Williams v. United States, 47736.

• Decision Date: 06 June 1949
• Docket Number: No. 47736.,47736.
• Citation: 84 F. Supp. 362
• Parties: WILLIAMS v. UNITED STATES.
• Court: U.S. Claims Court

84 F. Supp. 362

WILLIAMS v. UNITED STATES.

No. 47736.

United States Court of Claims.

June 6, 1949.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Lawrence J. Bernard, Washington, D. C., for the plaintiff. George E. McMurray, Jr., Washington, D. C., was on the brief.

H. S. Fessenden, with whom was Theron Lamar Caudle, Assistant Attorney General, for the defendant. Ellis N. Slack and Andrew D. Sharpe, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and MADDEN, HOWELL, WHITAKER and LITTLETON, Judges.

MADDEN, Judge.

This suit is to recover $68,977.66, which is a part of the income tax paid by the plaintiff in 1943. The income in question was received by the plaintiff in 1942, and the tax was paid in 1943 pursuant to Section 6(e) of the Current Tax Payment Act of 1943. The source of the income was a patent, United States Patent No. 2,090,656, for a short stroke piston device or vibrator which should serve as the operating mechanism of automatic firearms.

The plaintiff began to work on the invention which resulted in the patent in about the year 1925, and continued work on it until February 7, 1931, on which date he filed his application for a patent. The patent was not actually issued until August 24, 1937. In 1940 the plaintiff granted an exclusive license to the Winchester Repeating Arms Company for the use of his patent, subject to exceptions not material here, and that company agreed to pay the plaintiff a royalty upon each gun manufactured which used the plaintiff's invention. On March 19, 1942, the Winchester Company and the plaintiff liquidated the royalty agreement by Winchester's agreeing to pay the plaintiff $234,001.46 in lieu of all payments to which he would otherwise have been entitled under the royalty agreement. The named sum was paid to the plaintiff in 1942. It constituted much more than 80% of all the income which the plaintiff received from his patent at any time before, during, or since 1942.

Section 107(b) of the Internal Revenue Code reads as follows:

"Sec. 107. Compensation for services rendered for a period of thirty-six months or more and back pay.

* * * * * *

"(b) Patent, copyright, etc. For the purposes of this subsection, the term `artistic work or invention', in the case of an individual, means a literary, musical, or artistic composition of such individual or a patent or copyright covering an invention of or a literary, musical, or artistic composition of such individual, the work on which by such individual covered a period of thirty-six calendar months or more from the beginning to the completion of such composition or invention. If, in the taxable year, the gross income of any individual from a particular artistic work or invention by him is not less than 80 per centum of the gross income in respect of such artistic work or invention in the taxable year plus the gross income therefrom in previous taxable years and the twelve months immediately succeeding the close of the taxable year, the tax attributable to the part of such gross income of the taxable year which is not taxable as a gain from the sale or exchange of a capital asset held for more than 6 months shall not be greater than the aggregate of the taxes attributable to such part had it been received ratably over that part of the period preceding the close of the taxable year but not more than thirty-six calendar months."

The plaintiff says that this statute entitles him to compute his taxes upon the income received by him in 1942 from his patent as if that income had been received ratably during the thirty-six months ending on February 7, 1931, the date when he finished his work on his invention, and had been taxed at the income tax rates then in force. The Government says that the tax should be computed as if the income actually received in 1942 had been received ratably during the thirty-six months ending December 31, 1942, and had been taxed at the rates in force in 1940, 1941, and 1942. Since the applicable rates in the latter years were much higher than those which the plaintiff would use, the difference is large.

The obvious hardship of taxing a person who received, all or mostly in one year, income which he had worked many years to earn, and thus subjecting him to high surtax rates, was first dealt with by Congress in Section 220 of the Revenue Act of 1939, Section 107 of the Internal Revenue Code. It provided:

"Sec. 107. Compensation for services rendered for a period of five years or more.

"In the case of compensation (a) received, for personal services rendered by an individual in his individual capacity, or as a member of a partnership, and covering a period of five calendar years or more from the beginning to the completion of such services, (b) paid (or not less than 95 per centum of which is paid) only on completion of such services, and (c) required to be included in gross income of such individual for any taxable year beginning after December 31, 1938, the tax attributable to such compensation shall not be greater than the aggregate of the taxes attributable to such compensation had it been received in equal portions in each of the years included in such period."

Subsections (a) and (b) of Section 107 of the Internal Revenue Code in their present form were enacted in Section 139 of the Revenue Act of 1942, which, prior to its passage was H.R. 7378, 77th Congress, 2nd Session. By Section 139, Section 107 was amended and became Section 107(a) which reads as follows:

"Sec. 107. Compensation for services rendered for a period of thirty-six months or more * * *.

"(a) Personal services. If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such...