Busse v. United States

Curtis Busse (plaintiff) and Gilbert Busse, who were brothers, worked for many years as a partnership in the canning-and-loading industry. In the post-war 1950s, the canning industry was booming. The Busse brothers invented a product for bulk handling and arranging cans—a palletizer—and obtained a patent on it. The palletizer was very successful and profitable and immediately created a market for another Busse product that removed cans from a pallet, a de-palletizer. The Busse brothers did not have a patent for the de-palletizer, but many customers who purchased the palletizer also purchased the de-palletizer because the products worked together. Other companies tried but were unable to make a successful competing product. From 1957 to 1970, 75 to 90 percent of the palletizers in the nation were made by the Busse brothers. In 1962, Gilbert died, and his partnership interest passed to his wife, Marcella Busse (plaintiff). Thereafter, the partnership became a corporation. Marcella and Curtis (collectively, the taxpayers) each owned more than 25 percent of the shares in the corporation. In 1967, the taxpayers formally assigned the palletizer patent to the corporation, in return for which they would receive 5 percent of the sales for both palletizers and de-palletizers. Based on that formula, payments of approximately $45,500 and $46,900 were made to both taxpayers in 1968 and 1969, respectively. The taxpayers treated these payments as proceeds from the transfer of a capital asset. The Internal Revenue Service (IRS) (defendant) determined that the payments were ordinary income, and the taxpayers sued to recover overpaid taxes. During trial, the IRS primarily argued that the patent-assignment price, i.e., the amount of the payments to the taxpayers, was not reasonable because the formula was based on both patented and unpatented products.