Lewis R. Heim v. John J. Fitzpatrick, 1
3 A.F.T.R.2d (RIA) 558, 120 U.S.P.Q. (BNA) 205, 262 F.2d 887 (1959)
Rule of Law:
When an inventor assigns their patent rights to a company in exchange for royalties, and subsequently assigns interests in that royalty agreement, the royalties are not taxable to the original inventor if the assignment includes substantial property rights in the underlying patent agreement, such as the power to negotiate future royalties or a reversionary interest in the patent itself.
Facts:
- Lewis R. Heim invented a new type of rod end and spherical bearing and applied for patents in September and November 1942.
- On November 17, 1942, Heim formally assigned his invention and future patents to The Heim Company.
- This assignment was governed by a written agreement dated July 29, 1943, which stipulated that The Heim Company would pay specific royalties on 12 types of bearings and that Heim retained the right to negotiate royalties for new bearing types.
- The agreement also granted Heim an option to cancel the agreement and reclaim all patent rights if royalties for any two consecutive months or any one year fell below stated amounts.
- In August 1943, Heim assigned an undivided 25% interest in this agreement, his inventions, and patent rights to his wife, son, and daughter, respectively.
- Heim paid gift taxes on these assignments.
- The Heim Company was notified of these assignments and subsequently made royalty payments directly to Heim's wife, son, and daughter, as well as to Heim.
- Royalties for new types of bearings were fixed by agreement between The Heim Company, Heim, and his three assignees.
Procedural Posture:
- The Commissioner of Internal Revenue determined that patent royalty payments received by Lewis R. Heim's wife, son, and daughter for the years 1943-1946 were taxable to Heim, resulting in income tax deficiencies.
- Heim paid the determined deficiencies under protest to Collector of Internal Revenue Fitzpatrick.
- Heim filed claims for refund, which the Commissioner rejected.
- Heim then commenced a timely action against Fitzpatrick in the United States District Court for the District of Connecticut.
- The District Court heard the case based on an agreed statement of facts and supplemental affidavits.
- Both parties moved for summary judgment.
- The District Court (Judge Anderson) denied Heim's motion for summary judgment and granted Fitzpatrick's motion for summary judgment, ruling that the royalties were taxable to Heim.
- Heim, as the appellant, appealed the District Court's decision to the United States Court of Appeals for the Second Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Is income from patent royalties taxable to the original inventor-assignor when the assignor assigned to family members not merely the right to receive future income, but also substantial rights and a reversionary interest in the underlying patent agreement?
Opinions:
Majority - Swan, Circuit Judge
No, income from patent royalties is not taxable to the original inventor-assignor when the assignor assigned substantial rights and a reversionary interest in the underlying patent agreement, because such an assignment constitutes a transfer of income-producing property, not merely future income. The court distinguished this case from Helvering v. Horst and Helvering v. Eubank, which involved assignments of bare rights to income (interest coupons and earned commissions, respectively), by emphasizing that Heim transferred more than a simple right to receive future royalties. Heim had retained and then assigned substantial property rights: (1) the power to bargain for and fix royalties on new types of bearings, which the assignees actively exercised, and (2) a reversionary interest in his invention and patents through his option to cancel the agreement if royalty conditions were not met. These retained and assigned rights were deemed "sufficiently substantial to justify the view that they were given income-producing property." The court also rejected the Commissioner's argument, based on Commissioner v. Sunnen, that Heim retained control over the corporation and thus the royalties due to his family members' stock ownership, finding insufficient evidence to support an inference of such control.
Analysis:
This case is significant for clarifying the application of the assignment of income doctrine to intellectual property, particularly patents. It delineates a crucial distinction between merely assigning a right to future income, which remains taxable to the assignor, and assigning the underlying income-producing property itself, which shifts the tax burden to the assignee. The decision underscores that for an assignment of income from an asset like a patent to be effective for tax purposes, the assignor must transfer actual property interests beyond just the revenue stream. It provides guidance on what constitutes 'sufficiently substantial' rights in the context of patent royalties, offering a framework for evaluating similar transfers of intangible assets.
