Full opinion text
GOURLEY, Chief Judge. To simplify references which must be made to various parties, the following abbreviations will be used throughout this Opinion: H. H. Lamar —Taxpayer Stanley Granger, Collector of Internal Revenue —Collector Kerotest Manufacturing Company —Kerotest Henry Valve Company ■ — Henry W. J. Schoenberger Company ■ — Schoenberger United States of America —United States Action is brought by Taxpayer for refund of alleged overpayment of income taxes for the years 1944, 1945 and 1946 in the principal amount of $27,687.57. Counsel for the party litigants have been most vigorous, searching and thorough in the trial of this proceeding, and have presented most learned arguments and carefully annotated briefs in support of their respective positions. Taxpayer is an individual residing at 2504 Hollywood Drive, Wilkinsburg, Pennsylvania. Collector is and has been the duly qualified Collector of Internal Revenue for the 23rd Collection District of Pennsylvania. Taxpayer kept his books and filed his income tax returns on the calendar year cash basis of accounting. He timely filed his income tax returns for the years 1944, 1945 and 1946, and paid the taxes reported in these returns to Collector. On October 2, 1947, taxpayer duly filed claims for refund of a portion of the amounts so paid. No action had been taken on these claims. From 1930 to 1938, Taxpayer was employed as a designing engineer on a salary basis by Kerotest. Thereafter, he was similarly employed by Superior Valve & Fitting Company and by Henry until April 1, 1942. While working for Kerotest, Taxpayer invented a number of improvements for valves. These were developed on company time, with company facilities, and as an incident to his duties as a designing engineer for Kerotest. Applications for patents on five of these inventions were filed by Taxpayer and coincident with the filing of the applications, he unconditionally assigned to Kerotest his complete interest in the inventions. Also during the time that he was employed by Kerotest, Taxpayer began working in his spare time on another valve improvement. A completed sketch of this invention was made on April 22, 1938 and an application for a patent was filed on November 8, 1938. Taxpayer was issued Patent No. 2,217,842, October 15, 1940, and Letters Patent of the Dominion of Canada, No. 405,411, June 16, 1942. It is this invention and the resulting patent that give rise to the present controversy. The patent and invention provide: “The invention relates generally to valves and more particularly to high pressure valves. “In the operation of the high pressure valves heretofore employed by the trade, difficulty was experienced in actuating the valve head when it was attempted to operate the valve under certain pressure conditions. This resulted in operation failures and made it necessary to obtain a person acquainted with the valve construction and operation to operate it. Consequently, these high pressure valves could not be installed in places where the obtaining of an expert was uneconomical and apt to result in delays. “The object of the invention is to provide for a substantial balancing of pressures on the valve head disposed in the valve chamber to control the flow of fluids to facilitate the operation of the valve under all pressure conditions. “It is also an object of the invention to provide for the operation of a valve head without the use of auxiliary equipment and irrespective of the direction of application of the fluid pressures. “When this valve is connected to a system in which there is a compressor as in a refrigeration system, the check valve functions to protect the diaphragm against pressure surges. This will give the valve a long life. “The main feature of this invention, as illustrated in all the modifications, is to effect a substantial balance of pressures on the valve head. When this has been accomplished, the means provided for actuating the valve head will function to effect an opening of the valve.” In addition to the general expressions set forth in the patent and its relation to high pressure valves, it is claimed the invention can be applied in sixteen different 'Sets of circumstances. Reduced to simple phraseology, the sixteen claims in the invention have four uses in the industrial or scientific field of mechanics : (a) Refrigeration (b) High pressure fluid containers (c) Airplanes or aviation fields (d) General application or usages Various agreements were entered into by Taxpayer with Henry and Schoenberger. Each standing alone is somewhat confusing, and to ascertain the intention of the parties relative to said patent, all the instruments, each referring to the other, must be construed together. On December 9, 1939, Taxpayer and Henry entered into an agreement wherein Taxpayer granted to Henry an exclusive license to manufacture, use, and sell valves embodying the Taxpayer’s invention for a stipulated royalty of 5% of the net selling price of the valves, with guaranteed minimum royalties of $1,500 per year. On August 6, 1942 and January IS, 1943, contracts supplementing the December 9, 1939 indenture were entered into between the parties. Under the August 6, 1942 supplement, Henry gave Taxpayer “the right to license •others to make, use and sell and have made” valves embodying the patent: (1) for so-called high-pressure uses, not including, however, the right to make line valves, 'which is a shut-off valve; and (2) for use in aircraft. Under other provisions of the agreement Henry also reserved for itself a non-exclusive license to use the patent in making valves for high-pressure and aircraft uses after January 1, 1947, or sooner under certain conditions. The supplement of January 15, 1943, while substantially duplicating' the August 6, 1942 contract, made two important changes: Henry relinquished its previously reserved non-exclusive license to make valves for high pressure and aircraft uses; and Taxpayer agreed to pay Henry Valve Company $1,000 within sixty days after he granted exclusive licenses to others to use the patent. The sections of the supplement of January 15, 1943 which differ from the supplement of August 6, 1942 are set forth in footnote three. The first and second supplemental agreements between Taxpayer and Henry provided that any license of Taxpayer which related to the high-pressure or aviation field would be subject to the right of Henry to an indivisible, non-exclusive and nonassignable license from the licensee or assignee of Taxpayer in the fields of such a license grant to become effective as of January 1, 1947, and at the same royalty rate as such license grant from Taxpayer to the new licensee. Subsequently, Taxpayer entered into an agreement .with Schoenberger wherein Taxpayer granted to Schoenberger a nonassignable, exclusive license under the aforesaid patent to make, use and sell, and have made valve containers for certain high-pressure fluids, but not including line-valves of the same general type being made by Henry and for equipment and mechanisms for incorporation in airplanes of all kinds and airships which are lighter than air. The original agreement and two-supplemental agreements between Taxpayer and Henry were incorporated and. made a part of said agreement. It appears