Source: https://casetext.com/case/rollman-v-commissioner-of-internal-revenue
Timestamp: 2020-02-26 13:09:28
Document Index: 112630618

Matched Legal Cases: ['§ 117', '§ 22', '§ 117', '§ 1235', '§ 1235', '§ 117']

Rollman v. Commissioner of Internal Revenue, 244 F.2d 634 | Casetext
Bell Intercontinental Corp. v. United States
Id. at note 2. Likewise in Rollman v. Commissioner, 244 F.2d 634 (4th Cir. 1957), an agreement was found to…
It is true that a transaction is to be judged by its substance, and not by verbiage. Waterman v. Mackenzie,…
Full title:Ernest E. ROLLMAN and Hilda S. Rollman, Curt E. Kaufman and Louise…
Date published: May 8, 1957
244 F.2d 634 (4th Cir. 1957)
In Rollman v. Commissioner of Internal Revenue, 244 F.2d 634 (4th Cir. 1957), the transfer documents expressly provided that the grantee could not grant sublicenses under the patents except with the written consent of the transferor.
Summary of this case from E.I. duPONT de Nemours Co. v. United States
No. 7318.
David Alter, New York City (Squadron Alter, New York City, on the brief), for petitioners.
Morton K. Rothschild, Atty., Dept. of Justice, Washington, D.C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and Hilbert P. Zarky, Attys., Dept. of Justice, Washington, D.C., on the brief), for respondent.
This petition to review decisions of the Tax Court involves deficiencies in income taxes for the years 1948 and 1949 aggregating about $5400. The question presented is whether payments received in these years by a partnership, of which the taxpayers were members, for the transfer of rights in a patent owned by the partnership should be regarded as proceeds of sale of capital assets under § 117 or ordinary income under § 22(a) of the Internal Revenue Code, 1939, 26 U.S.C. § 117, 22(a).
"Rollmann, individually and as a member of the copartnership, and Grunebaum do hereby respectively grant to Rikol, subject to the conditions hereinafter set forth, an exclusive license (except for two non-exclusive licenses now outstanding in United States Rubber Products, Inc., and Pirelli, Ltd.) for the manufacture and sale of shoes pursuant to all of the above mentioned patents and any renewals, continuations, divisions, reissues or extensions thereof. Said license shall extend to the entire territory of the United States of America, and so long as Mr. Leo Weill, the representative of Rikol, shall remain alive and shall remain holder of a majority of the stock of Rikol, shall likewise extend to the possessions and dependencies of the United States of America.
"The license herein granted to Rikol shall be exclusive for the duration of this agreement with respect to the Rajeh Patent, and shall be exclusive with respect to the Rollmann Patents, except for the non-exclusive license possessed by the United States Rubber Products, Inc. and Pirelli, Ltd., Rollmann and Grunebaum herein agreeing that except for the two non-exclusive licenses above mentioned, no other licenses will be granted with regard to said patents during the term of this agreement. Rollmann and Grunebaum do hereby agree that the license heretofore granted to Pirelli, Ltd., and the United States Rubber Products, Inc. will not be renewed and that no other party will be substituted in place of Pirelli, Ltd. or the United States Rubber Products, Inc. in the event of a cancellation or other termination of said license or licenses. The patents hereinbefore named are licensed solely and exclusively to Rikol (excepting United States Rubber Products, Inc. and Pirelli, Ltd.), subject to the conditions as set forth in this agreement. * * *
The Tax Court reached the conclusion that there was not an assignment and sale of patent rights in the pending case because the patent statute confers upon an inventor the exclusive right to make, use and vend the patented articles, whereas the transfer described in the contract of December 19, 1940, conveyed only the right to make and sell the articles and made no mention of the right to use them. For the significance of this omission the Tax Court relied primarily on the decision of the Supreme Court in Waterman v. Mackenzie, 138 U.S. 252, 11 S.Ct. 334, 34 L.Ed. 923, in which it was held that a transfer of rights under a patent to manufacture and sell, but not including the right to use, the patented article in the United States conferred no right upon the licensee to sue an infringer. The Court was concerned with the procedural problem rather than the nature of the right conveyed, but declared in the course of the discussion that the grant did not amount to an assignment of title but only to a mere license because of the omission of the right to use. In a number of tax cases in the Tax Court and in other courts, this decision has been strictly and literally followed as authority for the rule that money paid for a grant of a right to manufacture and sell, without the right to use, a patented article is not to be regarded as the proceeds of a sale of capital assets subject to the capital gains tax, but as ordinary income; and in most of the decisions the rule has been applied without comment upon the fact that the Waterman case had no concern with tax statutes.
