Before DUFFY, SWYGERT and MAJOR, Circuit Judges.
The Tax Court of the United States, on December 14, 1960, sustained a determination by the Commissioner of Internal Revenue of deficiencies in petitioner's income tax for the years 1953 and 1954. The matter is here on petition for review of that decision. The deficiency asserted for the year 1953 has been disposed of by agreement, leaving for consideration that for the year 1954. Petitioner's name at the time its petition was filed with the Tax Court was National Cylinder Gas Company (referred to as N.C.G. or the taxpayer), which was subsequently changed to that shown in the caption.
The controversy arises from certain transactions which took place between taxpayer, Robert Klotz and Byron Jackson Company (referred to as B.J.Co.). Klotz, an inventor, owned the right, title and interest in and to certain inventions and patent applications pending in the United States Patent Office. On September 1, 1950, N.C.G. entered into an option contract with Klotz, whereby the former upon exercise of the option would acquire the entire interest of the latter in the inventions and patent applications. By the terms of the contract N.C.G. was obligated to prosecute the patent applications. The contract was not assignable by either party without the prior written consent of the other.
Subsequently, one of the applications designated in the option contract became involved in an interference proceeding with an application controlled by B.J.Co. Negotiations were carried on between N.C.G. and B.J.Co. relative to this interference and, in December 1952, an agreement was reached by which B.J.Co. would acquire the option rights of N.C.G. in the inventions and patent applications.
All agree that the taxpayer, in December 1952, transferred to B.J.Co. a capital asset. The ultimate question for decision is whether the proceeds from such transaction represented a long-term or short-term capital gain. This in turn depends upon whether the assets transferred had been held by the taxpayer for more or less than six months. Section 1222 of the Internal Revenue Code of 1954 (26 U.S.C. 1958 ed., § 1222).
The taxpayer contends, as it did before the Tax Court, that it sold and assigned to B.J.Co. the rights which it acquired under the option contract with Klotz, and that having held such option for more than six months, the proceeds were taxable as long-term capital gains. The Commissioner contends, as he did before the Tax Court, that the taxpayer exercised its option with Klotz, thereby acquiring ownership of the inventions and patent applications designated therein. The Commissioner further contends that the taxpayer acquired the inventions and patent applications less than six months prior to the sale and that the proceeds therefor were taxable as short-term capital gains. Taxpayer before the Tax Court advanced the alternative theory that even though it be held to have exercised its option and thereby acquired ownership of the inventions and patent applications, such acquirement took place more than six months prior to the December transaction and it would still be entitled to a long-term capital gain.
The Tax Court decided that the taxpayer exercised its option and that the transaction with B.J.Co. was a sale of the inventions and patent applications. In so doing it stated:
"We hold that in substance the petitioner exercised the option under the 1950 Agreement with Klotz and therefore the Assignment Agreement was a sale of the inventions and patent applications and not merely the assignment of an option."
The Tax Court, having thus decided that the taxpayer was the owner of the inventions and patent applications which it sold to B.J.Co., further held that such ownership was acquired less than six months prior to the transaction and that the proceeds were, therefore, taxable as a short-term capital gain.
It is our judgment, for reasons subsequently discussed, that the holding of the Tax Court that taxpayer sold to B.J.Co. inventions and patent applications rather than its rights under the option agreement with Klotz is clearly erroneous. We hold that the taxpayer did not acquire ownership of the inventions and patent applications, which makes irrelevant the Tax Court's holding that such ownership was acquired within six months of the time of the transaction with B.J.Co.
It may also be noted that the Commissioner, as he did before the Tax Court, advances the alternative theory that even though it be held that the taxpayer in the 1952 transaction sold its option to B.J.Co., such option was owned by the taxpayer for less than six months and, therefore, it was not entitled to a long-term capital gain. This contention was neither mentioned nor decided by the Tax Court. We conclude that this theory has no merit. We also note, although perhaps immaterial, that the Commissioner originally asserted a deficiency on the theory that the proceeds received by taxpayer as a result of the 1952 transaction represented royalty income taxable as ordinary income at the rate of 52%. No contention was made at that time that the 1952 transaction embodied the sale of a capital asset, either of the inventions and patent applications or of the option contract with Klotz.
The Tax Court had before it numerous documents and heard the oral testimony of the attorney for the taxpayer, the attorney for B.J.Co., and Klotz, all of whom had participated in some or all of the numerous agreements which were entered into by the parties. A detailed analysis of the documents or discussion of the oral testimony would unduly prolong this opinion and, in our view, is unnecessary. There are three documents which in plain, unambiguous language demonstrate that the taxpayer obtained an option agreement from Klotz in 1950 and that the rights acquired thereby were sold and assigned to B.J.Co. in December 1952: (1) the option agreement entered into between Klotz and the taxpayer September 1, 1950; (2) the agreement by the taxpayer, assented to by Klotz, by which the taxpayer agreed to assign its option to B.J.Co., and (3) the assignment executed December 6, 1952, by which Klotz sold and assigned its inventions and patent applications to B.J.Co.
Little need be said as to the 1950 agreement because it is not in dispute.By it, the taxpayer obtained an option to acquire Klotz's interest in certain designated inventions and patent applications. Taxpayer was obligated to prosecute such applications, was to receive a paid-up license as to any patents issued and during such time was to pay Klotz $100 per month. Taxpayer was free to exercise the option at any time by giving Klotz notice by registered mail. In the event the option was exercised, taxpayer was obligated to pay ...