that Henry was of the belief that the reservation of the rights in these two fields was not set forth with sufficient clarity in the supplemental agreements between Henry and Taxpayer. Therefore, after Taxpayer licensed Schoenberger, Henry requested Schoenberger to unequivocally set forth said rights by written agreement in the high-pressure aviation fields. Said request resulted in an agreement of April 20, 1943 between Schoenberger and Henry, which granted to Henry a nonexclusive, indivisible and non-assignable license under the Letters Patent in the high-pressure field after January 1, 1947. I do not believe this Agreement was necessary since Henry already had a joint right of use in said fields with Taxpayer or his assignee. The request further resulted in an agreement of June 10, 1943 between Schoenberger and Henry which granted to Henry a non-exclusive, indivisible, non-assignable license under the Letters Patent in equipment and mechanisms for incorpora tion in airplanes of all kinds and airship which are lighter than air. The agreements were found confusing and complicated and oral testimony became necessary to understand the purposes of the patent. The inquiry which the Court conducted or permitted in this matter did in no way seek to secure evidence to alter, modify, abrogate, or change the agreements. Since the original patent was applicable to sixteen different technical circumstances, which, in turn, were subject to four gerieralized uses, and since the various agreements stemmed from the terminology of the original patent, this Court found it imperative to request testimony to simplify and clarify those terms used in patent parlance but not understandable to the layman. Once the terminology was defined and made clear, the agreements spoke for themselves and the issue resolved itself into the application of the agreements to the law. Where the language of a contract is plain and unambiguous, the court will not resort to construction but will enforce the contract according to its terms. New York Life Ins. Co. v. Jackson, 304 U.S. 261, 58 S.Ct. 871, 82 L.Ed. 1329; Great Lakes Towing Co. v. Bethlehem Transportation Corp., 6 Cir., 1933, 65 F.2d 543; Provident Trust Co. of Philadelphia v. Metropolitan Casualty Ins. Co., 3 Cir., 152 F.2d 875; General Finance Co. v. Pa. T. & F. M. C. Ins. Co., 348 Pa. 358, 35 A.2d 409. Where the rights of respective parties are dependent upon a contract, unless that instrument is ambiguous, the intention of the parties must be determined by the words of the contract, unaided by oral testimony. Rock-Ola Mfg. Corp. v. Filben Mfg. Co., 8 Cir., 168 F.2d 919. In determining whether or not there is 'an ambiguity requiring an interpretation, the whole contract must be considered and not an isolated part. Buchanan v. Swift, 7 Cir., 130 F.2d 483; Fraser Fund v. Fraser, 350 Pa. 553, 40 A.2d 22; DeChicchis v. Elizabeth Borough School District, 142 Pa. Super. 94, 15 A.2d 492. A contract is ambiguous if, and only if, it is reasonably or fairly susceptible of different constructions; it is not ambiguous if the court can determine its meaning without any guide other than a knowledge of the simple facts on which, from the nature of language in general, its meaning depends. 17 C.J.S., Contracts, § 294 and cases there cited; Whiting Stoker Co. v. Chicago Stoker Corp., 7 Cir., 171 F.2d 248; Zehnder v. Michaud, 8 Cir., 145 F.2d 713. Contracts are not rendered ambiguous by the mere fact that the parties do not agree upon their proper construction. An ambiguous contract is one capable of being understood in more senses than one; an agreement obscure in meaning, through indefiniteness of expression, or having a double meaning. Contracts are not rendered ambiguous by the mere fact that parties do not agree upon their proper construction. Whiting Stoker Co. v. Chicago Stoker Corp., supra. Where a contract is ambiguous, evidence of extrinsic circumstances may be received to show that the parties themselves have adopted a permissible method of applying its terms to the subject matter. Zehnder v. Michaud, supra. Where parol evidence is admissible to alter the terms of a written contract, it must first appear that the contract is incomplete and that the evidence sought to be introduced in no way conflicts with what is written. American Sumatra Tobacco Corp. v. Willis, 5 Cir., 170 F.2d 215. The courts are not permitted to make contracts for party litigants and are only empowered to construe the language and meaning of contracts made and entered into as they are intended and understood by the parties. In the absence of fraud, accident or mistake, parol evidence is not admissible to vary, alter or contradict terms of a complete and unambiguous written contract. American Sumatra Tobacco Corp. v. Willis, supra. This is not a case where the parties are just unable to agree upon the proper construction to be placed on the contracts in suit. A situation exists where the contracts are capable of being understood in more senses than one without an explanation as to the purposes of the patent. There is no question in my mind that language used in patent agreements and contracts is peculiar and unique to the patent field. Of course, it is English, but it is a peculiar brand in many respects. There are words which have specialized meanings within the context or framework of patent practice and what might be called patent jargon. The admission of parol evidence in this proceeding was not to cbntradict or vary the terms of the written agreements. It was for the purpose of explaining the meaning of the contracts as they related to the patent rights given, received or retained by Taxpayer. The parol testimony was proper and necessary; otherwise the Court could not have seen the trees for the forest. To be chronological in approaching the problems which exist, determination must first be made of the legal effect to be given the various agreements entered into between— (1) Taxpayer and Henry (2) Henry and Taxpayer (3) Taxpayer and Schoenberger, and (4) Schoenberger and Henry This is necessary before any consideration can be given the question of Tax Law to be applied, as taken from the requirements of the Internal Revenue Code. Do the agreements between Taxpayer and Henry constitute a sale or assignment of the whole or part of the patent or a license to use part of the patent? Legal effect to be given the agreements between— (1) Taxpayer and Henry (2) Henry and Taxpayer The courts have generally followed basic patent law rules laid down by the United States Supreme Court and the other federal courts in determining whether a patent has been sold or exchanged or merely licensed. General Aniline & Film Corp. v. Comm. of Internal Revenue, 2 Cir., 139 F.2d 759; Myers v. C. I. R., 1946, 6 T. C. 258; Kimble Glass Co. v. C. I. R., 1947, 9 T.C. 183. Whether the agreements in this case constitute assignments or licenses is governed by federal law in general and federal tax law specifically. Patents are provided for in the Constitution and governed by federal statutes. 