Rollman v. Commissioner of Internal Revenue

• Decision Date: 08 May 1957
• Docket Number: No. 7318.,7318.
• Citation: 244 F.2d 634
• Parties: Ernest E. ROLLMAN and Hilda S. Rollman, Curt E. Kaufman and Louise Kaufman, Heinz W. Rollman and Tania Rollman, Walter Kaufman and Ellen Kaufman, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

244 F.2d 634 (1957)

Ernest E. ROLLMAN and Hilda S. Rollman, Curt E. Kaufman and Louise Kaufman, Heinz W. Rollman and Tania Rollman, Walter Kaufman and Ellen Kaufman, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 7318.

United States Court of Appeals Fourth Circuit.

Argued January 11, 1957.

Decided May 8, 1957.

David Alter, New York City (Squadron & Alter, New York City, on the brief), for petitioners.

Morton K. Rothschild, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and Hilbert P. Zarky, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before PARKER, Chief Judge, SOPER, Circuit Judge, and WARLICK, District Judge.

SOPER, Circuit Judge.

This petition to review decisions of the Tax Court involves deficiencies in income taxes for the years 1948 and 1949 aggregating about $5400. The question presented is whether payments received in these years by a partnership, of which the taxpayers were members, for the transfer of rights in a patent owned by the partnership should be regarded as proceeds of sale of capital assets under § 117 or ordinary income under § 22(a) of the Internal Revenue Code, 1939, 26 U. S.C. §§ 117, 22(a).

The taxpayers, Ernest Rollman, Heinz Rollman, Curt Kaufman and Walter Kaufman are members of a partnership known as "The Rollmans", presently engaged in business at Waynesville, North Carolina. The Rollmans was first formed as a partnership in Belgium in 1936. Prior to that time, the taxpayers had lived in Germany and had been there employed in several shoe factories owned by Hans Rollman, an original member of The Rollmans, now deceased. While so employed, taxpayers had become skilled in the production methods of leather and rubber shoe manufacture. Taxpayers and their families fled to Belgium in 1935 following the confiscation of their properties, including shoe factories, equipment and patents, by the Hitler regime in Germany. In Belgium, the taxpayers, being unable for lack of funds to engage in the manufacture of shoes but famous for their skill in this field, formed The Rollmans whose business consisted of giving technical advice to shoe manufacturers and granting limited licenses to such manufacturers for the production of shoes under patents developed by the partnership. This business has continued up to the present time.

On September 6, 1938, there was granted to the partnership United States Patent No. 2,129,106 which is known as the Rajeh patent and relates to footwear with a new type of sole consisting of a dense rubber outer sole united by a body of sponge rubber to the upper portion of the footwear. In 1939, The Rollmans, being desirous of establishing a business in the United States, assigned certain patents, including the Rajeh patent, to Heinz Rollman, a member of the partnership and one of the taxpayers, with authority to dispose of them and to execute agreements on behalf of the firm. Heinz first attempted to arrange with one Leo Weill and later with Rikol, Incorporated a corporation controlled by Weill, for the manufacture of shoes under the technical direction of The Rollmans and under a license under the Rajeh patent. These negotiations were unsuccessful largely because the manufacture of shoes under the patent required not only special shoe machinery but a supply of an uncured rubber compound which would involve the use of machinery costing about $250,000. Rikol could not supply the necessary money and consequently negotiations were undertaken between Rikol, Heinz representing The Rollmans, and the Dayton Rubber Company, looking to the building of a rubber plant by Dayton, the leasing of space to Rikol, and the supply of Rikol's requirements for the rubber compound for manufacturing operations under the patent. Dayton was unwilling to make the investment until it had investigated the Rajeh patent and had reviewed a proposed agreement for the grant of a limited license under the patent to Rikol. Dayton at that time was contemplating a complete transfer of all rights under the patents to Rikol in order to safeguard the proposed investment. The investigation disclosed a possible conflict with patents owned by one Ludwig H. Grunebaum and his associates, which had been acquired by them after the German Government confiscated The Rollmans' outstanding United States patents in 1935. As a result of this investigation, an arrangement was made for a transfer of the Grunebaum patent rights along with the transfer of the Rajeh patent, and an agreement was entered into on December 19, 1940, between Heinz, acting on behalf of the partnership, Grunebaum and Rikol, wherein Rollman and Grunebaum warranted that Grunebaum was the owner of United States Patents No. 1,955,720 of 1934 and No. 2,168,243 of 1939 relating to shoes and the manufacture thereof, sometimes referred to as The Rollman patents; that Rollman had full authority to act on behalf of Grunebaum in granting licenses under said patents; and that The Rollmans were the owners of United States Patent No. 2,129,106 of 1938, known as the Rajeh patent. Said agreement then set out the following mutual promises and covenants:

