Court Opinion

ID: 4607168
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:40:02.558749+00
Date Added: 2024-06-11T07:53:29.656878
License: Public Domain

Don O. Scott and Anne B. Scott, Petitioners, v. Commissioner of Internal Revenue, RespondentScott v. CommissionerDocket No. 53931United States Tax Court26 T.C. 869; 1956 U.S. Tax Ct. LEXIS 118; July 26, 1956, Filed *118 Decision will be entered for the respondent.  An individual acquired, by purchase from a corporation, a contract right to receive an interest in such "royalty" payments as might thereafter accrue and be paid, under an intercorporate patent license agreement respecting the manufacture and sale of domestic washing machines. He subsequently transferred this contract right to his wife, by gift; and she, from time to time, received the "royalty" payments.  Held, that such payments, in the absence of any contention or evidence that they represented a return of capital, were taxable to the wife as ordinary income.  Held, further, that where the wife entered into a settlement agreement with the corporation that was obligated to make the payments, under which claims to certain additional royalties were compromised and adjusted, she did not, by such settlement, sell or exchange any interest in a patent, or any interest in her contract right; and that, in the absence of a sale or exchange, the payments which she received pursuant to the settlement are taxable as ordinary income, and not capital gain. Spencer E. Irons, Esq., for the petitioners.Andrew Kopperud, Jr., Esq., for the respondent.  Pierce, Judge.  PIERCE *869  The respondent determined a deficiency of $ 7,109.31 in the income tax of the petitioners for the calendar year 1951.The sole issue for decision is whether all or any part of certain payments aggregating $ 21,589.56, which petitioner Anne B. Scott *870  received from Avco Manufacturing Corporation in the year involved, represented proceeds from a sale by her to said corporation of interests in a patent, so as to entitle said payments to capital gains treatment under section 117 of the Internal Revenue Code (1939).FINDINGS OF FACT.Certain facts have been stipulated; and the stipulation, together with the exhibits thereto attached, is incorporated herein by reference.The petitioners, Don O. Scott and Anne B. Scott, are husband and wife.  They filed a joint income tax return for the year 1951 with the*120  collector of internal revenue for the district of Michigan.On July 17, 1936, petitioner Don O. Scott was the holder of 12 shares, out of the total of 100 shares then issued and outstanding, of the capital stock of the Laundri-Matic Corporation, a New York corporation, (hereinafter called Laundri-Matic).  The stockholders of the corporation on said date, and the number of shares held by each, were:NameNo. of sharesDon O. Scott12Arthur A. Berard24Rex Earl Bassett, Jr26J. C. Rowland12John W. Chamberlin26Total100Scott had acquired his 12 shares at some time prior to said date.  But the evidence does not disclose either the date or manner of his acquisition; nor does it disclose his holding period, his original cost, or his adjusted basis for the shares on any date.Laundri-Matic, on said date, had a right to receive royalty payments under a certain patent license agreement which it had entered into on April 23, 1935, with Hydraulic Brake Company, a California corporation, (hereinafter called Hydraulic).  Under this agreement, Laundri-Matic had granted to Hydraulic an exclusive, transferable, and divisible license, in the domestic laundry field*121  (and in that field only), to manufacture, use, and sell throughout the United States and its territories, laundry machines covered by U. S.Patent No. 1,893,398 (herein called the Chamberlin patent), and by U. S. Patent Application No. 6,425 (herein called the Bassett patent application), together with all inventions in connection with such machines, during the life of each and every patent issued or to be issued in respect of such inventions and laundry machines. And Hydraulic, in consideration for such grant, had obligated itself to pay Laundri-Matic royalties, as follows: $ 1.25 per machine for the first 10,000 machines; $ 1 per machine for the next 37,500 machines; and 50 cents *871  per machine for all additional machines. Said agreement also provided that Hydraulic would pay Laundri-Matic $ 15,000 advance royalties, which were to be charged off against the unit royalties at a rate not to exceed $ 5,000 per year; and that, during the third and each succeeding 12-month period, Hydraulic would pay minimum royalties of $ 5,000, except that if it were sued for infringement it might withhold 50 per cent of the royalties for application against the expenses of the infringement*122  suit.  