35 U.S.C.A. § 31 et seq. A patent is property, title to which passes from the inventor only by assignment, and also no particular form of words is required, a written instrument of transfer must be unambiguous and show a clear intent to part with the patent. Marshall v. Colgate-Palmolive-Peet Co., 3 Cir., 175 F.2d 215; McClaskey v. Harbison-Walker Refractories Co., 3 Cir., 138 F.2d 493. A patent confers upon the owner the exclusive right to manufacture, use and sell the invention for the life of the patent. In order to constitute a valid assignment of his patent, the owner must transfer all of these rights, either in whole or in undivided part, the grant of anything less being a mere license which conveys no proprietary interest to the licensee. Waterman v. Mackenzie, 138 U.S. 252, 11 S.Ct. 334, 34 L.Ed. 923; United States v. General Electric Co., 272 U.S. 476, 47 S.Ct. 192, 71 L.Ed. 362. The law seems to be settled that an assignment of the patent is not invalidated because an invention is assigned before a patent issues or because there is a reservation of royalties. Kenyon v. Automatic Instrument Co., 6 Cir., 160 F.2d 878; Rude v. Westcott, 130 U.S. 152, 9 S.Ct. 463, 32 L.Ed. 888; John Tuman & Sons, Inc., v. Basse, 2 Cir., 113 F.2d 928. Whether the transfer of an interest or right under a patent is an assignment or a license does not depend upon the name by which it is called, but upon the legal effect of its provisions. No particular form is required for an assignment, but the instrument of transfer must be unambiguous and show a clear and unmistakable intent to part with the patent. Waterman v. Mackenzie, supra; Kenyon v. Automatic Instrument Co., supra. Thus a grant of the exclusive right to make, use and vend the invention for the life of the patent has been held to be an assignment, notwithstanding that the instrument was described as a “license” and the parties were designated as “licensor” and “licensee.” Bailey v. Commissioner, 15 T.C. 468; Myers v. Commissioner, 6 T.C. 258; Parke, Davis & Co., v. Commissioner, 31 B.T.A. 427; W. B. Davis & Son v. Commissioner, 5 T.C. 1195. Since a patent confers on the owner the exclusive right to make, use, and sell the invention for the life of the patent, a grant by the owner of these complete rights divests him of all interests in the patent and operates as a sale or an assignment. The Collector most urgently contends that Taxpayer’s case is based upon the erroneous theory that assignments of proprietary interests in the patent for each field in which the invention can be used may be assignable, when in reality a patent cannot be so split up and sold piecemeal.' The authorities which the Collector cites neither hold to this view nor represent the weight of the authority, and can be distinguished. In E. W. Bliss Co. v. United States, 253 U.S. 187, 40 S.Ct. 455, 64 L.Ed. 852, the patentee was obligated to defend the license and to assume the expenses for any suit against infringers, which was indicative of a reservation of title in the patentee. Rohmer v. Commissioner of Internal Revenue, 2 Cir., 153 F.2d 61, holds that all rights conferred by copyright must be transferred in order to constitute a sale under the Revenue Code. But, clearly, a publication is not subject to a breakdown into .varied functions as is a machine or valve, and the fact that a publication is indivisible does not render a mechanism so. In Collins v. Hupp Motor Car Corp., 6 Cir., 22 F.2d 27, the patent rights were mutually shared between the patentee and licensee, and no exclusive grant of any part thereof was perfected. Similarly, in General Motors Corp. v. Blackmore, 6 Cir., 53 F.2d 725, power to make settlements for past infringements or the granting of licenses was mutually shared by patentee and licensee, and no unlimited grant of an undivided part was perfected. In DeForest Radio Telephone & Telegraph Co. v. Radio Corporation of America, 3 Cir., 20 F.2d 598, the patentee and licensee shared the responsibility of manufacturing. The case of Gamewell Fire Alarm Telegraph Co. v. City of Brooklyn, C.C., 14 F. 255, does not dispute the power of a patentee to assign an undivided part of an entire patent, but holds that a segregated right for a particular employment of the invention is non-assignable. Relying upon this same authority, a similar opinion is expressed in Fauber v. United States, 37 F.Supp. 415, 93 Ct.Cl. 11. If a patent is divisible in part, so that it may be employed to perform different functions, I do not 'feel that the above language rules out a power to assign such patent for such distinct and separate functions. In Deitel v. Chisholm, 2 Cir., 42 F.2d 172, the court treated the exclusive right throughout the United States to use, manufacture and sell or to license others to use, manufacture, or sell, vanity cases as constituting an exclusive license, wherein the licensee retained a sufficient proprietary interest to sue infringers. In so far as the court failed to recognize such transaction as an actual sale of an undivided part of the patent interest, I am of the belief that the Court did not represent the majority viewpoint. The owner of a patent may assign it to another and convey, (1) the exclusive right to make, use and vend the invention throughout the United States, or, (2) an undivided part or share of that exclusive right, or (3) the exclusive right under the patent within and through a specific part of the United States. But any assignment or transfer short of one of these is a license, giving the licensee no title in the patent and no right to sue at law in his own name for an infringement. United States v. Gen. Electric Co., supra; Kenyon v. Automatic Instrument Co., supra; Walker on Patents, Deller’s Edition, Vol. II, page 1400 et seq.; Gayler v. Wilder, 10 How. 477, 51 U.S. 477, 13 L.Ed. 504; Littlefield v. Perry, 21 Wall. 205, 88 U. S. 205, 219, 22 L.Ed. 577. It is my judgment that the clear and unmistakable intent to part with the patent is clearly present here. The first paragraph of the December 9, 1939 agreement states: “Taxpayer hereby grants unto Henry an exclusive license under said inventions, and under any and all patents which may issue on said application or for said inventions, to manufacture, use and sell valves embodying said inventions, throughout the United States and all foreign countries.” It is of no moment that in paragraph 6 of this agreement Taxpayer reserved the option to terminate the agreement if the royalties were not paid as provided and in paragraph 11 in the event of bankruptcy for termination and revesting of title in Taxpayer. These are common provisions nearly universally found in patent agreements. An individual of inventive mind rarely has the ability, financial or otherwise, to produce and market his invention. He has to depend upon others and it is a means of self-protection to include such clauses; otherwise he is at the mercy of the assignee. It is the only control he has. The equity power of a court could not be availed of to compel specific performance. By the very nature of the relationship such clauses are included and to penalize the assignor by holding that such clauses make the sale a license is arbitrary and inequitable. Furthermore, the courts have recognized this and it is well settled that such clauses do not interfere with the passing of ownership (title) from the assignee, but operate as conditions subsequent. Waterman v. Mackenzie, supra; Commissioner v. Celanese Corp., 78 U.S. App.D.C. 292, 140 F.2d 