Drennen, Judge:
In these consolidated proceedings respondent determined deficiencies in income tax and additions to tax for the above petitioners for tbe taxable years and in tbe amounts shown below:
Year Petitioner Deficiency Additions to tax, sec. 293(a), I.R.C. 1939
1947 John W. Chamberlin_ $23,502.98 $1,175.15
1947 Marian McMichael Chamberlin.. 1,887.91 (1)
1948 John W. Chamberlin and Marian McMichael Chamberlin-14,244.20 712.21
1949 John W. Chamberlin and Marian McMichael Chamberlin-22,007.44 1,100.37
Petitioners filed timely claims for refunds as follows:
Year Petitioner Amount
1947 John W. Chamberlin_$6, 711.97
1947 Marian McMichael Chamberlin- 6,477. 93
The issues to be decided are:
(1) Whether the royalty payments received by petitioner John W. Chamberlin from Bendix Home Appliances, Inc., during the years 1947, 1948, 1949 are taxable as ordinary income or capital gain.
(2) Whether the royalty payments received by petitioner Marian McMichael Chamberlin from Bendix Home Appliances, Inc., during the years in issue are taxable as ordinary income or capital gain.
(3) Whether the royalty payments received by petitioner Marian McMichael Chamberlin from Borg-Wamer Corporation during the years in issue are taxable as ordinary income or capital gain.
All other issues for each of the years have been settled by stipulation by the parties.
BINDINGS OF FACT.
The stipulated facts are found as stipulated and are incorporated herein by this reference.
Petitioners John W. Chamberlin, hereafter referred to as Chamber-lin, and Marian McMichael Chamberlin, hereafter referred to as Marian, are husband and wife with their residence during the taxable years in question at 809 Brummel Street, Evanston, Illinois. Petitioners filed separate returns for 1947, Chamberlin with the collector of internal revenue for the district of Hawaii and Marian with the collector of internal revenue for the first district of Illinois. They filed joint returns for 1948 and 1949 with the collector of internal revenue for the first district of Illinois. Both reported their income for all years on a calendar year, cash basis of accounting.
In 1933, Chamberlin was issued a patent covering a cleansing machine he had invented. Bex Earl Bassett, Jr., was issued a patent on certain improvements in washing machines he had invented.
In 1935, an exclusive license under both the Chamberlin and Bas-sett patents in the field of domestic laxmdry machines was acquired by Laundri-Matic Corporation, a New York corporation in which Chamberlin and Bassett each owned 26 of its 100 shares of authorized stock. On April 23,1935, Laundri-Matic granted to Hydraulic Brake Company, a California corporation, an exclusive transferable license, in the domestic laundry field2 only, to manufacture, use, and sell laundry machines covered by the Chamberlin and Bassett patents throughout the lives thereof. The agreement could be canceled by Hydraulic upon 60 days’ notice; and by Laundri-Matic upon 60 days’ notice if Hydraulic defaulted in royalty payments.
As of July 17, 1936, stockholders of Laundri-Matic and the number of shares held by each were:
Name Number of shares
Don O. Scott_ 12
Arthur A. Berard_ 24
Rex Earl Bassett, Jr_ 26
J. O. Rowland_ 12
John W. Chamberlin_ 26
Total_ 100
Sometime after February 1935, but prior to July 17, 1936, the wife of Bex Earl Bassett, Jr., purchased 12 shares of Laundri-Matic stock from J. C. Bowland. Bassett’s wife then sold these shares to Don O. Scott.
