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124 C. Cls. Opinion of the Court judgment is denied. Defendant's motion for summary judg
ment is granted, and the petition is dismissed. Internal Revenue Cm 1766
Mr. William A. Patty for the plaintiff. Messrs. Shearman & Sterling & Wright, and Mr. Thomas P. Ford, were on the briefs.
Mr.J. A. Sheppard, with whom was Mr. Acting Assistant Attorney General Ellis N. Slack, for the defendant. Mr. Andrew D. Sharpe was on the brief.
The facts sufficiently appear from the opinion of the court.
HOWELL, Judge, delivered the opinion of the court:
The taxpayer, Eterpen Financiera Sociedad de Responsabilidad Limitada, an Argentine corporation not engaged in trade or business within the United States, brings this action for the recovery of income taxes totalling $115,822.21 which are alleged to have been erroneously withheld under the provisions of section 144 of the Internal Revenue Code, 26 U. S. C. § 144, by Eversharp, Incorporated, and Eberhard Faber Corporation from payments due the taxpayer for the use of its United States patents on the Biro ball pointed fountain pen and writing paste. Inasmuch as the laws of Argentina accord to citizens of the United States the right to prosecute claims against the Government of Argentina in the courts of that country, the taxpayer is entitled under the terms of the Act of June 25, 1948, ch. 646, § 1, 62 Stat. 976, 28 U. S. C. $ 2502, to maintain this action against the United States. Cf. Sudametal Sociedad Anonima Sud Americana v. United States, 116 C. Cls. 789, 790. Because the facts giving rise to these payments are not in dispute, both parties seek summary judgment on the question of law.
The pleadings, affidavits, and exhibits establish that in 1945 the taxpayer was the possessor of certain United States patents and pending patent applications on a ball pointed fountain pen known as the “Biro Pen,” and on a pulpy ink or writing paste for use in this pen. As the taxpayer was
1 On November 29, 1946, the taxpayer's name was changed from Eterpen Sociedad Anonima Financiera to Eterpen Financiera Sociedad de Responsabilidad Limitada.
Opinion of the Court not engaged in business in the United States, it elected on May 18, 1945 to enter into an agreement, entitled “License Agreement,” with Eversharp, Incorporated, and Eberhard Faber Corporation whereby it granted to these companies jointly the exclusive license under its United States patents “to make, use and vend” the devices and materials made from and in accordance with the patents throughout the United States, Hawaii, and Alaska during the full life of the patents. The terms of the agreement provided inter alia: (1) that the licensees might terminate the agreement at any time after it had been in effect for seven and one-half years, or at the end of any calendar year thereafter, upon giving six months advance notice in writing of its intention to do so; (2) that the licensees by joint action could sublicense others to make, use or vend the devices and materials; (3) that the licensees would not attempt to “pirate” sales outside the license area since the taxpayer reserved to itself the remaining world rights; (4) that the licensees would use all due vigor and diligence to create and exploit a market for the invention; (5) that the licensees or either of them might sue in the licensor's name for infringement and damages to the inventions, subject to the right of the licensor to intervene and take part in any and all such suits; (6) that any money recovery from infringement and damage suits should be applied first to the payment of the costs of the action, second to the payment to the licensor of royalties on the infringing sales, and the balance to be retained by the licensees; (7) that the licensees would pay to the licensor at the end of each calendar quarter of each year the agreement remained in force, as royalties, a sum equivalent to 514 per centum of their net sales prices of all ball pointed pens, replacement parts, and ink produced under the taxpayer's patents, less certain designated expenses; (8) that the obligations of the licensees to pay the designated royalties should be both joint and several; and (9) that the licensees should deduct from royalty payments any amounts required by the then present or future laws of the United States to be withheld for taxes.
Simultaneously with and in consideration of the execution of the license agreement the parties entered into a fur
124 C. Cls. Opinion of the Court ther agreement under which the taxpayer granted to the licensees individually and jointly an exclusive option to purchase for the area embraced in the license agreement the entire right, title, and interest in and to the patents and patent applications covered by the license agreement for the lump sum of $1,500,000.2 By its terms this option expired on March 1, 1946, but was subsequently extended by mutual consent of the parties. Pursuant to this agreement, on December 1, 1946, Eversharp exercised on its own behalf the right to purchase from the taxpayer the patents and patent applications covered by the license agreement. Although the option agreement called for a purchase price of $1,500,000, the taxpayer agreed at this time to accept $1,100,000 in view of the fact that the "royalty payments” by Eversharp and Faber for 1946, the first year of production, had exceeded $450,000. Since Faber did not desire to participate in the purchase of the patents, Eversharp, by means of a supplementary agreement, consented to continue to recognize Faber's rights as licensee under these patents.
