Court Opinion

ID: 4483251
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:59.362396+00
Date Added: 2024-06-11T14:54:03.088717
License: Public Domain

Wilbur, J., concurring in part and dissenting in part: We again face the issue of whether a use-restricted license represents "all substantial rights evidenced by a patent” under section 1235(a)1 when the holder has retained valuable rights. The regulations state that geographic and use-restricted licenses do not convey "all substantial rights.” Sections 1.1235-2(b)(l)(i) and (iii), and 1.1235-2(c), Income Tax Regs. We have held that these provisions of the regulations are unreasonable and plainly inconsistent with the statute and, on three different occasions, have been reversed by three different Circuit Courts of Appeals. Estate of Klein v. Commissioner, 507 F.2d 617 (7th Cir. 1974), revg. 61 T.C. 332 (1973), cert. denied 421 U.S. 991 (1975);2 Mros v. Commissioner, 493 F.2d 813 (9th Cir. 1974), revg. a Memorandum Opinion of this Court; Fawick v. Commissioner, 436 F.2d 655 (6th Cir. 1971), revg. 52 T.C. 104 (1969). The formidable and well-reasoned authority arrayed against our position requires a thorough reanalysis by the Court. Unless we can state a clearly articulated and compelling rationale for our position, a tenacious adherence to our prior views will serve only to promote further uncertainty. In fact, a compelling rationale for the Court’s position cannot be stated, since a review of the legislative history underlying section 1235 makes it quite clear that we are in error. Section 1235 was added to the Code in 1954. The House version provided capital gains treatment for a sale or exchange of a patent, an application for a patent, or an undivided interest therein, provided that the "seller retains no interest whatsoever” in the patent.3  The Senate Finance Committee rewrote section 1235 in its present form. The term "no interest whatsoever” in the House bill was deleted in favor of the term "all substantial rights.” The change appears to have been intended to simply permit the seller to retain a security interest in the patent, such as a reversion should the purchaser fail to make the payments.4 That the term clearly did not encompass geographic or use-restricted transfers can be seen by focusing on the term "undivided interest” (in a patent or all substantial rights to a patent) which appears in both the House and Senate bill. The Senate Finance Committee explained: By "undivided interest” a part of each property right represented by the patent (constituting a fractional share of the whole patent) is meant (and not, for example, a lesser interest such as a right to income, or a license limited geographically, or a license which conveys some, but not all, of the claims or uses covered by the patent). * * * [S. Rept. No. 1622, 83d Cong., 2d Sess. 439 (1954).[5] Emphasis added.] The Senate Finance Committee thus specifically stated that an "undivided interest” in all substantial rights did not encompass a use-restricted license. If a fractional interest in "all substantial rights” of a patent excludes a use-restricted transfer, then it seems clear that when the transfer is of the entire interest in all substantial rights, a use-restricted transfer is similarly excluded. First, Congress in using the term "all substantial rights” in the first sentence of section 1235 clearly used the word with the same meaning, and this meaning is clearly explained in the Senate committee report. Secondly, it would be odd (and again inconsistent) to exclude a use-restricted transfer from a transfer of a portion of all substantial rights if the broader concept of the entire interest in all substantial rights already permitted such a division.6  Petitioner’s agreement with Ever-Level raises the second issue of whether, once a use-restricted license is given, the holder of the reserved rights may sell them and receive capital gains treatment under section 1235. Clearly he cannot qualify under section 1.1235 — 2(b)(1), Income Tax Regs., which defines "all substantial rights” as: "all rights (whether or not then held by the grantor) which are of value at the time the rights to the patent (or an undivided interest therein) are transferred. * * * [Emphasis added.]” Nor can petitioner come within the reasoning of the Sixth Circuit, in Fawick v. Commissioner, supra at 662, that it is not enough for the taxpayer merely to surrender the last vestiges of his rights, but rather that he must surrender to a transferee the entire bundle of monopoly rights evidenced by a patent (or an undivided interest in such rights). The rationale of Fawick v. Commissioner, supra, and the regulations is consistent with both the statute and its legislative history. Section 1235 permits capital gains treatment upon