Busse v. Commissioner

On March 20, 1958, Curtis Busse (plaintiff) assigned to his brother an undivided one-half interest in an invention he had created. The invention received a patent on August 16, 1960. The brother’s one-half interest passed to his widow upon his death in 1962. On January 2, 1966, Busse and the widow organized Busse Bros., Inc. (the corporation), in which each owned 50 percent of the stock. On the same day, Busse, the widow, and the corporation entered into an oral agreement as follows: the shareholders would sell their interest in the patent to the corporation, and the corporation would pay Busse and the widow quarterly installments during the life of the patent, equal to 5 percent of the corporation’s net selling price of the devices covered by the patent. In 1967 the corporation paid Busse $36,029.01, which represented his one-half share. For the tax year 1967, Busse reported this amount as a long-term gain received on the sale of a capital asset. The commissioner of the Internal Revenue Service (IRS) (defendant) determined a deficiency of $1,659.47. The IRS found that, pursuant to Internal Revenue Code (IRC) § 483, only $33,011.81 of the payments was a capital gain, and the remaining amount was unstated interest on an installment sale, taxable as ordinary income. Busse petitioned the United States Tax Court for a redetermination. Busse argued that under IRC § 483(d)(4)—which provided an exception for the sale or exchange of patents stating that IRC § 483 did not apply to an amount contingent on the productivity, use, or disposition of the property transferred—the remaining amount should not be treated as unstated interest. The IRS argued that strict adherence to IRC § 483 would shock moral and common sense and, therefore, the court should depart from the letter of the law. The tax court held there was no 1967 deficiency. The IRS appealed. [Ed.’s note: In the Revenue Act of 1964, the subsection under discussion was named IRC § 483(f)(4), which is how it is referenced in the opinion. The casebook excerpt uses the current name of this subsection in the Internal Revenue Code of 1986.]