United States v. Zacks, 44

Citation375 U.S. 59,84 S.Ct. 178,11 L.Ed.2d 128
Decision Date21 November 1963
Docket NumberNo. 44,44
PartiesUNITED STATES, Petitioner, v. Aaron ZACKS et al
CourtUnited States Supreme Court

J. Mitchell Reese, Jr., Washington, D.C., for petitioner.

Scott P. Crampton, Washington, D.C., for respondents.

Mr. Justice HARLAN delivered the opinion of the Court.

The question in this case is whether § 117(q) of the Internal Revenue Code of 1939, a 1956 amendment to the Code which effected retroactive changes in the tax treatment of transfers of patent rights, gives rise to a claim for refund barred by the statute of limitations generally applicable to tax refund claims.

In 1952, Mrs. Zacks received royalties of about $37,000 on patents all substantial rights under which she had transferred by way of an exclusive license to a manufacturing corporation. In accordance with the then prevailing rulings of the Commissioner, the royalties were reported as ordinary income in the 1952 joint federal income tax return filed by Mrs. Zacks and her husband in 1953. The last payment of the taxes due was made in 1953. Under the statute of limitations governing a claim for refund of such taxes, the claim was barred in 1956. § 322(b)(1), Internal Revenue Code of 1939, 26 U.S.C. (1952 ed.) § 322(b)(1), 53 Stat. 91.1 By Act of June 29, 1956, 70 Stat. 404, Congress amended the provisions of the 1939 Code governing the taxability of amounts received in consideration for the transfer of patent rights. The amendment, made applicable to tax years beginning after May 31, 1950, provided that in the circumstances present here such amounts should be taxed as capital gains rather than as ordinary income.

In reliance on this amendment, the taxpayers, on June 23, 1958, filed a claim for a pro tanto refund of their 1952 income taxes. No action having been taken on the claim, they then commenced a refund suit in the Court of Claims. The United States asserted as a defense that the suit was barred by limitations under § 7422(a) of Internal Revenue Code of 1954, 26 U.S.C. § 7422(a), 68A Stat. 876.2 The Court of Claims granted the taxpayers' motion to strike this defense, 150 Ct.Cl. 814, 280 F.2d 829, and, other issues in the case being settled by stipulation, entered judgment for the taxpayers.

Because of the recurring importance of the problem in the administration of the tax laws and a conflict between the decision below and those of some of the Courts of Appeals,3 we granted certiorari. 371 U.S. 961, 83 S.Ct. 543, 9 L.Ed.2d 509. For reasons given hereafter, we hold that the taxpayers' claim was barred by limitations and, accordingly, reverse the judgment below.

Section 117(q) here in question provides in pertinent part:

'(Q) Transfer of Patent Rights.—

'(1) General rule.—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 whether or not payments in consideration of such transfer are—

'(A) payable periodically over a period generally coterminous with the transferee's use of the patent, or

'(B) contingent on the productivity, use, or disposition of the property transferred.

'(4) Applicability—This subsection shall apply with respect to any amount received, or payment made, pursuant to a transfer described in paragraph (1) in any taxable year beginning after May 31, 1950, regardless of the taxable year in which such transfer occurred.'

Since our sole concern is the intent of Congress in adding this section to the Code, it is necessary to look to the administrative and legislative background of the enactment. In 1946, the Commissioner of Internal Revenue announced his acquiescence in Myers, 6 T.C. 258, in which the Tax Court held, as to a so-called 'amateur' inventor,4 that the transfer by exclusive license of all substantial rights under a patent was a sale or exchange of a capital asset, notwithstanding that the consideration for the license was royalties based on a percentage of the selling price of articles sold under the patent, and paid annually. 1946—1 Cum.Bull. 3. On March 20, 1950, the Commissioner reversed his position and announced the withdrawal of his acquiescence in Myers, stating that royalties measured or paid as in that case would be taxed as ordinary income. Mim. 6490 1950—1 Cum.Bull. 9. The new ruling was declared applicable to tax years beginning after May 31, 1950. In the years following 1950, the Commissioner adhered to his new position, despite its rejection by several courts.5 The issue was settled for the future in 1954 by the enactment of § 1235 of the 1954 Code, 26 U.S.C. § 1235, 68A Stat. 329. Section 1235, applicable only prospectively, contains provisions identical in relevant part to those quoted above from § 117(q).6 Thus, prior to May 31, 1950, with exceptions noted hereafter,7 and again from the beginning of 1954, the law has been that for which the taxpayers contend in their refund suit.

