*1 controversy between COMMIS- uncompromising ROTORITE CORPORATION v. Respond- taxpayer. the Commissioner and SIONER OF INTERNAL this sum was contends that petitioner’s Peti- income for 1935. Seventh as a Circuit Court argues paid amount was tioner patents which it owned. over a specifically litigation More $11,702.91 which totalling up following items: was made $3,784.37,'income taxes, $6,336.83, personal surtaxes, $1,581.71, holding company penalty. subsidiary petitioner’s A issue concerns company.” “personal holding status aas 1934, 351(b)(1), 26 Revenue U.S. Act § Int.Rev.Acts, p. per- C.A. defines a company holding sonal one which re- per gross ceives “at least 80 centum of * * royalties early part If the received in the royalties, partial pay- of 1935 were and not purchase price, petitioner falls ment within that definition. Petitioner failed return, personal holding company file penalty and a was therefore im- of 25% posed. no business Petitioner did other during In had reduced the preferred stock from $110 .call per share. $85 The facts: Plaintiff an Illinois cor- poration organized acquire de- velop certain refrigerating household ma- chine and sell to manufacture machines. 1929 contracted with Manufacturing Sunbeam Electric Co. and dissenting. Circuit granted right manufac- the exclusive ture, sell, refrigerators and use electric petitioner’s patents full term patents. March effec- tive entered into a supplemental contract which billing the rate of 2% granted a This contract also option. The towas $135,000. If it exercised patent, in writing and was Schultz, Voorheis, Raymond H. Victor J. credited, upon said Kenyon, and David C. royalties paid by with all Sunbeam to petitioner. January 1, and the between Rotorite Lowery, P. Wenchel and Chas. E. unpaid purchase. The balance date of D.C., respondent. both „ payable. thereupon became due and EVANS, SPARKS, and TREA- paid in 1933 as 767.08 was NOR, paid. $50,819.97 was This left on $80,556.81 a balance EVANS, price, if the exercised its exercised. paid $65,797.06 after it had subject year 1935 has become the *2 Controversy royalties. (3) parties agreed, if look to The we as $65,797.06 merely agreement, over character of to the words of the the arises money payment royalty price that a and payment. purchase might be both Was it True, purchase money payment. the royalty? was it by latter character was determinable the perspective first to We must establish optionee. in its action was turn de- But determining the aid us the nature of pendent facts/to-wit, on the amount the survey. transaction under royalties.' parties contemplated a payments before writ- made patents sale 'of if and value their use option ten of the exercise of the royalties equaled measured in exceeded given, might well be called purchase price. the The election of the Quite might as the well said that optionee was a foregone conclusion—if the major portion payments was made of said royalties approached equaled pur- the taxpayer’s knowledge with the that full price. chase When fact occurred— the exercise its and licensee would to-wit, pay royalties equal sales sufficientto payments applied have the price. on the payments to changed the —then least, early same at the part payments pur- to apparent, certainty, became and then a chase payments that these installment were to be (4) passing on taxes for Sunbeam’s purchase price payments. used as year the the Commissioner treated being situation, Such taxpayer is a the payments as advances on permitted year to view as the patents consistency royalties. While —not held, a whole through or must it be is not Commissioner the empha- refinement of distinctions which more Congress, than it is of courts words, sizes than rather looks to the heart persuasiveness pres- adds the not to and transaction, by the substance of the finding Commissioner, the said words? the question It is not of what situation, payments same fact that the called; payments were What were companion the case were declared to be they in fact? purchase money payments. Moreover, the ' We .reach the conclusion that the decision of the Board this case was payments purchase money payments. were dissenting with six reached votes. of the Board Reasons. that the order It follows by Commis- affirming assessment the the said, “Tax (1) often been It has be re- must sioner of tax the eminently practical.” ation enter order with directions to an versed in accordance with the views 497, 503, States, Tyler v. 281 U.S. United here ex- 356, 359, 69 A.L.R. 50 S.Ct. 74 L.Ed. pressed. through form look the to We must so the substance of transaction. It ordered. the In the 1935 Sunbeam’s option, (dissenting). of its made certain the exercise by agreement the the an act transaction which The substance the payments, royalty parties the question gives must be rise to the price January payments. On taxpayer between the in the contract made, payments which had been were The substance and Sunbeam. large growing in amount that ac- so grant privilege was the to Sunbeam of the patents quisition of patents at a $65,000 payment of was certain. The by reduced amount first five months confirmed con- by payments subsequently fact, apparent on first. In clusion payments rapidly grew in 1934 so purchase. by Prior election option. tellingly exercise of the forecast the payments of election were date payments. By and in law were made their in fact It, the terms Sunbeam became character determined Sunbeam. taxpayer respondent, law the owner of fixed the fact o.r when elected to exer- payments. No on status of the could one June By rights option. under the force but Sunbeam’s 1935 cise its doubt royalty payments expectation revenue laws the made in the that it would in 1935 13 became make election thus received soon June taxpayer’s gross income for purchase money status.
24.7 taxpayer ceased to and was entitled owner of the royalty payments; to no and Sun- more obligation beam owner with an became the $135,000 pay less *3 all to June In my opinion constituted and under the law income. Haddad, pe for Wm. N. of
titioner. Wenchel, Clark, v. COMMISSIONER OF IN- Jr., GRAFF Samuel O. P. J. Monarch, Smith, and Lee TERNAL W. A. Louis John C., for re- Jackson, D. spondent. Appeals, Seventh Circuit Court of SPARKS, MAJOR, KER- 1941. NER, SPARKS, a decision Petitioner seeks to review of Board of a Tax income tax of in his for 1935. only question presented is whether capital gains which were added to the corpus were taxable of trust 1935 161,1 trustees or under Section under of the settlor Sections 1672 166 Revenue Act of U.S.C.A.Int.Rev. 26 1 Imposition, conjunction having any person Taw “§ 161. with not of “(a) Application of Tax. taxes in the dis- substantial interest adverse upon imposed position part corpus title individuals or such of the therefrom, apply shall to the income of or income estates or “(2) any having any property trust, person held in sub- kind of not disposi- including— stantial adverse interest in the “(1) corpus part tion of such or the Income accumulated trust of the therefrom, of unborn unascertained income then the income benefit or contingent persons part persons such trust included with in shall be gran- computing terests, net accumulated held income of the and income terms tor. future distribution * ,* Grantor s‘. Income “§ “(a) or trust the will Benefit Payment. Computation any part “(b) Where income computed upon trust— in- tax shall be net trust, “(1) is, in the discretion estate or shall be come of the fiduciary, except grantor any person having paid by or of (relating interest in the dis- to revocable substantial adverse section 166 may position part trusts) (relating in- section such grantor).” be, held or future dis- accumulated come for benefit of grantor; Trusts Revocable tribution “§ power may, gran- .“(2) the discretion of the ht time to re-- “Where any person having grantor any part tor or sub- in the title to vest disposi- corpus in the trust is vested— stantial adverse interest income, grantor, dis- either tion of alone or