Court Opinion

ID: 9459964
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:36:39.350846+00
Date Added: 2024-06-11T17:36:24.796484
License: Public Domain

LEVIN H. CAMPBELL,
Circuit Judge (concurring in the result).
Current Tax Court precedent, supported by Stahl v. CIR, 442 F.2d 324 (7th Cir. 1971), holds that patent applications are ordinarily not property “of a character which is subject to the allowance for depreciation.” A reading of neither § 1239 nor the Regulations would lead a taxpayer to conclude otherwise. The taxpayer is entitled to rely upon these decisions and the everyday reading of the statute and regulations when making decisions that will irrevocably fix his liability for taxes. When the decision is a close one, favoritism, if any, should be for the taxpayer rather than for the government. Fabreeka Products Co. v. CIR, 294 F.2d 876 (1st Cir. 1961) ; CIR v. Rabenold, 108 F.2d 639 (2d Cir. 1940). I therefore concur.
But the Supreme Court has also admonished us that when the taxpayer is, as here, claiming capital gains rather than ordinary rates, the construction should bear more strongly against the taxpayer. Capital gains are the exception, not the rule. CIR v. Gillette Motor Transport, Inc., 364 U.S. 130, 80 S.Ct. 1497, 4 L.Ed.2d 1617 (1960) ; Corn Products Co. v. CIR, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29 (1955). The issue becomes more difficult still because § 1239, according to its legislative history, is a “penalty” provision, intended to discourage transfers to controlled corporations that enable the taxpayer to take income at capital gains rates while providing the corporation with an asset of stepped-up basis that can be depreciated against income ordinarily taxable at ordinary income rates. The question is whether Congress intended to reach only assets that were depreciable in the hands of the transferee on the day of transfer or whether it wrote a statute *705with broader impact. The meagre legislative history, marshalled by the court’s opinion here, talks of “depreciable” property. But the statute itself modifies “depreciable” with the words “of a character.” We can neither read 'them out of the statute nor blithely assume that the patent application here, which was probably not depreciable, at least under Revenue Ruling 67-136, at the time of transfer, possessed the requisite “character.”
In situations like this one, a Treasury Regulation would be of invaluable assistance to court and taxpayer alike. Had the Commissioner’s present position been foreshadowed in a properly drawn regulation setting out the conditions under which patent applications were property “of a character . . . subject to the allowance for depreciation,” I would have found against the taxpayer.
Treasury Regulations must be upheld if they “implement the congressional mandate in some reasonable manner.” United States v. Cartwright, 411 U.S. 546, 550, 93 S.Ct. 1713, 1716, 36 L.Ed.2d 528 (1973), quoting from United States v. Correll, 389 U.S. 299, 307, 88 S.Ct. 445, 19 L.Ed.2d 537 (1967). It is virtually inescapable that Congress, when it passed § 1239, meant to penalize transactions of the sort involved in this case. This transaction, no less than one involving property potentially depreciable (but not actually being depreciated) at the time of transfer, poses the threat of the evil Congress clearly sought to reach. Cf. Twentieth Century-Fox Film Corp. v. CIR, 372 F.2d 281 (2d Cir. 1967) (film capable of depreciation but not actually depreciated); 512 West Fifty-Sixth Street Corp. v. CIR, 151 F.2d 942 (2d Cir. 1945) (option is of depreciable character even though non-depreciable).
Patent applications have all or virtually all of the attributes one normally associates with a depreciable “character.” They are used “in trade or business.” 26 U.S.C. § 167. Pekras v. CIR, 2 T.C. M. 195, aff’d, 139 F.2d 699 (6th Cir. 1943). They meet the requirements generally laid down in Treas.Reg. 1.-167(a)-2, since they are “wasting” assets that decline in value over time. Indeed, patent applications are, in some circumstances, depreciable assets. See Rev.Rul. 67-136, 1967-1 Cum.Bull. 58. The only bar to depreciating all patent applications is that they are of uncertain duration, so that it is difficult to ascertain the proper amount of depreciation in any given year. Even that problem is not insuperable; Rev.Rul. 67-136 solves it by allowing depreciation equal to the total royalty payments attributable to the application within the tax year. The Tax Court itself has acknowledged, in some cases not cited in its opinion in the instant case, that patent applications are of a depreciable character. Best Lock Corp., 31 T.C. 1217, 1234 (1959); Century Tank Mfg. Co., 18 T.C.M. 430 (1959). In one case the Tax Court characterized patent applications as intangible property “subject to depreciation in the hands of the transferee.” McDermott, 41 T.C. 50, 58 (1963).
Patent applications represent the same underlying res — the invention — as do patents. Both application and patent represent the full bundle, of legal rights available at the time; both waste; both are, in theory if not in fact, depreciable. The business transaction in the instant case reflects this economic reality. Taxpayer sold all of his rights in the patent to Chu Associates. The contract provided for royalty payments over time whether or not a patent was granted. The grant of a patent would not increase the size of the royalties, nor would its refusal reduce them. The tax treatment for purposes of other sections of the Internal Revenue Code parallels this structure. Chu Associates acquired one basis for the application that carried over to the patent when granted; the application and patent are treated as identical for basis purposes. It is difficult to see why they should be treated differently for purposes of § 1239.
*706Regulations could, I feel, accord with the statute in either of two forms. First, they could set out the attributes that describe “of a character subject to the allowance for depreciation.” A second approach, more complex, would avoid what the court in this case sees as the “worst of both worlds” situation in which admittedly wow-depreciable applications are involved and the taxpayer “loses” the opportunity to transfer these to a controlled corporation while being taxed at capital gain rates. The regulation might create a rebuttable presumption that all patent applications are de-preciable. This is a reasonable presumption, in light of the data in footnote 5 of the court’s opinion. It is a particularly appropriate presumption in eases like the present one, in which taxpayer has engaged in a sophisticated commercial transaction which discloses that taxpayer was relatively certain that the patent would be granted, and Chu Associates was willing to pay substantial sums for the applications on the assumption that a patent would issue. Taxpayer has firmly asserted a belief in patent-ability; it would not seem unjust to hold him, in tax matters, to the same assumption on which he acted in his dealings with Chu Associates.
Such a presumption, although powerful, could be rebutted. The • regulation might allow taxpayer to apply to the Commissioner before transfer for a ruling that the application was not depreciable for reasons peculiar to itself. It might also provide that taxpayer could rebut the presumption at some time after the transfer.
In conclusion, I support the court’s decision because the language of a tax statute should not be turned into a trap for the unwary. But I suggest that this may be a situation where, with the aid of appropriate Treasury Regulations, the Commissioner should be encouraged to accomplish what it is unfair to permit under the unaided language of the tax statute.