Court Opinion

ID: 8594704
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:01:46.057632+00
Date Added: 2024-06-11T16:54:50.238334
License: Public Domain

Per Curiam:
This case comes before the court without oral argument on plaintiffs’ motion, filed April 6,1973, moving that, pursuant to Rule 141 (b), the court adopt the recommended decision filed February 28, 1973, by Trial Commissioner Mastin G. White under Rule 134(h), defendant *750having failed to file a notice of intention to except and the time for so filing under the rules of the court having expired. Upon consideration thereof, since the court agrees with the decision, as hereinafter set forth, it hereby (granting plaintiffs’ motion to such extent) affirms and adopts the same as the basis for its judgment in this case. Therefore, it is concluded that plaintiffs are entitled to recover, together with interest as provided by law, and judgment is entered for plaintiffs accordingly, with the amount of recovery to be determined pursuant to Rule 131 (c).
OPINION OP COMMISSIONER
White, Commissioner:
The ultimate question to be decided in this case is whether the payments which the plaintiff Thomas N. Melin (“Mr. Melin”) received in 1964 and 1965 under agreements between Mr. Melin and two companies, Owens-Parks Lumber Company (“Owens-Parks”) and Rainier Manufacturing Company (“Rainier”), were taxable as long-term capital gains (the position taken by the plaintiffs) or as ordinary income (the position taken by the defendant).
It is my opinion that the payments in question were taxable as long-term capital gains, and, accordingly, that the plaintiffs are entitled to recover in the present action.
The agreement between Mr. Melin and Owens-Parks was dated March 20, 1964, and was denominated a “sales agreement.” It provided in part that “MELIN hereby sells, assigns and conveys to OWENS-PARKS * * * all of his right, title and interest in and to * * * Patent No. 2,658,630 and in and to the Lumber Stacking Device described and claimed therein * * *”; and that, “as consideration for the purchase of the patent,” Owens-Parks was to pay Mr. Melin a lump sum of $30,000 and a royalty of 10 cents per thousand board feet of Douglas Fir lumber shipped by Owens-Parks during the period from January 1, 1964, to November 10, 1970, the expiration date of the patent on the lumber-stacking device.
The agreement between Mr. Melin and Rainier was dated December 8, 1964, and was in the form of a license. It provided in part that “Licensor [Mr. Melin] hereby grants to Licensee [Rainier] the exclusive right and license to develop, *751manufacture, use, market, sell and otherwise commercialize, throughout the United States, its territories and possessions,” an invention that is commonly referred to as a mechanical off-bear and slab-handling apparatus. Rainier agreed to pay Mr. Melin a lump sum of $85,000 and royalties at the rate of 25 cents per thousand 'board feet on all lumber produced at Rainier’s plant.
Prior to entering into the agreement with Rainier, Mr. Melin in December 1962 had applied for a patent on the mechanical off-bear and slab-'handling apparatus. A patent was issued to him on September 14,1965, some 9 months after Mr. Melin and Rainier entered into the agreement dated December 8,1964.
In 1964, Mr. Melin received $41,312 from Owens-Parks and $113,093 from Rainier under the respective agreements previously mentioned; and he received $10,112 from Owens-Parks and $32,821 from Rainier in 1965 under such agreements. Mr. Melin and his wife, Virginia W. Melin, reported these amounts as long-term capital gains in their joint federal income tax returns for 1964 and 1965. However, the Internal Revenue Service assessed income tax deficiencies against Mr. Melin and his wife for 1964 and 1965 in the respective amounts of $63,019 and $13,315, the IRS having determined administratively that the payments from Owens-Parks and Rainier under the respective agreements of March 20 and December 8, 1964, were taxable as ordinary income, rather than as long-term capital gains. The amounts of the deficiencies, together with interest, were paid by Mr. Melin and his wife in September 1968, thus providing the bases for the present action.
There does not appear to be any disagreement between the parties over the following points:
(1) Mr. Melin was the inventor of the lumber-stacking device and of the mechanical off-bear and slab-handling apparatus referred to in the respective agreements of March 20 and December 8,1964.
(2)- The respective inventions were made by Mr. Melin (i.e., they were conceived and reduced to practice), and the patents were obtained or applied for by Mr. Melin, more than 6 months prior to the execution of the 1964 agreements.
*752(3) Prior to the execution, of the agreements with Owens-Parks and Rainier, Mr. Melin had not expressly granted, or attempted to grant, to anyone any rights in the patent referred to in the agreement of March 20, 1964, with Owens-Parks, or in the invention referred to in the agreement of December 8,1964, with Rainier.
(4) The patent referred to in the agreement of March 20, 1964, and the invention referred to in the agreement of December 8,1964, constituted capital assets.
(5) The agreements of March 20 and December 8, 1964, constituted sales or assignments to Owens-Parks and Rainier, respectively, of all the rights (if any) that Mr. Melin had in the patent and invention mentioned in the respective agreements. Although the agreement of December 8, 1964, between Mr. Melin and Rainier was in the form of a license, it granted to Rainier the exclusive right to make, use, and sell the mechanical off-bear and slab-handling apparatus, and, therefore, it was, in substance, a sale or assignment of the entirety of Mr. Melin’s rights (if any) in this invention, rather than a mere license. Waterman v. Mackenzie, 138 U.S. 252, 256 (1891); Kronner v. United States, 126 Ct. Cl. 156, 163, 110 F. Supp. 730, 734 (1958); Bell Intercontinental Corp. v. United States, 180 Ct. Cl. 1071, 1077, 381 F. 2d 1004, 1011 (1967).
There is, however, a sharp controversy between the parties over the question of who owned the patent and the invention as of the times when the respective agreements were entered into by Mr. Melin with Owens-Parks and Rainier, and whether Mr. Melin had any rights in the lumber-stacking patent or in the mechanical off-bear and slab-handling invention that could be the subject of a sale or assignment.
The defendant contends that Owens-Parks was the true owner of the lumber-stacking patent prior to and at the time of the execution of the agreement dated March 20,1964, and that Rainier should be regarded as the owner of the mechanical off-bear and slab-handling invention prior to and at the time of the execution of the agreement dated December 8, 1964. Accordingly, the defendant argues that the agreements of March 20 and December 8, 1964, actually were not sales or assignments of the patent and the invention by Mr. Melin *753to OwensJParks and Rainier, respectively, but were merely devices for channeling extra compensation from the two companies to Mr. Melin.
On the other hand, it is the plaintiffs’ position that Mr. Melin was the owner of all the rights in the patent and in the invention until he sold or assigned such rights to Owens-Parks and Rainier under the respective agreements of March 20 and December 8,1964.