Kimble Glass Co. v. Commissioner, 9 T.C. 183; Cleveland Graphite Bronze Co. v. Commissioner, 10 T.C. 974, affirmed per curiam on the Tax Court's Opinion, 6 Cir., 177 F.2d 200; Gregg v. Commissioner, 18 T.C. 291, affirmed per curiam on the Tax Court's Opinion, 3 Cir., 203 F.2d 954; Broderick v. Neale, 10 Cir., 201 F.2d 621.
The Tax Court itself has not always adhered strictly to the Waterman rule. Thus in Parke, Davis Co. v. Commissioner, 31 B.T.A. 427, which the Fifth Circuit followed in the last mentioned case, the taxpayer was a manufacturer of chemicals which had bought a patent covering machines designed to make and fill capsules; and, in consideration of one-half the purchase price of the patent, it assigned to another manufacturer of chemicals the exclusive right and privilege to manufacture, and have manufactured for its exclusive use, and to use, but not to sell, the inventions covered by the patents. The taxpayer reserved similar rights and privileges to itself, and it was agreed that neither company should assign rights under the patent to a third person without the consent of the other. Overruling the contention of the Commissioner that under the Waterman case the agreement was a license and not a sale, the Court said:
"In none of the cited cases did the court have the situation here existing. The questions there presented were entirely different from the one before us for decision. The right to maintain a suit at law is often controlled by the question of the possession of the naked legal title. Here we have a question of income tax liability where legal title is of little consequence and the inquiry is as to the ownership of the beneficial interest. We are not to determine whether petitioner or Eli Lilly Co. could maintain a suit for infringement in its own name, but merely whether petitioner, under its contract with Eli Lilly Co., divested itself irrevocably of certain capital investments in consideration of the payment made to it by the latter company. If this is the fact, then the transaction for income tax purposes is no more than a conversion of capital."
The situation is not like that before the Tax Court in Parke, Davis Co., where the right to use a patented machine in the manufacture of capsules was distinguishable from the right to sell the machine to third parties. Nor is the situation like that in Broderick v. Neale, 10 Cir., 201 F.2d 621, where the owner of the patent granted the right to manufacture and sell certain appliances that were usable in outside telephone construction and maintenance work, but limited the grant to manufacture and sale, omitting the right to use. The facts showed that at the time of the grant certain of the patented appliances were in existence which were available to the owner of the patent for use in the work in which he was engaged. In the pending case, the right to manufacture and sell footwear to the general public necessarily involves the right to use the patented articles for all practical purposes.
The purchase price to be paid by Rikol for rights under the Rajeh patent was fixed by the agreement of December 19, 1940, at 3 per cent of the total net cash receipts from sales of the shoes made and sold by Rikol; and on this account the Commissioner makes the additional contention, which was not considered in the opinion of the Tax Court, that the transfer did not amount to a sale. Aside from Bloch v. United States, 2 Cir., 200 F.2d 63, which involved a non-resident taxpayer, the weight of authority is clearly against this contention.
Myers v. Commissioner, 6 T.C. 258; Kimble Glass Co. v. Commissioner, 9 T.C. 183; Commissioner of Internal Revenue v. Celanese Corp., 78 U.S.App.D.C. 292, 140 F.2d 339; Allen v. Werner, 5 Cir., 190 F.2d 480; Commissioner of Internal Revenue v. Hopkinson, 2 Cir., 126 F.2d 406; Watson v. United States, 10 Cir., 222 F.2d 689; United States v. Carruthers, 9 Cir., 219 F.2d 21; First National Bank of Princeton v. United States, D.C., 136 F. Supp. 818.
In 1954, Congress rejected this ruling of the Commissioner by enacting § 1235(a)(1)(2) of the Internal Revenue Code of 1954, 26 U.S.C. 1952 ed., Supp. I § 1235, which provided that a transfer of all substantial rights to a patent shall be considered a sale of exchange of a capital asset held for more than six months regardless of whether or not payments in consideration of the transfers are made periodically over a period coterminus with the transferee's use of the patent, or contingent upon the productivity, use or disposition of the property transferred.
In response to this ruling of the Commissioner, Congress in 1956 enacted § 117(q) of the Internal Revenue Code of 1939 ( 70 Stat. 404) in substantially the same terms as the Act of 1954 and provided that the statute should be applicable to any payment made pursuant to a transfer of patent rights in any taxable year beginning after May 31, 1950, regardless of the year in which the transfer occurred. It is contended that since these statutory provisions are expressly made applicable to years subsequent to May 31, 1950, they did not apply to 1947, 1948 and 1949, the taxable years in the instant case. We do not think this contention is tenable. It seems obvious that the Acts of 1954 and 1956 were designed to overrule the position taken by the Commissioner and were not designed to change the law laid down in these decisions of the courts.