Kleinschmidt v. United States

Decision Date05 December 1956
Docket NumberCiv. A. No. 54-510.
Citation146 F. Supp. 253
PartiesRobert V. KLEINSCHMIDT v. UNITED STATES of America.
CourtU.S. District Court — District of Massachusetts

John F. Cremens, Boston, Mass., for plaintiff.

Arthur Biggins, Tax Division, U. S. Dept. of Justice, Washington, D. C., Anthony Julian, U. S. Atty., Andrew A. Caffrey, Arthur I. Weinberg, Asst. U. S. Attys., Boston, Mass., for defendant

ALDRICH, District Judge.

This is an action to recover income taxes for the calendar years 1944-47 inclusive. The taxes were duly paid in the amount disclosed on the returns. Taxpayer later filed claims for refund, which were not allowed, and thereafter this action was seasonably brought. Taxpayer is a mechanical engineer and an authority in the field of thermo-dynamics. Since 1930, exclusive of his period of service in the Navy during World War II, he has divided his time between teaching and practicing as a consulting engineer. In one of his returns he described his occupation as "inventor," but I find on the evidence that this was not his regular business. With one exception his inventions that have ripened into patents were incidental to his employment as a consulting engineer, and became forthwith the property of his current employer. The exception, and the invention involved in the present dispute, is the Kleinschmidt Still, so-called, a vapor-compression distillation device designed by taxpayer under the following circumstances.

Sometime in December, 1935 one of the officials of Arthur D. Little, Inc., a Massachusetts research and engineering firm, hereafter called Little, by whom taxpayer was retained from time to time on a per diem consulting basis, told taxpayer he had heard the Marine Corps was interested in a device for distilling sea water which would meet certain requirements. Little had no present personal concern in the matter and informed taxpayer simply because it knew of his general interests. In point of fact taxpayer had previously considered this subject to such an extent that he was then able, in a matter of days, to perfect plans of what seemed to be the very device desired. The comparative simplicity of his idea, and this rapidity of its execution, caused Little to regard taxpayer's design with skepticism. Taxpayer informed Little that if it would make its facilities and some materials available, he would undertake to prove to it that the device would work. Little complied. By the end of February, 1936 taxpayer completed a working pilot model. Subsequently a number of patents were obtained, the basic one being No. 2,185,595, issued January 2, 1940, which taxpayer transferred to Little in the application stage, and which was eventually licensed to the government on a royalty basis. One third of the royalties were paid to taxpayer. He now seeks to have them regarded as a return of capital, to result in a long-term capital gain. The government contends that the transaction was not a sale, but a joint venture between the parties.

When taxpayer invented the still he had no contractual relationships, and no thought of being paid by Little or anyone else. As soon as the pilot model was demonstrated, Little became interested, and on March 27, 1936 the parties entered into an oral understanding, which was reduced to writing in an informal memorandum. This provided that each would thereafter do "contingent work" on the apparatus;

"Time spent on the problem will be handled just as for clients if and when the cost can be collected from other parties, without obligation on either side." (Italics supplied.)

The memorandum further provided that patents "obtained under this arrangement will be held by Little with an agreement in the assignment1 to pay tax-payer one-third of any gross royalties or other divisible compensation for use of the patent by others or in event of its sale;" that Little should bear the cost of patent applications, and any sales expense, and that taxpayer, if available, should be employed by any clients for consultation work.

An application was filed with the patent office on December 9, 1936, for the original patent. The first office action took place in March, 1937. On June 7, 1937, taxpayer delivered to Little a full assignment of the invention. Also on that date the parties executed a formal agreement which recited the application for the patent and that the parties desired that Little "shall for their mutual benefit undertake the exploitation of the said invention or inventions upon the terms and conditions hereinafter stated." These terms were the same as those contained in the 1936 memorandum, except that no reference was made to taxpayer's obligation to contribute contingent time, nor to Little's obligation, in case there should be a client who would contract in advance to pay for consulting work, to endeavor to get taxpayer such uncontingent employment. This did not mean that these matters were lost sight of. It will be recalled that the parties originally contemplated that the provisions for royalties would be in the assignment itself. I believe the mechanical separation made by patent counsel into two documents explains why the June 7, 1937, agreement did not repeat the rest of the 1936 undertaking. Counsel was thinking only about the direct patent aspects. But as late as May 1, 1940 a memorandum executed by the parties with relation to work being done by taxpayer in connection with two sample stills being manufactured by Little in its attempt to interest the Navy in the device referred back to 1936. This memorandum recited that while taxpayer had been paid for certain work,

