Crook v. United States

• Decision Date: 11 October 1955
• Docket Number: Civ. A. No. 9506,9507.
• Parties: Richard H. CROOK and Virginia R. Thomas Zerbe, Executors of the Will of Bertha E. Thomas, Deceased, Plaintiffs, v. The UNITED STATES of America, Defendant. Richard H. CROOK and Virginia R. Thomas Zerbe, Executors of the Will of Bertha E. Thomas, Deceased, Plaintiffs, v. Stanley GRANGER, Collector of Internal Revenue for the 23rd District of Pennsylvania, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

135 F. Supp. 242

Richard H. CROOK and Virginia R. Thomas Zerbe, Executors of the Will of Bertha E. Thomas, Deceased, Plaintiffs, v. The UNITED STATES of America, Defendant.

Richard H. CROOK and Virginia R. Thomas Zerbe, Executors of the Will of Bertha E. Thomas, Deceased, Plaintiffs, v. Stanley GRANGER, Collector of Internal Revenue for the 23rd District of Pennsylvania, Defendant.

Civ. A. Nos. 9506, 9507.

United States District Court W. D. Pennsylvania.

October 11, 1955.

Bialas & Ryan, Pittsburgh, Pa., John F. Thaete, Walter B. Gibbons, Philadelphia, Pa., for plaintiffs.

D. Malcolm Anderson, Jr., U. S. Atty., Pittsburgh, Homer R. Miller, Spec. Asst. to Atty. Gen., for defendants.

JOHN L. MILLER, District Judge.

The above entitled cases, involving common questions of law and fact, were tried by this court without a jury.

Civil action No. 9506 is an action instituted by plaintiffs as executors of the will of Bertha E. Thomas, deceased, against the United States to recover income taxes for the calendar year 1940 in the amount of $6,285.95, plus interest. Civil action No. 9507 is an action by the same plaintiffs as executors of the will of Bertha E. Thomas, deceased, to recover $229,809.31, plus interest, income taxes for the years 1942, 1943, 1944, 1945, and 1946.

The main question presented is the same in both cases, i. e., as stated by defendants, whether certain sums received by decedent in her lifetime in the year 1940 and during the years 1942 to 1946, inclusive, which were paid to her by Thomas Flexible Coupling Company, are taxable as ordinary income under Int.Rev.Code of 1939, § 22(a), 53 Stat. 9, 26 U.S.C. § 22(a), or whether such sums are taxable as long-term capital gains under § 117(a) (4), 53 Stat. 50, 26 U.S.C. § 117(a) (4).

Other questions presented are as follows:

(a) Whether the alleged claim for refund filed by decedent for the year 1940 was adequate to constitute a legal claim for refund sufficient to support plaintiffs' cause of action no. 9506.

(b) A special question of allocation has been raised with respect to payments received by Mrs. Thomas in 1943.

(c) Whether plaintiffs have established by a fair preponderance of the evidence that all of the proceeds received by the decedent may be attributed to the transfer of the oldest of the patents on flexible couplings here involved, rather than to a later patent which the evidence discloses was held for a period of less than six months on the date of its transfer to Thomas Flexible Coupling Company by decedent.

Findings of Fact

1. Bertha E. Thomas, the decedent, died April 24, 1947, a resident of Warren County, Pennsylvania, leaving a will which was duly admitted to probate by the Register of Wills of Warren County and letters testamentary were issued to plaintiffs.

2. For the calendar year of 1940 Bertha E. Thomas filed an income tax return reporting an income tax of $8,227.96, which she paid to William Driscoll, then Collector of Internal Revenue, 23d District of Pennsylvania, on March 3, 1941. Driscoll retired from office June 16, 1941, and has not been in office as Collector for said district since the date of his retirement.

3. On February 23, 1941, decedent filed a claim for refund for income taxes paid for the year 1940 in the amount of $8,227.96, plus interest. In said claim decedent set forth the following:

"Taxpayer included in her 1940 taxable income receipt of $37,151.04 representing royalties on patents and so treated on her return in determining her tax liability for the year. A petition is now pending before the Board of Tax Appeals wherein there is a possibility that it may be held that the aforementioned payment of $37,151.04 should be treated as a capital expenditure instead of as payment of royalties on patents. This claim is therefore filed in order to preserve the taxpayer's right to a refund if it is finally determined that this payment was not royalties on patents as it has been treated on her return and that it should be treated as a capital receipt by the Taxpayer thereby resulting in a lower income tax liability for the said year. Until the nature of the payment has been definitely determined it is impracticable to attempt to compute a revised tax liability."¹

4. The Commissioner of Internal Revenue did not act upon the claim for refund for 1940 prior to the institution of civil action No. 9506, and more than six months elapsed between the filing of the claim for refund and the institution of said suit. The timeliness of the claim is not in dispute.