The Lumber-Stacking Device

Mr. Melin was employed by Owens-Parks as a mechanic and equipment operator during the period in 1946 and 1947 when he invented the lumber-stacking device. Owens-Parks operates a large retail lumber business in Los Angeles, California. While Mr. Melin was working for Owens-Parks as a mechanic and equipment operator, he concluded that inefficiency in the use of manpower was prevalent in the retail lumber industry, including the Owens-Parks plant. In particular, he observed that about 80 individual tally and order men were used by Owens-Parks in assembling lumber to fill retail orders, which included placing lumber on a conveyor chain and repiling it into square packages for delivery to retail customers. It was apparent to Mr. Melin that Owens-Parks had poor labor and production efficiency in the assembly and packaging of lumber for retail customers.
On his own time, and outside of his regular working hours for Owens-Parks, Mr. Melin mentally reviewed, considered, and rejected various possible systems for the improvement of efficiency in the use of manpower by Owens-Parks. Finally, he conceived the idea of a lumber-stacking device that could be used for the assembly and packaging of lumber for retail customers in such a way that the arrangement of the various pieces in a particular package would be of maximum convenience to the prospective user and, at the same time, would substantially reduce the amount of manpower needed for this operation. Mr. Melin next made sketches, on his own time, of the proposed device and refined its design.
After conceiving and designing the lumber-stacking device, Mr. Melin, with the consent of Owens-Parks, used the shop and welding facilities of Owens-Parks, and the *754assistance of two other mechanics employed by Owens-Parks, to build the first lumber-stacking device. It was built on company time, and from spare parts and discarded machinery that were owned by Owens-Parks and had a value of approximately $5,000.
Mr. Melin obtained the services of a patent attorney to prepare, file, and prosecute an application for a patent on the lumber-stacking device. Mr. Melin paid the fee and expenses of the attorney, and the other expenses that were involved in obtaining a patent.
In about February 1948, with the consent of Mr. Melin, Owens-Parks first began to use the lumber-stacking device in its business. It has continued to use such device since that time. Owens-Parks did not make any payment to Mr. Melin for the use of the lumber-stacking device until 1964.
The traditional rule is that where a person is employed by another to make an invention and he succeeds in accomplishing the assigned task during the period of employment, the employer is the equitable owner of the invention, and the employee is obligated to assign to the employer any patent that may be obtained on the invention, since the employee has only produced that which he was employed to invent; but that no assignment of the patent to the employer is required in a situation where an employee who is not assigned the specific task of inventing makes an invention, even though the invention relates to the employee’s field of employment and the employer’s time and resources are utilized in making the invention. Hapgood v. Hewitt, 119 U.S. 226 (1886); Solomons v. United States, 137 U.S. 342, 346 (1890); United States v. Dubilier Condenser Corp., 289 U.S. 178, 187-88 (1933).
Since Mr. Melin was not employed by Owens-Parks to invent the lumber-stacking device — or to invent anything else — Mr. Melin was not obligated under the rule quoted in the preceding paragraph to assign the patent on the lumber-stacking device to Owens-Parks.
The defendant urges, however, that Mr. Melin was obligated to assign the patent on the lumber-stacking device to Owens-Parks under the “alter ego” theory enunciated in Dowse v. Federal Rubber Co., 254 Fed. 308 (N.D. Ill. 1918). *755In that case, Dowse was the president and general manager, a one-fifth owner, the dominant member of the 3-member board of directors, and in complete control of the operations of a company engaged in the manufacture of rubber tires. While occupying such a relationship with the company, Dowse invented and obtained a patent on a method for reinforcing automobile tires, known as the “double cable base.” At the time of the suit, Dowse had left the manufacturing company. The question before the court related to the ownership of the patent, as between Dowse and the company. The court said (at page 310) that “the real test is whether Dowse occupied such a relation to the corporation that he was its alter ego, in such a capacity that it is only consistent with good faith that he should recognize its ownership of the patent issued to him.” On the basis of the facts, the court held that Dowse was the company’s “alter ego,” and that the company was the equitable owner of the patent.
This court applied the “alter ego” theory in LeFiell v. United States, 162 Ct. Cl. 865, 871 (1963), which involved the question of the ownership of a patent in a situation where the inventor was the president, general manager, and principal stockholder of a company at the time when the invention was made, and the company’s time, shop facilities, employees, and finances were used in developing the invention and obtaining a patent on it in the inventor’s name. The company was held to be the owner of the patent.
Mr. Melin’s situation in relation to Owens-Parks during the 1946-47 period when he invented the lumber-stacking device was not at all comparable to the situations that were involved in the Dowse and LeFiell cases. Mr. Melin was not an officer or director of Owens-Parks, and he did not exercise control over the operations of that company, at the time mentioned. He was only a mechanic and equipment operator in the employ of the company, taking orders as to the performance of the job from higher authority in the company. He was not a stockholder in 1946, although in 1947 he acquired 100 shares of Owens-Parks stock out of a total of 4,800 shares that wore issued and outstanding at the time. Mr. Melin could not, under any reasonable understanding of *756the term, be regarded as the “alter ego” of Owens-Parks at the time when he invented the lumber-stacking device.
It is true that by 1964, when the agreement between Mr. Melin and Owens-Parks was entered into, Mr. Melin had become vice president of Owens-Parks in charge of engineering and production, he was one of the seven members of the corporation’s board of directors, and a controlling majority of the Owens-Parks stock was held by members of the Melin family.1 However, Mr. Melin certainly was not the “alter ego” of Owens-Parks in 1964. The chief executive officer and largest stockholder of Owens-Parks at the time was Charles E. Melin, Mr. Melin’s father, an autocratic and very volatile individual. The evidence indicates clearly that Mr. Melin did not exercise any dominant control over his father in connection with the operations of Owens-Parks. On the contrary, Charles E. Melin discharged Mr. Melin as an officer and employee of Owens-Parks after 1964.
Furthermore, in determining the question of the ownership of a patent as between an employer and an employee under the “alter ego” theory, the Dowse case shows that the relationship which existed between the employer and the employee at the time when the invention was made is determinative, and not the relationship at a subsequent time. Therefore, the relationship that existed between Mr. Melin and Owens-Parks in 1964 is really immaterial.
Since Mr. Melin was not employed by Owens-Parks to invent the lumber-stacking device, and since there is no valid basis for regarding Mr. Melin as the “alter ego” of Owens-Parks at the time when he made this invention, Mr. Melin— and not Owens-Parks — was the true owner of the patent on the lumber-stacking device at the time when the parties entered into the agreement of March 20,1964.
On the other hand, it appears that Owens-Parks had a shop right in the lumber-stacking device and patent, i.e., the right to have a royalty-free, non-exclusive, and non-assignable license to use this invention in the company’s business at all times during the life of the patent. As indicated earlier in this *757part of the opinion, Mr. Melin used the shop and welding facilities of Owens-Parks, and the assistance of two other mechanics employed by Owens-Parks, to build the first lumber-stacking device. It was built on company time, and from spare parts and discarded machinery that were owned by Owens-Parks and had a value of approximately $5,000. Therefore, the company’s investment in the device was substantial. Mr. Melin then permitted Owens-Parks to use the lumber-stacking device in its 'business, free of charge, from about February 1948 until 1964.
In a situation where it appears that an employer made a substantial investment in an invention conceived by an employee, and that the inventor consented to the employer’s use of the invention, the employer has a shop right in the invention. LeFiell v. United States, supra, 162 Ct. Cl. at page 869. This is so even though the invention was conceived on the employee’s own time. Gill v. United States, 160 U.S. 426, 433-34 (1896).
Therefore, the sales agreement of March 20,1964, between Mr. Melin and Owens-Parks conveyed to the latter all rights in the lumber-stacking device and patent, except the right which Owens-Parks already had to use this invention and patent in the company’s business on a non-exclusive basis and without the payment of royalty to Mr. Melin. The principal right acquired under the agreement was the right to control the use of the invention and patent by others, either by issuing licenses to others or by withholding the issuance of licenses from others. The circumstance, as shown by the evidence, that Owens-Parks did not make any effort to issue licenses under the patent during the period between March 20,1964 (the date of the execution of the agreement between Mr. Melin and Owens-Parks) and November 10, 1970 (the expiration date of the patent on the lumber-stacking device) cannot be regarded as proof that the rights which Mr. Melin conveyed to Owens-Parks in the sales agreement of March 20,1964, were without value. On the contrary, the inference is warranted that such rights did have value.
For the reasons previously indicated in this part of the opinion, it is concluded that the amounts which Mr. Melin received from Owens-Parks in 1964 and 1965 under the agree*758ment of March 20,1964, should properly be regarded as long-term capital gains.

