DocketNumber: Docket No. 84422
Citation Numbers: 38 T.C. 168, 1962 U.S. Tax Ct. LEXIS 146
Judges: Fay
Filed Date: 4/27/1962
Status: Precedential
Modified Date: 1/13/2023
*146
Taxpayer received royalties under a license agreement by which he had transferred the exclusive right to sell in the United States certain patented goods made in Japan. Taxpayer retained the option to cancel the license agreement upon giving 6 months' notice.
*169 OPINION.
The Commissioner determined a deficiency in the petitioners' income tax for the taxable year 1957 in the amount of $ 911.62. Some of the issues have been conceded by the respondent. The only remaining*147 issue is whether sums received as royalties under a license of certain patents are capital gains.
All of the facts are stipulated and are found as stipulated.
The petitioners are husband and wife. They filed their joint Federal income tax return for the taxable year ended December 31, 1957, with the district director of internal revenue, Detroit, Michigan.
Franz Martini, hereinafter referred to as the petitioner, was issued
The petitioner entered into a license agreement dated October 18, 1955, with Commerce-Pacific, Inc. By this agreement the petitioner granted Commerce-Pacific --
the exclusive right and license in and throughout the United States and its territorial possessions to use and sell, and to sublicense others to use and sell, fishing reels made in Japan and embodying any of the inventions of said
This agreement further provided:
6. Either party hereto shall have the right to cancel and terminate this agreement by giving to the other party written notice of election so to do six (6) *148 months in advance of any anniversary date hereof. * * *
If not sooner terminated, the agreement was to remain in effect until the expiration of
The petitioner received $ 3,959.15 in 1957 as royalties under this license agreement.
During a period beginning about the middle of 1954 and extending beyond 1957 the petitioner, through several closely held corporations, manufactured fishing reels containing parts covered by the patents mentioned in the license agreement. These reels were sold and distributed throughout the United States by Longfellow Products, Inc.
The petitioner contends that he is entitled to treat the royalties received under this license agreement as gain from the sale of a capital asset. We cannot agree.
*170
(a) General. -- A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 6 months, regardless of *149 whether or not payments in consideration of such transfer are -- (1) payable periodically over a period generally coterminous with the transferee's use of the patent, or (2) contingent on the productivity, use, or disposition of the property transferred.
(b) (1) The term "all substantial rights to a patent" means all rights which are of value at the time the rights to the patent (or an undivided interest therein) are transferred. The circumstances of the whole transaction, rather than the particular terminology used in the instrument of transfer, shall be considered in determining whether or not all substantial rights to a patent are transferred in a transaction. A transfer limited in duration by the terms of the instrument to a period less than the remaining life of the patent is not a transfer of all substantial rights to a patent. * * * * (4) The retention of a right to terminate the transfer at will is the retention of a substantial right for the purposes of
We are unable to find that the petitioner transferred to the licensee all the substantial*150 rights in his patents. Whether he did so depends upon the legal effect of the license agreement.
The petitioner has urged that this case should be controlled by
In addition, the petitioner here retained the right to cancel the license at will upon giving 6 months' notice. Nothing in the record indicates that this right was without value. The retention of this right must also lead us to the conclusion that the petitioner failed to transfer all of his substantial rights under the patents.
Therefore, the income which the petitioner received in 1957 under the license agreement is not gain from the sale or exchange of a capital asset but is royalty income taxable at ordinary income rates.
Arthur M. And Ruth F. Young v. Commissioner of Internal ... , 269 F.2d 89 ( 1959 )
John H. Kirby, Ii, and Haysel Kirby v. United States , 297 F.2d 466 ( 1961 )
Robert C. Switzer v. Commissioner of Internal Revenue, ... , 226 F.2d 329 ( 1955 )
Clyde E. Bannister and Wife, Alwylda M. Bannister v. United ... , 262 F.2d 175 ( 1958 )