Source: https://supreme.justia.com/cases/federal/us/333/591/
Timestamp: 2019-04-26 06:34:13+00:00

Document:
1. A taxpayer owned 89% of the stock of a manufacturing corporation and his wife owned 10%. The corporation was managed by five directors, including the taxpayer and his wife, elected annually by the stockholders. A vote of three directors was required to take binding action. In exchange for a specified royalty, the taxpayer gave the corporation nonexclusive licenses to manufacture and sell devices covered by certain patents which he owned. The licenses were cancellable by either party upon giving appropriate notice, specified no minimum royalties, and did not bind the corporation to manufacture and sell any particular number of the patented devices. The taxpayer assigned his interest in the royalty agreements to his wife, who reported the income therefrom as hers.
Held: the facts were sufficient to support a finding by the Tax Court that the taxpayer retained sufficient interest in the royalty contracts and sufficient control over the amount of income derived therefrom to justify taxing the income as his. Pp. 333 U. S. 607-610.
2. The general rule of res judicata applies to tax proceedings involving the same claim and the same tax year, while the doctrine of collateral estoppel, which is a narrower version of the res judicata rule, applies to tax proceedings involving similar or unlike claims and different tax years. P. 333 U. S. 598.
3. An earlier decision of the Board of Tax Appeals involving a similar royalty agreement and assignment but different license contracts and different tax years was not conclusive of the controversy under the doctrine of collateral estoppel. P. 333 U. S. 602.
4. An earlier decision of the Board of Tax Appeals involving the same facts, issues and parties but different tax years and made prior to the decisions of this Court in Helvering v. Clifford, 309 U. S. 331; Helvering v. Horst, 311 U. S. 112; Helvering v. Eubank, 311 U. S. 122; Harrison v. Schaffner, 312 U. S. 579; Commissioner v: Tower, 327 U. S. 280, and Lusthaus v. Commissioner, 327 U. S. 293, was not conclusive of the controversy under the doctrine of collateral estoppel. Pp. 333 U. S. 602-607.
5. The doctrine of collateral estoppel or estoppel by judgment is not meant to create vested rights in decisions that have become obsolete or erroneous with time, thereby causing inequities among taxpayers. P. 333 U. S. 599.
6. Where two cases involve income taxes in different tax years, collateral estoppel must be confined to situations where the matter raised in the second suit is identical in all respects with that decided in the first, and where the controlling facts and applicable legal rules remain unchanged. Pp. 333 U. S. 599-600.
7. The doctrine of collateral estoppel is inapplicable in litigation regarding income taxes for different years where decisions of this Court intervening between the earlier and later litigation have changed the applicable legal principles. P. 333 U. S. 600.
8. If the relevant facts in two cases involving income taxes for different years are separable, even though they be similar or identical, collateral estoppel does not govern the legal issues which recur in the second case. P. 333 U. S. 601.
9. The clarification and growth of the principles governing the effect of intra-family assignments and transfers on liability for income taxes through decisions of this Court since 1939 effected a sufficient change in the legal climate to render a 1935 decision of the Board of Tax Appeals inapplicable under the doctrine of collateral estoppel to cases arising subsequently and involving these principles. Pp. 333 U. S. 606-607.
the taxpayer and reversed the part adverse to him. 161 F.2d 171. This Court granted certiorari. 332 U.S. 756. Reversed, p. 333 U. S. 610.
The problem of the federal income tax consequences of intra-family assignments of income is brought into focus again by this case.
The respondent taxpayer was an inventor-patentee and the president of the Sunnen Products Company, a corporation engaged in the manufacture and sale of patented grinding machines and other tools. He held 89% or 1,780 out of a total of 2,000 shares of the outstanding stock of the corporation . His wife held 200 shares, the vice-president held 18 shares, and two others connected with the corporation held one share each. The corporation's board of directors consisted of five members, including the taxpayer and his wife. This board was elected annually by the stockholders. A vote of three directors was required to take binding action.
while the other two were in existence at all pertinent times after June 20, 1939.
