Nor is the question governed by the method of payment, and it is, therefore, immaterial that payment is based on a percentage of sales or profits, or on an amount per unit manufactured. E.g., Reid, supra, 26 T.C. at 632; Myers, 6 T.C. 258 (1946); Allen v. Werner, 190 F.2d 840 (5th Cir. 1951). Moreover, clauses in an agreement permitting termination by the grantor upon the occurrence of stated events or conditions will not preclude the transaction from being considered a sale; such clauses are uniformly treated as conditions subsequent, akin to provisions in realty conveyances calling for reversion of title previously vested.
(6) It erred in failing to hold that each seperate claim in a patent is a separate invention. Roe v. United States, D.C., 138 F. Supp. 567; United States v. Carruthers, 9 Cir., 219 F.2d 21; Allen v. Werner, 5 Cir., 190 F.2d 840; Watson v. United States, 10 Cir., 222 F.2d 689; Lawrence v. United States, 5 Cir., 242 F.2d 542; Storm v. United States, 5 Cir., 243 F.2d 708; Rollman v. Commissioner, 4 Cir., 244 F.2d 634; Dairy Queen of Okla., Inc. v. Commissioner, 10 Cir., 250 F.2d 503. Pointing out that those enactments were declaratory of the controlling decisions and insisting that they must be liberally construed in the light of the circumstances of their enactment and the reports accompanying their passage, they argue that the district judge, instead of following the practical construction given by the courts and admonished by the statute, approached and decided the case from an unduly technical and restricted standpoint.
There is an impressive array of authority contrary to the contention of the government. Watson v. United States, 10 Cir., 1955, 222 F.2d 689, 691; United States v. Carruthers, 9 Cir., 1955, 219 F.2d 21, 26; Commissioner v. Celanese Corp., 1944, 78 U.S.App.D.C. 292, 140 F.2d 339; Commissioner of Internal Revenue v. Hopkinson, 2 Cir., 1942, 126 F.2d 406, 409-410; Kronner v. United States, 1953, 110 F. Supp. 730, 734, 126 Ct.Cl. 156; Lamar v. Granger, D.C.W.D. Pa. 1951, 99 F. Supp. 17, 36, 38. See also Allen v. Werner, 5 Cir., 1951, 190 F.2d 840. Neither can the government prevail in its contention that the obligation of Prof. Cooke to defend patent infringement suits brought against Pro Phy Lac Tic because of the patents originally held by him and to save Pro Phy Lac Tic harmless therefrom constitutes the reservation by Prof. Cooke of a proprietary interest in the patents sufficient to preclude the existence of a sale.
None of these reservations are strong enough to thwart the conclusion that Sharp Dohme was endeavoring to pass to Cyanamid all of its substantial interests in the sulfadiazine phase of this patent. Allen v. Werner, 5 Cir., 1951, 190 F.2d 840, 842. Cf. Waterman v. Mackenzie, 1891, 138 U.S. 252, 256, 11 S.Ct. 334, 34 L.Ed. 923. The fact that payment for the rights granted was in the form of royalties calculated as a percentage of the net sales value of sulfadiazine does not prevent these payments from being taxed at the capital gains rate. Lawrence v. United States, 5 Cir., 1957, 242 F.2d 542; Commissioner v. Hopkinson, 2 Cir., 1942, 126 F.2d 406, 410; Edward C. Myers, 1946, 6 T.C. 258.