By an agreement dated July 17, 1936, Laundri-Matic assigned to Chamberlin the right to receive 20 per cent of all royalties accruing or thereafter paid to Laundri-Matic under the Hydraulic license. These payments were to be made directly to Chamberlin by Hydraulic. Chamberlin acquired this right to receive the royalty payments in exchange for 20 of his 26 shares of stock in Laundri-Matic. The instrument by which this assignment was effected was as follows:
Know ail Men by These Presents that whereas, The Laundri-Matic Corporation, a New Xork Corporation, is the owner of the entire right, title and interest in and to a certain patent license contract between it and Hydraulic Brake Company, a California corporation, dated April 23,1935, and supplements, modifications, and additions thereto; and
Whereas Hydraulic Brake Company is obligated to, and will be obliged, to make certain royalty payments to The Laundri-Matic Corporation in accordance with the terms of said agreement, during the life of said agreement and supplements, modifications, and additions thereto; and
Whereas John W. Chamberlin is desirous of purchasing a twenty per cent (20%) interest in and to all royalties hereafter paid or accruing under said license agreement and supplements, modifications, and additions thereto, to the Laundri-Matic Corporation by Hydraulic Brake Company; and
Whereas, The Laundri-Matic Corporation is desirous of selling a twenty per cent (20%) interest in and to said royalties to the said JOHN W. CHAMBERLIN.
Now, Thebefobe, in consideration of One Dollar ($1.00) and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, The Laundri-Matic Corporation does hereby sell, transfer, assign and set over unto JOHN W. CHAMBERLIN, his heirs, assigns and legal representatives, forever twenty per cent (20%) of all royalties accruing or paid after the date h.ereof, by Hydraulic Brake Company under and pursuant to the license agreement between The Laundri-Matic Corporation and Hydraulic Brake Company, dated April 23, 1935, and all supplements, modifications, and additions thereto.
Hydraulic Brake Company is hereby requested and directed to make payment of twenty per cent (20%) of said royalties in the future, directly to said JOHN W. CHAMBERLIN, his heirs, assigns, or legal representatives.
In Witness Wheeeof, The Laundri-Matic Corporation has caused these presents to be duly signed and sealed by its corporate officers thereunto duly authorized, this 17th day of July, 1936.
The Latjndbi-Matic Coepoeation By Arthur A. Berard (signed)
CONSENT OF STOCKHOLDERS
We, the undersigned, stockholders of Laundri-Matic Corporation each holding the shares of stock set opposite his signature hereto and holding collectively all the shares of stock of said corporation, consent to this assignment.
'Same So. of Shares
D. O. Scott_ (signed)_ 12
Arthur A. Berard_ ” 24
Rex Earl Bassett, Jr. ” _ 26
J. C. Rowland_ ” _ 12
John W. Chamberlin. ” _ 26
By an agreement dated December 4, 1937, Laundri-Matic assigned to Chamberlin the right to receive an additional 6 per cent of the royalties payable under the Hydraulic license. This right to receive royalty payments was acquired in exchange for the remaining 6 shares of Chamberlin’s stock interest in Laundri-Matic.
On December 7,1937, Chamberlin transferred the 26 shares of stock to Laundri-Matic. On the same day Chamberlin assigned to Marian his 6 per cent interest in royalties payable under the Hydraulic license. Although the assignment states the receipt of $5 and other valuable considerations, no consideration was in fact paid, and the transfer of the 6 per cent royalty interest to Marian was a gift.
Laundri-Matic had few assets other than the right to receive royalty payments under the Hydraulic license.
On August 10, 1936, Hydraulic assigned to Bendix Home Appliances, Inc., a Delaware corporation, all right, title, and interest in the exclusive license it had received under the April 23, 1935, agreement with Laundri-Matic. Bendix agreed to pay all royalties and other amounts due Laundri-Matic and assumed all other obligations of Hydraulic under the license.
Chamberlin and Bassett, on December 24, 1937, formed the Cham-berlin Bassett Research Corporation, hereafter referred to- as Research, an Indiana corporation. The stock of the corporation was issued as follows:
Name Number 0} shares
Rex Earl Bassett, Jr_ 400
Marion E. Bassett- 100
John W. Chamberlin- 400
Marian Chamberlin_ 100
Total_1, 000
Chamberlin and Bassett in November 1938 assigned to Research all of their right, title, and interest in and to inventions and patents in the field of commercial lawndry machines. Research also acquired title to additional patent rights from various employees.