339; Myers v. C. I. R., supra; Kimble Glass Co. v. C. I. R., supra; Raymond M. Hessert, 1947, 6 TCN 1190. The fact that the purchase price of the patent was to be paid on a certain percentage of the net sales of the product which was made, used, or sold from the invention, does not prevent the vesting of title to the property in the individual to whom the patentee assigns his rights. Commissioner of Internal Revenue v. Hopkinson, 2 Cir., 126 F.2d 406. The parties are not required to 'be clairvoyant or prescient and determine beforehand a lump amount; it is a matter' of speculation. The patent may be commercially marketable or it may not be and the parties account for this risk by providing for installment payments based on a percentage of sales. Congress has recognized this and provided in Section 44(b) of the Internal Revenue Code, 26 U.S.C. § 44(b), that capital gains may foe reported over a period of years. These installments have-often been designated as “royalties,” and the amount to be paid has been measured by the annual use of the patent by the purchaser. Collector places considerable emphasis on paragraph 5 of the agreement, and contends that its limiting language indicates a reservation of title in the inventor. This paragraph provides: “In the event Henry finds it necessary to sublicense one or more users of valves under said inventions, Henry may grant sub-licenses to users of valves, at a royalty of not less than five per cent (5%), limited to valves supplied with or for use of refrigeration equipment sold by said users, and Henry agrees to pay to Taxpayer one-half of the royalties received by Henry from said users on the latter’s production.” (Italics supplied.) Collector asserts that the inventor apparently reserved title in himself in that he limited Henry’s right of sub-license to the refrigeration field, although the invention had several uses. To construe this language as a reservation of title in the inventor would appear far -fetched and place exaggerated emphasis upon a single phrase, when the entire instrument must be viewed in accordance with its general tenor. The paragraph is in some ways ambiguous and not clear; but by reading the document as a whole and placing this paragraph in its proper setting, the following appears to be a reasonable interpretation. There is no restriction on the granting o-f sub-licenses to make, use and sell the patent. Taxpayer conveyed everything he had away. The only restriction involved applied to royalties in the refrigeration-field. In other words, in the event Henry whose principal production was that of producing valves for refrigeration purposes, wished to grant a sublicense to a user in this field (not to make, use and sell the valve, but only use it for refrigeration purposes, etc.) then since Henry would lose its profit on the sale of the valve, Taxpayer agreed to take a 50% reduction in royalty. The restriction, therefore, only applied to royalties by a refrigeration user (not a manufacturer or seller) and there was no restriction on the granting of a sub-license to make, use and sell the patent. This is the proper and logical interpretation because Taxpayer was not interested in restricting sub-licenses. Why should he be ? It was to his advantage to have Henry grant sub-licenses because it increased his royalties. Collector’s interpretation implying that something remained in Taxpayer is rebutted by the fact that in order to get more uses for the valve, he was forced at a later time to purchase an interest in an undivided portion of the patent because of the inability of Henry to go into these other fields. The interest purchased or release back agreements of August 6, 1942 and January 15, 1943, have no affect on what the agreement of December 9, 1939, was, nor do they convert the 1939 agreement from a sale into a license. The first supplemental agreement was entered into with Henry after the Taxpayer left the employ of that company. Taxpayer went with Henry on August 1, 1939, as a design engineer at a fixed salary. Taxpayer was unable to develop his patent himself; he didn’t have the resources but Henry did and as a result after Taxpayer had been with the company for a short time and saw the possibilities of Henry being able to produce his patent, he sold it to them complete on December 9, 1939, approximately four months after he began work with them. Taxpayer stayed with Henry for over two and one-half years and engineered this patent and got it into production because Henry did not have the engineering know how. By that time he knew the potentialities of the company and the probability of it going into the “high-pressure” field and the “airplane field”. This was in the midst óf World War II and his patent had great possibilities if developed. Therefore, when Taxpayer saw that Henry wasn’t in a position to go into those two fields he asked for those two fields back — a perfectly normal and logical thing to do. Henry knew they had a valuable patent and were not going to give up any part of it without some benefit to them, and Taxpayer paid valuable consideration for the rights he received. In the original agreement there is a conveyance of the entire patent and, therefore, an assignment or sale. The supplemental agreements provide for a reservation or a right on the part of the taxpayer patentee to apply the invention himself or through third persons to certain specified purposes. The instruments, therefore, must be construed as a conveyance of the title to the patent, with a license back from the assignee to the patentee, or from Henry to Taxpayer. Littlefield v. Perry, supra. I conclude, therefore, that the agreement and supplemental agreements between Taxpayer and Henry constituted a sale or assignment of all rights which Taxpayer had in the grants of the patent, with a license back for two fields or purposes of the patent in Henry or his assignee. Legal effect to be given agreements between— (1) Henry and Taxpayer (2) Taxpayer and Schoenberger (3) Schoenberger and Henry Unquestionably, for the purpose of ascertaining the intention of the parties in making their contract, all the instruments, each referring to the other, are to be construed together. If, when so construed, they shall be found to convey to the assignee, Henry, the title to the patent and inventions, the rights and privileges given by Henry to Taxpayer amount to not more than the granting back of a mere license from -the assignee to the patentee. Littlefield v. Perry, supra. Wholly apart from other shortcomings, the grant back to Henry and from Henry to Schoenberger fails to qualify as an assignment since it did not convey the complete right to make, use, and vend the invention in one of the two fields to which it related. Under the various contracts, Henry retained the joint right to make valves in the high-pressure and aviation fields. Therefore, Schoenberger had neither a complete nor an exclusive right to the patent in either fields, and consequently its rights were only those of a licensee. It is my judgment that the rights secured by Taxpayer from Henry, which culminated in agreements between Henry and Schoenberger, and Schoenberger and Henry, did not constitute an assignment or sale but, on the contrary, amounted to a license. To