Dennis v. Comm'r of Internal Revenue
| Citation | 57 T.C. 352 |
| Decision Date | 13 December 1971 |
| Docket Number | Docket No. 772-70. |
| Parties | CLEMENT O. DENNIS AND GENIA LEE DENNIS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Louis Regenstein, Jr., Charles M. Cork, and William A. Burnham, for the petitioners.
James D. Burroughs, for the respondent.
Promissory note for $1,500,000 not in registered form or with interest coupons at time of issuance or on Mar. 1, 1954, payable in monthly installments of $10,000 for 12 1/2 years, received with 40 percent of stock, in exchange for transfer of undivided one-half interest in patent rights to corporation, capitalized at $10,000, at time of incorporation on Oct. 1, 1953, held to be security within meaning of sec. 112(b)(5), I.R.C. 1939, and payments received in retirement thereof are taxable as ordinary income.
Respondent determined deficiencies in petitioners' income taxes for the calendar years 1955 through 1962 in the following amounts:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦1955 ¦$37,436.32 ¦
+------+-------------¦
¦1956 ¦22,175.34 ¦
+------+-------------¦
¦1957 ¦39,158.53 ¦
+------+-------------¦
¦1958 ¦26,855.66 ¦
+------+-------------¦
¦1959 ¦21,163.87 ¦
+------+-------------¦
¦1960 ¦21,305.38 ¦
+------+-------------¦
¦1961 ¦2,677.28 ¦
+------+-------------¦
¦1962 ¦301.60 ¦
+--------------------+
Petitioners in their petition claimed overpayments for each of the years 1955 through 1960 based on an alternative position which they appear to have abandoned.
The only issue for decision is whether the amounts received in the years here in issue by petitioners as payments on an unregistered promissory note which did not have interest coupons attached issued on October 1, 1953, to one of petitioners by a corporation on its organization in exchange for all his rights to an undivided interest in patents and paten applications are taxable as ordinary income.
Some of the facts have been stipulated and are found accordingly.
Petitioners, husband and wife, resided at Macon, Ga., at the time of the filing of the petition in this case. They filed their joint Federal income tax returns for the calendar years 1955 through 1962 with the district director of internal revenue at Atlanta, Ga.
In 1939, Clement O. Dennis, hereinafter referred to as petitioner, formed a partnership with A. L. Jarvis and entered the tire-recapping business in Macon, Ga. The partnership was primarily in the business of recapping tires under a Government contract, but later it expanded to include operation of a service station. This venture, known as the Dennis-Jarvis Tire Co. operated until 1944.
The tire-recapping equipment of the Dennis-jarvis Tire Co. was steam operated, molding the tires by applying heat in the recapping process. In 1943 petitioner became acquainted with a retired engineer, J. W. Napier, who had, several years earlier, invented two electric tire-recapping devices. Napier had filed for letters patent for his inventions in 1942, the serial numbers being 427,423 and 463,726. Napier's inventions lacked certain features which would affect their usefulness; nevertheless, petitioner was convinced that, if improved, an electrically operated recapping mold would work.
Napier and petitioner in April 1943 discussed the granting by Napier to petitioner of exclusive rights and license to manufacture, use, and sell electric recapping molds of the design specified in the aforementioned patent applications. The sole territorial exclusion of this license was to be a 10-State area in the South which had previously been licensed to the MacMillan Electric Mold & Rubber Co. An agreement to this effect stated to be entered into on April 15, 1943, was reduced to writing but was signed only by Napier.
On January 31, 1944, by written contract, petitioner was given an exclusive right for a period of 90 days thereafter to an assignment of any of Napier's rights in the electric mold inventions, serial numbers 427,423 and 463,726. Petitioner agreed that if he obtained the assignment he would, with reasonable promptness, begin manufacturing the recapping equipment and pay 15 percent of the net profits to Napier.
Within the specified 90 days, petitioner advised Napier that he would enter the business of manufacturing tire-recapping apparatus. Petitioner and A. L. Jarvis formed another partnership in May 1944 known as the Den-Nap Electric Mold Co. and began the manufacture of molds for the recapping of automobile tires. Petitioner and Jarvis were equal partners in this venture. On May 1, 1944, petitioner and Jarvis contracted to purchase some land to build a plant and subsequently acquired the land on August 16, 1944. Prior to acquiring title to the land, construction of the plant was begun.
Napier, at the suggestion of petitioner, had been working all during this time at refining and improving his electric molds. On May 12, 1944, petitioner and Napier made formal application for a patent for his separate section abutment ring mold component for tire-recapping apparatus bearing serial number 532,909. The patent application had previously been assigned by Napier to petitioner by written assignment dated August 29, 1944. Letters Patent No. 2,398,151 were issued on April 9, 1946, for this device, in the name of petitioner as assignee of Napier.
On April 15, 1945, Napier made formal application for a patent for a tire-recapping apparatus, bearing serial number 586,684. The patent application had previously been assigned by Napier to petitioner on March 27, 1945. On December 5, 1946, a continuation application for patent bearing serial number 586,684 was filed. Letters Patent No. 2,475,579 were issued on this application on July 5, 1949, in the name of petitioner as assignee of Napier.
