Opinion of the Court

breaking bottom and buckling sides of boiler room Stop Can cut at boiler room and float forward end but do not recommend Stop Consider vessel constructive total loss Stop Recommend stripping and abandoning Stop Please radio decision direct."

On April 22, 1921, the Secretary of the Navy replied to the above by radio, as follows:

"2022 refer your nineteenth April stop salvage period turn in salvaged material to commandant seventh district 0545."

On receipt of the above radiogram, plaintiff proceeded to strip the wrecked barge of its apparel and loaded the salvaged material, the result of the stripping, on the schooner Crosland, and delivered the same to defendant at Key West. This stripping of the barge's apparel and delivery at Key West is the basis for plaintiff's bill, referred to in Finding VIII, viz:

(c) Itemized account under contract of March 31, 1921, as amended by radiogram from Secretary of the Navy and received April 22, 1921, heretofore referred to in Finding VI---

$19, 832. 42 We find no direction or authority in the radiogram from the Secretary of the Navy, which the plaintiff received on April 22, 1921, referred to in Finding VI, authorizing or directing the plaintiff to proceed to strip said barge of its apparel.

In view of the fact that the salvage contract of March 31, supra, limited plaintiff's expense to $35,000 if unsuccessful, for which it presented a bill of over $34,000, and in view of the further fact that said contract limited the plaintiff's bonus and expense together to $50,000, if plaintiff succeeded in delivering the barge to the navy yard at Charleston, it was indeed a violent assumption on the part of plaintiff to assume that the radiogram of April 22 authorized it to proceed with the stripping of the wreck of apparel valued at $2,017.63 by competent appraisers, and to obligate the defendant to pay the further sum of $19,000, which sum added to plaintiff's bill submitted to the Navy Department, referred to in Finding VIII (b), would exceed the limit of $50,000 for both expense and bonus if successful, provided for in said contract of March 31.

Opinion of the Court

The radiogram was a direct and positive order to stop salvage. Prior to the date of the receipt of this radiogram, it does not appear that plaintiff had stripped or salvaged any of the ship's apparel. The stripping of the ship was a salvage service. Plaintiff had positive orders to "stop salvage." Salvage is defined as follows:

"A salvage service, in the view of the Court of Admiralty, may be described, sufficiently for practical purposes (c), as a service (d) which saves or helps to save maritime property-a vessel, its apparel, cargo, or wreck * * *"Page 2, The Law of Civil Salvage," Ld. Justice Kennedy.

66

Salvage, apart from life salvage, is by the maritime law of England confined to ship, apparel, and cargo, or what has formed part of these, and to freight earned by carriage of cargo. A similar rule seems to be laid down in a decision of the Supreme Court of the United States."-35 Cyc. 733.

Webster's Dictionary defines nautical "apparel" as follows:

"(5) Naut. The equipment of a ship, as masts, sails, rigging, anchors, guns, etc."

It is apparent from the above definitions of "salvage" and ship's "apparel" that plaintiff was not authorized by the radiogram which it received from the Secretary of the Navy on April 22, 1921, to proceed to strip the ship of its apparel or to further salvage the ship, other than to turn in the salvaged material already collected to the commandant of the seventh district. As to the order to turn in the salvaged material, it does not appear that plaintiff had stripped or salvaged any of the ship's apparel prior to the receipt of said radiogram.

Therefore, in our opinion, plaintiff's bill, (c) in Finding VIII, should be disallowed for the reason that the basis of the claim is founded on the stripping of the wreck, after the receipt of the radiogram ordering plaintiff to "stop salvage," at which time plaintiff had not salvaged any of the wrecked barge's apparel. Had plaintiff had on hand, at the time of the receipt of said radiogram, any of the ship's apparel which it had salvaged, it was authorized by said radiogram to deliver the salvaged material to the commandant of the seventh district. Had this been the case we would

Reporter's Statement of the Case

be compelled to hold that such service was fairly within the scope of the salvage contract between plaintiff and defendant, referred to in Finding V, under which plaintiff submitted its bill to the Navy Department, referred to in Finding VIII, “(b) For expenses incurred under contract of March 31, 1921," under which said contract plaintiff settled its claim and gave a release for the consideration of $30,000, as is shown in Finding IX.

We are of the opinion that plaintiff's petition should be dismissed. It is so ordered and adjudged.

GREEN, Judge; Moss, Judge; GRAHAM, Judge; and Booтн, Chief Justice, concur.

