Lockhart v. Commissioner of Internal Revenue
| Decision Date | 18 July 1958 |
| Docket Number | No. 12486-12488.,12486-12488. |
| Citation | 258 F.2d 343 |
| Parties | Margaret L. LOCKHART, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ESTATE of Marshall L. LOCKHART, Deceased, Robert W. Matthies, Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ESTATE of Marshall L. LOCKHART, Deceased, Robert W. Matthies, Executor, and Margaret L. Lockhart, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Third Circuit |
Donald M. Dunn, New York City (J. Kenneth Campbell, Richard P. Jackson, New York City, on the brief), for petitioners.
Melvin L. Lebow, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., on the brief), for appellee.
Before MARIS, KALODNER and HASTIE, Circuit Judges.
These petitions by Margaret L. Lockhart and Robert W. Matthies, the executor of the estate of her deceased husband, Marshall L. Lockhart, to review decisions of the Tax Court present the question whether certain sums received by the Lockharts in the tax years 1946, 1947, 1948 and 1949 were ordinary income or were gains from the sale of capital assets within the meaning of section 117 of the Internal Revenue Act of 1939, 26 U.S. C. § 117. The monies received were in payment for the assignment of rights in patents for three devices known, respectively, as "Hypospray", a needleless hypodermic syringe for making subcutaneous injections by means of a high velocity spray through the skin, "Hyposeal", a hypodermic syringe disposable after one use, and "Twinpak", a plastic receptacle for the housing of hypodermic needles.
The facts as found by the Tax Court are these: From 1928 to 1934 Marshall L. Lockhart was employed as an engineer by the American Telephone and Telegraph Company in Des Moines, Iowa. During that time he filed, together with a co-inventor, a patent application for a switching device known as a selector, which patent was granted in 1936. In 1934 Marshall was on a leave of absence from his employment to develop an idea of his that heart sounds could be graphically photographed. This device, an electrostethograph, for which a patent application had been filed on February 5, 1934, had no connection with his employment. A patent was granted in 1937. In June, 1934, Marshall demonstrated the electrostethograph at the American Medical Association convention in Cleveland, Ohio, in order to interest someone in the manufacture and sale of the device. The Cambridge Instrument Company became interested in the electrostethograph, Marshall granted that company a license in August 1934 to manufacture and sell the device on a royalty basis, and joined the company as a development engineer in order to complete the development of the device and get it in a field-operating condition. Marshall remained with that company until April 1942 personally demonstrating the device to possible purchasers. He also, during this period, endeavored to interest the Postal Telegraph Company in the selector device which he had previously patented.
In 1935, while employed by Cambridge Instrument Company, he began work at home on a device which would give a hypodermic injection without the use of a needle. This device, called Hypospray, was not similar to the line of instruments manufactured by his employer. Sometime in 1940 or 1941, while still employed by Cambridge Instrument Company, Marshall demonstrated his Hypospray device to the Squibb Company, which corporation took an option on the device to explore its possibilities. Squibb Company did not have the facilities to manufacture the device and in 1942 it was turned over to the Gelatin Products Company.
Marshall joined the staff of the Gelatin Products Company in April 1942 as a consultant and remained there until the end of 1943. While there he worked on the development of the Hypospray device until he was requested to put that work aside in 1943 and work on a substitute for tin used in the Squibb syrette. Marshall developed a substitute, called Hyposeal, using plastic instead of tin. There was no agreement between Marshall and the Gelatin Products Company which required that any development or research work done by him be turned over to that company. During 1943 Marshall, while still employed by the Gelatin Products Company, showed the Hyposeal device to Becton, Dickinson & Company with a view to the possibilities of the device and the extent of its market. At this time there was litigation pending between the Gelatin Products Company and Lockhart as to the ownership of the Hyposeal device, and under a settlement arrangement Gelatin Products Company relinquished all claims to Hyposeal and received an exclusive license to manufacture, use and sell the Hypospray device. Under this license agreement, dated August 11, 1944, Marshall was to receive royalties on the sale of the Hypospray device, with a minimum annual payment of $10,000. He received $10,000 under this exclusive license agreement in 1946.
Early in 1944 Marshall was employed by Becton, Dickinson & Company as a consulting engineer, at an annual salary of $6,600, his principal duty being the development of the Hyposeal device. Marshall assigned a one-half interest in the Hyposeal patents to his wife, Margaret, on October 16, 1944. On November 14, 1944, Marshall and Margaret by a letter agreement granted to Becton, Dickinson & Company the "exclusive right to manufacture and sell" the Hyposeal device. Becton, Dickinson & Company paid royalties on the Hyposeal device to Marshall and Margaret from 1946 through the tax years here involved.
In 1946 Marshall assigned to Becton, Dickinson & Company for $8,500 his entire right, title and interest in a device patented by him under the name Twinpak.
On June 9, 1947, Marshall assigned his rights in the Hypospray devices, subject to the exclusive license previously granted by him to the Gelatin Products Company, to Becton, Dickinson & Company for $135,000, plus 50 per cent of the royalties payable to Becton, Dickinson & Company by Gelatin after Becton, Dickinson & Company had received $135,000. Marshall completed his work on Hyposeal for Becton, Dickinson & Company in December 1947 and left its employ at that time. During the years 1936 through 1955 approximately 37 patents were granted to Marshall, some representing refinement of basic inventions but at least 15 being for basic devices.
Marshall and Margaret filed individual income tax returns for the tax years 1946 and 1947 and filed joint returns for the tax years 1948 and 1949. Marshall died in 1954 and Robert W. Matthies, as executor of his estate, was substituted in his stead. The Commissioner of Internal Revenue determined that the income derived from the sale or license of the patents here involved was ordinary income, and determined deficiencies in federal income taxes as follows:
Margaret L. Lockhart ........... 1946 $ 2,639.92
1947 8,897.06
Estate of Marshall L. Lockhart
Deceased, Robert W. Matthies
Executor ....................... 1946 5,944.69
1947 70,861.98
Estate of Marshall L. Lockhart
Deceased, Robert W. Matthies
Executor, and Margaret L
Lockhart ...................... 1948 2,775.34
1949 20,637.62
Upon review by the Tax Court the Commissioner's determination was sustained upon the ground that Marshall was a professional inventor, that he was in the business of selling and licensing his inventions, and that consequently the payments received by him and Margaret during the years 1946 through 1949 from the transfer of the three basic patents were taxable as ordinary income. The petitioners contend that this was error and that the payments received by Marshall and Margaret were actually receipts from the sale of capital assets within the meaning of section 117 of the Internal Revenue Code of 1939 and should have been so treated for income tax purposes.
We shall consider first the contentions of the petitioners in respect to Marshall's tax liability. They urge that the Tax Court erred in finding that he was a professional inventor and argue that his patents were capital assets within the meaning of section 117. That section, in pertinent part, provides:
The petitioners do not quarrel with the evidentiary findings of the Tax Court but contend that the conclusions drawn therefrom are contrary to the weight of authority. They cite decisions which they contend support the proposition that the sale of a limited number of patents over a long period of years does not constitute the conduct of the business of selling patents and that under those cases the proceeds of the transactions here involved should have been treated as capital gains and not as the proceeds of property held primarily for sale in the ordinary course of business. It is true that the courts have in many instances determined that an inventor-taxpayer did not hold his inventions primarily for sale in the ordinary course of business, but those cases afford no rule for the decision of this one. As a matter of fact there is no fixed rule or formula for determining whether particular property sold by a taxpayer was held primarily for sale in the ordinary course of his business. As this court pointed out in Curtis...
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