Fouche v. Comm'r

G. R. Fouche, Petitioner, v. Commissioner of Internal Revenue, Respondent

Fouche v. Comm'r

Docket No. 5724

United States Tax Court

6 T.C. 462; 1946 U.S. Tax Ct. LEXIS 265; 68 U.S.P.Q. (BNA) 420;

March 14, 1946, Promulgated

---

Decision will be entered under Rule 50.

1. In August 1933 petitioner entered into two agreements to purchase certain stock in a corporation and certain rights in a patent and trade name from the individual who owned them. He was without sufficient funds and executed his nonnegotiable note for the consideration named. In October 1933 petitioner entered into a third contract with the same individual, agreeing to pay her a royalty in exchange for her agreement to cancel the note, deliver to him forthwith the stock, to refrain from competition, and to act in an advisory capacity. The corporation approved this agreement. In November 1933 petitioner entered into an agreement with the corporation whereby the corporation agreed to pay petitioner certain royalties for the right to manufacture and sell the garments covered by the patent. On the same day petitioner assigned the November contract as collateral security to the individual with whom he had entered into the three previous contracts. In the taxable year 1939 the corporation paid directly to the individual the royalties provided in the contract of November 9, 1933, which had been assigned to her as collateral security. Held, petitioner constructively received the royalties due him under the contract and these royalties are gross income to petitioner in the taxable year.

2. In the same year that petitioner constructively received these royalties they were paid to the owner of the patent and trade-mark under the contract which petitioner had with her dated October 21, 1933. Held, under the facts proved, two-thirds of such payments were in payment of capital assets and are not deductible by petitioner. One-third of such payments were made for advisory services rendered by the owner of the patent and trade-mark under the terms of her contract and are deductible by petitioner either as business expenses or as nonbusiness expenses incurred in the production of income.

3. The royalties which petitioner constructively received in the taxable year were as a result of his contract entered into with the corporation November 9, 1933, and petitioner has proved no cost basis for such contract. Held, petitioner is not entitled to any deduction as depreciation for the exhaustion of said contract.

F. W. Adams, Esq., for the petitioner.

Carroll Walker, Esq., for the respondent.

Black, Judge.

---

BLACK

This proceeding involves a deficiency in income tax for the calendar year 1939 in the amount of $ 1,316.78. The deficiency is the result of a single addition of $ 5,908.05 to income which the respondent, in a statement attached to the deficiency notice, explained as follows:

It is held that royalties in the amount of $ 5,908.05 payable to you by The Stayform Company during the taxable year under the terms of a contract entered into between you and The Stayform Company under date of November 9, 1933, were constructively received by you and constitute taxable income to you under the provisions of Section 22 (a) of the Internal Revenue Code.

By appropriate assignments of error petitioner contests this adjustment and alleges in the alternative that the respondent "erred in not allowing an offsetting deduction in the amount of $ 5,908.05 to petitioner for the taxable year in question."

FINDINGS OF FACT.

Many of the facts have been stipulated and these are found as stipulated.

Petitioner is an individual and resides at DesPlaines, Illinois. He filed his income tax return for the calendar year 1939 with the collector for the first district of Illinois at Chicago. The return was prepared on the accrual basis.

On October 5, 1926, letters patent were issued to Rose Hanskat, sometimes hereinafter referred to as Hanskat, on a woman's foundation garment combining the functions of a brassiere and a stayless hip reducing corset. The name "Rose Hanskat's Stayform" was registered as a trade-mark with the United States Patent Office by Rose Hanskat on April 27, 1926, while the application for the patent was pending.

Prior to June 22, 1927, Hanskat conducted her business of selling women's foundation garments from house to house as a sole proprietorship. On June 22, 1927, the Stayform Co. (hereinafter sometimes referred to as the company) was chartered as a corporation with a capital stock of 250 shares having a par value of $ 100 per share; and Hanskat exchanged her business (exclusive of patents, trade-marks and rights thereunder) for all of the capital stock. On March 1, 1930, the capital stock of the company was increased to 20,000 shares of no par value common stock.