In 1955, the Commissioner issued a further ruling declaring that he would adhere to his 1950 ruling for tax years beginning after May 31, 1950, and prior to 1954. Rev.Rule 55—58, 1955—1 Cum.Bull. 97. As a result, the Commissioner's position was that during the period from May 31, 1950 to 1954 there was a gap in the consistent application of the law as administratively and judicially established in 1946. It is evident that Congress intended to fill this gap when it enacted § 117(q) in 1956. But we are not able to say that Congress intended thereby to reopen for retroactive adjustment tax years with respect to which refund claims were already barred by limitations.

Section 117(q) does not in terms waive the application of the statute of limitations to refund claims then finally barred. On its face, § 117(q) does no more than overrule the Commissioner's position on a matter of substantive law respecting the years 1950 1954. Nor is there anything in the legislative history which suggests that such a waiver is to be implied. On the contrary, such indications as there are suggest that Congress intended only to terminate litigation then pending. Representative Cooper, then Chairman of the House Ways and Means Committee, stated on the floor of the House:

'The relief provided by section 1235 (of the 1954 Code) is available only with respect to amounts received in any taxable year to which the 1954 Code applies. As the result of this and the announced policy of the Internal Revenue Service to continue its insistence on its position for years beginning after May 31, 1950, and prior to effective date of the 1954 Code taxpayers are still confronted with litigation for taxable years falling in this period in order to secure the rights to which the courts, with practical unanimity, have held they are entitled.

'H.R. 6143 (the original version of § 117(q)) eliminates the necessity for such litigation by making the provisions of the 1954 Code available to years beginning after May 31, 1950.' 101 Cong.Rec. 12708 (Aug. 1, 1955).

There are other indications that Congress had only this limited intention. It is abundantly clear that Congress is aware of the limitations problem as it affects retroactive tax legislation. On numerous occasions, Congress has included an express provision reopening barred tax years. We need refer here to only a few examples. Section 14 of the Technical Amendments Act of 1958, 26 U.S.C. § 172(f)(3), (4), (g)(3), 72 Stat. 1606, 1611, provided rules for computing net operating loss deductions for tax years starting in 1953 and extending into 1954 and short tax years wholly within 1954. Subsection (c), added to the House bill by the Senate, provided expressly for a six-month period during which barred claims could be made. The addition was explained in the Senate report as follows:

'Your committee did amend the House provision, however, in one respect because 3 years have now el psed since 1954 and many of the transitional years with which this provision is concerned are now closed years. To prevent relief from being denied in such cases, your committee amends this provision to provide that if a refund or credit with respect to this provision is prevented on the date of enactment of this bill or within 6 months after that time by the operation of any law or rule of law (except closing agreements or compromises) refund or credit, nevertheless, is to be allowed if the claim is filed within 6 months of the date of enactment of this bill.' S.Rep. No. 1983, 85th Cong., 2d Sess. 24.

Again, by Act of August 9, 1955, 69 Stat. 607, Congress provided a one-year grace period for filing otherwise barred claims based on § 345 of the Revenue Act of 1951, 65 Stat. 452, 517, a retroactive relief measure affecting trust income accumulated for members of the Armed Services dying in active service on or after December 7, 1941, and before January 1, 1948. The House report on the bill stated:

'No relief was provided in the 1951 act, however, for cases where refunds or credits were barred by the expiration of the period of limitations, by prior court decisions, or for other similar reasons. Your committee is of the opinion that this failure was an oversight, and it believes that it is only equitable to extend treatment equivalent to that provided in section 345 of the Revenue Act of 1951 to cases where refunds or credits were barred by operation of law or rule of law (other than closing agreements or compromises).' H.R.Rep. No. 1438, 84th Cong., 1st Sess. 1—2.8

The most striking evidence of this sort, however, which we think is all but conclusive, is found in § 2 of the very Act here in dispute. That section, retroactively modifying § 106 of the 1939 Code, affected the taxation of payments received by a taxpayer from the United States with respect to a claim arising out of a construction contract for the Armed...

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