Sunnen v. Commissioner of Internal Revenue

Citation161 F.2d 171
Decision Date28 April 1947
Docket NumberNo. 13425,13426.,13425
PartiesSUNNEN v. COMMISSIONER OF INTERNAL REVENUE. COMMISSIONER OF INTERNAL REVENUE v. SUNNEN.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

COPYRIGHT MATERIAL OMITTED

C. P. Fordyce, of St. Louis, Mo., for Joseph Sunnen.

Hilbert P. Zarky, Sp. Asst. to Atty. Gen. (Sewall Key, Acting Asst. Atty. Gen., and Robert N. Anderson and Helen Goodner, Sp. Assts. to Atty. Gen., on the brief), for Commissioner of Internal Revenue.

Before GARDNER, THOMAS, and RIDDICK, Circuit Judges.

THOMAS, Circuit Judge.

These two petitions to review a single decision of the Tax Court present identical or similar questions for determination. By stipulation of the parties the cases have been consolidated here for briefing and argument and will accordingly be disposed of by us in one opinion.

The questions presented are: (1) Whether the petitioner, Joseph Sunnen, is taxable under § 22(a) of the Revenue Act of 1936, 49 Stat. 1648, 26 U.S.C.A. Internal Revenue Acts, page 825,1 and under § 22(a) of the Revenue Act of 1938, 52 Stat. 447, 26 U.S. C.A. Internal Revenue Acts, page 1008, for income from certain patent license royalty contracts which he had assigned to his wife; (2) whether a former decision of the Board of Tax Appeals involving other taxable years is res judicata as to the taxes here involved; and (3) whether the assessments for two of the years involved were made within the time prescribed by law.

The appeal of Sunnen, the taxpayer, in No. 13,425 involves deficiencies in income taxes for the years 1937 to 1941, inclusive; and the appeal of the Commissioner in No. 13,426 involves a deficiency for the year 1937 only.

The evidentiary facts are not in dispute. At all times material here the Sunnen Products Company, a Missouri corporation, was engaged at St. Louis, Missouri, in the manufacture and sale of patented grinding machines and other tools. The corporation had outstanding 2,000 shares of capital stock of which petitioner Joseph Sunnen, president of the company, owned 1,780 shares, Cornelia Sunnen, his wife, held 200 shares, W. A. Douglass, vice president, 18 shares, and C. J. Schuepach and R. S. Nichols, one share each. These five persons constituted the board of directors; and it was stipulated that a vote of three directors was required to make any action binding upon the Company.

Joseph Sunnen was an inventor of machines for use in repairing automobiles. He applied for a patent on a "Cylinder Grinder" in 1927, a "Pinhole Grinder" in 1931, and a "Crankshaft Grinder" in 1939, on which he received patents in 1934, 1933, and 1941, respectively. He continued to own these patents through 1941. He, also, applied for a patent on an "Improved Crankshaft Grinder" in 1939, and in 1942 assigned the application to his wife Cornelia. In 1943 a patent was issued to her thereon.

After applying for patents on these several devices, Sunnen entered into written contracts with the Products Company, by the terms of which he licensed the company to manufacture and sell the devices in the United States and foreign countries in consideration of a royalty of 10% of the gross sales price of the devices, to be paid to him "as the same are manufactured, sold and collected for."

The Cylinder Grinder license or royalty agreement was first executed January 10, 1928, expired January 10, 1938, and was renewed for the life of the patent which will expire on December 4, 1951. The Pinhole Grinder agreement was executed December 5, 1931, and the Crankshaft and Improved Crankshaft agreement June 20, 1931. The last two contracts were for a period of 10 years each.

Each royalty agreement contained a provision that "either party shall have the right without liability for damages or breach, to cancel this license or to cease manufacturing thereunder. * * *" The original Cylinder Grinder contract required a six months' written notice of cancellation; the other contracts required one year's written notice. No notices of cancellation were given by either party during the period involved in this controversy.

After the royalty contracts were executed Sunnen assigned them to his wife Cornelia in writing and gave notice thereof to the company. Each assignment provided that "I Joseph Sunnen do hereby assign * * * to Cornelia Sunnen all of my right, title and interest in and to a royalty contract this day executed," etc. The assignments were gifts to the taxpayer's wife, and all such gifts made after 1932 were reported for gift tax purposes.

In 1937 Mrs. Sunnen received $4,881.35 royalties from the 1928 Cylinder Grinder contract and $15,518.68 from the Pinhole Grinder contract. She received no royalties after 1937 from the original Cylinder Grinder contract; but from the 1938 renewal thereof and from the other contracts she received in 1938, $17,318.80; in 1939, $25,243.77; in 1940, $50,402.50; and in 1941, $149,002.78, all of which sums were included in her income tax returns and taxes were paid thereon. The income tax returns of petitioner Sunnen for the years 1937 and 1938 showed gross income in the respective amounts of $38,992.40 and $45,625.36.