On May 19, 1927, before the company was chartered, an agreement was entered into by and between Rose Hanskat, party of the first part, and her son, E. J. Hanskat, acting for the company, party of the second part. The material provisions of the agreement were as follows:

The party of the first part grants the privileges to the party of the second part to use the name Stayform in its corporate name; to enter into contracts for the manufacture of Rose Hanskat's Stayform in accordance with the patented designs owned by the party of the first part; to sell the foundation garment known as Rose Hanskat's Stayform at wholesale and retail, and to have the exclusive right to sell Rose Hanskat's Stayform for a period of thirteen years and seven months beginning as of June 1st, 1927 and terminating as of December 31st, 1940, subject to the following conditions:

1. The right to sell and enter into contracts for the manufacture of Rose Hanskat's Stayform, and to use the name Stayform in the corporate name of The Stayform Company, and to use the trade mark, Rose Hanskat's Stayform, shall cease immediately in case the party of the second part is adjudged bankrupt at any time.

2. It is understood and agreed that the party of the second part has absolutely no rights or interests in the patents that are owned by the party of the first part on the Foundation garment known as Rose Hanskat's Stayform.

3. It is understood and agreed that the party of the second part has absolutely no rights or interests in the copyright of the trademark known as Rose Hanskat's Stayform which is owned by the party of the first part.

4. It is understood and agreed that the party of the second part has absolutely no rights or interests in the copyright name, Stayform, that is owned by the party of the first part.

In April 1930 petitioner was employed by the company as sales manager. Towards the end of the first year he was given 100 shares of stock as a bonus and was made vice president and general manager of the company. Later, differences of opinion over management policies arose between petitioner and Hanskat, and petitioner resigned on or about May 15, 1932.

About a year later petitioner was induced to contact again Hanskat relative to the financial difficulties of the company. The two individuals had several conferences. At one of these conferences Hanskat said to petitioner "Why don't you buy the business; why don't you take it over? I am tired of the business and I would like to get out." Petitioner inquired what there was to sell and Hanskat replied that she had 8,000 some odd shares of the stock of the company and "you would also have the right to go on and see what you could do with this product." Petitioner answered and said, "There are two reasons why I don't feel that that would interest me, Mrs. Hanskat, first, because the stock has no value; secondly, I haven't got the money." Mrs. Hanskat said, "Well, I know something of your ability. I know something about what you did with the company before. Would you buy it if you had the money?" Petitioner answered by saying "Well, Mrs. Hanskat, I would buy the right to manufacture Stayform or the right to sell it but that is all you have to sell. However, there is no need of considering because I haven't got $ 25,000." Mrs. Hanskat then said, "Well, if I were to sell you these rights for $ 25,000 and take your note for it would you then buy it?" Petitioner replied that he would have to think that over.

On Friday August 18, 1933, Hanskat informed petitioner that three creditors had prepared a petition in involuntary bankruptcy and were going to present it the following Monday. She pled with petitioner to do something to save the name of Stayform. The following day, August 19, 1933, Hanskat as first party and petitioner as second party entered into two written contracts.

The first contract dated August 19, 1933, recited that the first party was then president and a director of the company and owner of 8,762.5 out of a total of 10,246 shares of stock of the company; that the first party was desirous of transferring and selling the stock to the second party and of relinquishing active control and participation in the business of the company; and that the parties mutually agreed as follows (only the provisions material to the issues are herein stated):

(1) That the first party shall transfer into the name of the party of the second part 8,762 1/2 shares of the common stock of The Stayform Company in consideration of the execution of a collateral note of even date herewith in the sum of $ 25,000 due 5 years from date, with interest at 6% per annum payable monthly, the said note to be non-negotiable and to be expressly subject to the terms and conditions of this agreement.

