Rogallo v. United States

• Citation: 475 F.2d 1
• Decision Date: 06 March 1973
• Docket Number: No. 72-1496.,72-1496.
• Parties: Francis M. ROGALLO and Gertrude S. Rogallo, Appellees, v. UNITED STATES of America, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

475 F.2d 1 (1973)

Francis M. ROGALLO and Gertrude S. Rogallo, Appellees, v. UNITED STATES of America, Appellant.

No. 72-1496.

United States Court of Appeals, Fourth Circuit.

Argued November 1, 1972.

Decided March 6, 1973.

Paul M. Ginsburg, Atty., Tax Div., Dept. of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks and John M. Scott, Jr., Attys., Tax Div., Dept. of Justice, and Brian P. Gettings, U. S. Atty., on brief), for appellant.

Herbert V. Kelly, Newport News, Va. (Jones, Blechman, Woltz & Kelly and F. O. Blechman and E. D. David, Newport News, Va., on brief), for appellees.

Before HAYNSWORTH, Chief Judge, and WINTER and RUSSELL, Circuit Judges.

WINTER, Circuit Judge:

In a suit by Mr. and Mrs. Francis M Rogallo for a tax refund, the district court entered judgment for the taxpayers.¹ It held that a $35,000 "contribution award" which the Rogallos received from the National Aeronautics and Space Administration (NASA) pursuant to § 306 of the National Aeronautics and Space Act, 42 U.S.C.A. § 2458 (1970), qualified as a prize or award primarily in recognition of scientific achievement and was therefore not includable in the Rogallos' gross income under IRC § 74(b), 26 U.S.C.A. § 74(b). Appealing, the government contends that § 306 "contribution awards" are primarily compensatory in nature and are therefore includable in gross income.² IRC §§ 61(a), 74(a), 26 U.S.C.A. §§ 61(a), 74(a).³ We are persuaded that the Rogallos' § 306 award did not meet the stringent tests of § 74(b), and accordingly reverse.

I.

Francis Rogallo, an aeronautical engineer, was employed by the government at the Langley Research Center, formerly a predecessor and now part of NASA. During his spare time, Mr. Rogallo and his wife pursued their hobby of flying and designing kites. In 1948, the pursuit of this hobby led to the development of the Rogallo Parawing, a flexible kite with the structural characteristics of a parachute and the aerodynamic characteristics of a wing. The Rogallos asked the government to obtain a patent for them,⁴ but the government expressed no interest. The Rogallos then patented the parawing at their own expense. By 1963, the government recognized the parawing's military and space potential and had begun to invest large sums in its development. The Rogallos received no royalties or other compensation from the government.⁵

On July 18, 1963, NASA presented the Rogallos with a monetary award having a face amount of $35,000, which, less taxes withheld, was divided equally between them. The award recited that it was made "for the technical contribution entitled 'flexible kite' which represents a significant value in the conduct of the aeronautic and space activities of the United States." The award was made pursuant to § 306(a), which, in pertinent part, provides:

The Administrator is authorized, upon his own initiative or upon application . . . to make a monetary award, in such amount and upon such terms as he shall determine to be warranted, to any person . . . for any scientific or technical contribution to the Administration which is determined to have significant value in the conduct of aeronautical and space activities . . .. In determining the terms and conditions of any award the Administrator shall take into account —

(1) the value of the contribution to the United States;

(2) the aggregate amount of any sums which have been expended . . . for the development of such contribution;

(3) the amount of compensation previously received by the applicant for or on account of such contribution by the United States; and

(4) such other factors as the Administrator shall determine to be material.

The Rogallos executed a royalty-free non-exclusive irrevocable license of their patent in favor of the government. They did so as required by § 306(b), which provides:

No award may be made under subsection (a) of this section with respect to any contribution —

(1) unless the applicant surrenders, by such means as the Administrator shall determine to be effective, all claims which such applicant may have to receive any compensation . . . for the use of such contribution . . . by . . . the United States.

The taxpayers and the government have stipulated these facts: NASA selected the Rogallos for the contribution award without any action or application on the Rogallos' part; NASA did not require the Rogallos to render substantial future services as a condition to receiving the award; NASA did not make the award "for an accomplishment in connection with Mr. Rogallo's employment but was developed by the Rogallos on their own time;"⁶ and the parawing is in the scientific field of aeronautics.

II.

