Burde v. CIR
| Citation | 352 F.2d 995 |
| Decision Date | 05 November 1965 |
| Docket Number | Docket 29623,66,29624.,No. 65,65 |
| Parties | Max A. BURDE and Berthe C. Burde, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Bernard WEISS and Peggy S. Weiss, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Robert J. Wolpert, of Steingarten, Wedeen & Weiss, New York City (Albert A. Wedeen, New York City, on the brief), for petitioners.
Jonathan S. Cohen, Attorney, Department of Justice, Washington, D. C. (John B. Jones, Jr., Acting Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney, Attorneys, Department of Justice, Washington, D. C., on the brief), for respondent.
Before FRIENDLY and KAUFMAN, Circuit Judges, and BRYAN, District Judge.*
This appeal raises novel and interesting questions involving the interrelationship between Sections 1235 and 707 of the Internal Revenue Code of 1954. The sole issue is whether payments of $19,484.33, received severally in 1958 by Max A. Burde and Bernard Weiss ("husbands," "taxpayers") on account of a 1955 transfer of their respective one-third interests in a bath oil formula to a partnership in which Berthe C. Burde and Peggy S. Weiss ("wives") each had a one-third interest, are properly taxable as ordinary income or as long term capital gains. The Tax Court, per Judge Fay, determined that the payments were ordinary income and upheld the Commissioner's assessment of deficiencies against Max Burde and Bernard Weiss, respectively, of $7,215.48 and $7,093.14 (the wives are parties only because both couples filed joint returns). See 43 T.C. 252 (1964). We affirm, but we disagree with one of the alternative grounds relied on below — that a partnership can never be treated as an entity for purposes of Section 1235. Because this is a question of first impression at the appellate level, we feel compelled to state our views in more detail than would otherwise be warranted.
The facts are undisputed and since they were fully set forth in the Tax Court opinion, we will make only brief reference to them. Since 1940, the husbands have been partners engaged in the business of wholesaling drugs, cosmetics, and toiletries. In April 1954, Martin F. Emory sought to interest them in a bath oil formula, which he had conceived but had not begun to develop. The husbands accepted his proposal to transfer to each of them a one-third interest in the formula, in return for which they would finance all of the development costs, estimated at $12,000. It was contemplated from the outset of the venture that the formula would be sold to a large cosmetic manufacturer as soon as it was proven commercially practicable. The husbands engaged a chemist to test the formula and personally sampled the product. Together with Emory, they participated in conferences with patent attorneys concerning the relative merits of patenting the formula or retaining it as a trade secret. A patent application was filed in February 1955, and the patent was subsequently granted in 1963.
On January 2, 1955, Emory met with the husbands and wives and suggested that instead of selling the formula to a large manufacturing concern, as originally contemplated, it would be wiser to produce and market it themselves. The husbands declined this proposal, but the wives, who had substantial experience in the cosmetics industry, were enthusiastic about the idea. As a result, the husbands acquiesced in an informal agreement whereby they and Emory would transfer their interests in the formula to a new manufacturing partnership known as "Sardo by Sardeau," in which Emory and the wives would each have a one-third interest, in return for a royalty to be established when production costs were ascertained. It was further agreed that the husbands' wholesaling partnership, Keystone Company, would undertake to solicit orders for the bath oil on a commission basis. Thereafter, Sardo by Sardeau produced the first large commercial batch of the formula, which bore the trade name "Sardo," and Keystone soon obtained orders for the oil from a large department store. On May 31, 1955, Emory and the husbands formally executed an agreement transferring Sardo to the partnership Sardo by Sardeau, in return for a flat payment of $2,500.00 plus 6 per cent of the net sales commencing January 1, 1956. The product rapidly caught the public's fancy, as evidenced by the 1955 net sales totaling $342,244.46. On January 2, 1956, Emory and the wives resuscitated a dormant corporation ("Sardeau, Inc."), transferred to it the assets and liabilities of Sardo by Sardeau, and extinguished the partnership.1 The corporation took over the royalty payments to Emory and the husbands, and in 1958, the year in issue, each of the three men received $19,484.33. For purposes of this case, we can ignore the incorporation of the partnership and treat the royalties as if received directly from the partnership.
Section 1235 provides, in essence, that a transfer of all substantial rights in a patent, or an undivided interest therein, by a holder, to transferees other than related persons, shall be treated as if it were a sale or exchange of a capital asset held for more than six months, without regard to whether the payments received in consideration for the transfer take the form of royalties on a license.2 Section 1235 is to be disregarded in assessing the tax consequences of a transaction not falling within its ambit, and the tax consequences are to be determined by other provisions of the Code. Treas. Reg. § 1.1235-1(b). The taxpayers do not contest on appeal that if the May 1955 transfer to the manufacturing partnership fails to qualify under Section 1235, the royalties they received are ineligible for taxation at long term capital gain rates.3
The Commissioner does not dispute that Emory and the husbands were "holders" who transferred all substantial rights in Sardo to the manufacturing partnership.4 He contends, rather, that Section 1235 is inapplicable because Sardo was transferred to related persons within the meaning of Section 1235(d). This subsection incorporates the definition of related persons contained in Section 267(b) (). In not uncommon reticulate tax law fashion, Section 267 (b) (1) refers us to Section 267(c) (4), where we at last find the hardly startling revelation that a spouse is a related person.