(2) The party of the second part, upon the transfer of the aforedescribed shares of stock into his name, agrees to deliver to the escrow agent, as hereinafter described, a collateral note in the sum of $ 25,000 due 5 years from date, as described in Paragraph 1, and to deliver to the escrow agent as hereinafter described, as collateral security for the said note, certificate or certificates of stock in The Stayform Company, aggregating 8,762 1/2 shares, and properly endorsed.

(3) Upon the delivery of the aforedescribed collateral note with the aforedescribed certificate or certificates of stock to the first party, then the party of the first part will immediately resign as President and a member of the Board of Directors of The Stayform Company.

* * * *

(5) It is further agreed by the parties hereto that in case of default in payment of interest or principal on the collateral note hereinbefore described, for a period of ninety (90) days, that the sole and only remedy of the party of the first part shall be her right to transfer the certificate or certificates of stock in The Stayform Company, held by the party of the first part as collateral security, into her name, to be and remain as her sole and separate property; and that in no event shall the party of the second part be unconditionally bound to pay the said sum of $ 25,000 with interest, as hereinabove provided for.

* * * *

(8) It is further agreed by the parties hereto that the party of the second part, upon assuming control and management of The Stayform Company, will cause the said company to grant and give unto the party of the first part a franchise, in the usual terms, to sell the foundation garment known as Rose Hanskat's Stayform, at retail, in Cook County, Illinois.

(9) As a further consideration for the execution of this contract by the party of the second part, party of the first part hereby affirms and ratifies a certain agreement between the party of the first part and The Stayform Company, dated May 19, 1927 * * *

(10) It is further agreed by the parties hereto that at the expiration of the rights granted to The Stayform Company under the contract between the party of the first part and The Stayform Company dated May 19, 1927, that the party of the first part will grant to the party of the second part the exclusive right to use the copyrighted trademark and tradename "Stayform" for a period of twenty-five (25) years from and after the expiration of the contract set forth in Paragraph 9, and that the party of the first part will further grant unto the party of the second part the exclusive right to manufacture and sell Rose Hanskat's Stayform after the expiration of the contract set forth in Paragraph 9, for such further time as the party of the first part may secure an extension of patents now owned by her from the United States.

The second contract dated August 19, 1933, recited "That Whereas, the parties hereto have this day entered into a certain contract for the sale and purchase of 8,762.5 shares of the common stock of" the company; that whereas the first party is the owner and holder in her individual right of a copyright to the trade name and trade-mark "Stayform" and of certain patents in connection therewith; that whereas the right and privilege of using such copyright and patents are now held by the company; and that in consideration of the party of the second part undertaking the operation of the said company and relieving the party of the first part from further active participation in the operation of the said company, it is mutually agreed as follows (only the provisions material to the issues are herein stated):

(1) That in case of the reorganization of The Stayform Company at any time within five (5) years from the date hereof, which shall result in the enforced withdrawal of the party of the second part from the operation of the business of the said The Stayform Company, or in case the said The Stayform Company shall be adjudicated a bankrupt under the laws of the United States, or of the State of Illinois, within said period of time, that the party of the first part will grand [sic] unto the party of the second part the exclusive right to use the copyrighted trademark and tradename "Stayform" for a period of twenty-five (25) years from and after the happening of any of the aforedescribed events.

(2) That the party of the first part, in case of the happening of any of the contingencies mentioned in Paragraph 1, will grant unto the party of the second part the exclusive right and license to manufacture and sell Rose Hanskat's Stayform in accordance with the patents owned by the party of the first part, and such grant or license shall be for the unexpired term of the present patents and for any extension thereof which the party of the first part may be granted by the United States.

* * * *

This agreement is made as a successor to and ancillary to the contract of even date herewith, hereinbefore described.

Pursuant to the two contracts dated August 19, 1933, petitioner on that date executed and delivered his nonnegotiable note to Hanskat in the amount of $ 25,000.

