Court Opinion

ID: 9625383
Source: CourtListenerOpinion
Date Created: 2023-08-22 07:38:41.166613+00
Date Added: 2024-06-11T12:28:03.676410
License: Public Domain

MADDEN, Judge (dissenting).
The opinion of the court pays its respects to the doctrine that parties cannot, by the form and language in which they couch a transaction, prevent it from having the legal consequences of what it really is. Thus a potential taxpayer cannot by language and labels suggested by a skillful lawyer, avoid the taxes which would be due if the transaction were correctly labeled and contained straightforward language. But tlie doctrine, as I understand it, works both ways. If the transaction is mislabeled so that superficially it appears to be taxable, but is actually a non-taxable transaction, the Government has no right to insist upon taxing it as if it were correctly labeled.
In the instant case, I think the .question is whether the plaintiff, by the transaction eyidenced by the documents summarized in the opinion of the court, parted with the ownership of the patents, in the designated geographical area. If it did, the transaction was a sale, and non-taxable. Treasury Regulation 29.231-2(a) says specifically that the tax statute here in question “does not include * * * ’ profits derived from the sale within the United States of personal property or real property located therein.”
If the plaintiff did not part with all of its interests in the patents, what interest did it retain? The court mentions the fact that the taxpayer, in the agreement in question, did not expressly confer upon Ever-sharp and Faber the right to sue in their own names for infringement of the patents. I would have supposed that the question of whether the victim of a wrong can sue the wrongdoer in his own name or must sue in the name of someone else, such as an assignor, trustee, guardian, husband, etc., is determined by the law and is not the subject of private agreements. And in the instances which I have cited, it has nothing to do with the real ownership of the right. I am not helped then, by the omission of an attempt to confer upon Eversharp and Faber a right to sue infringers in their own names any more than I would have been helped by its inclusion, in determining who really owned the patents.
The principal reliance of the court is upon the option agreement made simultaneously with the license agreement. The plaintiff’s contention, in substance, is that the option conferred by this agreement was only the option to pay a lump sum of $1,-500,000 and thus escape the liability for paying a percentage of the sales prices which might have been and at the time the option was exercised, gave prospect of being greatly in excess of the lump sum stipulated in the option. I see in the option agreement nothing more than that. Suppose one has a lease for 17 years on a piece of land. He “licenses” another to use and occupy the land exclusively for the full period of his lease, paying him twenty percent of the gross income which he obtains from the land. The agreement contains also an option in the second party to, within the first two years of the term, pay a lump sum of $10,000 and thereby free himself from any further payments of a percentage of the income. Before, and after, and whether or not, the option is exercised, the transaction is a sale of the seventeen year leasehold, and payments made thereunder are not taxable under the statute here in question.
The court’s opinion considers the fact that Eversharp and Faber were joint “licensees” as an indication that the transaction was truly a license. As I see it, the fact is not significant. Eversharp and Faber were made joint owners of the patents by the agreements, each paying the plaintiff a percentage of the proceeds of its sales. Under the option they could pay the stipulated lump sum and thereby extinguish their liability for further percentage payments. Eversharp desired to do this, Faber did not. Those two companies thereupon made an agreement that when Eversharp had made the lump ' sum payment extinguishing fur*107ther percentage payments to the plaintiff, Faber would make its percentage payments to Eversfaarp. Both still had the same substantive rights in the patents which they had had from the beginning. The fact that one of them paid off the vendor in full, and the other agreed to pay that one off in installments, was a natural arrangement having no bearing on the question of who, in reality owned the patents.
I find nothing which indicates a license agreement except labels and words. The substance of the transaction is not consistent with the labels and words. I think the taxpayer should not be penalized for using the wrong labels and words, just as he would not be rewarded for doing so, if they indicated non-taxability of a transaction whose substance was taxable.