The taxpayers urge that Sardo was transferred to a partnership, and since Section 267(b) does not define a partnership as a related person, Section 1235(d) has no application to this case. The Commissioner counters with the interesting suggestion that the partnership entity must be disregarded for purposes of Section 1235. Therefore, he argues, the transfer must be deemed to be directly from Emory and the husbands to Emory and the wives.
The Tax Court opinion evidenced full agreement with the Commissioner. As support for this position, however, it relied heavily on Treas.Reg. § 1.1235-2 (d) (2), which provides that a partnership cannot be the holder of a patent, but that the individuals comprising the partnership may qualify as co-holders to the extent of their partnership interests. We believe that reliance on this Regulation is misplaced. It is of course true that a partnership cannot be the holder of a patent; Section 1235(b) expressly defines a holder as an individual who either invented the res of the patent or purchased an interest in it before it was reduced to actual practice. But a transferee of an invention which has been reduced to actual practice (see note 3, supra) can never be a holder, Section 1235 (b). Therefore, it would seem to us that the Regulation interpreting the statutory definition of holder has no relevance to a transferee partnership, and that nothing in Section 1235 itself precludes treating the partnership as an entity.
Section 1235(d) was drafted expressly to prevent the conversion of ordinary income into capital gains by a transfer of a patent within essentially the same economic group. See H.Rep. No. 1337, 83d Cong., 2d Sess. A280-A281 (1954), U.S.Code Congressional and Administrative News, p. 4025. We are, therefore, not persuaded by the taxpayers' argument that the silence of Section 267(b) on the subject of partnerships signifies a Congressional intent that a transfer to a partnership can never fall within the ambit of Section 1235(d). It is far more likely that Congress never considered the question.5 When Congress in 1954 enacted Section 707, permitting a partnership to be treated as an entity in the circumstances we shall discuss, it recognized the impossible task of foreseeing all the instances in which resourceful taxpayers might urge that a partnership was deserving of entity treatment.
No inference is intended, however, that a partnership is to be considered as a separate entity for the purpose of applying other provisions of the internal revenue laws than § 707 if the concept of the partnership as a collection of individuals is more appropriate for such provisions. H. Conf.Rep. No. 2543, 83d Cong., 2d Sess. 59 (1954), U.S. Code Congressional and Administrative News, p. 5319.
We do not agree with the Commissioner, however, that it is necessary in all Section 1235 cases to "pierce the partnership veil." If this were the rule, then the transfer of a wholly owned patent to a partnership in which the transferor (or a related person) owned but a small interest would fail to qualify for capital gains rates to the extent of the transferor's partnership interest, in spite of the fact that the patent was no longer controlled within essentially the same economic group. This result was rejected in Weller v. Brownell, 240 F.Supp. 201, 208-210 (M.D.Pa.1965), where the transferor-inventor and related persons owned 44.90 per cent of the transferee partnership.
Our task of interpretation and reasoned elaboration cannot be...
To continue reading
Request your trial
-
Rodman v. C. I. R.
...creator. Because a joint venture is not an individual, it cannot itself be a " holder," Treas.Reg. § 1.1235-2(d)(2); Burde v. Commissioner, 352 F.2d 995, 998 (2d Cir. 1965). Although the individual members of a joint venture may be accorded such status, on the record in the tax court only N......
-
Prof'l Servs. v. Comm'r of Internal Revenue
...to the substance of that transaction.” Cf. Bixby v. Commissioner, supra; Miles v. Commissioner, 41 T.C. 165 (1963); Burde v. Commissioner, 352 F.2d 995 (2d Cir. 1965), affg. 43 T.C. 252 (1964), cert. denied 383 U.S. 966 (1966). Initially, the documents which purport to establish Professiona......
-
Gilson v. Commissioner
...all substantial rights to a patentable product (e.g., design or invention). See Burde v. Commissioner 65-2 USTC ¶ 9733, 352 F. 2d 995, 998, n. 4 (2d Cir. 1965), affg. Dec. 27,064 43 T.C. 252 (1964), cert. denied 383 U.S. 966 (1966); Ofria v. Commissioner Dec. 38,198, 77 T.C. 524 539 (1981).......
-
Green v. Comm'r of Internal Revenue
...sales, he recovers his basis, if any, in the sale. See secs. 1001, 1222, 1235(a); Burde v. Commissioner, 43 T.C. 252 (1964), affd. 352 F.2d 995 (2d Cir. 1965); Myers v. Commissioner, 6 T.C. at 258; Winchester v. Commissioner, 27 B.T.A. 798 (1933). After the transfer, he no longer owns any p......
-
The consequences of electing out of Subchapter K.
...of ordinary income into capital gain). The court's holding ultimately was codified in section 761(e). See also Burde v. Commissioner, 352 F.2d 995 (2d Cir. 1965), aff'g 43 T.C. 252 (1964), cert. denied, 383 U.S. 966 (1966) (aggregate theory applied to prevent the taxpayers from achieving ca......