The taxpayer at various times assigned to his wife all his right, title, and interest in the various license contracts. [Footnote 3] She was given exclusive title and power over the royalties accruing under these contracts. All the assignments were without consideration, and were made as gifts to the wife, those occurring after 1932 being reported by the taxpayer for gift tax purposes. The corporation was notified of each assignment.
In 1937, the corporation, pursuant to this arrangement, paid the wife royalties in the amount of $4,881.35 on the license contract made in 1928; no other royalties on that contract were paid during the taxable years in question. The wife received royalties from other contracts totaling $15,518,68 in 1937, $17,318.80 in 1938, $25,243.77 in 1939, $50,492,50 in 1940, and $149,002.78 in 1941. She included all these payments in her income tax returns for those years, and the taxes she paid thereon have not been refunded.
Relying upon its own prior decision in Estate of Dodson v. Commissioner, 1 T.C. 416, [Footnote 4] the Tax Court held that, with one exception, all the royalties paid to the wife from 1937 to 1941 were part of the taxable income of the taxpayer. 6 T.C. 431. The one exception concerned the royalties of $4,881.35 paid in 1937 under the 1928 agreement. In an earlier proceeding in 1935, the Board of Tax Appeals dealt with the taxpayer's income tax liability for the years 1929-1931; it concluded that he was not taxable on the royalties paid to his wife during those years under the 1928 license agreement. This prior determination by the Board caused the Tax Court to apply the principle of res judicata to bar a different result as to the royalties paid pursuant to the same agreement during 1937.
the taxpayer's additional claim that the res judicata doctrine applied as well to the other royalties (those accruing apart from the 1928 agreement) paid in the taxable years. We then brought the case here on certiorari, the Commissioner alleging that the result below conflicts with prior decisions of this Court.
If the doctrine of res judicata is properly applicable, so that all the royalty payments made during 1937-1941 are governed by the prior decision of the Board of Tax Appeals, the case may be disposed of without reaching the merits of the controversy. We accordingly cast our attention initially on that possibility, one that has been explored by the Tax Court and that has been fully argued by the parties before us.
Cromwell v. County of Sac, 94 U. S. 351, 94 U. S. 352. The judgment puts an end to the cause of action, which cannot again be brought into litigation between the parties upon any ground whatever, absent fraud or some other factor invalidating the judgment. See von Moschzisker, "Res Judicata," 38 Yale L.J. 299; Restatement of the Law of Judgments, §§ 47, 48.
res judicata is applied much more narrowly. In this situation, the judgment in the prior action operates as an estoppel not as to matters which might have been litigated and determined, but "only as to those matters in issue or points controverted, upon the determination of which the finding or verdict was rendered." Cromwell v. County of Sac, supra, 94 U. S. 353. And see Russell v. Place, 94 U. S. 606; Southern Pacific R. Co.v . United States, 168 U. S. 1, 168 U. S. 48; Mercoid Corp. v. Mid-Continent Co., 320 U. S. 661, 320 U. S. 671. Since the cause of action involved in the second proceeding is not swallowed by the judgment in the prior suit, the parties are free to litigate points which were not at issue in the first proceeding, even though such points might have been tendered and decided at that time. But matters which were actually litigated and determined in the first proceeding cannot later be relitigated. Once a party has fought out a matter in litigation with the other party, he cannot later renew that duel. In this sense, res judicata is usually and more accurately referred to as estoppel by judgment, or collateral estoppel. See Restatement of the Law of Judgments, §§ 68, 69, 70; Scott, "Collateral Estoppel by Judgment," 56 Harv.L.Rev. 1.
estoppel operates, in other words, to relieve the government and the taxpayer of "redundant litigation of the identical question of the statute's application to the taxpayer's status." Tait v. Western Md. R. Co., 289 U. S. 620, 289 U. S. 624.
