Petitions for Review of Decision of the United States Board of Tax Appeals.
Before BUFFINGTON and THOMPSON, Circuit Judges, and MARIS, District Judge.
These are petitions by Hazeltine Corporation, petitioner below, and the Commissioner of Internal Revenue, respondent below, to review a decision of the Board of Tax Appeals determining a deficiency in the petitioner's income tax for the year 1930. For a proper understanding of the questions involved a full statement of the facts is required. They are that petitioner was incorporated January 29, 1924, for the primary purpose of taking over from Hazeltine Research Corporation certain patents, applications for patents and inventions relating to the radio art developed by Louis A. Hazeltine. Hazeltine was professor of electrical engineering at Stevens Institute of Technology and since 1915 had made a specialty of radio. Prior to 1923 the radio receivers on the market were not satisfactory because they were subject to squeals, howls, and whistles. Hazeltine devoted his time to perfecting a radio receiver which would eliminate these noises.
On August 7, 1919, he made application for his first patent, upon which subsequently was granted patent No. 1,450,080 entitled "Method and Electric Circuit Arrangement for Neutralizing Capacity Coupling." This disclosed his basic invention, which was further covered and the specific applications thereof protected by various other patents thereafter granted upon his subsequent applications. By neutralizing the tendency to feed back between the tubes through the means of condensers and other instrumentalities Hazeltine's invention prevented the undesirable oscillations and resulting noises. By simplicity of operation, ready dialing and stability, radio receivers thereby became usable by the public. This was a notable advance. Hazeltine named his arrangement the "Neutrodyne," and receivers embodying it became known as Neutrodyne receivers. It was put into successful operation in December, 1922.
On February 17, 1923, Hazeltine entered into a written contract with the Independent Radio Manufacturers, Inc. (herein referred to as I.R.M.). The stockholders of this corporation were a number of radio manufacturers interested in obtaining the right under the Hazeltine inventions to manufacture receivers including his "Neutrodyne" arrangement. The I.R.M. contract in substance provided, among other things, that the stock of I.R.M. should be owned only by persons engaged in the business of manufacturing and selling radios, that the licenses granted to I.R.M. should extend to its stockholding companies only when they were licensed by I.R.M. under its sublicensing power, that Hazeltine granted to I.R.M. an exclusive license to manufacture and sell radio receiving apparatus embodying the inventions set forth in his applications to the end of the terms for which the patents were granted and for the period of any renewals, and that the license granted should extend to all future applications and patents constituting improvements. I.R.M. agreed to pay certain royalties to Hazeltine and to collect certain royalties from its licensees. The agreement, while not transferable by I.R.M., was assignable by Hazeltine. On February 27, 1923, Hazeltine filed in the Patent Office three applications for registration of the trade-marks "Neutrodyne," "Neutroformer," and "Neutrodon," which were registered on August 21, 1923. On August 28, 1923, Hazeltine assigned to Hazeltine Research Corporation, which he had previously organized and of which he was the sole stockholder, patent No. 1,450,080, the various other patent applications, all reissues and extensions of those patents, certain "other improvements and inventions relating to 'Uni-Control of Radio Receivers' and improvements relating to the 'Disposition of Coils at an Incline to Prevent Magnetic Coupling There Between,'" the I.R.M. contract and his entire business and good will, including the trade-marks above mentioned.
During December, 1923, or January, 1924, one of the sublicensees of I.R.M. attempted to cut down on the rate of royalties, which necessitated legal proceedings. Hazeltine then requested Willis H. Taylor, Jr., his friend and patent counsel, to see what could be done toward capitalizing the inventions so that Hazeltine might get out of the commercial field and devote his time to research and professional work. Robert E. McConnell, an engineer and member of the investment firm of Foster, McConnell & Co., was a mutual friend of Taylor and Hazeltine. Negotiations were had with McConnell which matured into a contract on February 2, 1924. At this time also two radio inventors, the Dreyer brothers, were preparing to file an application for a patent on the "Means for Neutralizing Capacity Coupling." All of their rights in that invention had been acquired by Taylor. The application was filed on February 20, 1924, and resulted in a patent being granted June 5, 1928.