Petitioner, upon assuming the management and control of the company on August 19, 1933, induced the three creditors above mentioned not to file their petition for involuntary bankruptcy. At that time the liabilities of the company exceeded its tangible assets by at least $ 10,000.

On October 21, 1933, petitioner as first party (note reverse positions of parties) and Hanskat as second party entered into an agreement, which was approved and agreed to by the company, providing in part as follows:

That Whereas, G. R. Fouche purchased 8,762 1/2 shares of the capital stock of The Stayform Company from Rose Hanskat on August 19, 1933, and paid for the same with his note in the sum of * * * ($ 25,000.00) * * * payable five (5) years after date, and pledged the said stock as security therefor, and now offers to pay said note as follows: By giving Rose Hanskat a contract to pay her ten cents per garment on the gross sales of The Stayform Company, or any other business G. R. Fouche is engaged in dealing in foundation garments, or its successors or assigns, for a period of twenty-five (25) years from November 1, 1933, and guarantees the amount shall not be less than * * * ($ 400.00) * * * per month, payable monthly, with a prior lien on the profits of the Stevens Building Shop as security if G. R. Fouche becomes in default for forty-five days; and G. R. Fouche further agrees to take over the business, furniture, fixtures, etc., located in Rooms 1109-10 Stevens Building, and Rose Hanskat free and harmless from any and all liability in connection therewith after November 1, 1933, in consideration of Rose Hanskat cancelling said note of G. R. Fouche and delivering the lease of the premises, and possession of the business in the Stevens Building to him November 1, 1933, and delivering the stock certificate for 8,762 1/2 shares of the aforesaid stock to G. R. Fouche, and her agreeing to refrain from engaging in said or similar lines of business in Chicago or elsewhere during the time he pays her the ten cents per garment of the gross sales of The Stayform Company, or its successors or assigns, which amount shall not be less than * * * ($ 400.00) * * * per month, and the further agreement that Rose Hanskat may act in an advisory capacity during the life of this agreement, and practice on any new improvement, which new improvement, if any, shall accrue to G. R. Fouche: Rose Hanskat shall have access to the sales books and records, at any time during business hours, for verification of sales.

It is further agreed that if G. R. Fouche defaults in the monthly payments for a period of ninety (90) days, then all the rights of Rose Hanskat shall revive any and all contracts as made by her with The Stayform Company or G. R. Fouche.

G. R. Fouche agrees to retain, at all times, fifty-one (51%) percent of the stock of The Stayform Company * * *.

The said note is cancelled and the shares of stock are delivered herewith.

This contract of October 21, 1933, besides being signed by the parties thereto, Hanskat and petitioner, also bears the following notation thereon: "The Stayform Company hereby approves the foregoing agreement between G. R. Fouche and Rose Hanskat, and agrees thereto. The Stayform Company, By: G. R. Fouche, President."

On or about October 21, 1933, there was written in ink at the bottom of the above mentioned nonnegotiable note the following: "10/21/33 Paid as per contract of October 21, 1933 and stock delivered. [Signed] Rose Hanskat."

On November 9, 1933, the company as first party and petitioner as second party entered into an agreement the material provisions of which are as follows:

Whereas, the party of the first part, being desirous of securing the services of the party of the second part as President of The Stayform Company, and in consideration of the purchase by the party of the second part of a controlling interest in the party of the first part, the said interest being the stock formerly held by Rose Hanskat,

Now Therefore, it is mutually agreed as follows:

1. The party of the first part hereby assigns and sets over to the party of the second part all of its right, title and interest in and to the use of the patents, copyrights and trademarks which it acquired under the said contract dated May 19, 1927, and owned by Rose Hanskat, unto the party of the second part, and subject to all of the terms and conditions set forth in the said contract.

2. The party of the first part hereby agrees to pay to the party of the second part a royalty of ten cents per garment on the gross sales of The Stayform Company, or any other company in which the party of the second part may be engaged in dealing in foundation garments, or its successors or assigns, for a period of twenty-five (25) years from November 1, 1933, and guarantees the amount shall not be less than * * * ($ 400.00) * * * per month, payable monthly.