In February 1939, Research granted an exclusive license to Borg-Warner Corporation to manufacture, use, and sell for domestic use laundry machines and devices designed to handle more than 18 pounds of dry material in one load. Borg-Warner agreed to pay Research a royalty for each machine sold during each year the license was in effect with a minimum monthly royalty, and also agreed to furnish Research with written statements specifying the number of machines sold during each month. The agreement provided that it should remain in force until the last patent covered by it should expire, unless previously terminated as provided in the agreement. Borg-Warner 'had the right to cancel the agreement 90 days after giving written notice thereof, and Research could terminate the license upon 30 days’ notice in the event of Borg-Wamer’s failure to pay royalties, render statements required by the agreement, and to comply with other obligations in the agreement, or in the event of bankruptcy, insolvency, or liquidation of Borg-Warner.
By agreement dated March 13, 1939, Research sold and assigned to Chamberlin and Bassett each a 50 per cent interest in and to all royalties thereafter accruing or paid by Borg-Warner under the Borg-Warner license.
On December 5, 1939, Marian purchased her husband’s 400 shares of Research stock, and in June 1940 she purchased the 500 shares owned by Bassett and his wife, leaving her the sole stockholder of Research.
By corporate resolution adopted June 17, 1940, Chamberlin and Marian were authorized and empowered to sell any assets of Research. Pursuant to this resolution, various assets, property, equipment, machinery, and patent rights which Research had acquired were sold. It is not clear from the evidence whether any rights that were retained by Research under the Borg-Warner license were distributed in liquidation or retained by the corporation, but on the advice of its attorneys, Research was not formally dissolved. However, essentially all of the assets of Research were thus disposed of during the year 1941.
By assignment dated August 25, 1940, Chamberlin sold to Marian all rights to receive royalties which had or might thereafter accrue to him under the license agreement between Research and Borg-Warner by reason of the assignment to him by Research of the right to receive such payments, and whatever rights might revert to him or Research in the event the Borg-Warner license should terminate.
By letter dated February 28, 1942, Research and Marian notified Borg-Warner of an intention to cancel the Borg-Warner license for default in payment of royalties and rendering certain statements called for by the license agreement. The notification was signed for Research by Chamberlin as president, and was also signed by Marian.
In a letter dated March 24, 1942, Borg-Warner denied that it was in default under the license agreement. The letter stated that it was not in default regarding the payment of royalties but had in fact advanced on behalf of Research a greater amount than was due as royalties under the license. This excess was being regarded as prepaid royalties. Concerning the allegation of default for failure to render statements of machines manufactured and sold by Borg-Warner, the letter states:
Technically, we may he in default under Section 1, Article IV, for not having reported each month the number of “Licensed Apparatus” manufactured and sold by us. However, we are reporting to you now that we have sold no “Licensed Apparatus” since the License Agreement was entered into, as you are fully aware.
Negotiations were conducted from April 1942 until April 1948 between Borg-Warner and Louis C. Chapleau, attorney for Marian, regarding the question of default.
On April 15,1943, Chapleau, as trustee for Marian, purchased from Bassett his right to receive 50 per cent of the royalties payable under the Borg-Warner license, which he later transferred to Marian.-
On April 17, 1943, the dispute with Borg-Warner was settled and the following letter of agreement addressed to Norge Division, Borg-Warner Corporation, was signed by Marian Chamberlin, Louis C. Chapleau, trustee, and Chamberlin Bassett Research Corporation, by Chamberlin as president:
Gentlemen :
The undersigned, being the owners of the entire interest arising out of and by reason of a certain option agreement dated December 1st, 1938 and a patent license agreement which became effective by a letter of acceptance dated February 23rd, 1939 between Chamberlin Bassett Research Corporation and Borg-Warner Corporation, hereby acknowledge that all royalty payments due under and by virtue of the provisions of said license agreement have been fully paid up to April 1st, 1943.
We further agree that said license agreement is in full force and effect and that any notices of cancellation heretofore given for alleged breach of contract were premature and ineffective.
The undersigned further acknowledge receipt of the sum of $12,000 in payment of minimum royalties at the rate of $1,000 a month from April 1, 1943 to April 1, 1944. Earned royalties in excess of the minimum, if any, will be accounted for on April 1,1944.