But collateral estoppel is a doctrine capable of being applied so as to avoid an undue disparity in the impact of income tax liability. A taxpayer may secure a judicial determination of a particular tax matter, a matter which may recur without substantial variation for some years thereafter. But a subsequent modification of the significant facts or a change or development in the controlling legal principles may make that determination obsolete or erroneous, at least for future purposes. If such a determination is then perpetuated each succeeding year as to the taxpayer involved in the original litigation, he is accorded a tax treatment different from that given to other taxpayers of the same class. As a result, there are inequalities in the administration of the revenue laws, discriminatory distinctions in tax liability, and a fertile basis for litigious confusion. Compare United States v. Stone & Downer Co., 274 U. S. 225, 274 U. S. 235-236. Such consequences, however, are neither necessitated nor justified by the principle of collateral estoppel. That principle is designed to prevent repetitious lawsuits over matters which have once been decided and which have remained substantially static, factually and legally. It is not meant to create vested rights in decisions that have become obsolete or erroneous with time, thereby causing inequities among taxpayers.
proceeding must involve the same set of events or documents and the same bundle of legal principles that contributed to the rendering of the first judgment. Tait v. Western Maryland R. Co., supra. And see Griswold, "Res Judicata in Federal Tax Cases," 46 Yale L.J. 1320; Paul and Zimet, "Res Judicata in Federal Taxation," appearing in Paul, Selected Studies in Federal Taxation, 2d series, 1938, p. 104.
It is readily apparent in this case that the royalty payments growing out of the license contracts which were not involved in the earlier action before the Board of Tax Appeals and which concerned different tax years are free from the effects of the collateral estoppel doctrine. That is true even though those contracts are identical in all important respects with the 1928 contract, the only one that was before the Board, and even though the issue as to those contracts is the same as that raised by the 1928 contract. For income tax purposes, what is decided as to one contract is not conclusive as to any other contract which is not then in issue, however similar or identical it may be. In this respect, the instant case thus differs vitally from Tait v. Western Md. R. Co., supra, where the two proceedings involved the same instruments and the same surrounding facts.
A more difficult problem is posed as to the $4,881.35 in royalties paid to the taxpayer's wife in 1937 under the 1928 contract. Here, there is complete identity of facts, issues and parties as between the earlier Board proceeding and the instant one. The Commissioner claims, however, that legal principles developed in various intervening decisions of this Court have made plain the error of the Board's conclusion in the earlier proceeding, thus creating a situation like that involved in Blair v. Commissioner, supra. This change in the legal picture is said to have been brought about by such cases as Helvering v.
payments accruing thereunder, such payments would clearly have been taxable income to him. It has long been established that the mere assignment of the right to receive income is not enough to insulate the assignor from income tax liability. Lucas v. Earl, 281 U. S. 111; Burnet v. Leininger, 285 U. S. 136. As long as the assignor actually earns the income or is otherwise the source of the right to receive and enjoy the income, he remains taxable. The problem here is whether any different result follows because the taxpayer assigned the underlying contracts to his wife in addition to giving her the right to receive the royalty payments.
concerned with the refinements of title as it is with actual command over the property taxed -- the actual benefit for which the tax is paid."
"lest what is in reality but one economic unit be multiplied into two or more by devices which, though valid under state law, are not conclusive so far as § 22(a) is concerned."
if he controls the disposition of that which he could have received himself and diverts payment from himself to the assignee as a means of procuring the satisfaction of his wants, the receipt of income by the assignee merely being the fruition of the assignor's economic gain.
"one vested with the right to receive income did not escape the tax by any kind of anticipatory arrangement, however skillfully devised, by which he procures payment of it to another, since, by the exercise of his power to command the income, he enjoys the benefit of the income on which the tax is laid."
"Even though the gift of income be in form accomplished by the temporary disposition of the donor's property which produces the income, the donor retaining every other substantial interest in it, we have not allowed the form to obscure the reality."
