Commissioner of Internal Revenue v. Celanese Corp., 8570.

• Citation: 140 F.2d 339
• Decision Date: 17 January 1944
• Docket Number: No. 8570.,8570.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. CELANESE CORPORATION OF AMERICA.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

140 F.2d 339 (1944)

COMMISSIONER OF INTERNAL REVENUE v. CELANESE CORPORATION OF AMERICA.

No. 8570.

United States Court of Appeals District of Columbia.

Argued December 10, 1943.

Decided January 17, 1944.

Mr. Joseph M. Jones, Sp. Asst. to the Atty. Gen., with whom Messrs. Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., were on the brief for petitioner. Messrs. J. P. Wenchel, Chief Counsel, and C. E. Lowery, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., also entered appearances for petitioner.

Mr. E. Barrett Prettyman, of Washington, D. C., with whom Messrs. Fred R. Angevine, of New York City, F. G. Awalt, and Raymond Sparks, both of Washington, D. C., were on the brief, for respondent.

Before GRONER, C. J., and EDGERTON and DOBIE,^* JJ.

GRONER, C. J.

This is a tax case in which the Commissioner determined deficiencies against respondent, as a withholding agent, of $14,074.20, with penalties of $3,518.55 for 1937, and of $7,253.08 and penalties of $1,831.27 for 1938. The Tax Court held that there was no duty on respondent to withhold the tax. The Commissioner appealed. The question in the case is whether payments made by respondent to one Henri Dreyfus, a nonresident alien, were subject, in the two years in question, to the income tax withholding provisions of the Revenue Acts;¹ and the answer turns upon whether the payments were royalties for the use of patents or were payments on their purchase price.

The facts were stipulated in the Tax Court and for present purposes may be stated as follows:

Henri and Camille Dreyfus were in November, 1918, citizens and residents of Switzerland. They had invented and owned certain secret manufacturing processes upon which patents had been granted by the United States. On November 30, 1918, they contracted with respondent's predecessor corporation to assign and deliver to it all of such patents, with full and exclusive right and authority to manufacture and sell in the United States, its territories and dependencies, Mexico, Cuba and South America. The contract was executed by the Dreyfuses in London. A cotemporaneous contract provided for their employment as Managing Directors of the corporation for a period of fifteen years. Pursuant to the terms of the first mentioned contract, the Dreyfuses executed written assignments of "the whole of the exclusive right, title and interest in and to each and all of said letters patent * * * and in and to the inventions therein described and claimed, the same to be held by the said, the American Cellulose & Chemical Manufacturing Company, Ltd. (respondent's predecessor), for its own use and behoof and for the use and behoof of its successors, assigns, or legal representatives, subject to the terms and conditions of the said agreement of the 30th of November, 1918."

Camille Dreyfus subsequently became an American citizen and is not concerned with the appeal. His brother, Henri Dreyfus, continued a nonresident alien and at no time had an office or engaged in any trade or business in the United States.

In 1937 and 1938 respondent paid Henri Dreyfus $140,742.04 and $72,530.79, respectively, under the 1918 sales contract. It did not withhold income tax on these payments. If the payments were made in the purchase of personal property, as was decided by the Tax Court, then respondent is not subject to the income tax withholding provisions.² But the Commissioner claims that the payments were not purchase money payments, but were in fact royalties for the use of patents, (Sec. 119, Acts 1936, 1938, 26 U.S.C.A.Int.Rev.Acts, pages 876-879). If that be true, then admittedly respondent would be subject to the withholding provisions of the Act.

The November, 1918, sales agreement, after reciting the circumstances under which the Dreyfuses obtained the patents and that respondent, called "the Purchaser", desired to acquire them "to use, enjoy and exploit them in the Purchaser's area," provided that in consideration of the delivery by the Purchaser to the sellers of 150,000 shares of the Purchaser's fully paid, non-assessable common stock and the payment of six per cent (three per cent to each of the brothers) of the Purchaser's net profits to be paid in each year in which there should be payments of dividends to stockholders — "The Vendors hereby assign and make over to the Purchaser and its successors and assigns, the said processes and the full benefit thereof with the full and exclusive right and authority to manufacture and sell in the Purchaser's area, namely, in the United States of America, its territories and dependencies and also similar rights in Mexico, Cuba, and the countries of South America provided patents are taken out by the purchasers in any of the said countries in which purchasers may wish to do business (but not elsewhere) articles made under, by or in accordance with the said processes or any of them," etc.

And the stipulated facts show that in accordance with the quoted provision, the Vendors did assign in writing the whole of their exclusive right, title, and interest in the patents within the described territory to the Purchaser, and that the assignments were accepted and recorded in the United States Patent Office and that the Purchaser has uninterruptedly had and used the same and their extensions as its own property for a quarter of a century.

Considered in this aspect there can be no manner of doubt that the parties intended to effect a purchase and sale of the patents and not a royalty use.³ The 1918 contract confirms this purpose in unmistakable language, and this was the conclusion reached by the Tax Court. The stipulation, that Court said, categorically provides that the patents and processes covered in the 1918 contract were transferred to the petitioner before the tax years in question; and there is no reason to believe that when the parties drew their contract they intended to provide for licenses and royalties when they expressly provided for sale and price.

This reasoning seems to us in all respects sound, and when it is considered that we were recently told by the Supreme Court,⁴ that the judicial function is exhausted when there is found to be a rational basis for the decision of the Tax Court, the conclusion reached by that Court, supported, as here we think it is, by the stipulated facts and the established law, necessarily forecloses the question, unless there is something else in the record which of itself impels a different result. The Commissioner's case is, in the main, based on such a claim. He says that, notwithstanding the words of outright conveyance and sale, or the intention of the parties to make a purchase and sale, there are in the contract restrictions and limitations on the transfer which indicate that it was in law no more than a licensing agreement. To support this he points to various provisions from which he concludes that an absolute sale was not accomplished, since, as he thinks, respondent might, as the result of one or another of these provisions, in the contingencies named, lose the patents and the Vendors recover them. We find no merit in the claim. Most of the language to which the Commissioner alludes embraces precautionary provisions in the protection of the rights of the parties,...