recapitulate, I am satisfied that in. the field of patent law the various agreements, which must be considered together, require the following conclusions: (1) The agreement between Taxpayer and Henry constituted an absolute assignment or sale of all rights in the patent. (2) The agreements between Henry and Taxpayer, Taxpayer and Schoenberger, and Schoenberger and Henry, constituted a license rather than an assignment or sale to manufacture, make and use the patent in the fields of high-pressure gases and aviation. Henry merely licensed back to Taxpayer a joint right to participate in these specialized fields, reserving in Henry a corresponding, co-extensive right. It is axiomatic that, regardless what language the agreements between Henry and Schoen'berger may have employed, Schoenberger, as assignee of Taxpayer, could secure no greater rights than Taxpayer possessed, and consequently as between all the parties the agreements never rose above the status of a license. The problem now resolves itself into the application of appropriate provisions of the Internal Revenue Code as to the basis, to be applied for the computation of the tax owed by Taxpayer, as based upon payments received on agreements from Henry and Schoenberger. Simply stated, the problem is whether the proceeds which eminate from the patent rights of the taxpayer should be taxed as ordinary income or long-term capital gains, or whether “royalty” payments received by Taxpayer from Henry and Schoenberger were taxable as ordinary income, as contended by the Government, or as long-term capital gains, as contended by Taxpayer. The question is one of federal taxation which is governed by federal statute and the transactions are within the purview of those statutes, and whether an instrument constitutes an assignment at common law or is an assignment under the law .of a particular state is immaterial. The question is whether it is what purports to be within the meaning of the Internal Revenue Code. The applicable statutes are: Sec. 117 [as amended by Sec. 115(b), Revenue Act of 1941, c. 412, 55 Stat. 687, and Secs. 150(a) and (c) and 151(a), Revenue Act of 1942, c. 619, 56 Stat. 798]. CAPITAL GAINS AND LOSSES. (a) Definitions. — As used in this chapter— “(1) Capital assets. The term ‘capital assets’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included .in the inventory of the taxpayer if on hand at the dose of the taxable year, or property held ¡by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23(l), or an obligation of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, or real property used in the trade or business of the taxpayer; “(2) Short-term capital gain. The term ‘short-term capital gain’ means gain from the sale or exchange of a capital asset held for not more than 6 months, if and to the extent such gain is taken into account in computing net income; ^ ^ ^ “(b) Percentage taken into account. In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account.. in computing net capital gain, net capital loss, and net income : “100 per centum if .the capital asset has been held for not more than 6 months; “50 per centum if the capital asset has been held for more than 6 months.” 26 U.S.C. 1946 ed., § 117. In filing his income tax returns for 1944, 1945 and 1946, Taxpayer treated his contracts with Henry and Schoenberger as licensing agreements under which he remained the proprietor of the valve patent. As a result, he reported the payments received by him as ordinary income, and, consistently, he took deductions for depreciation on the patent. Thereafter, however, he filed refund claims, and, on their denial, brought the present action, asserting that his contracts with Henry and Schoenberger affected sales of the patent, rather than mere licenses. The reason for this reversal may be found in the provisions of the revenue laws according preferred treatment to gains realized from the sale or exchange of capital assets. Section 117(a) and (b) of the Internal Revenue Code. As applied here, those provisions require taxation of only 50% of the gain, realized on the sale or exchange of a long-term capital asset. To avail himself of the benefits of Section 117, it is incumbent upon Taxpayer to establish: (1) That the property in question is a “capital asset”, as defined in Section 117(a) ; (2) that it has been held for more than six months; and (3) that there has been a “sale or exchange” of the property. General Aniline & Film Corp. v. Commissioner, 2 Cir., 139 F.2d 759. A capital gain is a gain from the sale or exchange of assets which comes within the statutory definition of capital asset as provided in Section, 117(a) (1) o,f the Internal Revenue Code. Special treatment for tax purposes is accorded in the case of a capital asset in recognition of the fact that gain or loss resulting from such asset held over a certain period of time is not properly assignable in its entirety to a single taxable year. In the case of a taxpayer, other than a corporation, only fifty percent of the recognized gain or loss Upon the sale or exchange of an asset held for more than six months is taken into account. If the capital asset was held for not more than six months, the entire gain or loss is taken, into account. The 'basis for determining gain or loss of a patent is its cost adjusted for capital charges, losses and depreciation. The plaintiff here claims no basis and concedes that the amounts he received during 1944, 1945 and 1946 were gain, the question being, what kind of gain, i. e., whether it was ordinary gain or capital gain. In view of the conclusion that the agreement consummated between Taxpayer and Henry constituted a “sale or exchange” in conformity with Section 117 of the Internal' Revenue Code, for plaintiff to avail himself of the benefits of Section 117, he must further prove (1) that the property in question is a “capital asset,” as defined in Section 117(a) and (2) that it has been held for more than six months. (1) Collector contends that the. patent was not a “capital asset,” but under Section 117(a) (1) (A) was “property held .by the taxpayer primarily for sale to customers in the ordinary course of his trade or business”. The Internal Revenue Code in Section 117(a) (1) defines a “capital asset” more by exclusion than it does by inclusion. However, in general so. far as patents are concerned, if the income-producing activity in connection with a patent is :an isolated or casual affair or a mere hobby or recreation,, the patent is a capital asset. John W. Hogg, 1944, 3 T.C.M. 212; Maurice B. Cooke, 1945, 4 T.C.M. 204; Myers v. C. I. R., 1946, 6 T.C. 258; U. S. v. Adamson, 9 Cir., 161 F.2d 942; Hofferbert v. Briggs, 4 Cir., 178 F.2d 743. The record shows that Taxpayer had been engaged over a period of years in design engineering work. He was employed by'others at a fixed salary. That some time incident to his work and on company timé he made patentable improvements on valves but bn his own time at home and at his own expense he conceived ánd reduced to" practice, thereby acquiring a pibjperty 'right thereto, the invention under consideration in this case. That he did not have the means personally to manufacture and sell the patent, but instead chose to convert his property right by transferring it to Henry