the sale of "all substantial rights,” not, as petitioners would have us read it, upon the sale of all rights still possessed by the holder. Petitioner did not sell "all substantial rights” in the patent to Ever-Level, but only those rights he still retained. It was the clear intent of Congress, as illustrated previously in this dissent, to give capital gains treatment only to outright sales of patents and not to those who chose to exploit them through piecemeal dismemberment. Finally, there is no basis either in the statute or the legislative history upon which to make a principled distinction between the last sale conveying the holder’s remaining rights and previous use-restricted licenses.7    All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise specified.    In reversing our decision in Klein (a case involving a geographically restricted patent license), the Seventh Circuit made it clear that geographic and use-restricted patents, for purposes of the issue before us, present essentially the same question by citing the Courts of Appeals opinions in Fawick v. Commissioner, 436 F.2d 655 (6th Cir. 1971), revg. 52 T.C. 104 (1969), and Mros v. Commissioner, 493 F.2d 813 (9th Cir. 1974), revg. a Memorandum Opinion of this Court, for support. Estate of Klein v. Commissioner, 507 F.2d 617, 622 (7th Cir. 1974), revg. 61 T.C. 332 (1973), cert. denied 421 U.S. 991 (1975).    As originally approved by the House, sec. 1235(a) appeared as follows: (a) General. — Gain from the sale or exchange of property consisting of a patent or application therefor, or an undivided interest therein which includes a part of all rights in such patent or application, by any person whose efforts created such property shall be deemed gain from the sale or exchange of a capital asset if and only if— (1) the seller retains no interest whatsoever in the patent, application, or undivided interest therein so transferred, except to the extent that the purchase price may be related to the productivity, use, or disposition of the property transferred within a period of 5 years from the date of such sale or exchange; and (2) the entire proceeds of such sale or exchange are received by the seller within a period of 5 years from the date of such sale or exchange. For purposes of this paragraph, any proceeds due and payable within such period which are received thereafter solely by reason of failure of the purchaser (or any successor in interest of such purchaser) to fulfill a contractual obligation shall be deemed to have been received within such period. [H.R. 8300, 83d Cong., 2d Sess. 259 (1954)].    Several persons testified before the Senate Finance Committee that the "no interest whatsoever” language of the House bill would prevent the retention of such an interest. Hearings on H.R. 8300 Before the Senate Committee on Finance, 83d Cong., 2d Sess. 339 (Statement of Tarleau, Chairman of the A.B.A. Section of Taxation), 492 (Statement submitted on behalf of the A.B.A. Section of Taxation), 1235-1236 (Statement of William B. Barnes, a professional mechanical engineer), 1866 (Statement by Francis W. Davis, a consulting engineer) (1954).    See also H. Rept. No. 1337, 83d Cong., 2d Sess. A279 (1954), and Summary of the New Provisions of the Internal Revenue Code of 1954 (H.R. 8300) as Agreed to by the Conferees 105 (1955), Staff of the Joint Committee on Internal Revenue Taxation. The latter, a contemporaneous summary, provides: "The sale of an undivided interest in a patent which includes a part of each property right represented by the patent will also be deemed to give rise to long-term capital gains. On the other hand, a license limited geographically or limited to certain uses of the patent would not be considered a sale. The inventor could, of course, sell all the rights covered by, say, the United States patent while retaining foreign patents.”    See also Estate of Klein v. Commissioner, 507 F.2d 617, 621 (7th Cir. 1974), revg. 61 T.C. 332 (1973), cert. denied 421 U.S. 991 (1975).    It is no answer to say that a nonholder might qualify for capital gains under certain circumstances. We are here concerned with a "holder” and only with sec. 1235 (see n. 4 of majority opinion). A professional inventor clearly can look only to sec. 1235; amateur inventors are similarly restricted since Congress clearly stated there was to be "no distinction” between the two. H. Rept. No. 1337, 83d Cong., 2d Sess. 82. It is true that someone else may hold similar property in a different capacity not covered by sec. 1235 and qualify for capital gains on the sale of a patent. But these are not the circumstances we confront. As to the facts before us the regulation is clear and by no stretch of the imagination can we say it is unreasonable and plainly inconsistent with the statute.