Court Opinion

ID: 4600696
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:26:08.35315+00
Date Added: 2024-06-11T07:52:21.164925
License: Public Domain

HAROLD T. AVERY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Avery v. CommissionerDocket No. 107836.United States Board of Tax Appeals47 B.T.A. 538; 1942 BTA LEXIS 679; August 13, 1942, Promulgated 1942 BTA LEXIS 679">*679  The petitioner during a period of about seventeen years procured about twelve patents on inventions developed outside his regular hours of employment.  Certain inventions led to his employment by a manufacturer of calculating machines and sale to such employer of two inventions for which application for patent had been made prior to his employment.  One was purchased by the employer in 1935 for $30,000, payable in installments over a period of years.  In addition he sold another patent and granted certain rights in two other patents, from one of which he has received royalties since 1932.  Held, that the patent sold in 1935 was property held by the petitioner his trade or business such sale in 1938 and 1939 is taxable as ordinary gain.  R. E. Brotherton, Esq., for the petitioner.  Arthur L. Murray, Esq., for the respondent.  ARNOLD 47 B.T.A. 538">*538  The Commissioner determined deficiencies in petitioner's income tax in the amounts of $183.23 and $137.01 for the years 1938 and 1939, respectively.  The question is whether the gain of $4,500 and $3,300 reported by petitioner in his 1938 and 1939 income tax returns, respectively, represented ordinary gain1942 BTA LEXIS 679">*680  or capital gain within the meaning of section 117 of the Revenue Act of 1938.  47 B.T.A. 538">*539  FINDINGS OF FACT.  The petitioner is a resident of Oakland, California.  He filed his returns for the years 1938 and 1939 with the collector of internal revenue for the first district of California.  The petitioner graduated from college in 1915 with an A.B. degree in civil engineering.  During certain periods from 1912 to 1917 and continuously from September 1919 to February 15, 1929, he was a salaried employee of the California State Highway Commission.  On February 15, 1929, he became, and has since been, a salaried employee of the Marchant Calculating Machine Co. of Oakland, California.  He was employed in the capacity of director of the application division in the sales department but in two or three months thereafter became chief engineer of the company.  His duties on becoming chief engineer were the directing of the design and experimental work carried on in connection with new developments in which the company was interested.  Upon his employment with the company he signed a contract of employment which provided, inter alia, that petitioner was employed: * * * to do and perform1942 BTA LEXIS 679">*681  various and sundry services including the inventing and improving of calculating machines, adding machines, printing calculating machines and similar devices or parts thereof or accessories therefor, and devices, dies, machines, etc., for manufacturing said above named devices and machines * * * and be therein, in consideration of his employment and compensation for his services, transferred and assigned to the company, its successors and assigns, any and all inventions and improvements in any way relating to the above named machines and devices that he had made or might make or assist in making during the term of his employment by the company, excepting inventions of petitioner and improvements thereon as follows: Patent No. 1,601,337, flying machine Patent No. 1,615,002, airship.  Application No. 15, 578, airship improvement Application No. 132,686, airplane control Application No. 200,630, automatic steering device Application No. 209,061, altitude control Application No. 215,126, banking control Application No. 221,732, latitude and longitude meter Application No. 228,314, automatic navigator Not yet filed, current and wind corrector Not yet filed, ground1942 BTA LEXIS 679">*682  speed meter The petitioner signed a similar contract dated March 5, 1931, under the terms of which the above mentioned patents and applications were exempted from the provisions thereof, together with additional applications for patents numbered 416,805, pertaining to "Registering Instrument 47 B.T.A. 538">*540  Altimeter), Employment contracts of every employee of the company, in whatever department employed, contained similar provisions relating to the transfer and assignment of any inventions or improvements of machines or devices in the manufacture, use, and sale of which the company was interested.  The petitioner first became interested in inventing in 1925 and in 1926 obtained his first patent, which related to aircrafts.  Since 1925 he has obtained about a dozen patents, two of which relate to calculating machines and the remainder to aeronautical or aerial navigational apparatus.  A few applications for patents have been abandoned.  The only application for a patent now pending pertains to the helicopter type of aircraft.  Application for a patent for one of his inventions pertaining to calculating machines was filed June 18, 1927.  About five months before his employment by the1942 BTA LEXIS 679">*683  Marchant Co. petitioner made arrangements with the company for the use of this invention.  This led to his employment by the company.  On March 23, 1933, Letters Patent No. 1,910,738 were issued to petitioner on the application filed June 18, 1927.  On October 1, 1935, the petitioner sold and transferred such patent to the Marchant Co. together with any future improvements in the invention covered by such patent, for $30,000, payable in monthly installments over a period of years.  Prior to January the petitioner had received installments totaling $15,600.  He received installments totaling $4,500 and $3,300 in 1938 and 1939, respectively.  In his returns for 1938 and 1939 the petitioner reported the total installments received in each year as capital gain taxable to the extent of 50 percent.  In addition to the sale of the invention covered by Letters Patent No. 1,910,738 the petitioner sold two patents, one to the Marchant Co. and one to the Autogyro Co. of America.  