The agreement further provided that it could be canceled by Hydraulic at any time after 18 months from the date thereof, upon 60 days' notice; and that it could be canceled by Laundri-Matic, upon 60 days' notice, in the event Hydraulic defaulted in making the royalty payments.  Actually, the agreement was never canceled by either party.The manner in which Laundri-Matic had acquired its interests in the said Chamberlin patent and said Bassett patent application, in respect of which the above-mentioned royalty payments were to be made, was as follows:(1) On January 3, 1933, one John W. Chamberlin was issued U. S. Patent No. 1,893,398 (the Chamberlin patent), covering a cleansing machine that he had invented.  During that year, he assigned this patent to National Rubber Machine Company, an Ohio corporation, insofar as it was applicable to commercial dry cleaning machines; and shortly thereafter in the same year, he sold and assigned to John W. Chamberlin, Inc., an Ohio corporation, all his remaining right, title, and interest in said patent.Thereafter, on February 16, 1935, John W. Chamberlin and John W. Chamberlin, Inc., granted to Laundri-Matic an exclusive license, *123 in the field of domestic laundry machines only, to make, sell, and use machines covered by said Chamberlin patent, throughout the United States and its territories and possessions, and also the right to assign said license or to sublicense others thereunder.(2) On February 15, 1935, one Rex Earl Bassett, Jr., having theretofore filed U. S. Patent Application No. 6,425 (the Bassett patent application) for a patent on certain improvements in washing machines, sold, assigned, and transferred to Laundri-Matic all his interest in said application; and on the same date, Laundri-Matic, acting pursuant to a condition embodied in the above assignment, granted back to Bassett an exclusive license to manufacture, use, and sell machines covered by said application, except in the field of domestic laundry machines.Subsequently, on December 17, 1940, U. S.Patent No. 2,225,407 (herein called the Bassett patent) was issued, pursuant to said application, to Laundri-Matic as assignee of Rex Earl Bassett, Jr.(3) On April 4, 1936, Laundri-Matic, Hydraulic, John W. Chamberlin, John W. Chamberlin, Inc., and Rex Earl Bassett, Jr., all entered *872  into a supplemental agreement, whereby, *124  among other things, certain terms of the above-mentioned license agreements were made more definite; the licenses covering the Chamberlin patent, as embodied in the grant from Chamberlin and his corporation to Laundri-Matic, and also in the grant from Laundri-Matic to Hydraulic, were enlarged to include exports from the United States and its territories; and the royalty provisions of the licenses were revised to provide for export sales.On July 17, 1936, Laundri-Matic, acting pursuant to the consent of all its stockholders, sold, assigned, and transferred to petitioner Don O. Scott, in consideration for the surrender by him of all his 12 shares of stock in said corporation, a 12 per cent interest in all the royalties which would thereafter be payable by Hydraulic pursuant to its above-mentioned patent license agreement with Laundri-Matic of April 23, 1935, as amended.  The instrument by which this assignment was effected was as follows:Know All Men By These Presents that whereas, The Laundri-Matic Corporation, a New York 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*125  corporation, dated April 23, 1935, and supplements, modifications, and additions thereto; andWhereas, 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; andWhereas, DON O. SCOTT is desirous of purchasing a twelve per cent (12%) 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; andWhereas, The Laundri-Matic Corporation is desirous of selling a twelve per cent (12%) interest in and to said royalties to the said DON O. SCOTT.Now, Therefore, 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 DON O. SCOTT, his heirs, assigns and legal representatives forever, twelve per cent (12%) of all royalties accruing or paid after the date hereof, by Hydraulic*126  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 twelve per cent (12%) of said royalties in the future, directly to said DON O. SCOTT, his heirs, assigns, or legal representatives.In Witness Whereof, 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 Laundri-Matic CorporationBy (Signed) Arthur A. Berard[Corporate Seal]*873  CONSENT OF STOCKHOLDERSWe, 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.NameNo. of shares/s/ D. O. Scott12/s/ Arthur A. Berard24/s/ Rex Earl Bassett, Jr26/s/ J. C. Rowland12/s/ John W. Chamberlin26On the same date, Laundri-Matic made similar assignments of additional interests in said royalty payments to*127  other stockholders. Thereafter, and at all times here material, Laundri-Matic continued its corporate existence, and had outstanding such shares of its stock as were not so surrendered -- none of which was held by either of the present petitioners.  