Talge v. United States

• Decision Date: 20 April 1964
• Docket Number: Civ. A. No. 13540-4.
• Citation: 229 F. Supp. 836
• Parties: Foster L. TALGE, Plaintiff, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Missouri

229 F. Supp. 836

Foster L. TALGE, Plaintiff, v. The UNITED STATES of America, Defendant.

Civ. A. No. 13540-4.

United States District Court W. D. Missouri, W. D.

April 20, 1964.

Hillix, Hall, Hasburgh, Brown & Hoffhaus, by Albert F. Hillix, and Richard H. Brown, Alfred Kuraner, Kansas City, Mo., for plaintiff.

F. Russell Millin, U. S. Atty., by William A. Kitchen, Asst. U. S. Atty., Kansas City, Mo., William A. Miner, Tax Division, Dept. of Justice, Washington, D. C., for defendant.

BECKER, District Judge.

This is a suit for refund of gift taxes, interest and penalties brought pursuant to Section 1346(a) (1) of Title 28, United States Code. Plaintiff seeks recovery of gift taxes paid for the year 1947 in the amount of $6,399.59, of interest paid thereon in the amount of $5,007.68 and of a penalty paid thereon in the amount of $1,599.90.

The plaintiff has complied with all conditions precedent to filing the suit. Jurisdiction to hear and determine the suit exists.

The facts have been fully developed by pre-trial and post-trial stipulations and by evidence received at trial. The unusual factual pattern of this case has made very difficult the application of the controlling statutes, regulations and legal principles.

Background Facts

In December, 1945, plaintiff, Foster L. Talge, and his father, Henry Talge, were joint owners of a number of mechanical and design patents and patent applications useful in the manufacture and sale of housewares (sometimes called kitchenwares) including, among other things, can openers, juice extractors, ice crushers, grinders and salad making machines.

At that time plaintiff and his father were also partners in a partnership enterprise known as Rival Manufacturing Company. (This company was incorporated on January 22, 1946. It is referred to hereinafter as "Rival.") Rival had been manufacturing and selling housewares under the jointly owned patents since 1936 (except for 1943 and 1944 war work years).

These patents and patent applications were, and are, classified as wasting assets. Each had a life of seventeen years. On February 1, 1946, these patents had an average remaining life of about nine and three quarters years. Evaluated under Hoskold's formula plaintiff's one-half of the patents and patent applications were worth $31,160.13 on February 1, 1946.¹

In February, 1946, Rival had all the facilities, including tools, dies and production machinery, to manufacture the housewares covered by the patents and patent applications, and had been manufacturing some of them for a substantial period of time. Rival then owned attractive established brand names under which it had successfully sold its general line of housewares in the past, including some of the housewares covered by the patents.

Features of the Housewares Industry

The housewares industry is, and was at all times in question, a very competitive industry in which the products are sold at relatively low prices. In many lines a competitor can make modifications in patented items manufactured by others and produce substantially the same products without liability for infringement. Each competing manufacturer in the housewares field seeks to establish a market for its unique line under its own brand names. This makes it difficult for an established manufacturer profitably to shift to a new line, requiring new tools and dies, a break in continuity of production and sales and customer acceptance of new items under the established brand names or establishment of new brand names for the new items.

Another feature of the housewares industry is the necessity of continued research and development of improvements on existing patents in order to remain competitive, because of rapid obsolescence of many items.

In the housewares industry manufacture and sale of a general line results in a saving on sales costs.

As in most competitive industries, achievement and maintenance of a high volume of gross sales is definitely desirable from the standpoint of the licensor of patents, who is paid royalties on a percentage of sales. A history of high volume of gross sales increases the amount of royalties to be expected from any given percentage of sales.

In 1945 Rival had reached a peak volume of gross sales of $1,123,057 from items manufactured under patents owned by plaintiff and his father. The experience from 1936 to 1945 inclusive afforded a reasonable basis for determining on February 1, 1946, the value of the patents and patent applications.²

Plaintiff's Purposes

In December of 1945 the plaintiff became interested in creating a "living estate" for his three minor children, Jacquelynne, age 10, Henry Stephen, age 8, and Foster, Jr., age 7. He proposed to create this interest for his children by gifts of his interest in the patents and patent applications owned by his father and himself.

