Opinion
Docket No. 3209-67.
1969-03-6
VINCENT B. RODGERS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Thomas J. Kane, Jr., for the petitioner. Roger A. Pott, for the respondent.
Thomas J. Kane, Jr., for the petitioner. Roger A. Pott, for the respondent.
Held: Petitioner properly reported amounts received from the grant of certain patent rights as capital gains. Par. (b)(1) of sec. 1.1235-2, Income Tax Regs., as amended on Oct. 5, 1965, insofar as it provides that ‘The term ‘all substantial rights to a patent’ does not include a grant of rights to a patent * * * (i) Which is limited geographically within the country of issuance * * * ‘ held invalid.
OPINION
TIETJENS, Judge:
The Commissioner determined deficiencies in income taxes of petitioner as follows:
+----------------------------+ ¦Taxable year ¦Deficiency ¦ +---------------+------------¦ ¦ ¦ ¦ +---------------+------------¦ ¦1963 ¦$4,102.58 ¦ +---------------+------------¦ ¦1964 ¦5,523.00 ¦ +---------------+------------¦ ¦1965 ¦7,025.74 ¦ +----------------------------+
The facts have been fully stipulated. The stipulation and the exhibits attached thereto are incorporated herein by this reference.
The question for decision is whether amounts received by the petitioner from the grant of certain patent rights were properly reported as capital gains.
Vincent B. Rodgers (hereinafter referred to as petitioner) resided in Turlock, Calif., at the time he filed his petition herein. He filed Federal individual income tax returns for 1963, 1964, and 1965 with the district director of internal revenue, San Francisco, Calif.
Petitioner holds the following U.S. patents on varieties of almonds:
+------------------------------------------------------+ ¦Patent number ¦Date of issuance ¦Variety of almond ¦ +---------------+------------------+-------------------¦ ¦ ¦ ¦ ¦ +---------------+------------------+-------------------¦ ¦2330 ¦December 1963 ¦Cressey. ¦ +---------------+------------------+-------------------¦ ¦1730 ¦July 1958 ¦Merced. ¦ +---------------+------------------+-------------------¦ ¦1568 ¦February 1957 ¦Ballico. ¦ +------------------------------------------------------+
On April 1, 1963, in exchange for royalties, petitioner granted Burchell Nursery the exclusive right to grow, propagate, use, and sell the Merced almond in California for the life of the patent. He reserved the right to prohibit subassignment.
On that same day, petitioner entered into similar agreements with respect to his rights in the Ballico patent; he transferred his rights in the area of California north of the south line of Sacramento County to Fowler Nurseries, and his rights in the remaining area of California to Burchell Nursery.
On January 2, 1964, he entered into a similar agreement with respect to his rights in the Cressey patent, granting his rights in the entire State of California to Burchell Nursery.
Commercial production of almonds in the United States occurs only in California. Outside the United States almonds are commercially grown in the Mediterranean basin countries.
Petitioner received net payments under these agreements of $14,539, $18,717.75, and $27,659.75 in 1963, 1964, and 1965, respectively, which he reported as long-term capital gain from the sales of patents. The Commissioner determined that no amount of these payments is entitled to capital gains treatment under section 1235, I.R.C. 1954, because petitioner did not, by any of the above grants, transfer property consisting of all substantial rights to the subject patents.
Section 1235(a) of the Internal Revenue Code of 1954 provides:
(a) GENERAL.— A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 6 months, regardless of whether or not payments in consideration of such transfer are
(1) payable periodically over a period generally coterminous with the transferee's use of the patent, or
(2) contingent on the productivity, use, or disposition of the property transferred.
The dispute in this case focuses upon the requirement of a transfer of property consisting of all substantial rights to a patent. This requirement recognizes the basic criteria of a ‘sale or exchange’ as developed in the case law under section 117 of the 1939 Code. Those criteria were employed by the courts to distinguish between a ‘sale’ of patent rights and the mere ‘license’ of such rights. The criteria relate to the quantity of rights transferred in the subject property. The adjudicated cases under section 117 of the 1939 Code have not construed that section as containing any such requirement as insisted on by the Commissioner in this case— see below. Rather, the cases decided that separate bundles of rights in the same patent might constitute separate properties each of which might be the subject of a ‘sale’ with the proceeds taxed as capital gain. Dairy Queen of Oklahoma v. Commissioner, 250 F.2d 503 (C.A. 10, 1957), reversing on other grounds and remanding 26 T.C. 61; Merck & Co. v. Smith, 261 F.2d 162 (C.A. 3, 1958); United States v. Carruthers, 219 F.2d 21 (C.A. 9, 1955). This Court decided, under section 117 of the 1939 Code, that the exclusive right to manufacture, use, and sell a patented article, limited to a geographical area within the United States, constitutes a capital asset, the proceeds from the sale of which are taxable as capital gain. Vincent A. Marco, 25 T.C. 544 (1955).
The Commissioner contends that Vincent A. Marco, supra, decided under section 117 of the 1939 Code, is without continuing validity under section 1235. He relies upon paragraph (b)(1) of section 1.1235-2 of the Income Tax Regulations as amended on October 5, 1965, and which reads in part as follows:
The term ‘all substantial rights to a patent’ does not include a grant of rights to a patent
(i) Which is limited geographically within the country of issuance;