Christensen v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 24 September 1935 |
| Docket Number | Docket No. 72424. |
| Parties | NIELS A. CHRISTENSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Howard F. Burns, Esq., for the petitioner.
Arthur Carnduff, Esq., for the respondent.
This proceeding was brought to redetermine a deficiency in the income taxes of the petitioner for the year 1930 in the sum of $19,122.74.
The issues are:
(1) Whether the entire amount, $296,511.44, of a judgment paid to the petitioner in 1930 as a result of a suit for patent infringement was income to him, or if such sum should be reduced by $103,589.34, representing the amount equivalent to royalties and interest arising prior to March 1, 1913.
(2) The inclusion by the respondent of certain portions of the judgment which were garnisheed by the petitioner's creditors.
The facts were stipulated and in so far as material are as follows:
During the year 1909 the petitioner sued the National Brake & Electric Co. for an infringement of a patent, expiring March 21, 1916, developed by and belonging to him. The litigation continued until 1930, when a judgment for $296,511.44 in favor of the petitioner was paid. The judgment was computed by allowing the petitioner royalties for the period from December 1, 1906, to March 21, 1916, corresponding to royalties fixed in a contract between the parties in effect prior to December 1, 1906. The total amount of such royalties was $128,692.17, the costs were $5,281.22 and the interest allowed, $162,538.05. No exemplary damages were awarded. The royalties were computed on a fiscal year basis and were also segregated as to before and after March 1, 1913. The total amount of the principal of such royalties and interest thereon from December 1, 1906, to February 28, 1913, inclusive, was $103,589.34.
Out of the proceeds of the judgment the petitioner paid $198,589.90 as his ordinary and necessary business expenses relating to the litigation. All such expenses were incurred in their entirety after March 1, 1913, and were paid during 1930. The net income from the judgment was $97,927.54.
The petitioner filed his income tax return for 1930 on the cash receipts and disbursements basis and included therein $4,399.41 as income derived from the judgment. The respondent determined that the amount of taxable income derived therefrom was $97,927.54 and thus increased the petitioner's income from such judgment by $93,528.13.
Before any part of the above judgment was paid, summonses in garnishment were served at the instance of the American Timber Holding Co. and Merrill Griswold, impounding funds aggregating $23,000 in the hands of the clerk of the Circuit Court of Milwaukee County. On February 9, 1932, the clerk paid $7,500 to the American Timber Holding Co. and $15,500 to Merrill Griswold to apply on judgments held by them against the petitioner. A further sum of $4,300 was impounded by garnishment proceedings brought by J. W. Pereles to whom the sum was paid on August 1, 1931.
The sum of $6,000 was placed in escrow by the petitioner and the National Brake & Electric Co. for the benefit of Edward Friedman, to whom, with others, that amount was finally paid on February 26, 1932. The said sums of $23,000, $4,300, and $6,000 were a part of the amount paid by the National Brake & Electric Co. in 1930 in satisfaction of the petitioner's judgment against it. All of the claims and debts mentioned were controverted by the petitioner.
The respondent's position is that on March 1, 1913, the petitioner had an unliquidated claim for damages in tort for the infringement of his patent; that the amount recoverable on that claim was uncertain, conditional, and contingent on March 1, 1913; and that since he recovered a lump sum covering damages for the entire period from December 1, 1906, to March 21, 1916, such entire lump sum was income to him in 1930.
It scarcely need be repeated that income accrued prior to March 1, 1913, should be considered as capital and is not taxable as income. Southern Pacific Co. v. Lowe, 247 U. S. 330. The question here involved is but one step removed. Is income which accrued prior to March 1, 1913, but not received until 1930 taxable in the latter year?
In Safety Car Heating & Lighting Co. v. United States, 5 Fed. Supp. 276, a comparable situation was under consideration. The court there said:
Taking up the issues in the order of their statement, we are first called upon to answer the question as to whether or not the net amount received by plaintiff in settlement of a patent suit instituted prior to March 1, 1913, and settled in 1925 is taxable income in the latter year. The net amount attributable to infringement prior to March 1, 1913, is as stated $153,621.72, and the entire amount to the day of settlement in 1925 was $176,531.95. The sum is thus apportioned because the amount allocated to the period prior to March 1, 1913, is dealt with by the plaintiff as a nontaxable asset, while defendant contends it is income for the year 1925 and taxable as such.
The values with which we are concerned had their source in a claim or chose in action, and on March 1, 1913, that chose in action had not been valued or fixed in terms of money. That it existed cannot be denied, and that it had value cannot be ignored. Nor can it be said to be a thing the value of which could not be ascertained with legal certainty as of March 1, 1913. Actually, its value was so ascertained and fixed by a special master who arrived at his conclusions in terms of money by the use of admissible facts and mathematical calculations. Article 90 of Regulations 65 expressly provides that unconditional claims arising prior to March 1, 1913, whether presently payable or not, are not taxable as income accruing subsequent to that date. The prosecution of the infringement suit was necessary in this case only because the infringer refused to recognize the law and the facts, which at all times were there to be construed in plaintiff's favor. To hold that the unjust necessity for this suit constituted a condition precedent to the vesting of rights or title in plaintiff as to the damages inherent in the...
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