He licensed two other patents, one to the Autogyro Co. of America and one, pertaining to a latitude and longitude meter, to the Armo Corporation of Brooklyn.  Under the latter license agreement petitioner has received1942 BTA LEXIS 679">*684  royalties in small amounts since 1932.  He received royalties thereunder totaling $549.80 in 1938 and $481 in 1939.  The petitioner was very active in church and civic organizations and technical societies.  The time which he devoted to the development of inventions other than as an employee of Marchant Co. varied greatly and depended upon the demands of his other activities upon his spare time.  Some months he spent no time in such activities and in some months devoted about 10 to 30 hours thereto.  The petitioner in 1938 and 1939, outside of his employment with Marchant Co., was engaged in the business of inventing and procuring patents and selling or licensing the same, and Patent No. 1,910,73847 B.T.A. 538">*541  was property of a kind held by him primarily for sale to customers in the ordinary course of such business.  OPINION.  ARNOLD: The question involved is whether the gain of $4,500 and $3,300 realized by petitioner in 1938 and 1939, respectively, from the sale of Patent No. 1,910,738 in 1935 is taxable as long-term capital gain to the extent of 50 percent, as contended by petitioner, or as ordinary gain in its entirety, as contended by respondent.  The amount of the gain1942 BTA LEXIS 679">*685  is not in dispute.  Section 117:a):1) of the Revenue Act of 1938 provides in part as follows: * * * The term :whether or not connected with his trade or business), but does not include * * * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * *.  It is contended by respondent that the petitioner was engaged outside of his regular hours of employment in the business of inventing and selling and licensing of patents obtained by him, and that the inventions and patents which he was not contractually obligated to transfer to his employer constituted property held by him for sale to customers in the ordinary course of his trade or business. Whether the petitioner was engaged in a trade or business requires examination of the facts in each case.  Higgins v. Commissioner,312 U.S. 212">312 U.S. 212. Upon the facts of record we have found that the petitioner was engaged in business and that the patent sold in 1935 was property held by him primarily for sale to customers in the ordinary course of his business.  The petitioner testified that his interest in mechanical items had been his principal hobby, practically1942 BTA LEXIS 679">*686  his sole hobby, over a period of a good many years.  In our opinion what may have been a hobby developed into a business enterprise.  The pleasure or recreation derived from an undertaking can not change its character from a business to that of one for pleasure and recreation. Thomas F. Sheridan,4 B.T.A. 1299">4 B.T.A. 1299. Whether an undertaking is carried on for pleasure and recreation or as a business is largely a matter of intent.  Edwin S. George,22 B.T.A. 189">22 B.T.A. 189, 22 B.T.A. 189">195. Intent "is to be gleaned from all the facts and the normal and reasonable inference therefrom." Charles E. Mitchell,32 B.T.A. 1093">32 B.T.A. 1093, 32 B.T.A. 1093">1129. The petitioner over a period of about seventeen years procured about twelve patents covering his inventions.  If pleasure was the only incentive and recompense sought by the petitioner in developing his mechanical ideas, there was no necessity to go to the trouble and expense of 47 B.T.A. 538">*542  procuring patents.  He sold three of his inventions, including the one sold in 1935 in which his employer company had had certain rights prior to the sale to it of the patent covering it.  He also granted to other companies certain rights in two other patents. 1942 BTA LEXIS 679">*687  He, therefore, disposed of five patents or rights therein, or about half of the patents procured by him.  The evidence fails to disclose the consideration received by petitioner from the disposition of three of the five patents or rights therein, but presumably he did not transfer or assign such patents or rights therein without some monetary consideration.  The sale in 1935 was not an isolated transaction.  The primary use to petitioner of the appliances and divices developed by his creative genius and the patents issued thereon was the gain to be derived from the sale or other disposition of the patents to persons or corporations to whom they were of beneficial use.  What may have been a hobby originally became a trade or business when he held the patents for sale or license to others for profit.  We think it is immaterial that he created no new devices or received no new patents in the year he sold the patent to the Marchant Co.  Until disposed of his patents were held primarily for sale or other disposition to customers and this situation was not different during the taxable year.  He not only hoped to but did realize gains or profits from his activity as an inventor and the1942 BTA LEXIS 679">*688  sale or licensing of patents on devices invented by him.  While the petitioner may not have been particularly active in trying to make money out of his patents, as testified by him, his testimony discloses that he endeavored to keep acquainted with the persons who were working along lines similar to his own and informed them what he was doing since out of such acquaintances something develops. not only sufficiently effective to obtain purchasers or licensees for five of his twelve patents but also led to his employment by the Marchant Co.  Under the circumstances any person thus found who bought petitioner's patents or acquired rights therein is a customer, as that term is ordinarily understood.  Charles H. Black, Sr.,45 B.T.A. 204">45 B.T.A. 204, 45 B.T.A. 204">210. The action of respondent in treating as ordinary gains the amounts of $4,500 and $3,300 reported in 1938 and 1939, respectively, by petitioner as profits realized by him on the sale of Patent No. 1,910,738 is approved.  Decision will be entered for the respondent.