United States v. Dresser Industries, Inc.

• Decision Date: 17 December 1963
• Docket Number: No. 20018.,20018.
• Citation: 324 F.2d 56
• Parties: UNITED STATES of America, Appellant, v. DRESSER INDUSTRIES, INC., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

324 F.2d 56 (1963)

UNITED STATES of America, Appellant, v. DRESSER INDUSTRIES, INC., Appellee.

No. 20018.

United States Court of Appeals Fifth Circuit.

November 6, 1963.

Rehearing Denied December 17, 1963.

William M. Rivkind, Atty., Dept. of Justice, Dallas, Tex., John B. Jones, Jr., Acting Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Louis F. Oberdorfer, Asst. Atty. Gen., Washington, D. C., H. Barefoot Sanders, U. S. Atty., Dallas, Tex., Michael Smith, David O. Walter, Attys., Dept. of Justice, Washington, D. C., for appellant.

William P. Fonville, Dallas, Tex., for appellee.

Before CAMERON and BROWN, Circuit Judges, and WHITEHURST, District Judge.

CAMERON, Circuit Judge.

This case involves the question whether money received by the taxpayer¹ qualifies for capital gains treatment. The court below held for the taxpayer, awarding judgment in the amount of some ninety thousand dollars, and the government appeals.

The facts underlying this controversy are not in material dispute, most of them being stipulated. Taxpayer owned two patents relating to radioactivity oil well surveying. Well-Surveys, Inc., another party, owned certain patent rights relating to a method and apparatus for logging oil wells. In 1942, it developed a new well surveying method called "Neutron-Gamma Ray Well Logging."

In 1940, Well-Surveys and taxpayer entered into an agreement whereby Well-Surveys granted to taxpayer a license to practice its patent for others, for hire. The agreement described the license given as exclusive, but exempted licenses which had been previously granted to others, and reserved to Well-Surveys the right to practice the patent for hire. Taxpayer agreed to pay to Well-Surveys one-quarter of any fees earned from practice of the patent, and Well-Surveys acquired the right to practice certain of taxpayers' patents. In 1942, the new patent was included in the agreement.

In 1951, Well-Surveys and taxpayer entered into a new agreement. Taxpayer no longer possessed the "exclusive" feature of the grant, and in return Well-Surveys agreed to pay to taxpayer the sum of five hundred thousand dollars, to be paid out of one quarter of the fees earned by practice of the patent to third parties. The sums paid taxpayer under this arrangement are the subject matter of this tax refund action, taxpayer having paid taxes as ordinary income on such sums received, and having brought this action claiming that capital gains treatment was due.

The government contends, first, that the right assigned or transferred in 1951 was not "property" or a "capital asset", but was "nothing more than a substitute for ordinary income to the `selling' party;" and, second, that "even assuming arguendo that a capital asset was here involved, there was no sale or exchange of that asset."

Appellee taxpayer, of course, argues that the exclusive right to practice the patent for hire was a capital asset, and that there was a sale or exchange, inasmuch as, at the moment of sale, it had the right and no money and, after the "sale," it had no exclusive right and a claim to money.²

The government makes the customary broadside attack on the sale by citing the usual three cases: Corn Products Refining Co. v. Commissioner, 1955, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29; Commissioner v. P. G. Lake, Inc., 1958, 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743; Commissioner v. Gillette Motor Transport, Inc., 1960, 364 U.S. 130, 80 S.Ct. 1497, 4 L.Ed.2d 1617, attempting to demonstrate that their holdings are dispositive of this case. As we did in Nelson Weaver Realty Co. v. Commissioner, 1962, 5 Cir., 307 F.2d 897, we will distinguish those cases at the threshold:

"In Corn Products * * * the Tax Court, * * * the Court of Appeals, * * * and the Supreme Court found specifically that the taxpayer regularly dealt in corn futures as part of its everyday business operations and they were, therefore, judicially excluded from the definition of capital assets." Nelson Weaver, supra, 307 F.2d at p. 902.

The taxpayer here did not, by any stretch of the imagination, deal regularly with the sale of well surveying patents.