The Mechanical Off-Bear and Slab-Handling Apparatus

Rainier is a large-volume manufacturer of framing lumber. Its principal office and plant are located in Rainier, Oregon, which is 50 miles west of Portland and on the Columbia River.
In 1956, when Mr. Melin was vice president and general manager of Rainier, a large fire completely destroyed Rainier’s plant. Mr. Melin was assigned the task of supervising the construction of a new plant, and part of his task was to incorporate in the new plant as much labor-saving equipment as possible.
During the substantial period of time while Mr. Melin was organizing the work for the construction of the new plant, hiring personnel, and drafting layouts for the plant, he utilized his free time, outside of his regular working hours for Rainier, in attempting to think of innovations that would increase the production of lumber and decrease the need for manpower in the new plant. One result of Mr. Melin’s thinking along these lines was the conception, on his own time, of the idea for a device that is commonly referred to as the mechanical off-bear and slaib-handling apparatus.2
¡After conceiving the idea of the mechanical off-bear and slab-handling apparatus, Mr. Melin built the apparatus on the site of the Rainier plant and on company time; and he utilized for this purpose shop equipment owned by Rainier and mechanics employed by Rainier.
With Mr. Melin’s consent, Rainier first began to use the mechanical off-bear and slab-handling apparatus on an experimental basis in 1958, at about the time when the new plant commenced operations. However, the apparatus was not very effective in the beginning, and Mr. Melin continued to make improvements in it for several years. The apparatus was perfected for semi-automatic operation in 1963.
Mr. Melin engaged the services of a law firm to prepare, file, and prosecute an application for a patent on the mechanical off-bear and slab-handling apparatus. The applica*759tion for patent was filed on December 26,1962, and tbe patent was issued to Mr. Melin on September 14,1965, some 9 months after Mr. Melin and Rainier entered into the agreement of December 8,1964. Mr. Melin paid the fee and expenses of the law firm, and also the other costs that were incurred in securing the patent.
Although Mr. Melin was directed 'by Rainier to incorporate in the new plant as much labor-saving equipment as possible, he was not employed by Rainier to invent the mechanical off-bear and slab-handling apparatus, or any other equipment. Consequently, Mr. Melin was not under any obligation to assign this invention to Rainier under the traditional rule discussed in the preceding part of this opinion. The crucial question as to ownership, then, is whether Mr. Melin should be regarded as the “alter ego” of Rainier at the time when the mechanical off-bear and slaib-handling apparatus was invented.
During the period when the mechanical off-bear and slab-handling apparatus was conceived and reduced to practice, Mr. Melin was vice president and general manager of Rainier, he was directly responsible for all operations of the company, he was a member of the company’s board of directors, and he was a principal shareholder of the company.3
Mr. Melin’s reationship to Rainier at the time of the invention of the mechanical off-bear and slab-handling apparatus can be distinguished from the situations which the courts dealt with in the Dowse and LeFiell cases, discussed in the preceding part of this opinion. The inventor-employee in each of those cases was the president and general manager of the employer-company. Here, although Mr. Melin, as vice president and general manager, was directly responsible for Rainier’s operations, his father, Charles R. Melin, was the president and chief executive officer of the company. As indicated in the preceding part of this opinion, Charles R. Melin was an autocratic, volatile individual who did not hesitate to exercise his authority in dealing with members of *760his family concerning company affairs. It has been mentioned previously that Charles E. Melin discharged Mr. Melin as an officer and employee of Owens-Parks; and it would be appropriate to state here that Charles E. Melin also discharged another son, Arthur K. Melin, from the employ of Owens-Parks. So long as Charles E. Melin was serving as the president and chief executive officer of Rainier, it would not be realistic to regard Mr. Melin as the “alter ego” of that company.
It must be concluded, therefore, that Mr. Melin — and not Rainier — was the owner of the mechanical off-bear and slab-handling invention.
However, since Eainier made a substantial investment in this invention, and since Mr. Melin consented to the use of the invention by Rainier, without charge, from 1958 to 1964, Rainier had the right in 1964 and thereafter to use the invention in its business on a non-exclusive basis and without the payment of royalty to Mr. Melin Eainier had a shop right in the invention).
What has been said in the preceding part of this opinion with respect to the rights conveyed by Mr. Melin to Owens-Parks in the agreement of March 20, 1964, and the value of such rights, is equally applicable to the effect of the agreement dated December 8, 1964, between Mr. Melin and Rainier.
It necessarily follows that the amounts which Mr. Melin received from Rainier in 1964 and 1965 under the agreement of December 8, 1964, constituted long-term capital gains.
FINDINGS of Fact
1. The petition in this case was timely filed against the defendant pursuant to the provisions of 28 U.S.C. § 1491 for the recovery of income taxes which the plaintiffs allege were illegally and erroneously assessed against and collected from them for each of the years 1964 and 1965.
2. (a) During the years 1964 and 1965, and prior thereto, the plaintiffs, Thomas N. Melin and Virginia W. Melin, were citizens of the United States, and they were husband and wife, residing in the City of Los Angeles, State of California. Their federal income tax return for each of these *761years was filed with, tlie District Director of Internal Revenue in Los Angeles, California.
(b)The plaintiffs now reside in the City of Longview, State of Washington.