1*128  Don O. Scott continued to hold his 12 per cent interest in the royalties due under said Laundri-Matic agreement of April 23, 1935, as amended, from July 17, 1936, to November 1, 1940.  During this period and on about August 10, 1936, Hydraulic entered into an agreement with Bendix Home Appliances, Inc., a Delaware corporation (herein called Bendix), under which it granted to Bendix, its successors, or assigns, an exclusive and divisible license to manufacture, use, and sell in the United States and all foreign countries, and to export therefrom, all devices that Hydraulic had, under its agreement with Laundri-Matic of April 23, 1935, as amended, been licensed to make, use, and sell for the duration of such license; and Bendix assumed the obligation of Hydraulic to make royalty payments under said Laundri-Matic agreement.Also during the period that Don O. Scott held his interest in the royalty payments, and under date of November 13, 1937, Bendix entered into an agreement with Rex Earl Bassett, Jr., and John W. Chamberlin (herein called the November 1937 agreement), under which, so far as here material, said individuals granted to Bendix an exclusive and divisible license to make, *129  use, and sell domestic laundry machines, under "all inventions and patents and patent applications *874  now or hereafter owned or controlled by them or either of them"; and Bendix agreed to pay to said individuals jointly, until the expiration of the last of the patents so licensed, a royalty of 25 cents (to be reduced to 12 1/2 cents, if use of the patents also required a license from a third party), on each domestic laundry machine sold by it or its sublicensees, irrespective of whether such machine embodied any of said inventions, on which Bendix was not obligated to pay royalties under said Laundri-Matic agreement of April 23, 1935, as amended.On November 1, 1940, Don O. Scott transferred to his wife, Anne B. Scott, by gift, all of his said 12 per cent interest in the royalties to be paid under the above-mentioned Laundri-Matic agreement of April 23, 1935, as amended.  The evidence does not disclose the adjusted basis, if any, of said interest in the hands of Anne B. Scott, either immediately following the transfer or on any subsequent date.In 1949, controversies arose among Bendix and two groups of individuals who claimed additional royalties in respect of certain *130  laundry machines which Bendix and one of its sublicensees were manufacturing. These controversies involved not only a three-way dispute as to the scope of the Bassett patent (U. S.Patent No. 2,225,407, issued to Laundri-Matic in 1940), in respect of which Bendix had, as aforesaid, been licensed to manufacture and sell certain washing machines; but they also involved other disputes between the two groups of individuals.  The nature of these disputes was as follows:(1) One group of the individuals (called the Laundri-Matic Participants), which included the petitioner Anne B. Scott, had, by assignments or otherwise, acquired interests in the royalties to be paid under the license agreement between Laundri-Matic and Hydraulic of April 23, 1935, as amended; and Bendix had assumed the payment of royalties under that agreement.  This group contended that the Bassett patent that was licensed under said agreement, not only covered certain "tumble action" washers which Bendix was manufacturing and on which it was paying royalties to such group; but that it also covered two other types of washers on which royalties were not being paid, namely: Rand-type washers which Bendix had been manufacturing*131  since about 1949, and Westinghouse-type washers which WestinghouseElectric Corporation had been manufacturing since about 1940 under a sublicense obtained from Bendix.  This group claimed the right to receive additional royalties from Bendix, at the rate of 50 cents per machine, on each of these Rand-type and Westinghouse-type washers. But Bendix denied that either of these types of washers was covered by the Bassett patent.