in exchange' for a contract providing for payment in installments. That by transferring what was practically his one and only invention, he “sold” a “capital asset” and was not transferring property held primarily for sale to customers in any trade or business conducted by him. In 1939, the year of the sale to Henry, the holding period for long-term capital gains was eighteen months. Revised Act, 1939, Sec. 117(a) (4). For the years in question, 1944, 1945 and 1946, the holding period had been reduced to six months. Revenue Act 1942, Sec. 150(a) (1). The holding period required in order to gain the benefits of the capital gain rates is governed by the taxing statute in effect the year the income is received. Dreymann v. C. I. R., 1948, 11 T.C. 153. In other words, when a person chooses to spread the tax over the period of installments, Section 44, I.R.C. he also assumes the risk that the rate of tax might change or that the proportionate amount of capital gain to be taken into account might change upward or downward. See Golden v. C. I. R., 1942, 47 B.T.A. 94. The important consideration here is when was the patent conceived and reduced to practice because taxwise it is settled that an inventor’s property right in his invention does not come into being upon his obtaining a patent, but exists prior to that time upon his reduction of an original invention to actual practice, and that date marks the beginning of the holding period. Dreymann v. C. I. R., supra; Barlow, 1943, 2 T.C.M. 133; Myers v. C. I. R., supra; Diescher v. C. I. R., 1937, 36 B.T.A. 732. The record is clear that this was accomplished on April 22, 1938, the date the idea was reduced to a drawing, or at the latest April 23, 1938, the date the successful test was made. In. any event, whether the applicable holding period is six months or eighteen months, since the plaintiff completely conceived and reduced the patent to actual practice by April 23, 1938, at the latest, and the sale to Henry was made on December 9, 1939, his actual holding period was in excess of eighteen months. All told, Taxpayer might be said to have eight inventions, six of them subject to the shop-right doctrine and with five of the six he had no alternative but to assign them and on only two of which did he personally ever hold a patent. The patent involved in this case cannot be said to be “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,” nor is it stock in trade, nor is it inventoriable property. Taxpayer had no customers. He had only one patent which he could call his own and made only two sales of patents in his life time (both involving the same patent). It is my judgment that the sale of said patent to Henry constituted a sale of a “capital asset” as defined in Section 117(a). (2) It is my further judgment that Taxpayer held the patent the required time period to claim capital gain rates. Taxpayer is, therefore, entitled to judgment for the tax based on the income received from Henry on the original and two supplemental agreements, but not including income received from the high-pressure valve or aviation industry fields. Collector is entitled to judgment for the tax based on the income received by Taxpayer from Henry or Schoenberger in the high-pressure válve or aviation industry fields. Interest held by Taxpayer was a license in said two fields rather than receiving an assignment or title thereto. It is my conclusion that the payments received by Taxpayer from Henry on the manufacture, sale or use of the patent in the refrigeration or general use field entitled Taxpayer under the Internal Revenue Code to compute his income tax on the basis of a long-term capital gain, said rights constituting a sale or assignment. I also conclude that the payments received by Taxpayer from Henry or Schoenberger on the manufacture, sale or use of the patent in the high-pressure or aviation fields require Taxpayer under the Internal Revenue Code to compute his income tax on the 'basis of ordinary income, said rights operating only as a license to use jointly by Henry or Taxpayer, or the assignee of Henry who is Schoenberger. The United States filed its petition for leave to intervene herein for the purpose of asserting a counterclaim for additional taxes which have been assessed against Taxpayer for 1946. Section 3740 of 26 U.S.C.A. provides: “No suit for the recovery of taxes * * * shall be commenced unless the Commissioner authorizes or sanctions the proceedings and the Attorney General directs that the suit be commenced.” The proposed intervention has been authorized by the Attorney General upon request of the Commissioner of Internal Revenue. In his 1944, 1945 and 1946 income tax returns, the taxpayer claimed deductions under Section 23(a) (2) of the Internal Revenue Code for traveling expenses allegedly incurred in the operation, supervision, and maintenance of his valve patent. The deductions were first allowed in the office-audit of Taxpayer’s returns, but after the filing of the claims for refund herein, Taxpayer was requested to furnish such records as he had supporting the claimed deductions. Upon being advised that Taxpayer had no such records, the Commissioner disallowed the traveling expense deductions for lack of substantiation, in accordance with Section 29.23(a)-2 of Treasury Regulations 111. Internal Revenue Code: Sec. 23 [as amended by Sec. 121(a), Revenue Act of 1942, c. 619, 56 Stat. 798]. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: “(a) Expenses ****** “(2) Nion-trade or non-business expenses. In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.” 26 U.S.C.1946 ed., § 23. On or about August 18, 1949, Collector issued and served upon Taxpayer notice and demand for the payment of the additional taxes. No part of said additional taxes and interest has been paid. Sec. 272. Procedure In General, “(a) (1) Petition to Board of Tax Appeals. If in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this chapter, the Commissioner is authorized to send notice of such deficiency to the taxpayer by registered mail. Within ninety days after such notice is mailed (not counting Sunday or a legal holiday in the District of Columbia as the ninetieth day) the taxpayer may file a petition with the Board of Tax Appeals for a redetermination of the deficiency. No assessment of a deficiency in respect of the tax imposed by this chapter and no distraint or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such ninety-day period, nor, if a petition has been filed with the Board, until the decision of the Board has ¡become final.” 26 U.S.C.1946 Ed., § 272. Thereafter and on August 23, 1949, pursuant to Section 273(b) of the Internal Revenue Code, the Commissioner of Internal Revenue mailed a statutory notice of deficiency, or ninety day letter, to Taxpayer. Sec. 273. Jeopardy Assessments. “(a) Authority for making. If the Commissioner believes that the assessment of collection of a deficiency will be jeopardized by delay, he shall immediately assess such deficiency (together with all interest, additional amounts, or additions to the tax provided for by law) and. notice and demand shall be made by the collector for the payment thereof. - (b) Deficiency letters. If the jeopardy •assessment is made before any notice in respect of the tax to which the jeopardy assessment relates has been mailed under section 272(a), then the Commissioner shall mail a notice under such subsection within sixty days after the making of the assessment.” 