The contract dated February 2, 1924, was made between Hazeltine, Hazeltine Research Corporation, Taylor, and the firm of Foster, McConnell & Co. It provided that Hazeltine Corporation would be organized under Delaware law with 200,000 shares of no par value stock and three to eleven directors. Hazeltine, Taylor, and one Russ would be directors, but Foster, McConnell & Co. would nominate the balance of the board. On notice from that firm Hazeltine Research Corporation agreed to transfer to the new corporation the patents, applications, and trade-names set forth in an attached schedule relating to the Neutrodyne inventions (and also certain improvements in "Uni-Control" or Unit Control of broadcast receivers) that had been invented by Hazeltine, all agreements with I.R.M. and any business and good will of Hazeltine Research Corporation associated with the aforesaid assets. Hazeltine and Hazeltine Research Corporation agreed to assign rights to obtain foreign patents and to lend any assistance necessary to obtain the same.
Upon acquisition of this property by the new corporation 155,250 shares of its stock would be issued to Hazeltine Research Corporation and 14,750 shares to Taylor in consideration of the transfer by him of the Dreyer invention covering a small instrument (condenser) valuable in accomplishing the Hazeltine neutralization. Foster, McConnell & Co. were to subscribe for 5,000 shares at $10 per share and the balance of 25,000 shares would remain unissued until further order of the directors. It was further provided that Hazeltine Research Corporation should immediately transfer 135,000 shares of the stock to Foster, McConnell & Co. for $650,000 cash payable on delivery of the stock. Hazeltine and Hazeltine Research Corporation also gave that firm an option for one year to purchase 10,000 shares at $15 per share and Taylor gave the firm a similar option on 7,500 shares. Hazeltine contracted to assign any new inventions covering improvements on the inventions transferred or any alternate or substitute devices or parallel developments without further consideration. The new corporation would ratify an agreement of January 29, 1924, between Hazeltine and Harold M. Wheeler to employ Wheeler for two years.The contract was to be performed within five days after written notice by the firm to the other parties, but if notice was not given on or before March 1, 1924, the contract was void.
Hazeltine Corporation, the petitioner below, was the new corporation referred to in the contract and it had been organized on January 29, 1924. The first meeting of its board of directors was held February 15, 1924. At this meeting the contract was ratified. Hazeltine and Taylor then retired and the remaining directors determined pursuant to the Delaware statute that the value of the assets to be received for the 170,000 shares of stock was $3,500,000. Prior to this meeting Foster, McConnell & Co. had proceeded with the preparations for marketing the 140,000 shares of stock it was to receive. A syndicate had been organized and on February 11, 1924, public trading in petitioner's stock had begun on the New York Curb Exchange on a "when, as and if issued" basis.The firm had also organized H. N. Corporation, a trading corporation for members of the firm, and had assigned to it the firm's interest in the contract of February 2, 1924. Verbal notice of intent to proceed under the contract had been given by the firm to the other parties on or prior to February 11th and on February 15, 1924, H. N. Corporation, by written notice called for performance of the contract by February 20, 1924.
On February 19, 1924, Hazeltine Research Corporation executed a general assignment of the Neutrodyne patent, applications and trade-marks to petitioner, followed on February 20th by separate assignments of the specific patent applications, inventions and the I.R.M. contract. On the same day Taylor executed an assignment of the Dreyer invention.On February 19, 1924, Hazeltine Research Corporation executed an assignment of 135,000 shares of stock of petitioner to Foster, McConnell & Co. Stock certificates dated February 18, 1924, were prepared as follows:
T-1 Hazeltine Research Corporation 135,000 shares
T-2 Foster, McConnell & Company 5,000 shares
T-3 Hazeltine Research Corporation 20,250 shares