312 U.S. at 312 U. S. 583. Commissioner v. Tower, supra, and its companion case, Lusthaus v. Commissioner, supra, reiterated the various principles laid down in the earlier decisions and applied them to income arising from family partnerships.
The principles which have thus been recognized and developed by the Clifford and Horst cases and those following them are directly applicable to the transfer of patent license contracts between members of the same family. They are guideposts for those who seek to determine in a particular instance whether such an assignor retains sufficient control over the assigned contracts or over the receipt of income by the assignee to make it fair to impose income tax liability on him.
the 1928 contract. True, these cases did not originate the concept that an assignor is taxable if he retains control over the assigned property or power to defeat the receipt of income by the assignee. But they gave much added emphasis and substance to that concept, making it more suited to meet the "attenuated subtleties" created by taxpayers. So substantial was the amplification of this concept as to justify a reconsideration of earlier Tax Court decisions reached without the benefit of the expanded notions, decisions which are now sought to be perpetuated regardless of their present correctness. Thus, in the earlier litigation in 1935, the Board of Tax Appeals was unable to bring to bear on the assignment of the 1928 contract the full breadth of the ideas enunciated in the Clifford-Horst series of cases. And, as we shall see, a proper application of the principles as there developed might well have produced a different result, such as was reached by the Tax Court in this case in regard to the assignments of the other contracts. Under those circumstances, collateral estoppel should not have been used by the Tax Court in the instant proceeding to perpetuate the 1935 viewpoint of the assignment.
the Tax Court's decision on the merits of the controversy in this case.
reason of his extensive stock holdings. The wife, as assignee and as a party to contracts expressly terminable by the corporation without liability, could not prevent cancellation, provided that the necessary notice was given.
And it is not necessary to assume that such cancellation would amount to a fraud on the corporation -- a fraud which could be enjoined or otherwise prevented. Cancellation conceivably could occur because the taxpayer and his corporation were ready to make new license contracts on terms more favorable to the corporation, in which case no fraud would necessarily be present. All that we are concerned with here is the power to procure cancellation, not with the possibility that such power might be abused. And once it is evident that such power exists, the conclusion is unavoidable that the taxpayer retained a substantial interest in the license contracts which he assigned.
(2) The taxpayer's controlling position in the corporation also permitted him to regulate the amount of royalties payable to his wife. The contracts specified no minimum royalties, and did not bind the corporation to manufacture and sell any particular number of devices. Hence, by controlling the production and sales policies of the corporation, the taxpayer was able to increase or lower the royalties; or he could stop those royalties completely by eliminating the manufacture of the devices covered by the royalties without cancelling the contracts.
(3) The taxpayer remained the owner of the patents and the patent applications. Since the licenses which he gave the corporation were nonexclusive in nature, there was nothing to prevent him from licensing other firms to exploit his patents, thereby diverting some or all of the royalties from his wife.
economic status. Despite the assignments, the license contracts and the royalty payments accruing thereunder remained within the taxpayer's intimate family group. He was able to enjoy at least indirectly, the benefits received by his wife. And when that fact is added to the legal controls which he retained over the contracts and the royalties, it can fairly be said that the taxpayer retained the substance of all the rights which he had prior to the assignments. See Helvering v. Clifford, supra, 309 U. S. 335-336.
These factors make reasonable the Tax Court's conclusion that the assignments of the license contracts merely involved a transfer of the right to receive income, rather than a complete disposition of all the taxpayer's interest in the contracts and the royalties. The existence of the taxpayer's power to terminate those contracts and to regulate the amount of the royalties rendered ineffective, for tax purposes, his attempt to dispose of the contracts and royalties. The transactions were simply a reallocation of income within the family group, a reallocation which did not shift the incidence of income tax liability.
The judgment below must therefore be reversed, and the case remanded for such further proceedings as may be necessary in light of this opinion.
