Burde v. Comm'r of Internal Revenue
| Decision Date | 30 November 1964 |
| Docket Number | 1365-62.,Docket Nos. 1364-62 |
| Citation | 24 T.C.M. (CCH) 46,43 T.C. 252 |
| Parties | MAX A. BURDE AND BERTHE C. BURDE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTBERNARD WEISS AND PEGGY S. WEISS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Albert A. Wedeen, E. Michael DiFabio, and Robert J. Wolpert, for the petitioners.
Leon M. Kerry, for the respondent.
Petitioners Max A. Burde and Bernard Weiss each acquired a one-third interest in a bath oil invention in consideration for their promise to assist the inventor in the development thereof. Because of the extent of their mutual activities in connection with the development of the invention, these three individuals held the invention as joint ventures. Prior to the time the invention was reduced to practice, the joint venturers sold it to a partnership in which the inventor, Burde's wife, and Weiss' wife each held a one-third interest. Held: Section 1235 is inapplicable because the transfer constituted a sale to related parties. Sec. 1235(d). Pursuant to section 707(b)(2)(B), the gain realized by petitioners Burde and Weiss is taxable as ordinary income. Even in the absence of section 707(b)(2)(B), the gain realized by Burde and Weiss would not constitute long-term capital gain since they did not hold property rights in the invention for the requisite 6-month holding period.
Respondent determined deficiencies in the income taxes of petitioners Max A. and Berthe C. Burde and petitioners Bernard and Peggy S. Weiss for the calendar year 1958 in the respective amounts of $7,215.48 and $7,093.14.
These proceedings have been consolidated.
The sole issue remaining for decision is whether the royalty payments received by petitioners Max A. Burde and Bernard Weiss in 1958 were taxable as long-term capital gain.1
Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
Petitioners Max A. and Berthe C. Burde were, at all times relevant hereto, husband and wife. They filed their joint income tax return for 1958, prepared on the basis of a calendar year and the cash method of accounting, with the district director of internal revenue, Upper Manhattan, New York. Petitioner Max A. Burde will hereinafter be referred to as Burde.
Petitioners Bernard and Peggy S. Weiss were, at all times relevant hereto, husband and wife. They filed their joint income tax return for 1958, prepared on the basis of a calendar year and the cash method of accounting, with the district director of internal revenue, Brooklyn, N.Y. Petitioner Bernard Weiss will hereinafter be referred to as Weiss.
Burde and Weiss have, since 1940, been partners engaged in the business of selling drugs, cosmetics, toiletries, and related products to drug and department stores on behalf of manufacturers. The name of their partnership is Keystone Co. (hereinafter referred to as Keystone). In the course of their activities in this business they became acquainted with an individual named Martin F. Emory (hereinafter referred to as Emory).
Emory, Burde, and Weiss are not related to each other by blood or in law.
Emory has been connected, in one way or another, with the promotion and sale of cosmetics, toiletries, and pharmaceutical products since the mid-1940's. Although Emory did not, at any time relevant hereto, possess any formal scientific or pharmaceutical training, he has been interested in the development of new products in the above-mentioned fields. Burde, Weiss, and Emory have, at least upon one occasion prior to the transactions hereinafter described, been associated in a business venture. That venture, which was conducted in the form of a corporation, known as Sardeau, Inc. (hereinafter referred to as the corporation), involved the sale or distribution of relatively expensive perfumes to retail stores. That business proved unsuccessful, and Burde and Weiss discontinued their association with it in 1953. Their wives, however, formed a partnership with Emory to continue said business. That partnership will hereinafter be referred to as Perfume Co. The corporation through which the perfume business had theretofore been conducted remained in existence solely because of the fact that its annual State franchise taxes continued to be paid.