Shortly after the parties entered into the license agreement of May 18, 1945, both the taxpayer and Faber requested rulings from the Commissioner of Internal Revenue as to whether the agreement would be regarded as a license of the patent and the payments called for therein as royalties subject to withholding at the source under the provisions of 26 U. S. C. $$ 143 (b) and 144, or whether the agreement would be construed as an assignment of the patent and the payments as installments on the purchase price, and therefore not subject to any tax. Pending this decision, Eversharp elected to withhold 30 per centum of the gross amount of the installments paid to the taxpayer during the taxable year 1946. This sum, which totalled $121,038.02, was paid to the Chicago Collector of Internal Revenue on August 15, 1947. Similar withholdings totalling $25,298.90 were made by
On May 5, 1945, Eversharp and Faber, in contemplation of the execution of the license agreement and option agreement with Eterpen, executed an agreement setting forth their respective rights and duties as joint licensees. The agreement provided that Eversharp would produce the pens and ink to be sold by Faber, and that Faber might acquire up to 25 per centum of Eversharp's production.
3 The purchase price included $50,000 for the Canadian patent rights which had been licensed to Twoco Corporation, Ltd., a subsidiary of Eversharp.
Opinion of the Court Faber from installments due the taxpayer and were remitted to the appropriate Collector. A total of $146,336.92 was withheld in this manner.
On December 22, 1947, the Commissioner of Internal Revenue ruled that the payments called for by the license agreement were in fact royalties and sustained the withholding of income taxes on these sums at their sources by the licensees. However, the Commissioner further determined, upon grounds not disclosed by the present state of the record, that $30,514.71 of the amount previously withheld should be refunded to the taxpayer. Thereafter, on January 12, 1949, the taxpayer filed with the appropriate Collectors claims for refund of the balance of the withheld tax, $115,822.21, contending that the sums payable to it under the license agreement of May 18, 1945 constituted installment payments of the purchase price for the patent rights allegedly "purchased” jointly by Eversharp and Faber, and that accordingly withholding and payment of the tax at the source was not required. Following the rejection of these claims by the Commissioner of Internal Revenue, the taxpayer brought suit in this court, relying upon the same grounds for recovery.
Sections 143 (b) and 144 of the Internal Revenue Code under which the sum in dispute was withheld, provide in part that:
$ 143 (b). All persons, in whatever capacity acting, * * * having the control, * * * or payment of * * * dividends, rents, salaries, wages, *** compensations, * * * or other fixed or determinable annual or periodical gains, profits and income * * * of any nonresident alien individual, * * * shall * * * deduct and withhold * * * a tax equal to 30 per centum thereof, * * *
$ 144. In the case of foreign corporations subject to taxation under this chapter not engaged in trade or business within the United States, 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 30 per centum thereof, * * *. Section 231 of the Internal Revenue Code, 26 U.S. C. $ 231 (a) (1), contains a similar provision which states that:
8 231 (a) (1). There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed 249444–53— 4
124 C. Cis. Opinion of the Court by sections 13 and 14, upon the amount received by every foreign corporation not engaged in trade or business within the United States * * * as interest * * * dividends, rents, salaries, wages, * * * compensations, * * * or other fixed or determinable annual or periodical gains, profits, and income, a tax of 30 per
centum of such amount, * * * Sections 29.231-1 and 29.231–2 of Treasury Regulations 111, promulgated under section 231, supra, provide as follows:
8 29.231–1 (a). * * * For the purposes of section 231 (a), the term "amount received” means "gross income.” Specific items of fixed or determinable annual or periodical income are enumerated * * * but other fixed or determinable annual or periodical gains, profits, and income are also subject to the tax, as, for instance, royalties. * * *
$ 29.231-2 (a). A nonresident foreign corporation is taxable under section 231 (a) only on fixed or determinable annual or periodical gross income received from sources within the United States. Its taxable income does not include * * * profits derived from the sale within the United States of personal property or real
property located therein. As indicated above, the taxpayer takes the position that even though the agreement of May 18, 1945, was entitled “License Agreement,” its terms, whereby the taxpayer granted to the licensee the exclusive right to make, use, and vend the inventions embraced therein, constituted, under well defined principles of patent law, a joint assignment or sale to Eversharp and Faber of the taxpayer's patents and pending patent applications. From this the taxpayer argues that the payments provided for in the agreement were installment payments of the purchase price for personal property, rather than determinable annual income, i. e., royalties, arising from the use of its patent rights, and hence were not subject to taxation under the withholding provisions set forth above. In support of this position, the taxpayer relies principally upon the decision of the Tax Court in Edward C. Myers, 6 T. C. 258, where the license agreement was in many respects similar to the license agreement executed by Eterpen. Moreover, the taxpayer insists that the option agreement contains nothing to negative the present transfer of the patent rights