MR. JUSTICE FRANKFURTER and MR. JUSTICE JACKSON believe the judgment of the Tax Court is based on substantial evidence and is consistent with the law, and would affirm that judgment for reasons stated in Dobson v. Commissioner, 320 U. S. 489, and Commissioner v. Scottish American Co., 323 U. S. 119.
(1) A cylinder grinder. The taxpayer applied for a patent on Nov. 17, 1927, and was issued one on Dec. 4, 1934. The royalty agreement to manufacture and sell this device was dated Jan. 10, 1928. This agreement expired on Jan. 10, 1938; a renewal agreement in substantially the same terms was then executed for the balance of the life of the patent, which ends on Dec. 4, 1951.
(2) A pinhole grinder. The taxpayer applied for a patent on Dec. 4, 1931, and was issued one on June 13, 1933. The royalty agreement to manufacture and sell this device was dated Dec. 5, 1931.
(3) A crankshaft grinder. The taxpayer applied for a patent on May 22, 1939, and was issued one on May 6, 1941. The royalty agreement to manufacture and sell this device was dated June 20, 1939.
(4) Another crankshaft grinder. The taxpayer applied for a patent on Dec. 29, 1939. He assigned this application to his wife on Dec. 29, 1942, and she was issued a patent on Jan. 26, 1943. The royalty agreement to manufacture and sell this device was dated June 20, 1939.
The taxpayer remained the owner of the first three patents throughout the year 1941, and he remained the owner of the patent application on the fourth device throughout that year.
Six months' notice was provided in the agreement dated Jan. 10, 1928, covering the cylinder grinder. The other three agreements provided for one year's notice of cancellation.
"all of my right, title and interest in and to said royalty contract of January 10, 1928. . . . And I hereby state that the royalties accruing under said royalty contract have heretofore been and are hereafter the sole and exclusive property of the said Cornelia Sunnen [his wife], and hereby declare that said royalties shall be paid to the said Cornelia Sunnen or to her order, and that she shall have the sole right to collect, receive, receipt for, retain or sue for said royalties."
Assignments similar in form and substance to the assignment of Dec. 21, 1931, were made as to the other three royalty contracts.
In the Dodson case, Dodson owned 51% of the stock of a corporation, and his wife owned the other 49%. He was the owner of a formula and trademark. Pursuant to a contract which he made with the corporation, the corporation was given the exclusive use of the formula and trade mark for 5 years, renewable for a like period. Dodson was to receive in return a royalty measured by a certain percentage of the net sales. He then assigned a one-half interest in the contract to his wife, retaining his full interest in the formula and trademark. The Tax Court held that his dominant stock position permitted him to cancel or modify the contract at any time, thus rendering him taxable on the income flowing from his wife's share in the contract.
See also Henricksen v. Seward, 135 F.2d 986; Monteith Bros. Co. v. United States, 142 F.2d 139; Pelham Hall Co. v. Hassett, 147 F.2d 63; Commissioner v. Arundel-Brooks Concrete Corp., 152 F.2d 225; Corrigan v. Commissioner, 155 F.2d 164. Compare Grandview Dairy v. Jones, 157 F.2d 5.
And see Commissioner v. Security-First Nat. Bank, 148 F.2d 937.
Stoddard v. Commissioner, 141 F.2d 76, 80; Campana Corporation v. Harrison, 135 F.2d 334; Engineer's Club of Philadelphia v. United States, 95 Ct.Cl. 92, 42 F.Supp. 182.
"gains, profits, and income derived from salaries, wages, or compensation for personal service . . of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or for gains or profits and income derived from any source whatever."
See also Art. 22(a)-1 of Treasury Regulations 94, promulgated under the 1936 Act; Art. 22(a)-1 of Treasury Regulations 101, promulgated under the 1938 Act; and § 19.22(a)-1 of Treasury Regulations 103, promulgated under the Internal Revenue Code.

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