Gable v. Commissioner of Internal Revenue

Frank Gable (plaintiff) applied for a patent over his invention of water-soluble compounds with magnetic properties. While the patent application was pending, Gable approached Chemetron Corporation (Chemetron) to see if Chemetron would be interested in the invention. The parties began negotiations, and Chemetron agreed to acquire an option to purchase Gable’s rights in the invention and to fund a research and development program designed to make the invention commercially marketable. The parties primarily bargained over provisions regarding the acquisition and commercial exploitation of Gable’s invention. A clause of the option agreement allowed Gable to retain his and Chemetron’s development work on the invention if Chemetron decided not to exercise its option. A form of license agreement was attached to the option agreement. In connection with executing the option agreement, Chemetron made two payments totaling $40,000 to Gable so that he could work on developing the invention. In 1970, Chemetron exercised its option to acquire the invention, and the parties executed a license agreement under which Gable was entitled to royalty payments. The Internal Revenue Service (IRS) (defendant) required Gable to treat the $40,000 received from Chemetron as compensation for services, taxed as ordinary income. Gable contested the IRS’s determination, claiming that the $40,000 constituted proceeds from the sale of a property right.