3. It is further agreed between the parties hereto that this agreement shall cease at once in case the party of the first part is adjudicated a bankrupt at any time hereafter; and it is expressly agreed and understood that the party of the first part has no right, title or interest in and to the copyright name "Stayform" nor in the patented foundation garments known as "Rose Hanskat's Stayform."

4. It is further agreed between the parties hereto that G. R. Fouche shall retain at all times fifty-one (51%) per cent of the stock in The Stayform Company, or any successor thereof, or any other business G. R. Fouche may form to deal in foundation garments during the life of this contract. This contract is executed by the parties hereto in part consideration of the benefits flowing hereto to the parties hereto, by reason of a certain contract made October 21, 1933 by and between G. R. Fouche and Rose Hanskat and approved by the party of the first part.

The contract dated November 9, 1933, was endorsed as follows:

I hereby assign my interests in the above contract to Rose Hanskat, insofar as the royalty payments are concerned as security for the payments of royalty by myself to Rose Hanskat as provided for in the contract between the undersigned and Rose Hanskat.

[Signed] G. R. Fouche

During the taxable year 1939 petitioner was president and general manager of the company and, together with his wife, owned or controlled all of the issued stock of such company. He also operated on his own account as an individual three retail outlets in Chicago for the sale of the products manufactured by the company. On his return for 1939 he reported gross sales from this source of over $ 50,000, which, after deducting cost of sales and expenses, resulted in a loss. He also owned and operated a business building.

During the period of sixty-two months from November 1, 1933, to December 31, 1938, inclusive, the company paid direct to Hanskat, pursuant to the contract dated November 9, 1933, and the assignment thereof by petitioner to Hanskat, the sum of $ 25,877.60, or an average of about $ 417.38 per month.

During the year 1939 and pursuant to the contract dated November 9, 1933, and the assignment thereof by petitioner to Hanskat, the company paid direct to Rose Hanskat the sum of $ 5,908.05. This amount was claimed and has been allowed as a deduction to the company in computing its net income for the year 1939.

Except for her actual expenses in connection with the rendition of services, no moneys were paid Rose Hanskat other than the amounts represented by 10 cents per garment as provided in the contract of October 21, 1933. During the year 1939 Hanskat rendered services of considerable value to the company and to petitioner. During the early part of the year she spent ten weeks in Chicago completely revising the patterns for the company. She later on spent two weeks in Chicago helping the company to write a fitting manual. Also, during the year she wrote many letters to the company and to petitioner from her home in Florida, tendering advice as to the improvement of the appearance of the garment and its fitting qualities and general utility. These services were rendered in accordance with the contract of October 21, 1933, between petitioner and Hanskat. The value of these services for the year 1939 was one-third of $ 5,908.05.

OPINION.

Petitioner contends that he did not actually or constructively receive any part of the amount of $ 5,908.05, and that, if it be deemed that any part of such amount constitutes additional income to him in 1939, then he is entitled to deduct an amount equivalent thereto as either (a) an ordinary and necessary business expense or (b) as an annual depreciation of a depreciable capital asset.

The respondent contends that royalties in the amount of $ 5,908.05 which were payable to petitioner by the company in 1939 under the terms of a contract entered into between petitioner and the company under date of November 9, 1933, were constructively received by petitioner and constituted income to him under the provisions of section 22 (a) of the Internal Revenue Code. We think the Commissioner must be sustained in this contention. Up to the date of the contract of November 9, 1933, the company had a right to manufacture and sell the Stayform garments without the payment of a royalty to anyone. This right extended from June 1, 1927, to December 31, 1940, by virtue of a contract which the company had with Hanskat, the owner of the patent and the trade-mark. By the contract of November 9, 1933, the company conveyed this contract right to petitioner for the considerations named in the contract and thereafter petitioner was not only the owner of the rights which he had acquired under the contracts with Hanskat on August 19 and October 21, 1933, but he was also the owner of the rights which the company acquired from Hanskat in June 1927.

