United States v. Carruthers, 13932.

• Decision Date: 04 February 1955
• Docket Number: No. 13932.,13932.
• Citation: 219 F.2d 21
• Parties: UNITED STATES of America, Appellant, v. Eben H. CARRUTHERS and Nancy Carruthers, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

219 F.2d 21 (1955)

UNITED STATES of America, Appellant, v. Eben H. CARRUTHERS and Nancy Carruthers, Appellees.

No. 13932.

United States Court of Appeals, Ninth Circuit.

February 4, 1955.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, A. F. Prescott, John J. Kelley, Jr., Sp. Assts. to Atty. Gen., George Lynch, Attorney, Dept. of Justice, Washington, D. C., C. E. Luckey, U. S. Atty., Eugene, Or., Victor E. Harr, Asst. U. S. Atty., Portland, Or., for appellant.

Gordon Sloan, Astoria, Or., Carl E. Davidson, Charles P. Duffy, Portland, Or., for appellees.

Before HEALY, BONE and POPE, Circuit Judges.

BONE, Circuit Judge.

This is an action for the recovery of individual income taxes collected from appellees by a former Collector of Internal Revenue of the United States for the District of Oregon for the calendar year 1950.

On February 9, 1951, the appellees filed a joint income tax return for the year 1950 reporting a total net income of $36,927.44 and a tax liability of $10,581.98, which was duly paid. In this return the appellees included as ordinary gross income the total amount of $38,976.75, received from the E. H. Carruthers Company in accordance with a contract executed on May 27, 1950, between Carruthers and the company for the transfer of patent rights.

On October 2, 1951, the appellees filed an amended joint income tax return showing a net income of $28,419.06 and a timely claim for refund on Form 843 for $3,635.92, upon the ground that the amount of $17,016.75 received by appellee in the year 1950 as provided in the contract with the company of May 27, 1950, represented profit to him on the sale of patent rights as a long-term capital gain rather than as ordinary income.

Appellees filed a claim for refund but did not receive a notice of disallowance. They commenced this action in accordance with § 3772(a) (2) of the Internal Revenue Code, 26 U.S.C.A. § 3772(a) (2), after a period of more than six months had expired from the filing of their claim for refund.

The question here is whether the lower court was correct in determining that the payments received by the taxpayers in the taxable year 1950 from the E. H. Carruthers Company for the transfer of patent rights constituted proceeds from a sale within the meaning of Section 117 of the Internal Revenue Code, 26 U.S.C. A. § 117, so as to be taxable as capital gains.

The lower court made Findings of Fact in part as follows:

IV

"On the 27th day of May, 1950 plaintiff Eben H. Carruthers entered into a contract with the E. H. Carruthers Company, an Oregon corporation, * * * and on the 31st day of May, 1950 plaintiff Eben H. Carruthers entered into a `license agreement\' with the same corporation * * * under the terms of which he granted to the company `an exclusive license to manufacture, use, sell or lease machinery or to practice any method in accordance with or as set forth in certain United States and foreign patents and applications for patents, together with the right to sublicense others\', as more fully stated in the agreement. The exclusive license was `limited to the tuna canning industry\', but extended `to the end of the term of any patent listed or to the end of the term of any patent which may issue upon a patent application listed.\'" (Emphasis ours.)

V

"The inventions of plaintiff Eben H. Carruthers, which were the subject of the said agreements, had been reduced to practice more than six months prior to the 27th day of May, 1950."

VIII

"The license agreement dated May 31, 1950 * * * constituted an absolute assignment and sale of all of the inventions, applications for patent and patents described therein. The amount of $17,016.75 received by plaintiff Eben H. Carruthers in the year 1950 as `royalties\' was in consideration for such assignment and sale."

The lower court thereupon made the following Conclusions of Law:

I

"The inventions, applications for patent and patents described in said license agreements were capital assets in the hands of plaintiff Eben H. Carruthers."

II

"The contract of May 27, 1950 * * * and the license agreement dated May 31, 1950 * * * constituted an absolute assignment and sale of said inventions, applications for patent and patents, within the meaning of Section 117 of the Internal Revenue Code."

III

"The amounts received by plaintiff Eben H. Carruthers during the year 1950 as `royalties\' from E. H. Carruthers Company, an Oregon corporation, by virtue of said agreements, were within the purview of Section 117 of the Internal Revenue Code and were subject to the limitations of Section 117(b) of the Internal Revenue Code."

IV

"By reason of the foregoing, plaintiffs are entitled to recover judgment of and from defendant * * *."

Appellant complains that the lower court made erroneous findings and conclusions when it determined that there was a sale of patents within the meaning of Section 117 of the Internal Revenue Code. However, appellant admits that an assignment for consideration is a sale within the meaning of § 117.

On appeal, the government no longer questions that the patents are capital assets.

Both parties agree and appellant states in its brief, "Whether a transfer of an interest or a right under a patent is a sale or only a license does not depend upon the terminology used by the parties."

Appellant makes two arguments for reversal:

One, The Proceeds Received By The Patentee Were Ordinary Income Because The Transfer Was Limited To The Tuna Industry Which Establishes That There Was A Retention Of Rights Of The Type Which Makes The Transfer A License Rather Than An Assignment For Tax Purposes.

Both parties point to Waterman v. Mackenzie, 138 U.S. 252, 11 S.Ct. 334, 34 L.Ed. 923 as the classic case in this field. That case was concerned with infringement of patent rights rather than with their taxation. Nevertheless, the court laid down a test, (which has been repeatedly quoted with approval) for determining whether there has been a license or an assignment of patent rights. The test set forth in the Waterman case, 138 U.S. at page 255, 11 S.Ct. at page 335, is as follows:

"The monopoly thus granted is one entire thing, and cannot be divided into parts, except as authorized by those laws. The patentee or his assigns may, by instrument in writing, assign, grant, and convey, either (1) the whole patent, comprising the exclusive right to make, use, and vend the invention throughout the United States; or (2) an undivided part or share of that exclusive right; or (3) the exclusive right under the patent within and throughout a specified part of the United States. Rev.Stat. § 4898. A transfer of either of these three kinds of interests is an assignment, properly speaking, and vests in the assignee a title in so much of the patent itself, with a right to sue infringers * * *. Any assignment or transfer, short of one of these, is a mere license, giving the licensee no title in the patent, and no right to sue at law in his own name for an infringment." (Emphasis added.)

Counsel for appellant admitted that under the Waterman decision it is not necessary that the patentee transfer all his rights in the patents for the result to be an assignment. Clearly, the transfer can be limited in area. However, in oral argument on appeal it was urged that even though there could be an assignment to a specified area, for the transfer to be an assignment under the Waterman decision it must be of "whole" patent rights to that limited area; and, a transfer to an industry (even though unlimited in area) must receive different tax treatment. The cases cited by appellant do not, in our view, support the argument tendered in this paragraph. Counsel for appellant admitted in oral argument that no case holds that a transfer of a patent for use in an industry would not, for that reason, be a sale within the meaning of § 117.

Appellant's chief argument in...