"In Commissioner v. P. G. Lake, Inc., * * * the taxpayer received from the sale of an oil payment an amount exactly equal to the `face value\' of the oil payment transferred, which was expected to and did pay out in slightly more than three years. The interest transferred to the assignee was to terminate after the assignee had received the $600,000.00, the interest which was assigned, plus an amount equal to three percent on the unpaid balance. The seller kept a reversionary interest in the property sold, the purchaser received nothing but a right to payments, which right was to terminate as soon as the $600,000.00 plus three percent interest was paid. What was sold, therefore, was the right to receive money in the future, the sales price being almost the exact equivalent of the income which was to be produced in the future." Nelson Weaver, supra, 307 F.2d at p. 902.

The taxpayer here is cutting off a "vertical slice" of its rights, rather than carving out an interest from the totality of its rights under the grant. The interest transferred was not to terminate when a certain amount was paid, as was so in Lake, and taxpayer retained no reversionary interest in the "exclusivity" feature transferred. The tree was sold, along with the fruit, at least insofar as that branch was concerned. Cf. "Assignment of Income: Fruit and Tree as Irrigated by the P. G. Lake Case," 17 Tax Law Review, New York University School of Law, No. 3, March 1962, pp. 293 et seq.

"Gillette Motor Co., * * * involved the question whether the amount received by it as compensation for the temporary taking by the Government of its business facilities for a period of about ten months during World War II constituted ordinary income or capital gain. * * *

"The Motor Carrier Claims Commission allowed in this and all similar cases the fair market value of what was taken, which it held to be nothing more than the use of the facilities entitling Gillette to the fair rental value with interest. * * *" Nelson Weaver, supra, 307 F.2d at p. 903.

The temporary taking by the government of private facilities merely produced what was, in effect, rent which is usually considered ordinary income. The transfer involved here was permanent and final.

The government did not, below, raise the first point, that is, that the gain is anticipated future income, and cannot raise it here on appeal for the first time. Nelson Weaver, 307 F.2d at page 903, fn. 6. But we feel that the broad assertion made that, in any case where the purchase price includes anticipated income there can be no capital gains treatment, must be answered. Another panel of this Court, in the case of United States v. Eidson, 1962, 5 Cir., 310 F.2d 111,³ accepted literally the Supreme Court's generalization in Lake, supra, 356 U.S. p. 266, 78 S.Ct. p. 695, 2 L.Ed.2d 743: "The substance of what was assigned was the right to receive future income. The substance of what was received was the present value of income which the recipient would otherwise obtain in the future. In short, consideration was paid for the right to receive future income, not for an increase in the value of the income-producing property.", to mean that any money paid which represents the present value of future income to be earned is always taxed as ordinary gains. As a legal or economic position, this cannot be so. The only commercial value of any property is the present worth of future earnings or usefulness. If the expectation of earnings of stock rises, the market value of the stock may rise; at least a part of this increase in price is attributable to the expectation of increased income. The value of a vending machine, as metal and plastic, is almost nil; its value arises from the fact that it will produce income.

At common law, the right to receive income from land was ownership of the land. Lord Coke said: "If a man seized of land in fee by his deed granteth to another the profits of these lands, to have and to hold to him and his heirs, and maketh livery secundum forman chartae, the whole land itself doth pass. For what is land but the profits thereof?" Co.Lit. 45. Emphasis added.

There is, in law and fact, a vast difference between the present sale of the future right to earn income and the present sale of the future right to earned income.⁴ If an asset will not in the future be useful, or capable of earning income, it is worthless in the business world.

We conclude, therefore, that the sale was not merely the present sale of the right to earned income, to be paid in the future. Taxpayer had an asset, a right, a property which would produce income. The fact that the income which could be earned would be ordinary income is immaterial; such would be true of the sale of all income-producing property. See Commissioner v. Ferrer, 1962, 2 Cir., 304 F.2d 125, especially the discussion beginning in the last paragraph on page 132 304 F.2d on page 132.

We readily distinguish Wiseman v. Halliburton Oil Well Cementing Co., 10 Cir., 1962, 301 F.2d 654, relied on by the government. Although the facts appear similar, it is plain that, in that case, the taxpayer had the right to sublicense the patent to third parties for a fee. He gave up that right in return for a share of royalties received by the patent owner from licenses to be granted to third parties. That is not the case here, inasmuch as taxpayer had no right to allow other parties to practice the patent. Perhaps in Halliburton the taxpayer merely substituted the right to receive ordinary income from one source for the right to receive ordinary income from another; but that is not the case here inasmuch as taxpayer had no right to grant to third parties the right to practice the patent.

The second question is whether there was a sale or exchange of property, rather than merely a "termination" or "relinquishme...