In the early part of April 1954, Emory contacted Burde and Weiss with regard to a bath oil formula he had conceived. Emory proposed to transfer to each of them a one-third interest in the formula in return for their promise to pay all of the development costs, including any possible legal and patent fees, the cost of a chemist, and the production costs of a commercial batch of the bath oil. In the latter part of that month, Burde and Weiss accepted Emory's offer. It was estimated that Burde and Weiss would probably incur costs of approximately $12,000 in connection with the commercial development of the bath oil, consisting of $1,000 for attorney fees in connection with a patent application, $1,000 for other legal fees, $500 to be paid to a chemist for producing samples of the product, $5,000 or $6,000 as the cost of producing a 50-gross commercial batch, and $2,000 to $3,000 for laboratory testings of the product. It was contemplated from the very outset of their agreement that Burde and Weiss would finance Emory in connection with the development of the bath oil and that after the oil had been sufficiently developed they would sell the formula and the bath oil invention to some large cosmetic manufacturer.
Emory's bath oil formula, which subsequently became known as Sardo, consists of a unique combination of five oils, each of which by itself is not an unusual product or ingredient. At the time Burde and Weiss orally accepted Emory's offer, Emory had made no effort to develop this product. Prior to that time he had never even attempted to make a sample of the bath oil. In fact, Emory had not found it necessary to reduce the formula to writing prior to that time since he had committed the elements of the formula to memory.
In May 1954, Burde and Weiss brought Emory to their attorney, explained the terms of their agreement to the attorney, and requested him to reduce their agreement to writing. Burde and Weiss advised the attorney that any services rendered in connection with the bath oil formula or requested by either of them or by Emory should be billed to Burde and Weiss personally and that Emory would not bear any part of the legal fees.
In June 1954, Burde and Weiss contacted a chemist and retained him to prepare samples of the bath oil. Emory conferred with the chemist and revealed the bath oil formula to him. The chemist in August of that year delivered six 4-ounce samples to Emory. Emory, Burde, and Weiss, as well as members of their immediate families, made personal tests of the samples.
During the summer of 1954, Emory, Burde, and Weiss, at the suggestion of Burde's and Weiss' lawyer, conferred with a firm of patent lawyers concerning the advisability of applying for a patent on the bath oil formula. At this meeting Weiss advised the patent attorneys that all services rendered and disbursements made in connection with the bath oil invention should be billed to Burde and Weiss personally or to their partnership, Keystone. The patent attorneys were of the opinion that the formula was patentable and that Emory, Burde, and Weiss might have a better chance of selling the formula to some large cosmetic manufacturing company if it were patented. They held discussions concerning the filing of a patent application upon a number of occasions during that summer. In connection therewith, the matters of patent infringement and protecting the formula were discussed. In the early part of December 1954, it was finally decided that an application for a patent would be filed.
On December 21, 1954, Burde, Weiss, and Emory executed a written agreement memorializing their oral agreement of April 1954. There was no basic difference between the April 1954 oral agreement and the December 21, 1954, written agreement. That agreement provided, in pertinent part, as follows:
WHEREAS (Emory) has with the cooperation and aid of (Burde and Weiss) invented a formula for a bath oil which is also a remedy against dry skin and skin irritation, which invention also consists of a new use for a compound of previously known ingredients, and;
WHEREAS the parties hereto have previously orally among themselves agreed on their respective interests in said inventions and are now desirous of reducing their said agreement to writing;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows:
1. (Emory) hereby assigns, transfers and sets over unto (Burde and Weiss) two-thirds of all his right, title and interest in and to the inventions aforementioned, namely the formula for said oil, the process of manufacturing the same, and the new use thereof, all of which are now known to all the parties.
TO HAVE AND TO HOLD such inventions and income therefrom and rights thereto, to (Burde and Weiss), one-third thereof to each, their heirs and assigns for their own use and behoof, forever.
2. (Emory) hereby further agrees to file or cause to be filed in the United States Government Patent Office in his own name, an application for letters patent to said inventions and to execute all necessary papers and documents required in connection therewith, now being prepared by (certain patent lawyers).
3. (Emory) further agrees that immediately upon his receipt of a serial number in connection with such application to the United States Patent Office, he will execute and deliver to each of (Burde and Weiss), an assignment of said invention or inventions and patent applications in proper recordable form as required by the said United States Patent Office for a one-third...
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