Fawick v. Commissioner

436 F.2d 655 (1971)

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Fawick v. Commissioner

United States Court of Appeals for the Sixth Circuit
436 F.2d 655 (1971)

Facts

Inventor Thomas Fawick (plaintiff) obtained a patent for a flexible brake, coupling, and clutch. In 1937, Fawick entered a license agreement with Falk Corporation that granted Falk, among other things, an exclusive license for Fawick’s driving clutches. The license contained a field-of-use restriction limiting the license to marine use. In 1938, Fawick formed Fawick Corporation to manufacture and sell the driving clutches for uses other than marine use. Fawick assigned Fawick Corporation his rights in the patents, excluding the rights assigned to Falk in the license agreement. Decades later, the Commissioner of Internal Revenue (the commissioner) (defendant) determined deficiencies in Fawick’s taxes based on Fawick’s practice of treating royalties received from Falk with respect to the marine clutches as long-term capital gains. Fawick petitioned for redetermination, asserting that the royalties were paid under the marine-use clause of the license agreement, which Fawick claimed was a transfer of “all substantial rights to a patent” that qualified the royalties for capital-gain treatment under Internal Revenue Code § 1235. The tax court ruled in Fawick’s favor, and the commissioner appealed.

Rule of Law

Issue

Holding and Reasoning (Phillips, C.J.)

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