Den-Nap Electric Mold Co. entered into a written agreement with Napier on August 11, 1944, whereby Napier agreed to provide certain engineering advisory services to the partnership for a salary plus 20 percent of the net profits of the partnership. Den-Nap proposed to manufacture and sell or lease electric recapping molds in accordance with patterns prepared and to be prepared by Napier, within 60 days after August 11, 1944. In the event of Napier's death or incapacity, his salary would cease but the percentage of profits would be increased to 25 percent and would be paid to Napier, his heirs and assigns, so long as the Den-Nap Electric Mold Co. by the same instrument, all of his existing inventions and applications for patents relative to the manufacture and use of electric molds in the recapping of tires subject to existing assignments.
Napier died in 1949 and in 1951 a settlement on the employment agreement was effected with his widow by petitioner. She released all claims she might have to U.S. Letters Patent Nos. 2,398,151 and 2,475,579 and any rights arising under the agreement between Den-Nap Electric Co. and her late husband in exchange for the sum of $10,000.
Den-Nap, the partnership, began the manufacture of tire-recapping equipment in the summer of 1944, prior to the closing of the purchase of the plant site. Although a model of the tire-recapping apparatus incorporating Napier's earlier inventions (bearing serial numbers 427,423 and 463,726) has been shown to petitioner by Napier in 1943 when they first became acquainted, the first model of the improved electric mold recapping apparatus was not built and tested by the Den-Nap partnership until the early or middle part of July 1944. Petitioner, believing himself to be especially knowledgeable about tire recapping, had proceeded to form the Den-Nap partnership to manufacture these new improved molds on the basis of the drawings shown to him by Napier.
For several months prior to September 1944, substantial studies were conducted and detailed calculations were made to determine a proper selling price for the recapping apparatus. The first sale or lease by the partnership, Den-Nap, of the tire-recapping apparatus embodying and employing the new Napier inventions, the separate section abutment ring mold component or the tire-recapping apparatus was to J. J. Thompson on September 5, 1944. The first mold was completed approximately 2 months prior to the lease date September 5, 1944. Subsequent to the lease date of September 5, 1944, additional molds were leased during 1944.
On January 1, 1946, the partnership of Den-Nap Electric Mold Co. was incorporated under the same name pursuant to the laws of the State of Georgia. A total of 500 shares of $100 par value stock was authorized and 100 shares were issued. Dennis and Jarvis exchanged the assets of the partnership for 50 shares each of the corporation's stock. The corporation Den-Nap Electric Co. (hereinafter referred to as Den-Nap) assumed all the debts and liabilities of the partnership and received all the partnership's assets. Den-Nap continued to manufacture and lease or sell electric molds used in the recapping of automobile, truck, and airplane tires. The molds incorporated Napier's abutment ring mold component and tire-recapping apparatus.
In late 1948 and early 1949, Jarvis sold his stock in Den-Nap to Zeb Mattox who, at that time, was the sole owner of Retreading Equipment Co. of Charlotte, N.C., hereinafter referred to as Retreading.
Two more issues of five shares each of the stock of Den-Nap were made by the corporation. These shares were issued to James Emerson (five shares) and C. F. Calhoun (five shares). The stock of C. F. Calhoun was later reacquired by the corporation as treasury stock, so that ownership of Den-Nap became as follows:
+---------------------------------+
¦Stockholder ¦Number of shares ¦
+--------------+------------------¦
¦ ¦ ¦
+--------------+------------------¦
¦C. O. Dennis ¦50 ¦
+--------------+------------------¦
¦Zeb Mattox ¦50 ¦...To continue reading
Request your trial
-
Dennis v. CIR, 72-1813.
...the corporate note. The factual context out of which this appeal arises is fully set forth in the Tax Court's opinion, reported at 57 T.C. 352, 352-360 (1971). Accordingly, we set forth only those facts necessary to understand our disposition of the issues raised on this In 1939 taxpayer, C......
-
Yamamoto v. Comm'r of Internal Revenue
...in determining whether section 351 applies (Six Seam Co. v. United States, 524 F.2d 347, 355-356 (6th Cir. 1975); Dennis v. Commissioner, 57 T.C. 352, 363 (1971), affd. 473 F.2d 274 (5th Cir. 1973); Nye v. Commissioner, 50 T.C. 203, 209 (1968); Gus Russell, Inc. v. Commissioner, 36 T.C. 965......
-
Grudberg v. Commissioner, Docket No. 6100-72.
... ... MacDonald Dec. 30,665, 55 T.C. 840 (1971). In Dennis v. Commissioner 73-1 USTC ¶ 9181, 473 F. 2d 274, 285 (C.A. 5, 1973), ... ...
-
Computer Sciences Corp. v. Comm'r of Internal Revenue, Docket No. 3382-70.
...Cong., 2d Sess., p. 440 (1954), added to the House version of section 1235 what is now section 1235(b)(2). * * * See also Clement O. Dennis, 57 T.C. 352, 365 (1971), affd. 473 F.2d 274 (C.A. 5, 1973). Section 1.1235-2(e), Income Tax Regs., defines ‘actual reduction to practice’ as having th......