IRC § 74(b) excludes from gross income:

amounts received as prizes and awards made primarily in recognition of . . . scientific . . . or civic achievement, but only if —

(1) the recipient was selected without any action on his part to enter the contest or proceeding; and

(2) the recipient is not required to render substantial future services as a condition to receiving the prize or award.

IRC Regulation § 1.74-1(b) restates the tests of the statute and adds another: an award is includable if it is from an employer to an employee in recognition of some achievement in connection with his employment. The Regulation further explains that the award must be made in recognition of "past achievements" and cites the Nobel and Pulitzer Prizes as the type of award that would qualify for exclusion. The legislative history refers to the same examples. See H.R.Rep.No.1337, 83d Cong., 2d Sess. (1954) and S.Rep.No.1622, 83d Cong., 2d Sess. (1954), reprinted in 3 U.S.Code Cong. & Admin.News, pp. 4163-64, 4813 (1954). These references to the Nobel and Pulitzer Prizes indicate Congress' intent that the exclusion be available only where the award was gratuitous, rather than compensatory.⁷

The stipulated facts establish that the Rogallos' § 306 award satisfied all the requirements of § 74(b) and Reg. 1.74-1(b) but one, leaving still at issue the requirement that the award be made "primarily in recognition of" rather than in compensation for the Rogallos' scientific contribution. We turn to resolution of this issue.

III.

The language, legislative history, and operation of § 306 all indicate that NASA presents the awards not primarily for an act of invention per se, but primarily for the act of contributing an invention or scientific or technical improvement to NASA. Section 306 is entitled "contribution awards." By its terms, § 306 authorizes the Administrator to make an award "for any scientific or technical contribution to the Administration." (emphasis added). The conditions enumerated in § 306(a) for determining the amount of the award also implicitly embody the concept of quid pro quo. Thus, the statute instructs the Administrator to consider the value of the contribution to the government, the aggregate amount of the contributor's expenses, and the "compensation previously received" by the contributor from the United States. § 306(a)(1)-(3). The statute's emphasis on the value of the contribution to the government and on monies previously received by the contributor tends to rebut the notion that the award was intended primarily to provide gratuitous honorific recognition of achievement.⁸

Moreover, § 306(b) imposes a condition precedent to presentation of the award: the inventor or developer must contribute his invention or scientific or technical improvement to the government and must surrender all claims to compensation for its use by the government.⁹ This provision stands in sharp contrast to the sheerly gratuitous nature of the Nobel and Pulitzer Prizes which exemplify excludable awards.

The legislative history of § 306 supports the conclusion that the NASA award is not made primarily to salute scientific achievement. One Congressman, speaking in support of § 306, characterized it as providing "cash incentive awards . . . given to the inventors or firms which make significant technical contributions to the National Space Program." 104 Cong.Rec. 13988 (1958) (remarks of Congressman Keating). The Conference Report states that § 306 "provides for making awards for scientific and technical contributions." Conf.Rep.No.2166, 85th Cong., 2d Sess. (1958), reprinted in 2 U.S.Code Cong. & Admin.News, pp. 3199-3200 (1968) (emphasis added).

The minutes of the NASA Inventions and Contributions Board, the body which determines the recipients and the amounts of § 306 awards, reveal that notions of quid pro quo and bargain were prominent in its consideration of the Rogallo award.¹⁰ Moreover, the checks which NASA presented at the awards ceremony were not for the $35,000 face amount of the award, but for $28,700, the difference representing federal income tax which NASA evidently considered appropriate to withhold. On the other hand, NASA's public pronouncements do stress the honorific nature of the award.¹¹

The taxpayers vigorously urge, and the district court held, that Simmons v. United States, 308 F.2d 160 (4 Cir. 1962), forbids consideration of NASA's motives and thereby renders much of the preceding discussion irrelevant and improper. In Simmons, we were concerned with a prize allegedly for civic achievement. We held that the taxpayer could not exclude a prize presented to him by a brewing company for catching a specially marked fish, under § 74(b), because catching the fish did not qualify as a civic achievement. We went on to hypothesize:

But even if a civic purpose could be discerned in the company\'s campaign, . . . it is not the motivations of the donor that are legally relevant. The statute and its legislative history speak only of the character of the recipient\'s achievement, and the crucial test is the nature of the activity being rewarded. For example, if Simmons\' achievement cannot be considered one of those enumerated in section 74(b), the exclusion provided in that section would not apply even if the prize were

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