26 U.S.C.A.1946 Ed., § 273 The assessment not having been paid, the United States claims the right to intervene for the purpose of counter-claiming for such additional taxes. Section 3744 of 26 U.S.C.A., 1946 Ed., provides: “Suits for taxes “Taxes may be sued for and recovered in the name of the United States in any proper form of action, before any district court of the United States, for the district within which the liability to such tax is incurred, or where the party from whom such tax-is due resides at the time of the commencement of the said action. Section 1396 of 28 U.S.C.A. provides: “Internal revenue taxes “Any civil action for the collection of internal revenue taxes may be brought in the' district where the liability for such tax accrues, in the district of the taxpayer’s residence, or in the district where the return was filed.” Defendant Collector cannot recover an affirmative judgment against Taxpayer since judgments for taxes must be sought in the name of the United States. Jenkins v. Smith, 2 Cir., 99 F.2d 827. The Court could not award the Collector an affirmative judgment for any taxes which may be due from Taxpayer and the Collector has not asked for such a judgment. If Taxpayer owes any taxes, the United States is the proper party to recover judgment for them, and it is for that' reason that the Government seeks leave to intervene here. Rule 24 of the Federal Rules of Civil Procedure, 28 U.S.C.A., provides: “(a) Intervention of Right. Upon timely application anyone shall .be permitted to intervene in an action: (1) when a statute of the United States confers an unconditional right to» intervene; or (2) when the representation of the applicant’s interest by existing parties is or may be inadequate and the applicant is or may be bound by a judgment in the action; or (3) when the applicant is so situated as to be adversely affected 'by a distribution or other disposition of property which is in the custody or subject to the control or disposition of the court or an officer thereof.” On the merits, Taxpayer’s opposition to the motion to intervene is two-fold: First, he contends that there is no right to intervene since the Collector can adequately represent the interests of the United States; and second, he argues that in any event the right to counterclaim is barred by Section 272(a) (1) of the Internal Revenue Code. 1. Not being able to obtain an affirmative judgment against Taxpayer, Collector cannot adequately represent the interests of the United States. If such a judgment is to be recovered, it must be by the intervener and not by Collector. Therefore, the intervention should be permitted pursuant to Rule 24(a) of the Federal Rules of Civil Procedure since Taxpayer concedes that the United States will be bound by the decision in this case. 2. The provisions of Section 272(a) (1), upon which Taxpayer relies, are as follows: “No assessment of a, deficiency * * * and no * * * proceeding in court for its collection, shall be made, begun, or prosecuted until such [ninety-day] notice 'has been mailed to the taxpayer, nor until the expiration of such ninety-day period, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final. *• * *” Taxpayer’s argument is that the counterclaim by the United States if for taxes which have been assessed as a deficiency; that taxpayer now has pending in the Tax Court a petition for redetermination of the deficiency; that under Section 272(a), supra, the United States is barred from instituting a “proceeding in court” to collect the deficiency until the decision of the Tax Court becomes final; and that the assertion of the counterclaim amounts to the institution of a “proceeding in court” contrary to the injunction of Section 272 (a) (1). In making this argument, Taxpayer completely overlooks the fact that the restrictions of Section 272(a) (1) do not apply in the case of jeopardy assessments. Section 272(a) (2) of the Internal Revenue Code. The deficiency here arises under a jeopardy assessment made in accordance with Section 273(a) and (b) of the Internal Revenue Code. In absence of a bond posted 'by Taxpayer to stay collection, appropriate action may be taken to enforce payment of the deficiency before a final decision by the Tax Court. Section 273(f), (g) of the Internal Revenue Code. Since Taxpayer posted no bond here, the additional tax can be collected at any time, notwithstanding the pendency of the Tax Court proceeding. Furthermore, while Section 272 (a) (1) prohibits a “proceeding in court” for the collection of a deficiency while the matter is pending in the Tax Court, it is doubtful that this prohibition applies to counterclaims asserted by the United States in a refund suit. Generally, the courts have upheld the Government’s right to counterclaim under circumstances analogous to those presented here. Camp v. United States, 4 Cir., 44 F.2d 126; Ohio Steel Foundry Co. v. United States, Ct.Cl., 38 F.2d 144; Ellis v. Commissioner, 14 T. C. 484. These cases hold that where the taxpayer files suit to recover an alleged overpayment of income taxes, he opens the door for a correct determination of his entire tax liability, and if he has underpaid his taxes, the United States should be permitted to counterclaim and recover judgment for such taxes as may be due. There is no reason why Taxpayer’s liability for 1946 income taxes should be litigated piecemeal. Both parties were represented in court; evidence has been offered and the issue has been fully litigated. There is no need to burden court and counsel with the necessity of relitigating the identical issue at a later date in another forum and equally important, there would then be no possibility that the Government would be met in the Tax Court with the argument that although this Court declined to pass on the expense deduction issue, its decision nevertheless is res judicata as to all questions relating to Taxpayer’s 1946 tax liability and the Tax Court is without jurisdiction to determine a deficiency for that year. Guettel v. United States, 8 Cir., 95 F.2d 229, 118 A.L.R. 1060, certiorari denied 305 U.S. 603, 59 S. Ct. 64, 83 L.Ed. 383. Where property of the United States is involved in a litigation to which they are not technically parties under authority of an Act of Congress, the attorney for the United States may intervene. Stanley v. Schwalby, 147 U.S. 508, 13 S. Ct. 418, 37 L.Ed. 259. The United States, through the Attorney General, may intervene in a suit or action by individuals against officers of the United States. Cyclopedia of Federal Procedure, 2 Ed., Volume VI, § 2445. By permitting the intervention, no unfairness to the Taxpayer will result. Regardless of captions, the issues in this case could not change and the real party in interest is the United States and will always remain the same. Rule 13 of the Federal Rules of Civil Procedure provides: “Rule 13. Counterclaim and Cross-Claim “(a) Compulsory Counterclaims. A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction, except that such a claim need not be so stated if at the time the action was commenced the