5. During her lifetime decedent filed income tax returns for the calendar years 1942, 1943, 1944, 1945, and 1946 and reported and paid income taxes as follows:

                Year                             Amount
                1943                           $264,173.46
                (proper adjustments being
                   made for 1942 tax)
                1944                             54,563.46
                1945                              3,338.63
                1946                             12,802.86
                                               ___________
                                               $334,878.41
                

The timeliness of payment of these taxes is not in dispute. The dates of payment are as disclosed by allegations in the complaint, admissions in the answers, and stipulations of counsel.

6. During her lifetime decedent filed concededly sufficient and timely claims for refund for the years 1942 to 1946, inclusive, based on the grounds that decedent erroneously reported in her returns for 1942 to 1946, inclusive, as ordinary income the following sums:

                Year                     Amount
                1942                   $170,833.16
                1943                    276,323.73
                1944                     80,000.00
                1945                     17,978.35
                1946                     33,089.04
                

Decedent alleged in said claims for refund that said sums were erroneously reported as ordinary income, whereas they should have been treated as capital gains for the reason that they were paid by Thomas Flexible to decedent on the sale or exchange of certain patent rights owned by decedent, and that said sums represent capital gains under Int. Rev.Code, § 117.

7. On February 13, 1951, the Commissioner of Internal Revenue notified plaintiffs of the disallowance of the claims for refund for 1944 and 1946. The Commissioner has taken no action on the claims for refund for 1942, 1943, and 1945. However, more than six months elapsed between the filing of said claims and the institution of civil action no. 9507.

8. On September 2, 1937, the decedent made application to the United States Patent Office for letters patent, hereinafter called the first patent, under patent application No. 162205, on which letters patent No. 2182711 were issued on December 5, 1939, on certain flexible couplings.

9. On August 8, 1939, decedent made an application to the United States Patent Office under patent application No. 289058 on which letters patent No. 2251722, hereinafter called the second patent, were issued on August 5, 1941.

10. On November 26, 1939, decedent and Thomas Flexible entered into a written contract, hereinafter called the 1939 contract, with respect to the transfer of the above-mentioned patent rights. This contract provided:

"THIS AGREEMENT made and entered into this 26 day of November 1939, by and between the Thomas Flexible Coupling Company, a corporation existing under and by virtue of the laws of the State of Pennsylvania, having its principal place of business at 1200 Main Avenue, Warren, Pennsylvania, hereinafter referred to as `Company' and Bertha E. Thomas of No. 9 Second Avenue, Warren, Pennsylvania, thereinafter referred to as `Inventor'.

"WITNESSETH, THAT:

"WHEREAS, `Inventor' has conceived of and produced inventions relating to flexible couplings, as more particularly set forth in applications filed in the United States Patent Office and identified as Follows: —

Flexible Couplings Serial No. 162,205 Filed September 2, 1937 Allowed October 10, 1939 Emergency Supports for Flexible Couplings Serial No. 289,058 Filed August 8, 1939

"WHEREAS, `Inventor' has, or may have, other new and useful improvements and ideas relating to flexible couplings.

"WHEREAS, `Company is desirous of securing assignment of the inventions and proprietary rights of `Inventor' in and to the above identified applications for United States patents, and in and to the inventions set forth therein, and to any inventions relating to flexible couplings which the `Inventor' may hereafter make.

"NOW, THEREFORE, for and in consideration of the sum of Three Thousand Five Hundred Dollars ($3500.00) paid by `Company' to `Inventor', receipt whereof is hereby acknowledged by `Inventor' and other good and valuable considerations hereinafter mentioned, it is mutually understood and agreed as follows: —

"Article 1. `Inventor' agrees at `Company's' request, to execute in `Company's' favor, all papers which may be necessary for the transfer, by complete assignment, of all of `Inventor's' proprietary rights in and to the above identified applications for letters patent in the United States, and of all proprietary rights in and to any inventions which `Inventor' may now have or make in the future relating to flexible couplings; on the terms and under the conditions as hereinafter provided.

"Article 2. `Inventor' agrees at `Company's' request, to make and execute and have filed in the United States Patent Office, and in the respective offices of foreign countries, applications for patents on such of `Inventor's' inventions relating to flexible couplings, as may be deemed advisable by `Company'.

"Article 3. `Company' agrees to keep a true and accurate record of the exact number of flexible couplings and discs manufactured and sold by it, together with the invoicing price of all such couplings and discs as are sold, and to render to `Inventor' monthly reports (under oath if requested by `Inventor') setting forth the number of flexible couplings and discs sold by it embodying any of `Inventor's' inventions. `Company' hereby agrees to

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