The Lumber-Stacking Device

3. (a) The plaintiff Thomas N. Melin (“Mr. Melin”) was first employed by the Owens-Parks Lumber Company (“Owens-Parks”), a California corporation, on February 13, 1946. He has been an employee or officer of Owens-Parks ever since that date, except as indicated in paragraph (d) of this finding. For the first 2 years of his employment, Mr. Melin’s job was that of a mechanic and equipment operator. He did not have any written contract of employment.
(b) At the end of 2 years, Mr. Melin was promoted by Owens-Parks to the position of Maintenance Superintendent. In that position, which he held until February 1964, Mr. Melin worked on the plant-flow and material-handling aspects of the business.
(c) (1) From March 1964 until March 1968, Mr. Melin was vice president of Owens-Parks in charge of engineering and production. In this capacity, he exercised supervision over the unloading of lumber cargoes consigned to Owens-Parks, over the unloading docks, and over yard operations at the Owens-Parks plant. He did not exercise supervision over sales or shipping.
(2) Mr. Melin’s salary as vice president of Owens-Parks was $4,800 in 1964 and $7,800 in 1965. These amounts were much less than the salaries paid to the other principal officers of Owens-Parks in the respective years 1964 and 1965. For example, the salary of the chairman of the board and chief executive officer of Owens-Parks was $33,919 in 1964 and $21,406 in 1965; the salary of the general manager was $16,200 in 1964 and $15,600 in 1965; the salary of the vice president in charge of sales was $17,500 in 1964 and $18,900 in 1965; and the salary of the secretary and credit manager was $16,200 in 1964 and $16,400 in 1965.
(d) During the period April 1968-March 1970, Mr. Melin was not an employee or officer of Owens-Parks.
*762(e) Since April 20,1970, Mr. Melin has been president of Owens-Parks.
(f) Mr. Melin became a member of the board of directors of Owens-Parks in 1951, and he has been a director since that time.
4. (a) Owens-Parks operates a large retail lumber business in Los Angeles, California. The executive and sales offices, the lumber yard, and the dock facilities of Owens-Parks are located on a 9-acre plot in the industrial section of Los Angeles. The company does not have any branch offices.
(b) Owens-Parks furnishes framing and construction lumber for houses and apartments within a trade territory that covers the Los Angeles area out to a maximum distance of about 100 miles from the Owens-Parks office and plant facilities located at 2100 East 88th Street. Approximately 80 percent of the company’s customers, however, are located within a distance of about 40 miles from the Owens-Parks office and plant.
(o) During the period that is material to the present litigation, Owens-Parks had approximately 200 to 250 employees.
5. (a) For the period 1945-70, Owens-Parks had only one class of stock authorized, issued, and outstanding. That was common stock, without par value ; and 5,000 shares were authorized. From 1945 until December 7, 1950, 4,800 shares were issued and outstanding. On December 7,1950,200 additional shares were issued, making a total of 5,000 shares issued and outstanding. This situation continued until September 26, 1966, when the board of directors authorized the purchase and redemption of 890 shares, leaving 3,110 shares outstanding thereafter.
(b) Mr. Melin has been an Owens-Parks shareholder since 1947. He owned 100 shares of such stock in 1947-49, 206 shares in 1950-58, and 108 shares since 1959. In 1946, the following relatives of Mr. Melin were Owens-Parks shareholders: Charles R. Melin, 1,566 shares; Della K. Melin, 359 shares; Maude P. Kelso, 214 shares; and Peggy Kelso Lefler, 250 shares. In 1947, the persons named in the preceding sentence owned the same number of shares, except that Charles R. Melin’s stock ownership had 'been reduced to 1,366 shares; *763and Mr. Melin and Arthur K. Melin had each acquired 100 shares of stock.
(c) The shareholders of Owens-Parks in 1964 were as follows: Charles R. Melin, 1,470 shares; Della K. Melin, 967 shares; Maude P. Kelso, 223 shares; J. C. Titus, 104 shares; Rebecca C. Rounds, 469 shares; Ralph Cooper Rounds, 468 shares; Dwight M. Rounds, 468 shares; Mr. Melin, 108 shares; Arthur K. Melin, 109 shares; Virginia Melin, 58 shares; John T., Ross R., Mary D., and David Melin, 10 shares each; Nay & Company, 31 shares.
(d) The shareholders of Owens-Parks in 1965 were the same as in 1964, except that Della K. Melin’s stock ownership had increased to 1,190 shares, and Maude P. Kelso and Rebecca C. Rounds were no longer shareholders.
(e) The shareholders of Owens-Parks during the 1966-70 period were the same as in 1965, except that Charles R. Melin’s stock ownership had increased to 1,605 shares, and J. C. Titus, Ralph Cooper Rounds, Dwight M. Rounds, and Nay & Company were no longer shareholders.
(f)(1) The following persons mentioned in paragraphs (b) - (e) of this finding were related to Mr. Melin: Charles R. Melin was his father; Della K. Melin was his mother; Maude P. Kelso was his grandmother; Arthur K. Melin was his brother; Virginia Melin was his wife; John T., Ross R., Mary D., and David Melin were his minor children; and Peggy Kelso Lefler was a relative. Mr. Melin did not have any minor grandchildren at the time involved here.
(2) The other persons mentioned in paragraphs (c)-(e) of this finding, J. C. Titus, Rebecca C. Rounds, Ralph Cooper Rounds, and Dwight M. Rounds, were not related to Mr. Melin.
(g) In 1964 and 1965, a substantial controversy developed between members of the Melin family and the members of the Rounds family with respect to the operation of Owens-Parks. As a result of this controversy, the members of the Rounds family severed their connection with Owens-Parks, and their stock in the corporation was redeemed by Owens-Parks in 1966. Thereafter, all the outstanding Owens-Parks stock (3,110 shares) was held by members of the Melin family.
*7646. (a) The 'board of directors of Owens-Parks in 1964 consisted of S. G\ McDonald, Charles E. Melin, Della K. Melin, Mr. Melin, Dwight M. Rounds, Ralph C. Rounds, and Ralph D. Hill.
(b) The board of directors of Owens-Parks in 1965 consisted of S. G. McDonald (until July 29, 1965), Charles E. Melin, Mr. Melin, Della K. Melin, Carl A. Nelson, Dwight M. Rounds, Malcolm Miller, and Ralph D. Hill (after July 29, 1965).
(c) Charles E. Melin was chairman of the board of directors and the chief executive officer of Owens-Parks from 1946 until his death in 1970. He also held the title of president of Owens-Parks throughout such period, except for most of 1964 and for a short time in 1969. Charles E. Melin was an autocratic individual and a very volatile man. He was not an easy man to work for, as is indicated by the fact that he fired his son, Arthur K. Melin, a few months after the latter went to work for Owens-Parks, and in 1968 he discharged Mr. Melin, another son, as an officer and employee of Owens-Parks. It was very hard for the other members of the Melin family to co-exist with Charles E. Melin.
(d) Following the death of Charles E. Melin, Mr. Melin became president of Owens-Parks on April 20, 1970, and he has held this position since such date.