claim was the subject of another pending action. As amended Dec. 27, 1946, effective March 19, 1948. ****** “(f) Omitted Counterclaim. When a pleader fails to set up a counterclaim through oversight, inadvertence, or excusable neglect, or when justice requires, he may by leave of court set up the counterclaim by amendment.” The fundamental principles of justice demand that the issues of a controversy shall be adjudicated in a single action, and the rule, relating to counterclaims, is clearly designed in aid of such principles. The petition for leave to intervene is granted. Did Taxpayer erroneously claim deductions in his income tax return for traveling expenses under Section 23(a) of the Internal Revenue Code during the year 1946? When Taxpayer filed his income tax return for the year 1946, he reported and claimed as a deduction from gross income traveling expenses in the amount of $4,-536.80. It is claimed by the intervener, United States, that Taxpayer has failed to show in detail the nature and amount of the traveling expenses incurred by him in accordance with the provisions of Section 29.23(a)-2 of Treasury Regulation 111. That as a result thereof, Taxpayer has underestimated his 1946 net taxable income 'by the amount of $4,536.80, and understated and underpaid his income tax for the year 1946. There is a prima facie presumption of the correctness attaching the Commissioner’s action in disallowing these deductions which must be rebutted, or the right to the deductions must be denied. Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623; Reinecke v. Spalding, 280 U.S. 227, 50 S.Ct. 96, 74 L.Ed. 385; Ruud Mfg. Co. v. Commissioner, 3 Cir., 45 F.2d 63; Evans v. Kavanagh, D.C., 86 F. Supp. 535. For the year 1946, it was necessary for Taxpayer to make many trips to various parts of the country in order to further the use of his valve by giving the users technical help and advice. It is to be remembered that this was during the war years and his valve had a valuable place in the war effort. The construction and use of valves, especially high-pressure valves, and valves of this type used in the airplane industry, is a very technical process calling for a man highly skilled in that field. It is one thing to have the plans and drawings for a patent, but it is a very different thing to be able to produce that patent in commercial quantities and have it work. Not even an engineer without the knowledge and skill of this specialized field could fill the requirements. Taxpayer was vitally interested in the successful operation of the valve wherever used, and it was he who got Henry set up on the production of the valve, and it was •he who got Schoenberger interested in producing for the “high-pressure and airplane fields.” During 1946, Taxpayer made many trips which averaged about' one trip every ten days. These were to places mainly in the eastern portion of the country and were on the average of two to three days in duration. So that for every ten days during 1946, Taxpayer was spending two to three days of that time on trips directly connected with the production of income. In order to facilitate the manufacture and use required by this valve Taxpayer had a business car and during the gas rationing period a “C” card. At times it was more feasible to use the car for transportation than to go by rail. This car was used solely for business-purposes, i. e., transportation for the operation, supervision and maintenance of the valve. In determining whether the expense deductions -should be allowed, in whole or in part, it is not necessary that Taxpayer be held to absolute certainty. Such proof in this fast-moving business and social world is usually impossible. It, therefore, becomes necessary to make as close an approximation as is possible, bearing heavily upon Taxpayer whose inexactitude is of his own making. Hanson v. United States, Ct.Cl., 92 F.Supp. 972, 978; Cohan v. Commissioner, 2 Cir., 39 F.2d 540, 544; Marx v. Commissioner, 1 Cir., 179 F.2d 938. I have reviewed the record in this case to determine whether some other basis exists for allowing any of the-disputed deductions, and believe the following would be proper for the year 1946 since they carry definiteness as to time,’ place and circumstances : Traveling Expenses 1. Railroad fare, including tax, and automobile expense ... .$1046.89 2. Hotel rooms ................ 284.50 3. Meals ...................... 636.55 4. Telephone, telegraph and entertainment ............... 513.20 5. Taxi, tips and miscellaneous .. 281.70 6. Trade journals ............. 27.75 7. Accounting and secretarial fees ...................... 254.50 Total ................$3045.09 Findings Of Fact 1. The Court adopts and incorporates by reference the stipulation of facts which has been filed herein. 2. That the United States is entitled to intervene herein and its petition for leave tc intervene is granted. 3. That the idea for the patent was conceived on February 5, 1935. 4. That at the time the idea was conceived, Taxpayer was employed on a fixed salary by Kerotest as a designing engineer. 5. That Taxpayer left the employ of Kerotest on April 1, 1938, and from April 3, 1938 to May 1, 1938, was unemployed. 6. That on May 1, 1938, Taxpayer accepted a position as designing engineer with Superior on a fixed salary, remaining there until August 1, 1939, when he accepted a position with Henry as a designing engineer at a fixed salary. 7. That Taxpayer remained with Henry until April 1, 1942. 8. That the valve patent was reduced to practice prior to May 1, 1938, while Taxpayer was unemployed, i. e., during the month after he left Kerotest and before he went with Superior. 9. That the original sketch was made on April 22, 1938 and tested successfully on April 23, 1938. 10. That the valve patent was developed by Taxpayer on his own time and at his own expense. 11. That the valve patent involved in this case had four fields of use, depending upon the material used in its construction, viz., (1) Refrigeration; (2) High-pressure; (3) Airplanes and (4) General application. 12. That the only other invention on which Taxpayer ever held a patent was the “ice-cuber” device developed on company time while working as a design engineer for Henry and which he assigned to them as part consideration for the license or release back of the “high-pressure field” and the “airplane field” from Henry on August 6, 1942. 13. Taxpayer was not an inventor by trade or in the business of inventing. 14. That Taxpayer held title to the valve patent from April 22, 1938 to December 9, 1939. 15. That the agreement of December 9, 1939 between Taxpayer and Henry was intended by the contracting parties as a sale or assignment. 16. That the agreements between Henry and Taxpayer were intended as a license, with right of joint use in the high-pressure and aviation fields in Henry and Taxpayer or his assignee, Schoenberger. 17. That Taxpayer or his assignee, Schoenberger, had the license or right to use jointly with Henry the “high-pressure field” and the “airplane field.” 18. That Schoenberger paid $1,000 by check on or about April 30, 1943 direct to Henry, pursuant to agreement between Taxpayer and Schoenberger. 19. That Schoenberger p.aid $1,000 by check on or about June 10, 1943 to Henry, pursua