Busse v. CIR

• Decision Date: 01 June 1973
• Docket Number: No. 72-1957.,72-1957.
• Citation: 479 F.2d 1147
• Parties: Curtis T. BUSSE and Myrtle Busse, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

479 F.2d 1147 (1973)

Curtis T. BUSSE and Myrtle Busse, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 72-1957.

United States Court of Appeals, Seventh Circuit.

Argued April 12, 1973.

Decided June 1, 1973.

Scott P. Crampton, Asst. Atty. Gen., William S. Estabrook, III, Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., for respondent-appellant.

John S. Best, Robert A. Schnur, Milwaukee, Wis., for petitioners-appellees.

Before HASTINGS, Senior Circuit Judge, CUMMINGS, Circuit Judge, and CAMPBELL, Senior District Judge.^*

HASTINGS, Senior Circuit Judge.

Pursuant to § 7483 of the Internal Revenue Code of 1954, the Commissioner of Internal Revenue brings this appeal from a decision and order of the United States Tax Court, 58 T.C. 389 (1972), holding that he erroneously determined a deficiency in the 1967 federal income tax of Curtis T. Busse (the taxpayer) and Myrtle Busse¹ of Randolph, Wisconsin. The parties stipulated all the facts.

Sometime before March 20, 1958, taxpayer invented a method and machine for stacking cans on pallets. On that date, he assigned an undivided one-half interest in the invention to his brother. A patent covering the invention issued to taxpayer on August 16, 1960. By reason of the assignment, taxpayer and his brother each owned one-half of the patent. When the brother died on July 10, 1962, his interest passed to his widow. Taxpayer and the widow organized Busse Bros., Inc., a Wisconsin corporation, on January 2, 1966, in which at all relevant times each owned 50 per cent of the issued and outstanding stock. On the same day the corporation was organized, taxpayer, his sister-in-law and the corporation entered into an oral agreement by which each shareholder sold his entire interest in the patent to the corporation.² In return, the corporation agreed to pay taxpayer and his sister-in-law quarterly installments, during the life of the patent, equal to five per cent of the corporation's net selling price (as that term was defined in the agreement) of devices covered by the patent claims.

During 1967 the corporation paid taxpayer $36,029.01 as his one-half share of the payments required under the agreement. Although taxpayer's 1966 assignment to the corporation was plainly "a transfer * * * of property consisting of * * * an undivided interest in all substantial rights to a patent which includes a part of all such rights, by any holder³," as described in § 1235(a) of the Code, taxpayer was not able to treat the 1967 payments as long-term capital gain under § 1235. Such treatment was precluded by the operation of § 1235(d), because taxpayer's assignment to the corporation was a transfer between related persons, specifically, in the words of § 267(b)(2) as modified by § 1235(d) (1), between "an individual and a corporation 25 percent or more in value of the outstanding stock of which is owned * * * by * * * such individual." However, taxpayer was able to and did report the entire amount of the 1967 payments as long-term gain received upon the sale of a capital asset, under the general provisions of §§ 1221 and 1222.⁴ The Commissioner, pursuant to the appropriate regulations under § 483, nevertheless concluded that only $33,011.81 of the 1967 payments constituted capital gain, while the remaining $3,017.20 was unstated interest on an installment sale, taxable at ordinary income rates. In line with this analysis, the Commissioner determined an income tax deficiency for 1967 of $1,659.47. He rejected taxpayer's contention that § 483(f)(4) protected the 1967 payments from unstated interest treatment. Taxpayer petitioned the Tax Court for a redetermination, and that court determined that there was no 1967 deficiency. This appeal followed.

The Tax Court's decision was of a narrow legal question: Given a patent transfer which is described in § 1235(a) of the Code but which does not receive its capital gain treatment under § 1235, should some part of the payments received pursuant thereto be treated as unstated interest under § 483, or is such treatment precluded by the exception contained in § 483(f)(4) ? We agree with the Tax Court that such payments do qualify for the statutory exception⁵ and, accordingly, affirm the decision and order.

Section 483, "Interest on certain deferred payments," was added to the Code by the Revenue Act of 1964, Pub.L.No. 88-272, § 224(a), 78 Stat. 19, 77. The section provides, in pertinent part:

"(a) * * * In the case of any contract for the sale or exchange of property there shall be treated as interest that part of a payment * * * which bears the same ratio to the amount of such payment as the total unstated interest⁶ under such contract bears to the total of the payments * * * which are due under such contract.