(2) The other group of individuals (called the November 1937 Participants), of which Anne B. Scott was not one, claimed the *875  right to receive royalties from Bendix, as assignees or otherwise, under the agreement of November 13, 1937, between Bendix, Bassett, and Chamberlin, whereunder Bendix had agreed to pay royalties at the rate of 25 cents per machine, on each laundry machine sold by it or its sublicensees, in respect of which it was not obligated to pay royalties under the Laundri-Matic agreement of April 23, 1935, as amended.  This group contended that the above-mentioned Rand-type and Westinghouse-type washers were not covered by the Bassett patent; that, for such reason, Bendix was not obligated to pay royalties on such washers to the Laundri-Matic*132  Participants; but that it was obligated to pay royalties to them on such washers at the rate of 25 cents per machine. Bendix resisted this claim.(3) Certain members of the Laundri-Matic Participants were also members of the November 1937 Participants; and these presented royalty claims, in the alternative, under both the 1935 and 1937 agreements.(4) Other members of the Laundri-Matic Participants contended that the agreement of November 13, 1937, was made illegally by Bassett and Chamberlin while they were officers of Laundri-Matic; and that all royalties payable by Bendix under such 1937 agreement belonged equitably to the Laundri-Matic Participants.As the result of these controversies, certain of the individual claimants, not including Anne B. Scott, filed a suit against Bendix on September 15, 1949, in the District Court of the United States for the Northern District of Indiana, in which they made claim for royalties of $ 7,500 in respect of the Rand-type washers, and for royalties of $ 36,000 in respect of the Westinghouse-type washers, together with interest on both amounts.On October 26, 1949, Bendix filed an interpleader action in the District Court of the United States*133  for the Southern District of New York, against the Laundri-Matic Corporation, all of the Laundri-Matic Participants including Anne B. Scott, and all of the November 1937 Participants.  In this proceeding, Bendix alleged that Anne B. Scott and others had likewise threatened to file suits against it for recovery of royalties on the Rand-type and Westinghouse-type washers; that the interests of the Laundri-Matic Participants were adverse to those of the November 1937 Participants, with the result that Bendix was faced with royalty claims in respect of said types of washers, of 50 cents per machine by one group and 25 cents per machine by the other group; that, by reason of the large numbers of such washers already manufactured and expected to be manufactured, Bendix was in jeopardy of maximum liabilities totaling $ 108,750; and it therefore prayed for a declaration of its rights, obligations, and legal relations.*876  On about December 18, 1950, while these suits and controversies were pending, Bendix sold all its assets and properties to Avco Manufacturing Corporation, a Delaware corporation (herein called Avco); and Avco became the assignee, not only of the above-mentioned Laundri-Matic*134  agreement of April 23, 1935, as amended, but also of the above-mentioned agreement of November 13, 1937.  In this transaction, Avco assumed payment of all outstanding obligations of Bendix, including payment of all royalties payable under each of the above agreements; and Bendix was then dissolved.  Thereafter, Avco continued to conduct and operate the business of manufacturing and selling washing machines, formerly carried on by Bendix, through one of its divisions known as Bendix Home Appliances Division, Avco Manufacturing Corporation.On January 3, 1950, the Chamberlin patent expired.  But the Bassett patent was not due to expire until December 17, 1957; and the last of the patents licensed under the agreement of November 13, 1937, would continue in force until about November 11, 1964.After Avco had so acquired the rights and interests of Bendix, a series of conferences was had between Avco's representatives and representatives of the Laundri-Matic Participants and the November 1937 Participants, with a view to settling the above-mentioned lawsuits and controversies.  Several plans were considered; but Avco insisted that any settlement arranged would have to dispose of all the*135  pending suits and controversies, and not be merely a piecemeal agreement with particular claimants.  