"Rollmann, individually and as a member of the copartnership, and Grunebaum do hereby respectively grant to Rikol, subject to the conditions hereinafter set forth, an exclusive license (except for two nonexclusive licenses now outstanding in United States Rubber Products, Inc., and Pirelli, Ltd.) for the manufacture and sale of shoes pursuant to all of the above mentioned patents and any renewals, continuations, divisions, reissues or extensions thereof. Said license shall extend to the entire territory of the United States of America, and so long as Mr. Leo Weill, the representative of Rikol, shall remain alive and shall remain holder of a majority of the stock of Rikol, shall likewise extend to the possessions and dependencies of the United States of America.

* * * * * *

"It is understood that a contract shall be entered into between Rikol, or a subsidiary or affiliated company of Rikol, with a rubber company to supply rubber mixture and semi-vulcanized sole shells. It is understood that said contract will be negotiated by Mr. Leo Weill, as the representative of Rikol, in conjunction with Rollmann and that said contract shall be approved by Rollmann before its execution. Upon the execution of a contract as aforesaid, Rollmann agrees to place at the disposal of the management of said rubber factory all of the formulas necessary for the manufacture of the rubber materials needed by Rikol in order to fully exercise the license granted to it under the patents mentioned herein.

* * * * * *

"The license herein granted to Rikol shall be exclusive for the duration of this agreement with respect to the Rajeh Patent, and shall be exclusive with respect to the Rollmann Patents, except for the nonexclusive license possessed by the United States Rubber Products, Inc. and Pirelli, Ltd., Rollmann and Grunebaum herein agreeing that except for the two non-exclusive licenses above mentioned, no other licenses will be granted with regard to said patents during the term of this agreement. Rollmann and Grunebaum do hereby agree that the license heretofore granted to Pirelli, Ltd., and the United States Rubber Products, Inc. will not be renewed and that no other party will be substituted in place of Pirelli, Ltd. or the United States Rubber Products, Inc. in the event of a cancellation or other termination of said license or licenses. The patents hereinbefore named are licensed solely and exclusively to Rikol (excepting United States Rubber Products, Inc. and Pirelli, Ltd.), subject to the conditions as set forth in this agreement. * * *

"Rikol agrees that it will not grant sub-licenses with respect to the patents for which licenses are herein granted, or any improvements or developments with regard thereto; unless it shall first receive the written consent of Rollmann thereto; except, however, that Rikol shall have the right to grant licenses to any corporations or other enterprises in which Leo Weill shall directly or indirectly control a majority of the stock. In any event it is understood and agreed that Rikol shall have the right to assign the within agreement to a corporation to be formed, provided that Leo Weill shall directly or indirectly control at least a majority of the stock of such new corporation, and upon such new corporation assuming in writing all of the terms and provisions of the within agreement on Rikol\'s part to be performed, Rikol shall be released from any and all further liability hereunder."

Subsequently, on March 19, 1941, Leo Weill organized the Wellco Corporation and thereafter controlled both Rikol and Wellco. On the same date Rikol entered into an agreement with Wellco, granting the exclusive sub-license to manufacture and sell shoes pursuant to the two above mentioned United States patents under the two United States Rollman patents, formerly belonging to the Grunebaum group, for which exclusive licenses had been granted to Rikol under the agreement of December 19, 1940. The later 1941 agreement recited that in the earlier agreement Rikol had "obtained a license with respect to the use" of the so-called Rollman patents.

No further agreements were made in the United States with respect to the Rajeh patent or any improvements thereon by either Rikol or The Rollmans.

During 1947, 1948 and 1949, The Rollmans received payments pursuant to the agreement of December 19, 1940, in the amounts of $9,417.77, $20,178.03 and $17,900.69, respectively. It reported these amounts on its Federal income tax returns as long-term capital gain from the sale of an asset. The Commissioner, however, held that these payments constituted ordinary income to The Rollmans and, in accordance with this ruling, adjusted the taxpayers' distributable shares of ordinary income from the partnership for the taxable years. The...