* * * * * *

"(c) * * *

"(1) * * * Except as provided in subsection (f), this section shall apply to any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such sale or exchange under a contract—

"(A) under which some or all of the payments are due more than one year after the date of such sale or exchange, and

"(B) under which * * * there is total unstated interest."

The report of the Committee on Ways and Means of the House of Representatives,⁷ which accompanied the Revenue Act of 1964 on its sojourn through the Congress, explained the general reasons for the new provisions :

"Your committee sees no reason for not reporting amounts as interest income merely because the seller and purchaser did not specifically provide for interest payments. This treats taxpayers differently in what are essentially the same circumstances merely on the grounds of the names assigned to the payments. In the case of depreciable property this may convert what is in reality ordinary interest income into capital gain to the seller. At the same time the purchaser can still recoup the amount as a deduction against ordinary income through depreciation deductions. Even where the property involved is a nondepreciable capital asset, the difference in tax bracket of the seller and buyer may make a distortion of the treatment of the payments advantageous from a tax standpoint. Your committee believes that manipulation of the tax laws in such a manner is undesirable and that corrective action is needed."⁸

As specifically mentioned in subsection (c)(1), supra, subsection (f) contains outright exceptions to the applicability of § 483. There are five exceptions in all, of which only that contained in subsection (f) (4) concerns us :

"(4) Sales or exchanges of patents. —This section shall not apply to any payments made pursuant to a transfer described in section 1235(a) (relating to sale or exchange of patents)."

On brief, the Commissioner agrees that the payments made pursuant to the 1966 assignment "appear to fall within the literal language of Section 1235(a)." It would seem, then, that taxpayer is entitled to be excepted from the operation of § 483 by the "plain, unambiguous and understandable" words of the statute. United States v. Chused, 8 Cir., 209 F.2d 548, 550 (1954). This situation calls to mind the words of the late Circuit Judge Major for our court in Durkee Famous Foods, Inc. v. Harrison, 136 F.2d 303, 307 (1943), rev'd on other grounds, 320 U.S. 718, 64 S.Ct. 367, 88 L.Ed. 422:

"This clear and unambiguous language calls for the application of another rule, long recognized by the courts but too often, we fear, honored only by lip service. In United States v. Standard Brewery, 251 U.S. 210, 217, 40 S.Ct. 139, 140, 64 L.Ed. 229, the court said: `Nothing is better settled than that in the construction of a law its meaning must first be sought in the language employed. If that be plain, it is the duty of the courts to enforce the law as written, provided it be within the constitutional authority of the legislative body which passed it.\' Again, in United States v. Merriam, 263 U.S. 179, 187, 44 S.Ct. 69, 71, 68 L.Ed. 240, 29 A.L.R. 1547, the court said: `But in statutes levying taxes the literal meaning of the words employed is most important, for such statutes are not to be extended by implication beyond the clear import of the language used.\' Again, in United States v. Missouri P. R. Co., 278 U.S. 269, 277, 49 S.Ct. 133, 136, 73 L.Ed. 322, the court said: `We are therefore bound by the words employed and are not at liberty to conjure up conditions to raise doubts in order that resort may be had to construction. * * * Construction may not be substituted for legislation.\'

"Another rule often overlooked in construing a revenue statute is that in a doubtful situation the taxpayer is entitled to the benefit of the doubt. As was said by the court in United States v. Merriam, supra, 263 U.S. at page 188, 44 S.Ct. at page 71, 68 L. Ed. 240, 29 A.L.R. 1547: `If the words are doubtful, the doubt must be resolved against the government and in favor of the taxpayer.\'"

We do not consider that the law in this area of statutory construction has changed appreciably since Judge Major expressed it.

Nevertheless, the Commissioner seeks to avoid the consequences of strict construction by invoking the judicially developed rule which justifies "a departure from the letter of the law" when adherence to the letter would cause an absurdity "so gross as to shock the general moral or common sense" and when it is plain that Congress intended "that the letter of the statute is not to prevail." Crooks v. Harrelson, 282 U.S. 55, 60, 51 S.Ct. 49, 50, 75 L.Ed. 156 (1930).

The best indication of the intent of Congress is, of course, the literal wording of the statute itself, which we have held is not ambiguous. Discussion of subsection (f)(4) in the congressional committee reports is minimal and perfunctory,⁹ shedding no light on the intent the Commissioner purports to see of avoiding the result the Tax Court decision dictates....