Thereafter all payments under the license agreement were made to Marian.
During the years here involved, Chamberlin and Marian received payments from Bendix representing their 20 per cent and 6 per cent interests, respectively, in the royalties payable by Bendix to Laundri-Matic in the following amounts:
Year John, W. Chamberlin Marian Chamberlin
1947_$58, 999. 70 $17, Ü96. 91
1948_ 34,480. 60 10, 344.18
1949_ 10, 361. 70 3,108. 51
Marian received payments from Borg-Warner during the years in question in the following amounts:
1947_$12, 000. 00
1948_ 11, 000. 00
1949_ 59, 428. 03
Respondent determined in his notice of deficiency that the amounts petitioners collected from Bendix and Borg-Warner in the years involved were taxable as ordinary income rather than capital gain as reported on their returns; also a[i]t is held that the collections from the two above-named sources were not realized from the sale or exchange of a capital asset held for more than six months.”
In the notice of deficiency mailed to Chamberlin, respondent determined that the $11,696.91 received by Marian from Laundri-Matic in 1947 and reported on her 1947 return was properly taxable to Chamberlin because Chamberlin’s gift to Marian of a 6 per cent interest in anticipated collections from Bendix was ineffective for income tax purposes. Respondent abandoned this determination in the stipulation of facts between the parties and agreed that this income is taxable to Marian alone and is not taxable to Chamberlin. This income should be eliminated from the taxable income of Cham-berlin in the Rule 50 computation.
It is stipulated that petitioners are not subject to additions to tax for the years 1948 and 1949 under the provisions of section 293(a), I.R.C. 1939,
OPINION.
Issue 1.
The first issue is whether the payments received by Chamberlin from Bendix in each of the years involved were taxable to him as ordinary income or capital gain.
Chamberlin received these payments by virtue of an agreement dated July 17,1936, whereby Laundri-Matic assigned to him the right to receive 20 per cent of all royalties accruing or thereafter paid by Bendix, under an exclusive license agreement between Laundri-Matic and Hydraulic (whose interest was assigned to Bendix), in exchange for 20 shares of his stock in Laundri-Matic. There is no evidence of Chamberlin’s basis in the stock and no unrecovered basis is claimed by petitioners.
It is clear that the payments received by petitioners from Bendix and Borg-Wamer were in the form of royalties and taxable as ordinary income under section 22(a), I.R.C. 1939, unless allowed capital gains treatment under some specific provision of the Code or rule of law.
Chamberlin claims that under Burnet v. Logan, 283 U.S. 404, if the royalty interest he received in exchange for his stock in 1936 had no ascertainable value at that time, the transaction remained open, and under the doctrine of Commissioner v. Carter, 170 F. 2d 911 (C.A. 2), affirming 9 T.C. 364, and Westover v. Smith, 173 F. 2d 90 (C.A. 9), the royalty payments received in later years are a part of the consideration for the sale or exchange of his stock and are therefore taxable as capital gain.
Ordinarily, a sale or exchange of stock for cash or other assets is a closed transaction and any gain or loss, measured by the difference between the cash received plus the fair market value of the other assets received and the adjusted basis of the stock, is recognized for tax purposes at that time. Burnet v. Logan, supra, while not concerned with whether the income received by the taxpayer in that case was capital gain or ordinary income, laid the foundation for an exception to the usual tax treatment of such an exchange, holding that where the value of the contract right to receive future income could not be ascertained in the year of the exchange, the transaction would remain open to permit the taxpayer to recover her basis tax free before any of the income was taxable. The Carter and Smith cases, decided after the capital gain provisions had been adopted, relied on language used in the Logan opinion to hold that under such circumstances the amounts received in excess of the taxpayer’s basis were profit and taxable as capital gain.
Respondent recognizes that Chamberlin’s stock in Laundri-Matic was a capital asset which was sold or exchanged in 1936 for the right to receive 20 per cent of the royalties paid under the Bendix agreement, and consistent with his acquiescence in the Garter case and his position stated in Rev. Rul. 58-402, both found in 1958-2 C.B. 15, concedes that if the right received by Chamberlin in this transaction had no ascertainable value at that time, petitioners’ position is correct.