In the meantime, Avco accrued an estimated royalty of 25 cents on each Rand-type washer which it sold, against the time when some payment of royalties would have to be made.On about May 1, 1951, all of the above-mentioned legal suits and controversies were compromised and settled through a written agreement executed, as of said date, by the following parties: Avco Manufacturing Corporation; The Laundri-Matic Corporation; Chamberlin Bassett Research Corporation (an Indiana corporation which claimed to be a successor in interest of Rex Earl Bassett, Jr., and John W. Chamberlin to certain rights of these individuals in the November 13, 1937, agreement); all of the Laundri-Matic Participants, including petitioner Anne B. Scott and 11 other individuals; and all of the November 1937 Participants, which included 6 individuals.  The agreement, after reviewing the pending suits and controversies and the respective contentions of the several parties, stated that all parties were desirous of resolving the various controversies between them; and it then set forth the terms of the settlement which, *136  so far as here material, were in substance as follows:(1) It was agreed that all of the several patent license agreements involved in the controversies would, except to the extent specifically *877  amended or modified in the settlement, be continued in accordance with their terms.(2) The Laundri-Matic Participants, as such, acknowledged that they had no right, title, or interest in or to any patents or patent rights acquired or used by Bendix or Avco or under which these corporations were licensed, except the Chamberlin patent (then expired) and the Bassett patent.(3) Avco agreed that it would continue to pay to the Laundri-Matic Participants only, a royalty of 50 cents per machine on each tumble-action washer sold prior to December 17, 1957, which was the expiration date of the Bassett patent. (The payment of this royalty had never been in dispute.)(4) Avco also agreed to pay the following additional royalties, which would be divided equally between the Laundri-Matic Participants and the November 1937 Participants: 25 cents per machine, on each tumble-action washer manufactured in the United States and sold subsequent to the expiration of the Bassett patent and on or prior*137  to June 27, 1961; and also on each such washer manufactured in Canada and sold after March 17, 1959, and prior to June 27, 1961; 25 cents per machine, on each Rand-type washer which had been sold by Bendix or Avco prior to the settlement; and also on each Rand-type or any other type automatic washer, except tumble-action washers, sold subsequent to the settlement and prior to June 27, 1961; 12 1/2 cents per machine, on each Westinghouse-type washer which had been sold by Westinghouse from June 28, 1940, to October 26, 1949; and 25 cents per machine, on each such washer which had been sold between October 26, 1949, and the time of the settlement; and also 25 cents per machine on each such washer which might be sold subsequent to the settlement -- provided, however, that such royalties would be payable only if Avco issued sublicenses to Westinghouse under its existing license agreements.(5) The Laundri-Matic Participants and the November 1937 Participants agreed to accept the above-mentioned royalty payments in full satisfaction of all their claims; and they agreed also to hold Bendix, Avco, and Westinghouse harmless from any claim of patent infringement.(6) Royalties becoming payable*138  in respect of sales made subsequent to the settlement would be paid monthly to the Participants in their respective agreed percentages; and Avco agreed to keep records of its sales, for inspection by representatives of the two groups of Participants.(7) From and after June 27, 1961, all obligations of Bendix or Avco to pay royalties either to the Laundri-Matic Participants, as such, or to the November 1937 Participants, as such, would terminate.(8) All pending suits and litigation would be discontinued.