Neither considered the sale of the tool advisable or the right to sell a substantial right. What is "substantial" often becomes a factual question to be decided according to the facts and circumstances of each case and the peculiarities inherent in each patent. Allen v. Werner, 5 Cir., 190 F.2d 840, 842; Rohmer v. Commissioner, 2 Cir., 153 F.2d 61, 64. The Senate Committee Report on the Internal Revenue Code of 1954 recognized this in discussing the purpose of Section 1235, dealing with patents, by saying:
In cases where all such criteria are present, it has been held consistently that the particular contract between the parties was an assignment and sale rather than a license. Commissioner v. Hopkinson, (C.A. 2, 1942) 126 F.2d 406; Commissioner v. Celanese Corp., (C.A.,D.C., 1944) 140 F.2d 339; Edward C. Myers, 6 T.C. 258; Halsey W. Taylor, 16 T.C. 376 (1951); Kavanagh v. Evans, (C.A. 6, 1951) 188 F.2d 234; Allen v. Werner, (C.A. 5, 1951) 190 F.2d 840; Kronner v. United States, (Ct. Cl., 1953) 110 F.Supp. 730; United States v. Carruthers, (C.A. 9, 1955) 219 F.2d 21; Massey v. United States, (C.A. 7, 1955) 226 F.2d 724; Lawrence v. United States, (C.A. 5, 1957) 242 F.2d 542; Storm v. United States, (C.A. 5, 1957) 243 F.2d 708; Franklin S. Speicher, 28 T.C. 938 (1957); Carroll Pressure Roller Corporation, 28 T.C. 1288. In his brief the respondent cites certain provisions contained in the February 1, 1951, agreement between Super-Cut and Anderson and argues that such provisions negative a holding that the agreement was a sale.
Petitioner's argument is that the agreement of April 7, 1951, granting an exclusive right to William Craig Carroll to make, use, and sell the patented article constitutes a sale or assignment of its patent rights. Petitioner relies upon Roy J. Champayne, 26 T. C. 634; Arthur C. Ruge, 26 T. C. 138; Vincent A. Marco, 25 T. C. 544; Edward C. Myers, 6 T. C. 258; Ernest E. Rollman, 25 T. C. 481; Allen v. Werner, 190 F. 2d 840; United States v. Carruthers, 219 F. 2d 21; and Storm v. United States, 243 F. 2d 708. In Vincent A. Marco, supra, we said (p. 547):
One not engaged in holding patent rights "`primarily for sale to customers in the ordinary course of his trade or business,'" 6 T.C. 266, as distinguished from a "professional" inventor who is so engaged.See Kronner v. United States, 126 Ct. Cl. 156, 110 F. Supp. 730; Allen v. Werner, 190 F.2d 840 (C.A. 5th Cir.). The Commissioner's position was sustained by the Second Circuit in Bloch v. United States, 200 F.2d 63. Prior to 1946, several courts had taken the same position. Commissioner v. Celanese Corp., 78 U.S.App.D.C. 292, 140 F.2d 339: Commissioner v. Hopkinson, 126 F.2d 406 (C.A. 2d Cir.).The relevant portions of § 1235 are: "A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 6 months, regardless of whether or not payments in consideration of such transfer are — "(1) payable periodically over a period generally coterminous with the transferee's use of the patent, or "(2) contingent on the productivity, use, or disposition of the property transferred."
The origin of these uncertainties can be traced to Myers v. Commissioner, 6 T.C. 258 (1946) and the Commissioner's acquiescence (1946-1 Cum.Bull. 3) and later withdrawal of the acquiescence ( see Mim. 6409, 1950-1 Cum.Bull. 9) in the Myers decision. Although the Myers decision did not directly consider the impact of the existence of periodic and contingent royalty-type payments on its "sale or exchange" analysis, Mimeograph 6409 announced the Commissioner's position that such periodic and contingent royalty-type payments would not be accorded capital gains treatment. Judicial decisions subsequent to this announcement appeared to conflict with this position. ( Compare Kronner v. United States, 110 F.Supp. 730, 126 Ct.Cl. 156 (1953) and Allen v. Werner, 190 F.2d 840 (5th Cir. 1951) with Bloch v. United States, 200 F.2d 63 (2d Cir. 1952)). Section 1235, in effect, overruled the position taken in the mimeograph by allowing capital gains treatment for periodic royalty-type payments in the case of qualifying transactions.
We cannot agree with this conclusion. The use of the word "substantial" is doubtless in recognition of the rule applied in Allen v. Werner, 5 Cir. 1951, 190 F.2d 840; Allied Chemical Corp. v. United States, 2 Cir. 1967, 370 F.2d 697, and similar cases, that the retention by the transferor of minor rights under the patent shall not affect the character of a transfer as a sale entitled to capital gains treatment. But we think that the statutory requirement that the "substantial rights" transferred shall be "all" of them, even in the case of the transfer of an undivided interest in them, indicates a Congressional intention that the transfer of a part of the patent rights, divided off from the rest by a limitation on their use or the geographical area of their exercise, shall not be deemed a sale or exchange of a capital asset.