Estate of Dodson v. Comm'r of Internal Revenue
| Decision Date | 05 January 1943 |
| Docket Number | Docket No. 106847. |
| Citation | 1 T.C. 416 |
| Parties | ESTATE OF J. G. DODSON, DECEASED, BY CLARA MAY DODSON, AS EXECUTRIX OF THE WILL OF J. G. DODSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner's decedent, the sole owner of the formula of a yeast compound and of its trade-mark, organized a Georgia corporation and divided its shares between himself and his wife, retaining for himself 51 percent. He thereupon made a contract with the corporation under which it was given exclusive use of the formula and trade-mark for five years and was to pay him in return a continuing royalty measured by 10 percent of the net sales of all its products sold under the trade-mark. A few months later, in December 1934, he assigned a half interest in this royalty contract to his wife, retaining his full interest in the formula and trade-mark, and paid gift taxes on the transfer. The respondent seeks to tax the full royalty income to petitioner's decedent from 1935 until his death in 1939. Held that decedent's assignment of the royalty contract was not to be considered ‘for all substantial and practical purposes ‘ as a completed gift, by reason of his retained control over the contract through his control of the other party to the contract, the corporation, and the income from the contract was therefore taxable in full to him. Harrison v. Schaffner, 312 U.S. 579; Helvering v. Clifford, 309 U.S. 331. Pope F. Brock, Esq., for the petitioner.
F. L. Van Haaften, Esq., for the respondent.
The respondent has found deficiencies in decedent's income tax for 5 years in the following amounts:
+-----------------+
¦1935 ¦$27,996.59 ¦
+-----+-----------¦
¦1936 ¦52,972.65 ¦
+-----+-----------¦
¦1937 ¦13,822.42 ¦
+-----+-----------¦
¦1938 ¦44,498.25 ¦
+-----+-----------¦
¦1939 ¦28,386.28 ¦
+-----+-----------¦
¦Total¦167,676.19 ¦
+-----------------+
Other issues having been waived or stipulated, the only one before us is whether the decedent's assignment of a one-half interest in a certain contract to his wife, the executrix and petitioner, was invalid so as to require the inclusion of its proceeds in his income for the taxable years. The facts, which were stipulated for the most part, may be summarized as follows:
FINDINGS OF FACT.
J. G. Dodson died on May 8, 1939.
He filed income tax returns for the years 1935 to 1938, inclusive, with the collector for the district of Florida, and his executrix filed an income tax return for the decedent covering the period from January 1 to May 8, 1939, inclusive, with the collector for the district of Georgia.
In his will decedent named his wife, Clara May, his executrix, and after its probate, she qualified and has acted as such.
Item 2 of decedent's will is in the following words:
Should my wife, Mrs. Clara May Dodson, survive me, I devise and bequeath to her all of my property of every kind and description I may die seized of, whether real, personal or mixed and wheresoever situated, and whether now owned or hereafter acquired.
J. G. Dodson, the decedent, was originally a druggist. Sometime before 1920 he interested himself in the manufacture and sale of proprietary remedies and in due course developed a number of these, including a compound called ‘ironized yeast,‘ which he perfected in 1921. During that time and for a short period thereafter he operated as an individual proprietor. In March 1922, however, he organized a corporation called Ironized Yeast Co. to take over the manufacturing and selling of ‘ironized yeast‘ and others of his products. At that time all the assets of the sole proprietorship were transferred to the corporation except the formula and trade-mark covering ‘ironized yeast.‘ This corporation operated until April 30, 1929, when all the assets were turned over to J. G. Dodson, the sole stockholder. On January 1, 1930, he formed a partnership with his wife to carry on the business and did so in this form until the organization of the ‘Ironized Yeast Co., Inc.,‘ a Georgia corporation, on May 14, 1934, when the partnership ceased to manufacture and sell ironized yeast, and the corporation began to do so under the contract set out below. On its organization decedent acquired 51 percent of its stock and his wife, Clara May, the remainder. It was in the years around 1934 that decedent was acquiring his wealth and he did not want to be personally liable for the large advertising contracts.
