Karrer v. United States

152 F. Supp. 66 (1957)

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Karrer v. United States

United States Court of Claims
152 F. Supp. 66 (1957)

Facts

In 1934, in a series of letters, F. Hoffmann-LaRoche & Co. Ltd. of Basle, Switzerland (Basle) agreed to support vitamin B-2 research conducted by Professor Paul Karrer (plaintiff) of the University of Zurich in Switzerland. Basle received the sole right to exploit commercially valuable processes Karrer discovered and agreed to pay Karrer some of the sales proceeds. Under Swiss law, the letters comprised a special-employment contract making Basle the sole owner of patents filed as a result of Karrer’s research. Karrer discovered how to synthesize vitamin B-2. Beginning in 1934, Basle patented Karrer’s ideas in many countries. Karrer made similar arrangements with Basle for support of his vitamin E research. Basle agreed to pay Karrer 5 percent of the net proceeds of vitamin B-2 sales and 3 percent of the net proceeds of vitamin E sales. Basle did not engage in business or have a place of business in the United States. In 1941, Basle granted Hoffman-LaRoche, Inc. of Nutley, New Jersey (Nutley), a United States vitamin producer, exclusive rights to use Basle’s processes in the United States. United States law required patents to be filed by natural persons. At Basle’s request and expense, Karrer applied for United States patents related to his discoveries, assigning the patents to Nutley before they were granted. The patents were issued to Nutley. Nutley paid Karrer percentages of its net sales as described in Karrer’s contracts with Basle. Nutley’s books characterized the payments as royalties. From 1941 to 1945, on Karrer’s behalf, Nutley paid income tax of about $200,000 on these payments. Karrer sued to recover the tax paid, arguing that Nutley’s payments were for services performed outside the United States. United States tax authorities (defendants) argued that the payments were for use of Karrer’s United States property, that is, royalties, and constituted income from a United States source under Internal Revenue Code § 871(a)(1)(A).

Rule of Law

Issue

Holding and Reasoning (Littleton, J.)

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