However, respondent argues that the rule of the Garter case does not apply to this case unless it is clearly shown that the contract right to royalties received by Chamberlin in 1936 had no ascertainable value at that time, and that petitioners have failed to carry their burden of proving this. Therefore, he argues, upon distribution to Chamberlin, the right to receive future royalties was an asset, in the form of a claim or chose in action, received by Chamberlin in exchange for his stock, the basis in which was its fair market value on the date of distribution, and that that transaction thereupon was closed; and that the amounts thereafter received by Chamberlin, after recovering his basis in this asset, were simply collections of the claim or chose in action, rather than consideration for the sale or exchange of a capital asset, and are therefore taxable as ordinary income, relying on Pat O'Brien, 25 T.C. 376, and Osenbach v. Commissioner, 198 F. 2d 235 (C.A. 4), affirming 17 T.C. 797.
We agree that petitioners have the burden of proving that the exchange of stock was not a closed transaction in 1936 because unless that was the situation, there is no sale or exchange of a capital asset from which the income received in the years here involved could flow, and respondent’s determination must stand. Here, the only reason suggested by petitioners that this capital transaction should be kept open for tax purposes for these many years is that the asset received by Chamberlin in exchange for his stock had no ascertainable value in 1936. This they must prove to come within the exception to the general rule established by the Logan, Garter, and Smith cases, and to overcome the presumptive correctness of respondent’s determination.
On the record before us, we are unable to make an affirmative finding that there was no ascertainable value of the contract right distributed to Chamberlin in exchange for his stock in 1936 or in 1937. There is nothing inherent in a contract or claim for the future payment of indefinite amounts that causes it to be insusceptible of valuation. The fair market value of such contracts was determined in Pat O'Brien, supra, Boudreau v. Commissioner, 134 F. 2d 360 (C.A. 5), affirming 45 B.T.A. 390, and Commissioner v. Thompson, 222 F. 2d 893 (C.A. 3), affirming 21 T.C. 448. See also Gersten v. Commissioner, 267 F. 2d 195 (C.A. 9), affirming in part and remanding in part 28 T.C. 756. As said in the opinion of this Court in the Thompson case, the task may be difficult but it is not insuperable. Given all relevant evidence from which values are usually determined, it is only in rare and extraordinary cases that property would have no reasonably ascertainable fair market value. Such a statement, or words similar thereto, has long appeared in Commissioner’s regulations, including Regulations 94, article 111 — 1, applicable to the income tax under the Revenue Act of 1936.
The only evidence we have in support of petitioners’ claim that the right to receive royalties had no ascertainable value in 1936 is a copy of the license agreement itself. It may be true that, absent other facts which might help establish a value, it would be difficult to ascertain with any degree of certainty the value of the contract right to receive these royalties from the terms of the license agreement alone. But we have no evidence that there were not other facts relevant to the value of this right which would have permitted ascertainment of the value thereof. As a matter of fact, we have nothing in the record to show that Chamberlin did not actually place a value on it himself in 1936.
On the other hand, we do have evidence that 12 of the 100 shares of stock of Laundri-Matic were bought and sold twice within 16 months prior to July 17,1936, in what we can assume were arm’s-length transactions, at a time when about the only asset of Laundri-Matic was the right to receive these royalties. Unless there were other circumstances of which we are not advised, the sales price of this stock might very well have fairly represented the value of a proportionate interest in the sole asset of the corporation. Boudreau v. Commissioner, supra.
Furthermore, there is evidence that rights to receive a percentage of the Borg-Warner royalties were bought and sold during the years. If the parties could place a value on the right to receive these future royalties, it might well be that the value of the right to receive future Bendix royalties could also have been ascertained.