On May 15, 1934, decedent entered into a royalty contract with the ‘Ironized Yeast Co., Inc.,‘ which is incorporated by reference, and under which he licensed the corporation to use the trade-mark on the following conditions:
NOW THEREFORE, in consideration of One Dollar ($1.00) to him paid, receipt of which is hereby acknowledged and of the mutual covenants herein, the party of the first part hereby agrees to license and does license the party of the second part for the period of five (5) years to use exclusively the trade-mark ‘Ironized Yeast‘ in connection with products containing iron and yeast among other ingredients, together with all of the good-will appurtenant to the said trade-mark, and all other attributes of the said goodwill.
The party of the second part (the corporation) hereby covenants and agrees to pay unto the said party of the first part, his heirs, executors, administrators or assigns, a continuing royalty from the sale of all products sold under the trade-mark ‘Ironized Yeast‘ it being expressly understood that the said royalty shall attach to any said product that may be at any time sold by the said party of the second part in tablet form or in solid, granular, powdered, liquid, capsule, pill, lozenge, mixed or composite form of preparation; it being further expressly understood that the party of the second part agrees that during said period no product containing yeast in any quantity or proportion as an ingredient, either singular or in combination with iron or with any other substance shall be sold except under the said trade-mark ‘Ironized Yeast‘, and that the said royalty shall attach to any such product sold. Said royalty shall be 10% ‘Ironized Yeast,‘ or as aforesaid. The account of the party of the first part shall be credited monthly with the said royalty upon the sale and delivery of all of the products sold to any jobber, wholesale dealer, or other purchaser direct from the party of the second part upon the sales of the preceding month.
It is mutually covenanted and agreed by and between the parties hereto that upon the termination of five years the party of the second part is given the option to make the first acceptance of an offer to renew the license herein for a further period of five years, upon such terms and conditions as shall be fixed by the party of the first part.
On December 1, 1934, J. G. Dodson made an assignment to C. M. Dodson (the same person as Clara May Dodson) of one-half of his royalty interest in the above contract, in the following terms:
NOW THEREAFTER, to all whom it may concern, be it know that for and in consideration of the sum of One Dollar ($1.00) to me in hand paid, the receipt of which is hereby acknowledged, and in consideration of love and affection, I, the said J. G. Dodson, have sold, assigned and transferred, and by these presents do sell, assign and transfer unto my beloved wife, C. M. Dodson, her legal representatives, heirs and assigns, the undivided one-half part of the whole of all of my right, title and interest in the said certain contract dated May 15, 1934, entered into by me with the said Ironized Yeast Company, Inc., and the said undivided one-half part to be held and enjoyed by the said C. M. Dodson for her own use and behoof and for the use and behoof of her legal representatives, heirs and assigns, with the present right to receive and collect direct one-half of the proceeds of the said contract as they shall become due and payable, to the full end of the term of the said contract, as fully and as entirely as the same would have been held and enjoyed by me had this assignment not been made.
On the same day as the assignment, the ‘Ironized Yeast Co., Inc.‘, consented in writing to the above assignment, by J. G. Dodson, its president, the corporate act being duly attested by a notary public.
During this entire period and until it was sold by Dodson's executrix after his death, he or his executrix was the sole owner of the formula under which ironized yeast was manufactured and at all times he or his executrix claimed to be the owner of the trade-mark ‘Ironized Yeast.‘ The formula and trade-mark were sold by the executrix for $1,000,000, and they were valued on the Federal estate tax return at that figure.
On or about March 15, 1935, J. G. Dodson made a gift tax return on Form 709, in which he reported the gift as follows:
An undivided one-half part of J. G. Dodson's whole right, title and interest in a certain contract dated May 15th, 1934, expiring May 14th, 1939, under which the said J. G. Dodson has licensed the use of the trade-mark ‘Ironized Yeast‘ to the Ironized Yeast Company, Inc. upon payment of a certain royalty based upon sales.
The donee named in the return was C. M. Dodson, wife of the donor; the date of the gift was given as December 1, 1934; and the value of the gift was given as $156,700.02. At the time this return was filed J. G. Dodson paid to the Commissioner a gift tax in the sum of $3,735.50 on account of the gift reported. On July 24, 1935, the revenue agent at Atlanta, Georgia, after an examination of the return, recommended that the value be increased from $156,700.02 to $170,735.85 and that a deficiency in gift taxes in the sum of $1,237.33 be assessed. On November 16, 1935, a 30-day letter was mailed to J. G. Dodson in which the net value of the total gifts as shown in the return for the year 1934 was increased to $193,713. On or about May 18, 1936, J. G. Dodson and the Commissioner agreed upon a...
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