In the contract dated November 9, 1933, the company expressly agreed "to pay to the party of the second part [petitioner] a royalty of ten cents per garment on the gross sales of The Stayform Company." Plainly these royalties would have been paid direct to petitioner in the taxable year except for the fact that petitioner had, prior to the taxable year, assigned the contract to Hanskat "as security for the payments of royalty by myself to Rose Hanskat as provided for in the contract between the undersigned and Rose Hanskat." The fact that under the foregoing assignment the royalties were paid direct to Hanskat rather than to petitioner does not make them any the less taxable to petitioner. The payments, when made by the company, were royalty expenses as to it, due to petitioner for the use of the patent and the trade-mark and the incidental right to the services of Hanskat in an advisory capacity, and they were deductible by the company as royalties paid.

The Commissioner has allowed the deduction to the company and we have no reason to assume that the deduction was not proper. The royalties under the contract were, as we have already said, payable to petitioner for the rights granted by him to the company under the contract of November 9, 1933. If such royalties had been paid to him direct they certainly would have been taxable to him as royalties received. They were not so paid to him because he was indebted to Hanskat under his contract of October 21, 1933, whereby his note for $ 25,000 was fully paid, the 8,762.5 shares of stock in Stayform were delivered to him, and other valuable rights were granted to him by said contract. These payments, made in 1939 by the company to Hanskat under the assignment of the contract of November 9, 1933, were payments for petitioner's benefit and represented income to him. To what extent, if any, such payments were taxable to Rose Hanskat we express no opinion. We do not have her case before us.

Petitioner strongly contends in his brief that at least many of the payments made to Hanskat in the taxable year were made to her in payment of her services to the company in an advisory capacity. We think the evidence does support the contention that Hanskat rendered valuable services to the company in an advisory capacity and we have found that the value of these services was one-third of the total of $ 5,908.05 which the company constructively paid to petitioner as royalties. We have already pointed out that so far as the company was concerned this amount was paid to petitioner as royalties. However, petitioner was obligated to pay over to Hanskat a like amount and this amount was to be paid by petitioner for a twofold purpose, to wit, payment for the purchase of capital assets and payment to Hanskat for her services in an advisory capacity in the use of the patent and trade-mark. The contract so provides. The deductibility of the one-third of $ 5,908.05 paid to Hanskat by petitioner as remuneration for her services in an advisory capacity, we shall now discuss.

Petitioner contends in the alternative that if we should hold that the $ 5,908.05 in question is taxable to him as constructively received, then he is entitled to an offsetting deduction of the entire amount as an ordinary and necessary business expense. We think this contention must be sustained as to one-third of the $ 5,908.05 in question.

The contracts of August 19 and October 21, 1933, between Hanskat and petitioner clearly covered the purchase and sale of capital assets and also the rendering of services by Hanskat in an advisory capacity to the company and to petitioner incidental to the use of the patent and trade-mark. Clearly her services in that respect were of considerable value, and we have so found. In 1939 the services which she rendered were principally to the company, yet it is also clear that it was because she was under contract with petitioner to do so, and he was compensated for it in the $ 5,908.05 royalties which he received under his contract of November 9, 1933. When, constructively, he passed this on to Hanskat, two-thirds of it was in part payment of capital assets and one-third in payment of services which Hanskat had rendered in an advisory capacity. This latter one-third is deductible by petitioner either as a business expense or as a nonbusiness expense incurred by him in the production of income. We so hold. The remaining two-thirds is not deductible as a business expense because it represents a capital expenditure.