7. (a) In 1946 and 1947, while Mr. Melin was working for Owens-Parks as a mechanic and equipment operator, he concluded that inefficiency in the use of manpower was prevalent in the retail lumber industry, including the Owens-Parks plant. In particular, he observed that about 30 individual tally and order men were used by Owens-Parks in assembling lumber for retail orders, which included placing lumber on a conveyor chain and repiling it into square packages for delivery to retail customers. It was apparent to Mr. Melin that Owens-Parks had poor labor and production efficiency in the assembly and packaging of lumber for retail customers.
(b) On his own time, and outside of his regular working hours for Owens-Parks, Mr. Melin mentally reviewed, considered, and rejected various possible systems for the improvement of efficiency in the use of manpower. Finally, he conceived the idea of a lumber-stacking device that could be *765used for the assembly and packaging of lumber for retail customers in such a way that the arrangement of the various pieces in a particular package would be of maximum convenience to the prospective user and, at the same time, the amount of manpower needed for this operation would be substantially reduced. Mr. Melin next made sketches of the proposed device and refined its design. All of Mr. Melin’s activities in connection with the lumber-stacking device, as mentioned in this paragraph, were accomplished on his own time and outside of his regular working hours for Owens-Parks.
(c) Mr. Melin was never employed to invent any specific device for Owens-Parks.
(d) After conceiving and designing the lumber-stacking device, as mentioned in paragraph (a) of this finding, Mr. Melin, with the consent of Owens-Parks, used the shop and welding facilities of Owens-Parks, and the assistance of two other mechanics employed by Owens-Parks, to build the first lumber-stacking device. It was built on company time, and from spare parts and discarded machinery that were owned by Owens-Parks and had a value of approximately $5,000.
8. (a) In about February 1948, with the consent of Mr. Melin, Owens-Parks first began to use the lumber-stacking device in its business. It has continued to use such device since that time. Owens-Parks did not make any payment to Mr. Melin for the use of the lumber-stacking device until 1964.
(b) The lumber-stacking device was not essential to the operations of Owens-Parks, but it was very helpful and cost-reducing.
9. (a) Mr. Melin obtained the services of a patent attorney to prepare, file, and prosecute an application for a patent on the lumber-stacking device. The patent attorney who represented Mr. Melin in this matter was not an attorney in any capacity for Owens-Parks. Mr. Melin personally paid the fee and expenses of the attorney, and the other expenses that were involved in obtaining a patent.
(b) Mr. Melin’e application for a patent on the lumber-stacking device was filed in the U.S. Patent Office on August 23, 1947. The patent was issued on November 10, 1953, and was assigned the number 2,658,630,
*766(c) The only costs incurred by Mr. Melin on his lumber-stacking device were those involved in applying for and obtaining the patent.
10. Owens-Parks obtained the following specific advantages from its use of the lumber-stacking device: (a) a saving in labor (seven fewer men were needed for the operation of assembling and packaging lumber) ; (b) packages of lumber for delivery to retail customers were tighter and packed firmer; (c) lumber packages were easier to square and less expensive for lift-truck handling; (d) the loading of lumber packages was much faster, and also less expensive; and (3) the tally, counting, and order-making procedures at the unified input point were expedited.
11. At a meeting of the board of directors of Owens-Parks that was held on March 3, 1964, Owens-Parks “was authorized to purchase the patent rights to the Lumber Stacking Device * * * held by Thomas N. Melin, for the sum of $30,000.00, and to pay a royalty to said Thomas N. Melin of 10$ per thousand board feet of Douglas Fir lumber shipped by Owens-Parks Lumber Company from 1 January 1964, until the expiration of said patent, which expires 10 November, 1970.” Two members of the board, Dwight M. Rounds and Ralph O. Rounds, voted against the motion. Mr. Melin abstained from voting.
12. (a) On March 20, 1964, Mr. Melin and Owens-Parks entered into what was denominated a “sales agreement” with respect to patent No. 2,658,630 and the lumber-stacking device to which the patent related.
(b) The agreement of March 20, 1964, provided in part as follows:
2. MELIN hereby sells, assigns and conveys to OWENS-PANES, its legal representatives, successors and assigns, all of his right, title and interest in and to said United States Letters Patent No. 2,658,630 and in and to the Lumber 'Stacking Device described and claimed therein, and MELIN agrees to execute such additional documents and perform such additional acts as OWENS-PAEKS shall deem necessary or advisable to transfer all of his right, title and interest therein and to record such transfer.
*7673. OWENS-PARK'S shall pay MELIN as consideration for the purchase of the patent :
(a) The sum of Thirty Thousand Dollars ($30,000.00) upon execution of this agreement, receipt of which is hereby acknowledged by MELIN, and
(b) A royalty of Ten 'Cents ($0.10) per thousand (1,000) board feet of Douglas Fir lumber shipped by OWENS-P ARKS, its assignees or licensees from January 1, 1964 until the expiration date of said patent, to wit November 10,1970.
13. In March 1964, when Mr. Melin and Owens-Parks entered into the agreement that is referred to in finding 12, Mr. Melin was vice president of Owens-Parks in charge of engineering and production. It was his function at that time to endeavor to increase production in material flow, and to reduce overhead and operating costs. His responsibility did not extend to supervision over sales and shipping, but it did include cargo and dock control and yard operations.
14. (a) From November 10, 1953, when Mr. Melin was granted a patent for the lumber-stacking device, until March 20, 1964, when he entered into the agreement with Owens-Parks, Mr. Melin did not make any effort to assign or license this device.
(b) From March 20, 1964, the date of the execution of the agreement between Mr. Melin and Owens-Parks, until the expiration date of the patent on the lumber-stacking device, November 10, 1970, Owens-Parks did not make any effort to assign or license the lumber-stacking device.
15. (a) During the year 1964, Owens-Parks paid to Mr. Melin the sum of $30,000 under paragraph 3(a) of the agreement dated March 20, 1964, and $11,312 under paragraph 3(b) of that agreement.
(b) During the year 1965, Owens-Parks paid to Mr. Melin the sum of $10,112 under paragraph 3(b) of the agreement dated March 20,1964.
16. (a) The $30,000 which Owens-Parks paid to Mr. Melin under paragraph 3(a) of the agreement dated March 20, 1964, was amortized by Owens-Parks over an 80-month period from March 1964 until November 10, 1970, the expiration date of Mr. Melin’s patent on the lumber-stacking device. *768Owens-Parks took amortization deductions of $8,625 for 1964 and $4,500 for 1965.
(b) Owens-Parks also took deductions of $11,812 for 1964 and $10,112 for 1965 on the basis of the respective amounts which Owens-Parks paid to Mr. Melin for those years under paragraph 8 (b) of the agreement dated March 20, 1964.
(c)Although the federal income tax returns of Owens-Parks for the years 1964 and 1965 were examined by a revenue agent of the Internal Revenue Service in Los Angeles, California, there was no disallowance of the claimed deductions for those years mentioned in paragraphs (a) and
(b) of this finding.