The plaintiff's purposes for desiring to make the gifts were (1) to remove the property to be donated from the risk of loss from speculation and errors of judgment; (2) to remove the property from the risk of his business; (3) to obtain the benefit of expert management of money; and (4) to relieve himself from the burden of income taxes arising from the property to be given. (In respect to this latter purpose, (4), whether he was successful is beyond the issues in this case as will be pointed out hereinafter.)

Advice of Counsel

In December of 1945 the plaintiff Talge consulted the law firm of Gage, Hillix, Shrader and Phelps, then a well known and reputable firm in Kansas City, Missouri, engaged in the general practice, including federal tax practice. He was initially referred to John E. Park, Esquire, then a member of the firm. Thereafter plaintiff received advice and services from Mr. Park and Mr. Hillix of the firm, and also services from Thomas E. Scofield, Esquire, of Kansas City, an attorney specializing in patent law since 1924.

At the outset Mr. Park advised the plaintiff that in order to accomplish his purposes, plaintiff would have to divest himself completely and irrevocably of ownership of his interest in patents. The plaintiff then instructed Mr. Park to prepare the necessary documents.

The General Plan of the Gifts

After studying the problems involved in the gifts, counsel and the plaintiff devised the following plan.

First, the plaintiff and his father would execute a joint trust agreement whereby they would convey to John C. Hockery, as trustee, the patent and patent applications; retaining rights and powers (a) to receive the income from the trust, (b) to receive the remaining income and corpus on termination of the trust, (c) to designate a successor trustee, other than one of the settlors, in case of death, resignation or disability of the trustee, and (d) to dispose of beneficial interests therein by sale, assignment or transfer. This trust would be irrevocable and not subject to amendment. (It is hereinafter referred to as the "Hockery Trust.")

Second, the settlors intended, and so advised the proposed trustee Hockery, that Rival was to be the licensee of the patents at a fair and reasonable royalty. According to the plan Hockery as trustee would negotiate the royalty licensing agreement with Rival. Mr. Hockery was on February 1, 1946, and continued to be until his retirement in 1961, Secretary-Treasurer and Comptroller of Rival. He was employed by the predecessor partnership.

Third, after the execution of the Hockery trust, the plaintiff would execute three Declarations of Trust conveying to the First National Bank of Kansas City, in three stated percentages (totaling 100%) all of plaintiff's equitable beneficial right, title and interest in the Hockery trust properties. Each of three trusts would be for the benefit of one of the children of the plaintiff. These conveyances in trust would be complete, irrevocable and not subject to amendment or modification by the plaintiff as settlor. These three trusts are referred to hereinafter as the "Bank Trusts." The trust for the child Jacquelynne would terminate on her death or within 20 years thereafter, depending on contingencies. The trust for the child Henry Stephen would terminate on his 35th birthday. The trust for the child Foster, Jr., would terminate on his 35th birthday. In event of death of each beneficiary provision would be made for disposition of any undistributed trust property. No reversionary or other interest would be retained by the plaintiff.

The plan was approved by all parties to the four trust agreements and executed in three stages.

Execution of the Plan for the Gifts

On February 1, 1946, plaintiff, his father, Henry J. Talge, and John C. Hockery executed the proposed Hockery Trust agreement. The assignment of the patents and patent applications to the trustee was prepared by the patent attorney Mr. Scofield, executed by the settlors and then properly recorded in the United States Patent Office. As a result of the Hockery Trust agreement and the assignment of the patents and patent applications, the trustee Hockery became the legal owner of the patents and the patent applications formerly owned by plaintiff and his father. Plaintiff and his father then owned an equitable assignable beneficial interest in the trust properties.

On February 2, 1946, plaintiff and the First National Bank executed the three proposed declarations of trust creating the Bank Trusts.

Thereafter the Hockery Trust and the Bank Trusts were administered according to the trust agreements at all times in question, up to and including the time of trial.

On February 3, 1946, the trustee Hockery and Rival executed a license agreement under which Rival was granted the exclusive right to the manufacture, use and sale of the items covered by the patents and patent applications. On the same day the trustee Hockery by writing instructed Rival to pay the royalties under the license agreement directly to the Bank as trustee. These instructions were followed from 1946 until the...