The decision of the Tax Court in this proceeding was made March 11, 1946. In a previous proceeding involving the taxpayer's income tax liability for the years 1929, 1930, and 1931, the Board of Tax Appeals in a decision entered June 29, 1935, held that Joseph Sunnen was not liable for income taxes on the royalties paid by the Sunnen Products Company to his wife in those years under the original Cylinder Grinder license agreement of January 10, 1928, and the assignment thereof. That decision was based upon the finding that the royalty contract was an assignable property right; that the assignment vested the title to the property in the assignee; and that the license contract and not Sunnen produced the income. The Board cited as authority for its decision Nelson v. Ferguson, 3 Cir., 56 F.2d 121, certiorari denied 286 U.S. 565, 52 S.Ct. 646, 76 L.Ed. 1297.

The same royalty agreement involved in the 1935 proceeding was in effect in 1937, and the Tax Court in this proceeding held that the 1935 decision is res judicata that the royalties of $4,881.35 paid thereunder to Cornelia Sunnen in 1937 are not taxable to Sunnen. The correctness of this ruling is the question here presented by the Commissioner's appeal in No. 13,426.

In the present case the Tax Court on the authority of its own decision of January 15, 1943, in Estate of Dodson, 1 T.C. 416, held that all of the royalties paid to Mrs. Sunnen under the assigned royalty contracts involved were taxable to Joseph Sunnen. The basis of the decision is that by reason of his ownership of a majority of the stock of the Sunnen Products Company, his continued ownership of the patents, and the fact that the royalty contracts were for a limited period and cancellable upon 6 months' or a year's notice, Sunnen retained such control over the income as to make him liable for the taxes thereon.

The most important question presented for determination is whether the income derived from the several royalty contracts for the use of patents and assigned without consideration by Sunnen to his wife constituted a gift of income before it was earned and payable, and is, therefore, taxable to the donor; or, on the other hand, was it a gift of property which after the gift was complete produced income taxable to the donee. In other words, we must determine on which side of the line that separates "gifts of income-producing property and gifts of income from property of which the donor remains the owner" the income of Mrs. Sunnen from royalties falls. Harrison v. Schaffner, 312 U.S. 579, 583, 61 S.Ct. 759, 762, 85 L.Ed. 1055.

It is now quite definitely settled that an anticipatory assignment to a member of one's family of unearned wages or of the future income of property over which the assignor retains control or ownership does not shift the income tax from the assignor to the assignee. Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731; Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788; Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655; Helvering v. Eubank, 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81; Harrison v. Schaffner, 312 U.S. 579, 61 S.Ct. 759, 85 L.Ed. 1055. By applying the principle of these cases to the facts in the present case, the Commissioner contends that the decision of the Tax Court must be sustained. His first argument is that the patents, ownership of which was retained by Sunnen, and not the royalty contracts constitute the tree to which the fruit (income) must be attributed. We think the weight of authority is clearly to the contrary. The rule seems to be established that a royalty contract is the producing source of the royalty income and that such income is taxable to the assignee. Commissioner v. Field, 2 Cir., 42 F.2d 820; Hall v. Burnet, 60 App.D.C. 332, 54 F.2d 443, 83 A.L.R. 86, certiorari denied 285 U.S. 552, 52 S.Ct. 408, 76 L.Ed. 942; Nelson v. Ferguson, 3 Cir., 56 F.2d 121, certiorari denied 286 U.S. 565, 52 S.Ct. 646, 76 L.Ed. 1297; Lowery v. Helvering, 2 Cir., 70 F.2d 713; Helvering v. Seatree, 63 App.D.C. 274, 72 F.2d 67, 68; Shanley v. Bowers, 2 Cir., 81 F.2d 13; Commissioner v. O'Donnell, 9 Cir., 90 F.2d 907, 910, reversed on other grounds 303 U.S. 370, 58 S.Ct. 619, 82 L.Ed. 903.

In this instance the royalty contracts are Missouri contracts and are assignable under Missouri law. Rosecrans v. William S. Lozier, Inc., 8 Cir., 142 F.2d 118, 124; Keeley v. Indemnity Co., 222 Mo. App. 439, 7 S.W.2d 434. The assignments are also Missouri contracts. The question of their character, validity, the nature and extent of the interest of the assignee and the powers and rights of the assignor are to be determined therefore by Missouri law. Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465; Freuler v. Helvering, 291 U.S. 35, 54 S.Ct. 308, 78 L.Ed. 634; Eisenmenger...

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