## Facts

- E. I. du Pont de Nemours and Company (Du Pont) owned patents relating to urea herbicides and formed a wholly owned French subsidiary.
- The subsidiary was organized in part to comply with French requirements that patented items be manufactured in France within a specified period or risk compulsory licensing.
- Du Pont granted the subsidiary a royalty-free, nonexclusive license under certain French patent rights so the subsidiary could manufacture the products in France.
- In return for the license, the subsidiary issued additional stock to Du Pont valued at $411,500.
- Du Pont treated the transaction as a tax-free transfer under I.R.C. § 351 (transfer of property to a controlled corporation solely in exchange for stock) and did not include the stock’s value in taxable income.
- Du Pont later brought tax refund suits for the 1959 and 1960 tax years.
- The United States, through the IRS, asserted a set-off against the claimed refunds, contending the stock value should have been reported as taxable income because the nonexclusive license was not “property” for § 351 and/or the transaction was not a qualifying “exchange.”
- The Court of Claims addressed limited cross-motions for partial summary judgment on the set-off issue within the refund litigation.

## Issues

1. Does the grant of a royalty-free, nonexclusive patent license to a wholly owned subsidiary constitute a transfer of “property” within the meaning of I.R.C. § 351?
2. Does the issuance of subsidiary stock in return for that nonexclusive license qualify as an “exchange” under § 351 even though the transferor retains significant rights in the underlying patents?
3. If § 351 applies, may the government treat the value of the stock as taxable income and use it as a set-off against Du Pont’s refund claims?

## Decision

- The court held that the nonexclusive patent license was “property” for purposes of I.R.C. § 351.
- The court held that the transaction constituted an “exchange” for § 351 purposes even though Du Pont did not transfer all substantial rights in the patents.
- The court concluded that Du Pont’s receipt of the subsidiary stock (valued at $411,500) was not taxable income under § 351 on this theory, so the asserted set-off failed.
- The court granted Du Pont’s motion for partial summary judgment and denied the government’s cross-motion on the § 351 set-off issue.

## Legal Principles

- “Property” in I.R.C. § 351 is construed broadly and can include intangible rights such as a patent license, even when the license is nonexclusive.
- Section 351’s nonrecognition rule is aimed at changes in the form of ownership where the transferor remains in control; it is not limited by capital-gain doctrines that often turn on a complete divestiture of rights.
- A transfer can qualify as an “exchange” under § 351 even if the transferor retains other valuable rights in the underlying asset, so long as the transferee receives a meaningful interest that is exchanged for stock and the statutory control requirement is met.
- When § 351 applies, stock received solely in exchange for the transferred property generally is not recognized as current taxable income, limiting the government’s ability to offset refund claims on the theory of unreported gain from the exchange.

## Conclusion

In Du Pont’s refund litigation, the Court of Claims resolved a discrete set-off dispute by holding that Du Pont’s royalty-free, nonexclusive patent license to its wholly owned subsidiary was “property” transferred in an “exchange” for stock within I.R.C. § 351, so the stock’s value was not taxable income on that ground and could not be used to reduce Du Pont’s claimed refunds.


E. I. du Pont de Nemours and Co. v. United States, 471 F.2d 1211 (1973)