controlled. And under*113 the terms of the December 18, 1959, assignment agreement -- which provided that Chu was to receive 11/12 of 15 percent "of the gross selling price of each and every transmission line system and antenna" manufactured by the corporation until the expiration of the patent -- it would have been in his financial interest to continue to act as consultant for Chu Associates, Inc., in connection with its production of the antenna systems, in the event he sold or otherwise disposed of his controlling interest in the corporation. The corporation's production of the antenna systems under the patent created substantial gross receipts. And at the time of the trial *607 herein such antenna sales continued to generate considerable business. As a consequence of these sales and pursuant to the provisions of the assignment agreement, Dr. Chu received income in the following amounts during the years in issue: Year Income [1962] $ 84,020.14 [1963] 67,572.00 [1964] 74,629.00 [1965] 25,405.00 Total 251,626.14 Chu Associates, Inc., for its part, claimed deductions against ordinary income in respect of patent expenses in the following amounts and taxable periods: Taxable period Amount 10/1/59 -- 9/30/60 $ 47,000.00 10/1/60 -- 12/31/60 15,000.00 [1961] 91,658.34 [1962] 69,024.00 [1963] 81,413.91 [1964] 28,397.00 [1965] 28,092.00 360,585.25 *114 It does not appear on the record whether these deductions were in respect of other patents owned by the corporation as well as the patent which arose out of the transfer of the application here under question. The corporation did not claim any deductions for depreciation during the above taxable periods in respect of the antenna patent. On their joint income tax returns, the Chus reported as long-term capital gains the income received by Dr. Chu in each of the years in issue from the sale of the patent application. In his deficiency notice, the Commissioner determined that the amounts so received were taxable as ordinary income. OPINION The issue for decision is whether the amounts received by Dr. Chu in 1962, 1963, 1964, and 1965, from the transfer of his 11/12 interest in the antenna patent application to Chu Associates, Inc., are taxable as ordinary income under section 1239, I.R.C. *608 1954, 1 or as long-term capital gain. Section 1239 provides in part as follows: *373 SEC. 1239. GAIN FROM SALE OF CERTAIN PROPERTY BETWEEN SPOUSES OR BETWEEN AN INDIVIDUAL AND A CONTROLLED CORPORATION. (a) Treatment of Gain as Ordinary Income. -- In the case of a sale or exchange, directly*115 or indirectly, of property described in subsection (b) -- (1) between a husband and wife; or (2) between an individual and a corporation more than 80 percent in value of the outstanding stock of which is owned by such individual, his spouse, and his minor children and minor grandchildren; any gain recognized to the transferor from the sale or exchange of such property shall be considered as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. (b) Section Applicable Only to Sales or Exchanges of Depreciable Property. -- This section shall apply only in the case of a sale or exchange by a transferor of property which in the hands of the transferee is property of a character which is subject to the allowance for depreciation provided in section 167. The Commissioner contends that Dr. Chu owned more than "80 percent in value" of the corporation's outstanding stock, and that the patent application was property of the nature contemplated by section 1239. Sec. 1239(a)(2) and (b), I.R.C. 1954. In support of their position that section 1239 does not apply to the transfer in question, the petitioners have presented several*116 arguments in respect to paragraph (a)(2) of section 1239 as to the extent of Dr. Chu's ownership of stock in Chu Associates, Inc., and in respect of paragraph (b) as to the character of the patent application transferred. *117 Although we have substantial doubts on this record as to the soundness of petitioners' position under paragraph (a)(2) that Dr. Chu did not own "more than 80 percent in value" of the outstanding stock on December 18, 1959, the date of the assignment, we do agree with their contention that section 1239 is inapplicable because of the provisions of paragraph (b). The caption of paragraph (b) calls attention to the fact that section 1239 is concerned only with sales or exchanges of "Depreciable Property," and the text explicitly indicates that the section is applicable only where the transferred property is "of a character which is subject *609 to the allowance for depreciation [in the hands of the transferee] provided in section 167." We hold that the patent application transferred by Dr. Chu does not come within those terms. The starting point for the consideration of this issue is our decision in Estate of William F. Stahl, 52 T.C. 591, where the taxpayer had transferred eight patents and five patent applications to his controlled corporation. It was there held that the consideration received for