We cannot conclude as a matter of either fact or law, on the basis of the terms of the license agreement alone, that the value of a right to receive a percentage of the future royalties to be paid thereunder could not have been ascertained in 1936 and 1937. Lacking such conclusion, the transaction whereby Chamberlin exchanged his stock in Laundri-Matic for the right to receive royalties to be paid by Bendix was closed at the time of the exchange. The royalties received by Chamberlin during the taxable years have not been shown to be proceeds from the sale or exchange of a capital asset, and there being no claim that any part thereof represented a recovery of basis, are taxable as ordinary income. Pat O'Brien, supra; Osenbach v. Commissioner, supra; May D. Hatch, 14 T.C. 237, reversed on other grounds 190 F. 2d 254 (C.A. 2); Miller v. United States, 155 F. Supp. 767, affirmed per curiam 262 F. 2d 584 (C.A. 6); Warren v. United States, 171 F. Supp. 846 (Ct. Cl.). We do not understand that petitioners dispute this tax treatment of the income, provided the stock transaction was closed in 1936 — at least they do not argue to the contrary.
Issue 2.
The second issue is whether the payments received by Marian from Bendix in each of the years involved were taxable to her as ordinary income or capital gain.
Marian received these payments by virtue of the assignment to her of Chamberlin’s right to receive 6 per cent of the royalty payments under the Laundri-Matic-Hyrdaulic agreement, which had been transferred to him by Laundri-Matic in exchange for 6 shares of his stock in Laundri-Matic under circumstances similar to those involved in the first issue.
Petitioners claim that the assignment by Chamberlin to Marian was a gift and, therefore, the income received by Marian retained the same taxable character as it would have had had it been received by Chamberlin, relying on Commissioner v. Hopkinson, 126 F. 2d 406 (C.A. 2), affirming 42 B.T.A. 580, and that the amounts received by Marian from Bendix were payments on the purchase price of Chamberlin’s stock and were therefore taxable as capital gain.
Our discussion in issue 1 is equally applicable to Chamberlin’s exchange of 6 shares of Laundri-Matic stock for this 6 per cent interest in the Hydraulic-Bendix royalties in 1937. We also find that this transaction was closed in 1937 and had Chamberlin received the royalties assigned to Marian, on the record before us, they would have been taxable to him as ordinary income. So on petitioners’ own theory, the royalties received by Marian were taxable to her as ordinary income. It is not argued here as it was in Don O. Scott, 26 T.C. 869, that Marian herself made a sale or exchange of a capital asset which produced this income.
Issue 3.
The third issue is whether payments received by Marian from Borg-Warner Corporation in each of the years involved were taxable to her as ordinary income or capital gain.
Without repeating the details of the transactions, the pertinent parts of which are set out in our Findings of Fact, Marian received these payments under the following circumstances: Research was formed in 1937 and its capital stock was issued 400 shares to each of Chamber-lin and Bassett and 100 shares to each of Marian and Bassett’s wife. Chamberlin and Bassett assigned certain patents to Research. In 1939 Research granted an exclusive license to Borg-Warner to manufacture, use, and sell certain laundry machines for which Borg-Warner agreed to pay a royalty for each machine sold, with a minimum monthly royalty. Research then assigned to each of Chamberlin and Bassett a 50 per cent interest in the royalties payable by Borg-Warner. Later in 1939 Marian purchased her husband’s 400 shares of stock in Research, and in 1940 she purchased the remaining 500 shares from the Bassetts. In August 1940, Marian purchased Chamberlin’s 50 per cent interest in the royalties and prior to April IT, 1943, she purchased, through her attorney, Bassett’s 50 per cent interest in the royalties.
In 1942, a dispute arose between Borg-Warner and the patent and royalty owners. Borg-Warner was notified that its exclusive license was canceled, but by letter agreement of April IT, 1943, the dispute was settled. Thereafter all royalties were paid by Borg-Warner directly to Marian.