*878  (9) Except as set forth in the settlement, each party released and forever discharged the others from all claims, rights, and causes of action, involved in the pending suits and controversies.There was no provision in the settlement agreement for any sale, assignment, or transfer to Avco of any patent, patent application, invention, license, or other property.During the year 1951, petitioner Anne B. Scott received payments from Avco as follows:Prior to May 1, 1951:On tumble-type washers$ 3,338.28After May 1, 1951:On tumble-type washers$ 4,194.01On Rand-type washers which had been sold by Bendixor Avco prior to the settlement7,188.70On Rand-type washers and other than tumble-typewashers sold after the settlement1,360.81On Westinghouse-type washers which had been soldprior to the settlement7,777.87On Westinghouse-type washers sold subsequent tothe settlement1,883.8722,405.26Total$ 25,743.54*139  Avco charged all of the foregoing payments to operating expense in the same manner as it handled all royalty payments made prior to the settlement. It regarded itself, both before and after the settlement, to be a licensee under the Laundri-Matic agreement of April 23, 1935, as amended, and under the agreement of November 13, 1937.The petitioner Anne B. Scott, on the joint income tax return filed by her and her husband for the year 1951, reported $ 4,153.98 of said payments from Avco, as ordinary income from royalties received under the Laundri-Matic agreement of April 23, 1935, as amended; and she reported the balance of said payments from Avco, in the amount of $ 21,589.56, as long-term capital gain from the sale of an interest in patents.The respondent, in his notice of deficiency, determined that said amount of $ 21,589.56 was taxable as ordinary income, and not as capital gain.The petitioner Anne B. Scott did not, by the agreement of May 1, 1951, make any sale or exchange to or with Avco, of any interest in any patent; and none of the payments which she received from said corporation pursuant to such agreement was gain from the sale or exchange of a capital asset.OPINION. *140  Notwithstanding the numerous and complicated facts here presented, which are necessary to show the nature of the various claims and controversies settled with Avco Manufacturing *879  Corporation in the agreement of May 1, 1951, the issue for decision is relatively simple.  It is: Did petitioner Anne B. Scott, by her participation in said settlement agreement, sell or exchange any interest in a patent, or any interest in the contract right, which she had acquired by assignment from her husband, to receive "royalty" payments under the Laundri-Matic license agreement of 1935?  The answer to this question will determine whether the payments which she received from Avco subsequent to such settlement qualify as "long-term capital gain," within the meaning of section 117 of the Internal Revenue Code (1939).  2*141  It is our opinion that this question should be answered in the negative.  We have concluded from an examination of all the evidence, that Anne B. Scott, immediately prior to the settlement agreement of May 1, 1951, did not have either title or a proprietary interest in any patent, but only a contract right to receive 12 per cent of such "royalty" payments as might thereafter accrue and be paid under a certain intercorporate patent license agreement; and that she did not, by said settlement, sell or exchange any interest in a patent, or any interest in her contract right to receive such "royalty" payments.The situation, in brief, is this: Don O. Scott, in the year 1936, sold, assigned, and surrendered to the Laundri-Matic Corporation, all of his 12 shares of stock in that corporation; and he received, in substitution, a new kind of property interest -- a chose in action, a contract right to receive 12 per cent of such "royalty" payments as might thereafter accrue and be paid, under a certain intercorporate patent license agreement (called the Laundri-Matic agreement of April 23, 1935), for the manufacture and sale of domestic washing machines. The instrument of transfer to Don O. *142  Scott, which is set forth in our Findings of Fact, shows the nature of the interest which he so acquired, to wit: "* * * twelve per cent (12%) of all royalties accruing or paid after the date hereof, by Hydraulic Brake Company under and pursuant to the license agreement between The Laundri-Matic Corporation and Hydraulic Brake Company, dated April 23, 1935 * * *." The instrument did not assign or transfer any title or proprietary interest in any patent or patent application.  And after it was delivered, Laundri-Matic continued its corporate existence, without Don O. Scott being a stockholder thereof.On November 1, 1940, Don O. Scott transferred to his wife, Anne B. Scott, by gift, all of his said contract right to receive "royalty" payments.  *880  In the meantime, the obligation of Hydraulic to make such payments had been assumed by Bendix Home Appliances, Inc.; and later it was assumed by Avco Manufacturing Corporation which had become the exclusive licensee of all patents covered by said Laundri-Matic agreement.The contract right to receive "royalty" payments, which Anne B. Scott thus acquired by assignment, was income-producing property. Franklin A. Reece, 24 T. C. 187,*143  affd. (C. A. 1) 233 F. 2d 30. So long as she retained it and received the payments which flowed therefrom, these payments were taxable to her as ordinary income; because they were not the proceeds of any sale or exchange which she had made in acquiring the contract right, and there is no contention or evidence that any portion of the payments represented a return of capital.  Cf.  Lewis N. Cotlow, 22 T. C. 1019, affd. (C. A. 2) 228 F. 2d 186; Joseph A. Guthrie, 42 B. T. A. 696. Whether such payments would have been taxable in like manner to her predecessors in interest, who had acquired their rights under other circumstances, is a question that is not before us.On about May 1, 1951, Anne B. Scott, together with 17 other individuals and 2 corporations, entered into an agreement with Avco Manufacturing Corporation, under which they compromised and settled various lawsuits and controversies respecting royalty payments to be made by Avco under its existing license agreements.  The controversies reflected a three-way dispute between Avco and two adverse groups of royalty *144  claimants.  The effect of the settlement was that, (1) the rate of royalty to be paid by Avco on certain machines, for both past and future years, was compromised and finally determined; (2) the identity of the persons who would receive the royalties was determined by an agreement, that the royalties in dispute would be split equally between the two adverse groups of claimants, while certain undisputed royalties would continue to be paid only to the Laundri-Matic Participants; and (3) each of the parties to the settlement would release and discharge the others from all preexisting claims.In such settlement, Avco did not purchase or acquire any new interest in any patent, invention, or license; and Anne B. Scott did not sell or exchange any interest in any patent. Indeed, she had no title or proprietary interest in any patent. Also, she did not sell or exchange her contract right to receive "royalty" payments under the Laundri-Matic agreement; for all payments made to her pursuant to the settlement were made in recognition of her continued retention of such contract right.If the additional royalties which Anne B. Scott claimed under her contract right had been paid by Avco voluntarily, *145  and without the *881  controversy, they would have been taxable to her as ordinary income, under the authorities above cited.  The fact that they were paid (in reduced amount and over a somewhat different period) pursuant to a settlement of the controversy, does not change their character.  A compromise of indebtedness is not "a sale or exchange," within the meaning of section 117 of the 1939 Code.  Cf.  Hale v. Helvering, (C. A., D. C.) 85 F. 2d 819, affirming 32 B. T. A. 356; West Coast Securities Co., 14 T. C. 947, 961. In the absence of a sale or exchange, an essential condition to the application of said statute is not met, and the benefits of capital gains treatment are not available.All of the amount of $ 21,589.56 here involved, which petitioner Anne B. Scott received from Avco Manufacturing Corporation in the year 1951, is taxable as ordinary income.Decision will be entered for the respondent.  Footnotes1. The stipulation respecting such assignments of royalty interests to stockholders is inconsistent.  It states that "all royalties" accruing or paid thereafter were assigned to the stockholders, "proportional to the shares of each stockholder turned into the Corporation"; but it also states 98 per cent of the outstanding shares were so exchanged, and that 2 per cent of the stock was left outstanding.In an amicus curiae brief filed on behalf of John W. Chamberlin and his wife (Chamberlin was one of the stockholders at the time), it is stated that the stipulation is misleading; that, actually, only an 82 per cent interest in the royalty payments was assigned on July 17, 1936; and that on December 4, 1937, an additional 12 per cent interest was assigned pursuant to action taken at a meeting of the stockholders on that date.For present purposes, we accept the facts as stipulated.↩2. SEC. 117.  CAPITAL GAINS AND LOSSES.(a) Definitions.  -- As used in this chapter -- * * * *(4) Long-term capital gain. -- The term "long-term capital gain" means gain from the sale or exchange of a capital asset held for more than 6 months, if and to the extent such gain is taken into account in computing net income;↩