Massey v. United States, 11395.
| Decision Date | 21 October 1955 |
| Docket Number | No. 11395.,11395. |
| Citation | 226 F.2d 724 |
| Parties | Peter J. MASSEY and Elizabeth Massey, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
H. Brian Holland, Asst. Atty. Gen., David O. Walter, Atty., Dept. of Justice, Washington, D. C., Robert Tieken, U. S. Atty., Chicago, Ill., Ellis N. Slack, Melva M. Graney, Special Assts. to the Atty. Gen., for appellant.
Charles J. Merriam, Robert J. Downing, Peter J. Brennan, Jr., Chicago, Ill., (Merriam & Lorch, Mitchell & Conway, Chicago, Ill., of counsel), for appellees.
Before DUFFY, Chief Judge, and FINNEGAN and SCHNACKENBERG, Circuit Judges.
In this action taxpayers are seeking a refund of income taxes paid for the years 1948, 1949 and 1950 on royalties received by Peter J. Massey in connection with certain patents which had been issued to him. Whether taxpayers should recover the claimed refunds depends upon whether the royalties should be treated as long-term capital gains from the sale of capital assets or whether such royalties were ordinary income.
Taxpayers filed a joint return and originally reported and paid the tax on the basis that the royalty payments were ordinary income. Later, they filed amended returns and also filed claims for refund. The District Court held the royalty payments constituted gains from the sale of capital assets and entered judgment for taxpayers.
Taxpayer, Peter J. Massey, was executive vice-president of Seaman Paper Company which was a jobber or selling agent for paper manufacturers. He conceived and developed ideas for two inventions, one, a basic process for the coating of paper at any particular stage of the paper-making process, and the other, a subordinate process for the coating of paper before it becomes over-dried. United States Patents No. 1,921,368 and No. 1,921,369 were issued to him on August 8, 1933.
The patents were conceived and developed solely by Massey, largely on his own time, and involved the expenditure by him personally of approximately $150,000.00. Massey held sole and entire ownership in said Letters Patent from August 8, 1933 until December 1, 1933, and Seaman Paper Company recognized and acknowledged Massey to be the sole owner.
By an assignment dated December 1, 1933, Massey sold and assigned his entire right, title and interest in said patents to Seaman Paper Company. The consideration was stated to be $1.00 and other valuable considerations. A further agreement was executed under date of December 2, 1933 which provided that in the event Consolidated Water Power and Paper Company purchased for the sum of $100,000.00 a coating machine mentioned, and a half interest in the Massey patents, Seaman would 1) transfer to Massey 1000 shares of common capital stock of Munising Paper Company, and 2) transfer to Massey 1/5th of the amount of all royalties thereafter received by Seaman by reason of its ownership of the patents, and 1/5th of the net proceeds received by Seaman in connection with any sale by Seaman of its interests in said patents.
Also, on December 2, 1933, Seaman entered into an agreement with Consolidated whereby Seaman licensed Consolidated to use said patents for which Consolidated agreed to pay Seaman a royalty of 50 cents per ton on all coated paper manufactured by Consolidated in excess of 100,000 tons.
There also was an agreement dated December 2, 1933 whereby Seaman assigned and sold to Consolidated Water Power and Paper Company an undivided ½ interest in the patents, and the latter Company agreed to pay Massey 10 cents per ton of coated paper manufactured by Consolidated using the patented processes.
The required assignment of future royalties and net profits was executed by Seaman on September 25, 1934, and Seaman apparently also delivered to Massey the 1000 shares of Munising Paper Company stock.
In November, 1935, Seaman found itself in financial difficulties, and was indebted to Consolidated in an amount in excess of $100,000.00. On November 13, 1935, Seaman entered into a new agreement with Consolidated to which Massey was also a party, which provided that the license agreement of December 2, 1933 between Seaman and Consolidated, and the agreement of December 2, 1933 between Seaman and Massey to the extent to which they were not inconsistent with the November 13, 1935 agreement, were cancelled, and Seaman sold and assigned to Consolidated an undivided 4/10th interest in said patents for a credit of $100,000.00 against its indebtedness, and Seaman assigned to Massey a 1/10th interest in said patents. Consolidated agreed to pay Massey 10 cents per ton in excess of 100,000 tons of coated paper made by Consolidated under said patents, and 10% of the royalties received by Consolidated as a result of any license granted by Consolidated under said patents.
By later agreements the November 13, 1935 agreement was modified in some respects. Under one modification the royalty payment to Massey by Consolidated for coated paper...
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