The Mechanical Off-Bear and Slab-Handling Apparatus

17. (a) Mr. Melin, while retaining a connection with Owens-Parks, was sent in August 1948 to take charge of the operations of Rainier Manufacturing Company (“Rainier”), which was then a wholly owned subsidiary of Owens-Parks located in Rainier, Oregon. During the three immediately preceding years, there had been three or four other managers of Rainier, and the parent corporation, Owens-Parks, was not satisfied with the manner in which Rainier was being operated. Mr. Melin was told “to shake this plant up,” although he was only given the title of assistant manager of Rainier at first. Mr. Melin did not have any contract of employment with Rainier.
(b) Charles R. Melin, Mr. Melin’s father, was the president and chief executive officer of Rainier at the time when Mr. Melin joined Rainier.
(c) Mr. Melin was named manager of Rainier in August 1949, vice president and general manager in March 1952, and president in March 1967. He is still president of Rainier.
(d) Mr. Melin was one of the five members of Rainier’s board of directors at the times material to this litigation. His father and mother were also members of the board.
(e) In 1964 and 1965, Mr. Melin was directly responsible for all parts of Rainier’s operations, although his father, Charles R. Melin, was still president and chief executive officer of Rainier at that time.
*769(f) Since August 1,1948, when Mr. Melin commenced Ms employment with. Rainier, he has divided his working time between Rainier and Owens-Parks, except that he was not an officer or employee of Owens-Parks during the April 1968-March 1970 period.
18. (a) Rainier is a large-volume manufacturer of framing lumber. Its principal office and plant are located in Rainier, Oregon, which is 50 miles west of Portland and on the Columbia River. The Rainier plant produces approximately 180 million board feet of lumber per year. It is the single largest producer of green fir lumber among the plants in the United States engaged in the production of that type of lumber.
(b) As a cargo mill, Rainier ships lumber by waterborne vessels to wholesalers and distributors in what are essentially coastal markets, namely, Honolulu, Hawaii, and Los Angeles and San Diego, California.
(c) Rainier has competition in the coastal markets from the few cargo mills in the Pacific Northwest, all but one of which are located within 50 miles of Rainier, Oregon. The cost of shipping lumber by water is less than the cost of shipping it by rail or truck over long distances, but shipments by water are more expensive than shipments by rail or truck over short distances. Accordingly, Rainier, as a cargo mill, does not, except to a minor extent, engage in competition with inland mills, which use rail and truck shipments, since cargo mills and inland mills serve different markets.
19. (a) From 1946 through 1954, Rainier was a wholly owned subsidiary of Owens-Parks.
(b) Mr. Melin became a Rainier shareholder in 1955, at which time he owned 5,000 shares of stock out of a total of 25,000 shares that were issued and outstanding. The remaining 20,000 shares of stock in 1955 were owned by Owens-Parks.
(c) In 1956, Mr. Melin’s stock ownership in Rainier had increased to 5,824 shares, and by 1958 it had increased to 6,824 shares. His stock ownership in Rainier has been 6,824 shares ever since 1958.
(d) Since 1956, members of the Melin family have held the majority controlling stock interest in Rainier. In 1956-57 *770Mr. Melin owned 5,824 shares out of a total of 25,000 outstanding shares. He was the second-largest shareholder, next to his father, Charles It. Melin, who owned 5,880 shares. From 1958 until the present time, Mr. Melin, with 6,824 shares, has been the largest shareholder in Rainier.
(e) In 1964 and 1965, Rainier had 28,060 shares of stock issued and outstanding. The shareholders in Rainier during those years were as follows: Mr. Melin, 6,824 shares; Charles R. Melin, 6,772 shares; Arthur K. Melin, 436 shares; Della K. Melin, 3,868 shares; J. C. Titus, 416 shares; Dwight M. Rounds, 1,872 shares; Ralph Cooper Rounds, 1,872 shares ; Rebecca C. Rounds, 1,876 shares; Mary D., David W., John T., and Ross R. Melin, 500 shares each; Virginia W. Melin, 2,000 shares; and Kate W. Plumb, 124 shares.
(f) Because of a substantial controversy that existed between members of the Melin family and members of the Rounds family with respect to the operation of Rainier, the corporation in June 1966 redeemed all the stock that had previously been held by members of the Rounds family. Thereafter, members of the Melin family were the owners of all the remaining 22,440 shares of outstanding stock in Rainier.
20. (a) In 1956, while Mr. Melin was serving as vice president and general manager of Rainier and was responsible for that company’s operations (although his father, Charles R. Melin, was president and chief executive officer of Rainier), a large fixe completely destroyed Rainier’s plant. Mr. Melin ws assigned the task of supervising the construction of a new plant, and part of his task was to incorporate in the new plant as much labor-saving equipment as possible. During the substantial period of time when Mr. Melin was organizing the work for the construction of the new plant, hiring personnel, and drafting layouts for the plant, he utilized his free time, outside of his regular working hours for Rainier, in attempting to think of innovations that would increase the production of lumber and decrease the need for manpower in the new plant.
(b) One area of possible improvement that occurred to Mr. Melin related to the procedure by which slabs were cut from logs and then placed on a conveyor for subsequent processing. Mr. Melin had observed that it was customary *771in the Rainier plant, and elsewhere in the lumber industry, to use from two to four workmen, known as off-bear men, equipped with devices known as pickaroons, for the purpose of attempting to hold a slab, as it was being cut from a log, in such a way that it would not break away from the log prior to the completion of the cut, and then to place the slab, after it was completely sawn from the log, on the conveyor with the cut or flat side down, so as to facilitate the further processing of the slab. Mr. Melin regarded this as an inefficient operation, and also as a hazardous occupation for the off-bear men. Mr. Melin’s thinking about possible means of improving this procedure led to the conception of a device that is commonly referred to as the mechanical off-bear and slab-handling apparatus.
(c) After conceiving the idea of the mechanical off-bear and slab-handling apparatus, Mr. Melin built the apparatus on the site of the Rainier plant and on company time; and he utilized for this purpose shop equipment owned by Rainier and mechanics employed by Rainier.
