Green v. Comm'r of Internal Revenue
| Decision Date | 05 November 1984 |
| Docket Number | Docket No. 29477-83. |
| Citation | 225 U.S.P.Q. 752,83 T.C. 667,83 T.C. No. 37 |
| Parties | HAROLD J. GREEN and MARION F. GREEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P was a limited partner in a partnership formed to acquire, develop, and license four unpatented inventions. The partnership executed, on the same day, an acquisition agreement, a research and development agreement, and an exclusive license agreement with respect to each of the four inventions. Under the acquisition agreements, the partnership acquired all of the rights in the inventions from the inventors thereof. Under the research and development agreements, the partnership agreed to pay N $650,000 over 3 years to develop the inventions into commercially exploitable products. Under the license agreements, the partnership granted N an exclusive worldwide license to make, use, and sell the four inventions and any improvements thereto for the duration of their patent lives in return for the payment by N of royalties based upon future sales of the developed products. The partnership claimed depreciation deductions with respect to the inventions and a deduction under sec. 174(a), I.R.C. 1954, of $650,000 for the obligation under the research and development agreements. HELD: (1) The successful development of the inventions was not a condition precedent to the effectiveness of the license agreements, and therefore, the license agreements effected sales of the inventions to N on the same day as the partnership acquired such inventions. (2) The partnership received no ‘license‘ or other asset of a depreciation nature in return for the sales to N. (3) Because the partnership did not hold the inventions for investment or use them in a trade or business, the partnership is not entitled to depreciation deductions. (4) The partnership's payments to N for research and development were not made in connection with a trade or business within the meaning of section 174(a) and therefore are not deductible under such section. BERNARD WICZER and FRED R. HARBECKE, for the petitioners.
FRANCIS J. EMMONS, for the respondent.
This matter is before the Court on the Commissioner's motion for partial summary judgment pursuant to Rule 121, Tax Court Rules of Practice and Procedure.1 The issues raised by the motion are: (1) Whether four ‘Exclusive License Agreements‘ executed by LaSala, Ltd. (LaSala), effected a sale of the four inventions covered thereunder to National Patent Development Corporation (NPDC) on the same day as such inventions were acquired by LaSala; (2) whether LaSala received a depreciable license or other asset in return for its sale of the licenses; (3) whether LaSala is entitled to claimed depreciation deductions with respect to such inventions if they were sold on the day they were acquired; and (4) whether LaSala is entitled to a deduction for research and experimental expenditures under section 174 of the Internal Revenue Code of 1954.2
The Commissioner determined the following deficiencies in the petitioners' Federal income taxes:
+-------------------------------------+
¦ ¦ ¦Addition to tax ¦
+------+------------+-----------------¦
¦Year ¦Deficiency ¦sec. 6653(a) ¦
+------+------------+-----------------¦
¦ ¦ ¦ ¦
+------+------------+-----------------¦
¦1979 ¦$32,582.29 ¦$2,776.64 ¦
+------+------------+-----------------¦
¦1980 ¦38,508.63 ¦2,635.94 ¦
+-------------------------------------+
The petitioners, Harold and Marion Green, husband and wife, maintained their legal residence in Chicago, Ill., at the time they filed their petition in this case. They filed their joint Federal income tax returns for 1979 and 1980 with either the Office of the District Director in Chicago, Ill., or with the Internal Revenue Service Center, Kansas City, Mo. Mr. Green will sometimes be referred to as the petitioner.
LaSala was organized as an Illinois limited partnership on December 29, 1977. It was reorganized and expanded on December 19, 1979, for the stated purpose of acquiring four inventions for investment and income-producing purposes and to thereafter patent, improve, maintain, and exploit the inventions. Tower Hill Co., Inc. (Tower Hill), an Illinois corporation organized on November 30, 1979, became the general partner of LaSala in the reorganization.