Petitioner contends in the last place that if the Court should hold that he did constructively receive the income in question and is taxable upon it and is not entitled to an offsetting deduction of a like amount as a business expense, then he is entitled to deduct an amount equivalent to the amount received as depreciation of a capital asset acquired under his contract with Hanskat. In support of this contention petitioner cites Associated Patentees, Inc., 4 T.C. 979">4 T. C. 979. We think the instant case is clearly distinguishable from that case. In that case the taxpayer was the owner of several patents which it had acquired from four individuals under a contract obligating the taxpayer to pay them each year 80 percent of its income from licenses granted to others to use the patents. Under the contract the taxpayer paid to the four individuals the sum of $ 49,209.76 in the taxable year. We held that the expenditure of $ 49,209.76 by the taxpayer under the contract was a capital expenditure, that the taxpayer was entitled to recover by depreciation its total cost of the patents over the life thereof, and that, since such cost was not determinable until the close of the term when all of the value of the patents would pass and since the yearly payments were attributable to income of the year in which made, the "reasonable allowance" for depreciation provided by section 23 (1) of the Internal Revenue Code required the allowance of a deduction in each year equivalent to the payment made in that year.

We shall now discuss why we think the rule in the Associated Patentees, Inc., case, supra, is not applicable to the facts of the instant case. In the first place, petitioner did not acquire a patent from anyone. It is clear he owned no patent and it is not claimed that he did. The income which petitioner received as so-called royalties was because of his contract with the company dated November 9, 1933. For the considerations named in that contract the company conveyed to petitioner all the right which it already owned to manufacture and sell Stayform garments, which right continued on to 1940 without the payment of any royalties, and then in paragraph 2 of the contract agreed to pay to petitioner a royalty of 10 cents each on the sale of all Stayform garments for a period of 25 years, starting immediately. Clearly, the consideration which petitioner paid the company for this valuable contract by agreeing to serve as president of the company and agreeing that at all times he would retain 51 percent of the stock of the company would not furnish any basis for depreciation. At least we know of no law which would make such an arrangement the basis for a depreciation deduction. Now if it be argued that there was something in the contract dated October 21, 1933, between Hanskat and petitioner which might be the basis of depreciation, the parties having agreed in the contract of November 9, 1933, that it was executed in part because of the benefits flowing to the parties from the October 1933 contract, we still think we have no basis for granting such a deduction here. Under the October contract petitioner paid his note for $ 25,000 and secured immediate possession of 8,762.5 shares of stock of the company. Certainly the shares of stock which he unconditionally acquired by that contract are not subject to depreciation.

Another valuable right which petitioner acquired from Hanskat under the contract of August 19, 1933, was the exclusive right to use the copyrighted trade-mark and trade name "Stayform" for a period of 25 years from and after the expiration of the contract which Hanskat had already with the company. This right to use the trademark and trade name for a period of 25 years after 1940 was no doubt a very valuable right, but nothing was paid to petitioner under that right in 1939. That part of the contract will not begin to operate and to exhaust until 1941. If and when petitioner begins to receive income under his right received from Hanskat to the exclusive use of the trade name and trade-mark "Stayform" for 25 years after 1941, it will be soon enough to decide whether he will have the right to take depreciation for the exhaustion of that contract. We express no opinion as to that now.

Petitioner also insists in his brief that in the contract of October 21, 1933, Hanskat covenanted that she would not compete for a period of 25 years and that he is entitled to take depreciation on this contract not to compete. Petitioner cites B. T. Babbitt, Inc., 32 B. T. A. 693, and other cases on this point. In the Babbitt case, among other things, we said: "The decided cases are to the effect that the cost of eliminating competition is a capital asset. Where the restraint or elimination is for a definite and limited term the cost may be exhausted over such terms." (Citing cases.)

The principle of law governing such cases is clear, but petitioner has not furnished us with evidence upon which we can base the allowance of any such deduction. We have no evidence which would enable us to make any allocation of cost to this particular part of the contract. Therefore, we have made no attempt to make such an allocation. Petitioner's contention in this respect must fail for lack of evidence to sustain it.

Decision will be entered under Rule 50.