(d) The mechanical off-bear and slab-handling apparatus is a device for handling sawed slabs in sawmills. The apparatus is designed (1) to maintain a slab in position, relative to the log from which it is being sawn, until the cut between the log and the slab is completed, and thus minimize or eliminate the possibility of a breakout of the slab from the log before the completion of the cut; and (2) after the completion of the cut, to move the sawn slab from the log in a predetermined manner to the slab conveyor with the sawed or flat side down, thus facilitating the further processing of the slab.
(e) With Mr. Melin’s consent, Rainier first 'began to use the mechanical off-bear and slab-handling apparatus on an experimental basis in 1958, at about the time when the new plant commenced operations. However, the apparatus was not very effective in the beginning, Mr. Melin continued to make improvements in the apparatus for several years, and it was perfected for semi-automatic operation in about 1963.
(f) The use of the mechanical off-bear and slab-handling apparatus by Rainier has resulted in the following advantages to the company: (1) from 10 to 15 percent more produc*772tion; (2) more accurately sawn lumber, with, more overrun; (3) less split and breakout of cant or slab; and (4) the elimination of off-bear men and injuries to them.
21. (a) Mr. Melin engaged the services of a law firm to prepare, file, and prosecute before the U.S. Patent Office an application for a patent on the mechanical off-bear and slab-handling apparatus. The law firm that represented Mr. Melin in this matter did not serve as legal counsel in any capacity for Rainier. Mr. Melin paid the fee and expenses of the law firm, and also the other costs, in connection with the securing of a patent on the mechanical off-bear and slab-handling apparatus.
(b) On December 26, 1962, an application was filed on behalf of Mr. Melin with the U.S. Patent Office for a patent on the mechanical off-bear and slab-handling apparatus. On September 14, 1965, the requested patent was granted to Mr. Melin, the number of the patent being 3,205,924.
(c) The only expenses incurred by Mr. Melin in connection with the mechanical off-bear and slab-handling apparatus were those involved in applying for and obtaining the patent.
22. (a) On December 8, 1964, Mr. Melin entered into an agreement with Rainier regarding the mechanical off-bear and slab-handling apparatus, and the patent for which Mr. Melin had applied on this invention.
(b) The agreement of December 8, 1964, provided in part as follows:
1. Licensor [Mr. Melin] hereby grants to Licensee [Rainier] the exclusive right and license to develop, manufacture, use, market, sell and otherwise commercialize, throughout the United States, its territories and possessions, the following described Invention:
A certain automated, mechanical off-bear and slab handling device for sawmill band saw headrigs, with automatic saw guide cleaning, the patents for which were applied for by application dated December 26,1962, Serial No. 247,055.
2. Licensee agrees to pay to Licensor for the above described license, the following * * * amounts:
(a) The sum of $85,000 upon the date of the execution *773of this agreement, the receipt of which is hereby acknowledged by Licensor;
(b) Royalties at the rate of 25 ‡ per M for all lumber produced at Licensee’s lumber manufacturing plant located at Rainier, Oregon, so long as the Invention remains in operation at Licensee’s plant. Said royalties shall be paid on the 31st day of December of each calendar year during the term of this agreement, at the stipulated rate, for all lumber produced during that calendar year.
3. The above-granted license includes the right to grant sublicenses upon terms consistent with this agreement. The exclusive right and license granted hereunder shall apply to all inventions, improvements, patent applications and patents which Licensor now owns or controls or hereafter shall own or control relating to the Invention.
23. On December 8,1964, the board of directors of Rainier (with Mr. Melin abstaining from voting) adopted the following resolution:
RESOLVED, that the officers of this corporation be and they hereby are authorized and instructed to execute and carry into immediate effect the agreement between Thomas N. Melin as licensor and this corporation as licensee by which the licensor grants to the licensee the exclusive right and license to develop, manufacture, use, market, sell and otherwise commercialize the invention in question under certain terms and conditions and subject to a down payment of $85,000 and the payment of certain royalties, all as contained in the agreement between the parties which is attached hereto and by this reference made a part hereof.
24. (a) From the time when Mr. Melin initially conceived and reduced to practice the mechanical off-bear and slab-handling apparatus until December 8, 1964, the date of the execution of the agreement between Mr. Melin and Rainier, Mr. Melin did not make any effort to assign or license this apparatus.
(b) From December 8, 1964, the date of the execution of the agreement between Rainier and Mr. Melin, Rainier has not made any effort to assign or license the mechanical off-bear and slab-handling apparatus.
*77425. Rainier’s principal competitors do not have any device analogous to the mechanical off-bear and slab-handling apparatus invented by Mr. Melin. The other companies are still ñamo- two or more off-bear men in connection with the slab-sawing process.
26. (a) During the year 1964, Rainier paid to Mr. Melin the sum of $85,000 under paragraph 2(a) of the agreement dated December 8,1964, and the sum of $28,093 under paragraph 2(b) of such agreement.
(b) During the year 1965, Rainier paid to Mr. Melin the snm of $32,821 under paragraph 2(b) of the agreement dated December 8,1964.
27. (a) The $85,000 which Rainier paid to Mr. Melin in 1964 under paragraph 2(a) of the agreement dated December 8, 1964, was amortized by Rainier over a 20-year period commencing in 1965. Rainier claimed an amortization deduction of $4,250 for 1965.
(b) Rainier also took deductions in the respective amounts of $28,093 and $32,821 for 1964 and 1965 on the basis of the amounts which it had paid to' Mr. Melin for those years under paragraph 2 (b) of the agreement dated December 8, 1964.
(c) An examining revenue agent proposed to disallow the deductions referred to in paragraphs (a) and (b) of this finding, on the ground that Rainier had a “shop right” in the mechanical off-bear and slab-handling apparatus. However, the Commissioner of Internal Revenue, in the final determination of Rainier’s income tax liability for 1964 and 1965, overruled the examining revenue agent and determined that the deductions referred to in paragraphs (a) and (b) of this finding were allowable, as claimed on Rainier’s returns.