As reorganized, LaSala had 25 with a subscription price (payable in three annual installments) of $55,000 per unit. No further capital contributions could be required of a limited partner. The general partner was required to make a $1,000 capital contribution. According to projections contained in the partnership's ‘Confidential Private Offering Memorandum,‘ the partnership's entire capital of $1,376,000 was to be expended in the partnership's first 25 months of operation as follows:
+------------------------------------------------------------------+
¦ ¦1979 ¦1980 ¦1981 ¦
+---------------------------------------+--------+--------+--------¦
¦Capital contributions ¦ ¦ ¦ ¦
+---------------------------------------+--------+--------+--------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------------+--------+--------+--------¦
¦Limited partners ¦$500,000¦$437,500¦$437,500¦
+---------------------------------------+--------+--------+--------¦
¦General partner ¦1,000 ¦--- ¦--- ¦
+---------------------------------------+--------+--------+--------¦
¦Total ¦501,000 ¦437,500 ¦437,500 ¦
+---------------------------------------+--------+--------+--------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------------+--------+--------+--------¦
¦Use of contributed capital ¦ ¦ ¦ ¦
+---------------------------------------+--------+--------+--------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------------+--------+--------+--------¦
¦For acquisition of inventions ¦12,500 ¦12,500 ¦12,500 ¦
+---------------------------------------+--------+--------+--------¦
¦Research and development ¦200,000 ¦225,000 ¦225,000 ¦
+---------------------------------------+--------+--------+--------¦
¦General partner's annual management fee¦75,000 ¦75,000 ¦75,000 ¦
+---------------------------------------+--------+--------+--------¦
¦General partner's organization fee ¦40,000 ¦--- ¦30,000 ¦
+---------------------------------------+--------+--------+--------¦
¦Legal fees ¦63,000 ¦30,000 ¦30,000 ¦
+---------------------------------------+--------+--------+--------¦
¦Accounting fees ¦57,000 ¦65,000 ¦50,000 ¦
+---------------------------------------+--------+--------+--------¦
¦Offeree representative fees ¦45,000 ¦30,000 ¦15,000 ¦
+---------------------------------------+--------+--------+--------¦
¦Miscellaneous costs ¦8,500 ¦--- ¦--- ¦
+---------------------------------------+--------+--------+--------¦
¦Total ¦501,000 ¦437,500 ¦437,500 ¦
+------------------------------------------------------------------+
The petitioner subscribed for .75 of a limited partnership unit on December 27, 1979. He acquired his interest with an immediate cash contribution of $15,000 and a non-interest-bearing note of $26,250, payable in two installments of $13,125 each on August 1, 1980, and August 1, 1981. The petitioner paid the installments as they became due and remained a limited partner in LaSala through at least 1982.
LaSala's general partner, Tower Hill, had the sole and exclusive power to operate and manage the business of the partnership. Tower Hill had no previous experience in the acquisition and exploitation of inventions as its position as general partner of LaSala was its first corporate undertaking. The principal officers of Tower Hill, president Alex Pinsky and secretary-treasurer Zalmon Horn, had previously participated in the structuring of limited partnership offerings and had experience in the review and analysis of tax-sheltered investments in real estate, warehouses, and research and development ventures.
On or about December 24, 1979,3 LaSala entered into four sets of agreements, each set concerning one of four inventions acquired by the partnership. Each set included three separate agreements: (1) an acquisition agreement, (2) a research and development agreement (R&D agreement), and (3) an exclusive license agreement (license agreement). The sets of agreements are virtually identical, the principal distinctions being the inventor, the invention, and the amount of the consideration covered by each set of agreements.
Each acquisition agreement was entered into between LaSala and an inventor and, by its terms, conveyed to the partnership all the inventor's right, title, and interest in his invention or inventions, including any patent rights. Of the four inventions thus acquired, none was patented as of December 24, 1979, although at least one had a patent application pending.
The stated purchase price of each invention was payable in installments. The due dates and amounts of such installments were as follows:
To continue reading
Request your trial
-
Peat Oil & Gas Assocs. v. Comm'r of Internal Revenue
...citations omitted.]See also Diamond v. Commissioner, 930 F.2d 372, 374 (4th Cir.1991), affg. 92 T.C. 423 (1989); Green v. Commissioner, 83 T.C. 667, 686 (1984). Judge Ruwe's concurring opinion cites the Supreme Court's opinion in Commissioner v. Groetzinger, 480 U.S. 23 (1987), as support f......
-
Investment Research Associates, Ltd. v. Commissioner, Docket No. 43966-85.
...for such deductions. See Snow v. Commissioner [74-1 USTC ¶ 9432], 416 U.S. 500, 503-504 (1974). Nevertheless, in Green v. Commissioner [Dec. 41,596], 83 T.C. 667, 686-687 (1984), this Court For section 174 to apply, the taxpayer must still be engaged in a trade or business at some time, and......
-
Drobny v. Comm'r of Internal Revenue
...v. Commissioner, 416 U.S. 500 (1974), revg. 482 F.2d 1029 (6th Cir. 1973), affg. 58 T.C. 585 (1972). As we observed in Green v. Commissioner, 83 T.C. 667, 686-687 (1984), ‘For section 174 to apply, the taxpayer must still be engaged in a trade or business AT SOME TIME, and we must still det......
-
Bailey v. Comm'r of Internal Revenue
...each of the partnerships actually became the owner for purposes of depreciation. Helvering v. F & R Lazarus Co., supra; Green v. Commissioner, 83 T.C. 667 (1984). An examination of the various written agreements and surrounding circumstances in these cases reveals that the partnerships acqu......
-
R&E: make sure there is a trade or business.
...with a trade or business can mean, particularly in the case of a start-up company, that there is an intent to enter a market. In Green, 83 TC 667 (1984), the Tax Court held that it must be determined that activities in connection with a product are sufficiently substantial and regular to co......