"Payment for time spent by him after this date is contingent * * * to be paid only if and when such cost can be collected from other parties. This coincides with the memorandum of March 27, 1936 * * * To summarize the foregoing, the situation in regard to the patent understanding is unchanged and on the two stills Little will bear the out-of-pocket expenses while taxpayer will contribute his time." (Italics supplied.)

The March 27, 1936 agreement, in other words, still remained very much alive. There was other evidence that taxpayer was not shut of the affair.

Taxpayer contends that the 1936 agreement was not a sale. It is, of course, essential for him to show that the 1937, and only the 1937, agreement was a sale in order to establish a six-months holding period. Under other circumstances the holding period might present an interesting question. Following March, 1936 taxpayer was obligated to sell to Little, if the ultimate transaction constituted a sale at all, upon terms already defined. Little's obligations, also, were substantially stated. Execution of the actual assignment was merely postponed until it more clearly appeared that the invention had value. In other words, "if and when" it appeared that taxpayer in fact had a capital asset, it had been fully and irretrievably contracted away by the March, 1936 agreement.2 To allow taxpayer the benefit of a sale with this longer holding period under such circumstances might well be questionable. Cf. Oesterreich v. Com'r, 9 Cir., 226 F.2d 798; Kenyon v. Automatic Instrument Co., 6 Cir., 160 F.2d 878; Springfield Plywood Corp. v. C. I. R., 15 T.C. 697.

I believe, however, that neither the March, 1936 agreement, nor the June, 1937 agreement and assignment was a sale in any real sense.3 I find that the 1937 documents were simply the carrying out of one contemplated step of an enterprise undertaken in 1936. Taxpayer was not personally fitted to market and dispose of his invention, while Little was. Likewise, the government would not, or would prefer not, deal with an individual such as taxpayer, but it would deal with Little. If only for convenience the legal title to the patent preferably had to be in one person, and Little was the logical one. On the other hand, neither taxpayer nor Little wanted a cleavage between himself and the...

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12 cases
  • Air Technology Corp. v. General Elec. Co.
    • United States
    • United States State Supreme Judicial Court of Massachusetts Supreme Court
    • June 10, 1964
    ...Enterprise, 14 Bus.Lawyer 309.15 GE had control of the joint effort, but there was some consultation with AT. See Kleinschmidt v. United States, 146 F.Supp. 253, 256 (D.Mass.), which suggests that equal joint control may not be essential to a joint venture. See also Rowley, Partnership (2d ......
  • Frazell v. United States
    • United States
    • U.S. District Court — Western District of Louisiana
    • January 31, 1963
    ...175 So. 909 (La.Sup.Ct., 1937); Shoemake v. Davis, 146 Kan. 909, 73 P.2d 1043 (Kans.Sup.Ct., 1937). See, also, Kleinschmidt v. United States, 146 F. Supp. 253 (Mass., 1956) (patent engineer held joint venturer); Stricker v. Morgan, 158 F.Supp. 830 (S.D.Miss., 1958) aff. 268 F.2d 882 (5th Ci......
  • Boone v. United States
    • United States
    • U.S. District Court — District of South Dakota
    • December 27, 1973
    ...(8th Cir. 1963); See also Burde; Ayrton; Haley v. Commissioner of Internal Revenue, 203 F.2d 815 (5th Cir. 1953); Kleinschmidt v. United States, 146 F.Supp. 253 (D.Mass.1956). Noting that a joint venture is, by statute, a form of partnership, the Eighth Circuit stated that the question to b......
  • Payton v. Abbott Labs
    • United States
    • U.S. District Court — District of Massachusetts
    • April 23, 1981
    ...losses of the venture. Air Technology Corp. v. General Electric Co., 347 Mass. 613, 625, 199 N.E.2d 538 (1964); Kleinschmidt v. United States, 146 F.Supp. 253, 256 (D.Mass.1956). Joint control of the objectives of the undertaking and of the means of achieving those objectives is another ele......
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