The Admmistratwe Proceedings

28. (a) In filing their joint federal income tax return for the year 1964, Mr. Melin and his wife, Virginia W. Melin, reported as long-term capital gains the $41,312 received from Owens-Parks during that year under the agreement dated March 20,1964; and in filing their joint federal income tax return for the year 1965, they reported as long-term *775capital gains the $10,112 received from Owens-Parks during 1965 under the agreement dated March. 20,1964.
(b) In filing their 1964 joint federal income tax return, Mr. Melin and Virginia W. Melin reported as long-term capital gains the $113,093 received from Eainier during that year under the agreement of December 8,1964; and in filing their joint federal income tax return for the year 1965, they reported as long-term capital gams the $32,821 received during 1965 from Eainier under the agreement dated December 8, 1964.
29. By means of a letter dated April 12,1968, the Commissioner of Internal Revenue notified Mr. Melin and Virginia W. Melin of income tax deficiencies determined against them for the years 1964 and 1965 in the respective amounts of $63,-019 and $13,515. The principal bases for the deficiencies were determinations by the Commissioner to the effect that the amounts received from Eainier during 1964 and 1965 under the agreement dated December 8,1964, constituted additional “dividend income,” and to the effect that the amounts received from Owens-Parks during 1964 and 1965 under the agreement dated March 20, 1964, constituted additional “royalty income.”
30. (a) On or about September 9, 1968, Mr. Melin and Virginia W. Melin paid to the Internal Revenue Service Center at Ogden, Utah, the sum of $75,633.15 in payment of the asserted deficiency for the year 1964 in the amount of $63,019, together with interest thereon in the amount of $12,614.15.
(b) On or about September 28, 1968, Mr. Melin and Virginia W. Melin paid to the Internal Revenue Service Center at Ogden, Utah, the sum of $15,471.53 in payment of the asserted deficiency for the year 196'5 in the amount of $13,515, together with interest thereon in the amount of $1,956.33.
31. (a) On or about June 8,1970, Mr. Melin and Virginia W. Melin filed with the Internal Revenue Service Center at Ogden, Utah, their timely refund claims for 1964 and 1965 in the respective amounts of $75,633.15 and $15,471.53. These claims asserted that it was erroneous for the Internal Eevenue Service to determine that the amounts received from Owens-Parks and Rainier during 1964 and 1965 under the respective *776agreements dated March 20,1964, and December 8,1964, constituted ordinary income instead of long-term capital gains, as originally reported. The claims for refund were based upon the same grounds as those set forth in the petition that was filed in this court on February 23,1971.
(b) More than 6 months expired between the filing of the refund claims referred to in paragraph (a) of this finding and the filing of the petition in this court.

Ownership of Claims

32. The plaintiffs are the sole owners of the respective claims upon which the petition herein is based. There has been no assignment or transfer of said claims, or of any part thereof, or of any interest therein, to any other person, firm, or corporation. No action, other than 'as described in the previous findings, has been taken on these claims by the Congress, or by any department of the Government, or in any judicial proceeding, including any in the United States Tax Court.
33. Except for the agreements with Owens-Parks and Rainier referred to in previous findings, Mr. Melin never sold or licensed, or attempted to sell or license, any patent.
Conclusion oe Law
Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are entitled to recover, together with interest as provided by law, and judgment is entered to that effect. The amount of the recovery will be determined in subsequent proceedings under Rule 131 (c).

 Mr. Melin, his wife, and his children owned a total of 206 shares of stock in Owens-Park out of a total of 4,515 shares that were issued and outstanding in 1964. Other close relatives (Mr. Melin’s father, his mother, his grandmother, and his brother) owned a total of 2,769 shares.

 See paragraphs (b) and (d) of finding 20 for a description of this device.

 In 1956-57, Mr. Melin was tbe second-largest shareholder, with 5,824 shares out of a total of 25,000 outstanding shares. In 1958, he became the largest shareholder, with 6,824 shares out of a total of 30,000 shares. He has been the largest shareholder, with 6,824 shares, since 1958, but the total number of shares has been reduced to 22,440 since June 1966.