There being no sale or exchange of a capital asset by a predecessor in title to which Marian’s Borg-Warner payments can be related, petitioner attempts to create a sale or exchange by Marian out of the reinstatement of the agreement with Borg-Warner, following a tortuous path something like this, as we understand it. As sole owner of Research, Marian distributed to herself in liquidation of Research the legal ownership of the patent involved. When the dispute with Borg-Warner arose, she, as owner of the patent and as owner of Chamberlin’s 50 per cent royalty interest, canceled the Borg-Warner license for alleged failure to pay minimum royalties and render certain accountings. This caused the conditional title of Borg-Warner to revert to her and become merged with her bare legal title. This constituted a capital asset in her hands. When the dispute with Borg-Warner was settled and the exclusive license agreement was reinstated, this was a new granting of an exclusive license to make, use, and sell the patented machines and constituted a sale by her of the patent. Inasmuch as she had acquired “substantially all rights” in the patent upon the cancellation of the Borg-Warner license in April 1942, she had held the rights sold to Borg-Warner in the reinstatement for more than 6 months and is therefore entitled to treat the amounts thereafter received as long-term capital gains.
Respondent’s position is simply that Marian’s right to receive these royalties was a claim or chose in action, and there being no sale or exchange thereof, the amounts received in satisfaction of the claim were ordinary income. Respondent claims that there is no clear evidence that the patent was ever distributed to Marian by Research in the first place and that the settlement of the dispute with Borg-Warner did not amount to a sale or exchange in the second place. We agree with respondent on this issue.
The only competent evidence with respect to ownership of the patent is that it was originally assigned to Research by Chamberlin and Bassett, that after Marian acquired all the stock of Research a resolution was adopted by the corporation authorizing Chamberlin to dispose of any of the assets of Research, the testimony of Chamberlin that he thereafter sold most of the assets of Research and that the rest of the assets eventually wound up in the hands of Marian after the corporation folded up in 1941. On the other hand, there is no evi-. dence that Research actually assigned the patent to Marian, or that Research was ever completely liquidated, and Research was a party to both the April 1942 letter to Borg-Warner informing it of termination of the license agreement and the letter of April 17, 1948, settling the dispute. Without title to the patent it is quite doubtful that any agreement made by Marian with Borg-Warner ostensibly reinstating the exclusive license agreement, would qualify as the sale or exchange of a capital asset.
Furthermore, we do not think that, for tax purposes at least, there was such a termination of the exclusive license agreement as would give Marian a right she could in effect resell to Borg-Warner. Petitioner argues that in patent law a unilateral termination of an exclusive license agreement by the licensor for failure to pay minimum royalties automatically revests all rights in the licensor. We have examined the cases cited by petitioner in support of this theory, as well as some other cases on the subject, and there would appear to be some conflict on the point. See Ellis, Patent Assignments and Licenses, sec. 800-801. But in any event, for purposes of determining whether there was a sale or exchange under section 117 of the 1939 Code, we believe we must look to the realities of the situation. Further, petitioner agrees the termination can be set aside by the licensee going into court if the termination was not really valid under the agreement.
Here, petitioner claimed a failure to pay minimum royalties and make certain reports. Borg-Warner replied immediately that it had overpaid the minimum royalties because of funds advanced for various reasons and that the failure to make certain reports was only a technical violation. The parties negotiated a settlement of the dispute without going to court and agreed that the original “license agreement is in full force and effect and that any notices of cancellation heretofore given for alleged breach of contract were premature and ineffective.” In our opinion this would nullify the cancellation as effectively as though a court had declared it null and of no effect.
It appears that both the licensor and licensee retained the same rights and obligations they had before the notice of cancellation and that payments thereafter made by Borg-Warner to Marian Cham-berlin were based on the original agreement from Research to Borg-Warner and the assignment of the right to receive the royalties by Research to Chamberlin and Bassett, which rights were purchased from them by Marian. Marian did not receive the payments as the result of a sale or exchange of a capital asset either by her or by anyone else. Don O. Scott, supra; Bratter v. United States, 161 F. Supp. 365. The payments were received as collection of a claim for royalties due and to the extent they exceed her basis, are taxable as ordinary income. Osenbach v. Commissioner, supra.
Because of other issues agreed upon by the parties by stipulation,
Decisions will be entered u/nder Buie 50.
Reviewed by the Court.