Kirby v. United States
| Decision Date | 13 December 1961 |
| Docket Number | No. 19077.,19077. |
| Citation | 297 F.2d 466 |
| Parties | John H. KIRBY, II, and Haysel Kirby, Appellants, v. UNITED STATES of America, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Dougal C. Pope, Cooper K. Ragan, Houston, Tex., for appellants.
Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Washington, D. C., William B. Butler, U. S. Atty., John H. Baumgarten, Asst. U. S. Atty., Houston, Tex., Edward L. Rogers, Benjamin M. Parker, Attys., Dept. of Justice, Washington, D. C., Woodrow B. Seals, U. S. Atty., Houston, Tex., Harry Baum, Atty., Dept. of Justice, Washington, D. C., for appellee.
Before TUTTLE, Chief Judge, and HUTCHESON and JONES, Circuit Judges.
This is another of the cases in which the owner of a patent who transfers something less than all the rights owned under the patent seeks to treat the income he receives from the licensee as capital gains under the provisions of Section 1235 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 1235 and Section 117 (q) of the Internal Revenue Code of 1939, as amended, 26 U.S.C.A. § 117(q).1
The taxes here in question are for the years 1953 and 1954. The taxpayer and his wife filed joint returns and will be referred to herein as the taxpayer.
The taxpayer invented and patented a magnetic fishing tool device useful in the oil drilling industry. He and an employee organized a corporation, K & G Oil & Tool Service Co., Inc., to which taxpayer granted and conveyed a license for "the sole and exclusive right to manufacture, lease and let throughout the United States and the Dominion of Canada * * the magnetic fishing tool or improvements thereto * * *". The agreement further provided, however:
"3. Licensee shall under no conditions sell any of said Magnetic Fishing Tools which it may manufacture under the terms hereof but such Magnetic Fishing Tools shall be leased or rented by it on a per job basis to its customers * * *:"
The Commissioner of Internal Revenue disallowed the capital gains treatment claimed by the taxpayer as to the income he received by way of royalties under this agreement for the years 1953 and 1954. After paying the taxes the taxpayer filed a suit for refund which was tried by the District Court without a jury. The trial court considered the case on the pleadings, depositions, and oral testimony and, based on a finding that the retention by Kirby, the taxpayer here, of the right to manufacture the patented articles for sale was a "substantial right," held that, therefore, the transfer made by the taxpayer was not a transfer "of property consisting of all substantial rights to a patent," as required under Section 1235 and its predecessor, Section 117(q).
It is undisputed, although the taxpayer claims that the evidence was irrelevant as to the issue before the trial court, that the taxpayer made sales of the tools in 1954 for foreign use and that during the years 1955 through 1958 substantial profits were made from sales of the device manufactured in the United States and sold for foreign use. For the years 1956, 1957 and 1958 such sales produced substantially more net profit than the royalties received from K & G.
Appellant contends that the contract did not authorize the manufacture by Kirby for sales in the United States, since, he says, the license gave to K & G "the sole and exclusive right to manufacture, lease and let throughout the United States and the Dominion of Canada, subject to the terms and conditions hereinafter set out. * * *" The taxpayer complains that the trial court, while not construing the contract as giving Kirby the right to manufacture and sell in the United States, nevertheless held that it could properly consider the fact that Kirby actually did do so to his substantial profit in determining whether the license constituted a transfer of all substantial rights to the patent.
As we construe the contract as a whole, we are compelled to find that the contract did not grant to the licensee the sole and exclusive right to manufacture in the United States, but rather that it granted to the licensee the sole and exclusive right to manufacture only for the purpose of leasing throughout the United States. This necessarily follows from the language of the contract which makes the right "to manufacture, lease and let throughout the United States and the Dominion of Canada" "subject to the terms and conditions hereinafter set out." (Emphasis added.) The provisions of Paragraph 3 of the agreement impose the very strict condition that "licensee shall under no conditions sell any of said magnetic fishing tools which it may manufacture under the terms hereof, but such magnetic fishing drills shall be leased or rented by it. * * *" Moreover, it is significant that the paragraph of the contract touching on the royalties to be paid speaks only in terms of gross rentals. Paragraph 2 says: "Licensee shall pay to the Licensor as a license fee upon every magnetic fishing tool manufactured, leased and let by the licensee the following sums: * * *". (Emphasis added.) The use of the words, "manufactured, leased and let" clearly demonstrates that it is the manufacturing for leasing or letting that is the right granted under the license and not the separate right to manufacture for all purposes. Without the privilege of selling the manufactured article, a privilege which is denied to the licensee under paragraph 3, there remains no value in the hands of the licensee except the right to manufacture for lease to others.
We think, therefore, that, properly construed, this contract was one whereby the patentee, the taxpayer here, retained to himself the right to manufacture for sale both in the United States and Canada and abroad. Under this construction of the contract the taxpayer can not successfully contend that the right retained by the taxpayer has not been demonstrated to be a substantial right. We recognize, of course, and in fact the Internal Revenue Regulations issued under the...
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