CHARLES E. KALTENBACH v. THE UNITED

STATES

[No. D-583. Decided January 7, 1929]

On the Proofs

Income tax; sale or license of secret process; income; realization upon capital.-Plaintiff's agreement in writing with a corporation that it should have his "shop rights" on a certain process in the weighting of silk, kept secret by him, the process to remain his property, held to be a license and not a sale, and the compensation received therefor taxable income and not realization upon capital.

The Reporter's statement of the case:

Messrs. Victor House and Abbot P. Mills for the plaintiff. Mr. George V. A. McCloskey was on the briefs.

Mr. McClure Kelley, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant. Messrs. Alexander H. McCormick and Dan M. Jackson were on the briefs.

The court made special findings of fact, as follows:

I. The plaintiff is a loyal citizen of the United States. He has at all times borne true allegiance to the United States

Reporter's Statement of the Case

and has not aided, abetted, or given encouragement to rebellion against it.

II. Prior to 1913 the plaintiff discovered and developed a process for weighting silk by the use of chemicals or metals. This was a secret process and was never patented.

III. The process was used to some slight extent by the firm of Kaltenbach & Stephens, in which plaintiff was employed, but no sale or license was ever made of the process prior to 1919.

IV. Between the years 1913 and 1919, the plaintiff endeavored to prove to his father, the senior partner, and later the larger stockholder, when the partnership was incorporated, and Mr. Stephens, the other partner, the value of his process. The plaintiff's father died in 1918, and Mr. Stephens shortly thereafter, without having authorized the use or purchase of the process. The plaintiff was then made president of the then corporation, and continued to urge the use of his process by the corporation. Finally, in 1919, the stockholders, all relatives of the former partnership, decided to try out the process, and after considerable discussion as to the terms which would compensate the plaintiff if the process was successful, but would safeguard the corporation if the venture was unsuccessful, authorized the plaintiff's uncle, Henry Kaltenbach, to draw up contract, providing for the payment to the plaintiff of 25 per cent of all profits over $100,000 earned during each year for a 3-year period, such contract to be renewable by the corporation at the end of the term if it proved successful. The following is a copy of the contract:

ARTICLES OF AGREEMENT entered into this nineteenth day of August, nineteen hundred and nineteen, between Kaltenbach & Stephens, Inc., a corporation organized and existing under the laws of the State of Delaware, party of the first part, and Charles E. Kaltenbach, of Cranford, in the county of Union and State of New Jersey, party of the second part.

In view of the duties in addition to those of president which devolve upon party of the second part in the conduct and management of the business of the party of the first part, and the desire of the party of the first part to retain the services of the party of the second part for a period

Reporter's Statement of the Case

of years, and to secure the shop rights on any processes that may have been or that may be perfected by the party of the second part while engaged in the service of the party of the first part, it is agreed by and between the parties hereto in consideration of the premises and the payment of the sum of one dollar paid by the party of the first part to the party of the second part, the receipt whereof is hereby acknowledged and the mutual agreements and undertakings hereinafter contained, that the party of the second part shall devote his entire time to the supervision of the purchasing of raw material, the manufacture and disposition of the product of the party of the first part and the general conduct of its affairs; and, further, that the party of the first part shall have what are known as shop rights on any and all processes which the party of the second part has developed or perfected or may develop or perfect while in the service of the party of the first part which can be used in connection with the business and manufacturing operations of the party of the first part, such processes however to be the property of and belong to the party of the second part. And that for the services thus rendered and shop rights thus bestowed, the party of the first part pay to the party of the second part in addition to the salary he now receives as president, 25% of the annual net profits of the party of the first part in excess of one hundred thousand dollars; payment to be made annually after the profits have been ascertained, either in cash or preferred stock of Kaltenbach & Stephens, Inc., as the party of the first part may elect, provided that sufficient be paid the party of the second part in cash to enable him to pay Federal and State income tax on the amount to which he may be entitled under this

agreement.

In determining the profits of the party of the first part, it is understood that the present general method of determining the profits shall be continued, with the exception that hereafter at the end of each year the basis of valuation of the inventories shall first be determined upon by the board of directors-that is, as to whether the inventory shall be taken at cost or market, and, for the purpose of determining the amount due to the party of the second part, the net profits shall be taken as then shown by the books before the deduction of any Federal taxes which may be assessed against the party of the first part under the Federal statutes at the time of any adjustment made between the parties hereto.

The period of this agreement shall be for three years beginning on January 1st, 1919, and terminating on Decem