General Aniline Film v. C.I.R

Full title: GENERAL ANILINE FILM CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

Court: Circuit Court of Appeals, Second Circuit

Date published: Jan 3, 1944

139 F.2d 759 (2d Cir. 1944)

Opinion

No. 73.

January 3, 1944.

Petition for review of a decision of the Tax Court of the United States.

Proceeding by the General Aniline Film Corporation to review a decision of the Tax Court redetermining a deficiency in a withholding tax imposed by the Commissioner of Internal Revenue.

Reversed.

The statutory provisions here involved are 26 U.S.C.A. Int.Rev.Code, §§ 119, 143 and 144.¹ In March and May, 1940, petitioner entered into five contracts with I.G. Farben (for convenience called I.G.), a German corporation having its principal place of business at Frankfort, Germany; I.G. is a foreign corporation not engaged in trade or business in, and having no office in, the United States. In each of these contracts, I.G. agreed to sell and assign to petitioner, its entire right, title and interest to certain patents respectively named in the several contracts. Each of the contracts provided that the petitioner would not assert any rights under the patents against I.G. or its licensees in the event that products covered by such patents were imported from Germany into the United States by I.G. or its licensees. Two of the contracts provided that so long as petitioner was unable to supply the requirements of the American market, I.G. was to be free to import products coming within the patents; three of the contracts provided that petitioner would confine to the United States its manufacture and sale of such products. All the contracts provided that the assignments to be made under each contract were to be subject to all prior commitments of I.G. including certain exclusive obligations to various named corporations. Under one contract petitioner agreed to pay a lump sum of $180,000 in full on the date of the execution of the contract. Under the other four contracts, down payments were to be made at the date of execution, and additional payments were to be made by petitioner out of the net profits or other income derived by petitioner under the patents to the extent that such net profit and other income exceeded a definitely stated amount. Nothing in any of the contracts provided that the down payments were to be recoverable should there be no net profit or other income derived from the patents. The full amount of the lump sum payment under the one contract and of the initial payments under the other four contracts were paid by petitioner to I.G. in 1940. I.G. executed separate assignments of each of the patents stating that it had "sold and assigned and transferred" all rights under the patents including all rights of recovery in any suits for patent infringement; these assignments were recorded in the Patent Office during 1940.

1 These sections read as follows:
"§ 119. Income from sources within United States.
"(a) Gross income from sources in United States. The following items of gross income shall be treated as income from sources within the United States:

The Commissioner determined a deficiency in withholding tax against petitioner of 15% of the total consideration paid by petitioner to I.G. in 1940. On petitioner's petition for a redetermination of the deficiency, the Tax Court sustained the Commissioner. The Tax Court held that "the assignments fell short of transferring an exclusive right to make, use and vend under the patents throughout the United States and its territories"; that accordingly the petitioner was a licensee and not an assignee; that therefore the payments were royalties within the meaning of the statute. Petitioner is here on a petition for review of that decision.

* * * * "(4) Rentals and royalties. Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises and other like property; and * * *."
§ 143. Withholding of tax at source.
* * * * "(b) Nonresident aliens. All persons, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States, having the control, receipt, custody, disposal, or payment of interest (except interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States and not having an office or place of business therein), dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income (but only to the extent that any of the above items constitutes gross income from sources within the United States), of any nonresident alien individual, or of any partnership not engaged in trade or business within the United States and not having any office or place of business therein and composed in whole or in part of nonresident aliens, shall (except in the cases provided for in subsection (a) of this section and except as otherwise provided in regulations prescribed by the Commissioner under section 215) deduct and withhold from such annual or periodical gains, profits, and income a tax * * *."
"§ 144. Payment of corporation income tax at source.
"In the case of foreign corporations subject to taxation under this chapter not engaged in trade or business within the United States and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is provided in section 143 a tax equal to 15 per centum thereof * * *."

Martin Saxe and Roger H. Anderson, both of New York City, and Edward F. Colladay and Wilton H. Wallace, both of Washington, D.C. (W. Brown Morton and W. Peters Blanc, both of New York City, of counsel), for petitioner.

Samuel O. Clark, Jr., Sewall Key, Helen R. Carloss, and Newton K. Fox, all of Washington, D.C., for respondent.

Before L. HAND, CHASE, and FRANK, Circuit Judges.

FRANK, Circuit Judge.

We incline strongly to the belief that title to the patents passed to petitioner. Littlefield v. Perry, 21 Wall. 205, 22 L. Ed. 577.² However, the passing of title does not preclude the existence of royalties. But the crucial question here is whether the royalties are income to I.G. within the meaning of this tax statute. Under one of the contracts, a lump sum payment was made for the assignment. Such a payment is clearly not covered by the statute. The same would be true as to the other four contracts if the consideration had been payable in installments, none of which was contingent upon future profits. Under each of those four contracts a down payment was made which cannot as a matter of law be recovered by petitioner even if the profits derived by it from the patents never equal the amount of the initial payment; as those payments are not contingent upon future profits they are outside the statute. We need not now decide whether the future payments, under those four contracts, which depend wholly upon future profits, must be treated otherwise.³

2 It seems to us to be of no significance, with respect to the transfer of the title, whether, when a patent is assigned (a) the assignee simultaneously grants a license to the assignor or (b) the assignor reserves a license; such differences in form would seem to be immaterial. Nor does it seem to us important, in such a context, that the assignor, before making the assignment, had granted to others some rights under the patent.

3 As the decision of the Tax Court turned on "a clear-cut mistake of law," Dobson v. Commissioner, December 20, 1943, 64 S. Ct. 239, and Commissioner v. Heininger, December 20, 1943, 64 S.Ct. 249, are not applicable.

Reversed.