the eight patents was taxable as ordinary income *118 under section 1239. However, the Court ruled, relying upon Hershey Manufacturing Co., 14 B.T.A. 867, affirmed 43 F. 2d 298 (C.A. 10), and United States Mineral Products Co., 52 T.C. 177, that the five patent applications were not "depreciable property," nor were such applications property "of a character" that is subject to depreciation allowance. If we were to follow our prior opinion in Stahl, that would be the end of the matter, and petitioners would be entitled to prevail immediately upon the basis of that opinion. However, upon appeal to the Seventh Circuit, Stahl was affirmed in part and reversed in part in respect of the five patent applications, 442 F. 2d 324, and it becomes necessary to examine the present case in the light of the grounds relied upon by the Court of Appeals. As to two of the patent applications involved in that case the taxpayer-assignor had received a formal "Notice of Allowance" from the Patent Office prior to the transfer, and as to a third application he had received notification from the Patent Office, also prior to the transfer, *119 that two of the claims "[appeared] allowable." The remaining two applications had been rejected. Although the Seventh Circuit affirmed this Court as to these latter two applications, the Court of Appeals reversed as to the first three. In its view (442 F. 2d at 328), the two applications as to which official notices of allowance had been received and the application as to which a notification that two of its claims "[appeared] allowable" had been received prior to the transfer "were sufficiently matured applications as to require that they be treated as patents for purposes of section 1239." Applying the criteria set forth by the Seventh Circuit in respect of the foregoing three applications, we cannot reach the same result here on the record before us. The application in issue embodied 18 claims. While it is true that the Patent Office repeatedly recognized the validity of claims 14-18, it had on as many as three separate occasions explicitly refused to "allow" *374 or approve claims 1 through 13, which represented the heart of the claimed invention. We have set forth at some length in our findings the differences of views that were exchanged between Dr. *120 Chu's representatives and the Patent Office. Although much of it is mystifying to us, it establishes to our satisfaction, *610 in the absence of clarifying expert testimony, that the application could hardly be characterized as "mature" so that it could be "treated as a patent for purposes of section 1239" within the meaning of the Seventh Circuit's opinion. Accordingly, whether we apply our own prior opinion in Stahl or whether we apply the criteria of the Seventh Circuit's opinion in that case, we come to the same conclusion on the record before us, namely, that the patent application which had been repeatedly rejected at the time of the transfer was not of a character subject to depreciation within section 1239. 2 *121 Decision will be entered under Rule 50. Footnotes 1. No argument has been made by the Government that the amounts in issue constituted ordinary income solely on the basis that capital gain treatment is not permitted under sec. 1235, I.R.C. 1954, because of Dr. Chu's ownership of stock in excess of the limits set out in sec. 1235(d). Compare Myron C. Poole, 46 T.C. 392, 404-405, with Rev. Rul. 69-482, 1969-2 C.B. 164. Sec. 1235 deals with the transfer of "rights to a patent," and has been applied to the transfer of rights under a patent application as well. See William W. Taylor, 29 T.C.M. 1488, 1493. Cf. Franklin S. Speicher, 28 T.C. 938, 944-945. The Commissioner's argument herein that the amounts in issue received by Dr. Chu should be taxed as ordinary income is based entirely on the provisions of sec. 1239, I.R.C. 1954↩. 2. We note that as to one of the three applications in Stahl, reference is made to the fact that there had been official notification that two of the claims "[appeared] allowable," and, of course in the present case, the Patent Office had originally approved claims 14-18 as well as certain of the other claims in later notifications. But in the instant case claims 1 through 13 were the "heart" of the patent, and until they had been declared "allowable," the application as a whole must in substance be regarded as having been rejected. On the other hand, we have no knowledge as to whether the two claims regarded as "allowable" in Stahl↩ represented the essence of the invention, and in the absence of any further clarifying information, we may fairly assume that the Seventh Circuit regarded the basic claims in respect of that application to have been approved. In the instant case, it is clear that the application had not "matured" to the point that it could be regarded as the substantial equivalent of a patent within the analysis set forth by the Court of Appeals. We regard our disposition of this matter as wholly consistent with that analysis.