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Lehman v. Commissioner of Internal Revenue

835 F.2d 431 (1987)

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Lehman v. Commissioner of Internal Revenue

United States Court of Appeals for the Second Circuit

835 F.2d 431 (1987)

Facts

Herbert Lehman (plaintiff) worked as a chemist for International Business Machines Corporation (IBM). When he commenced his employment in 1960, Lehman agreed to assign his rights in all future inventions to IBM. In 1965, Lehman assigned to IBM his rights in a pending patent for an invention, and in 1981, he received a bonus from IBM based on the patent. Explanatory materials for the incentive plan indicated that its purpose was to recognize employee achievements of significant or outstanding value. IBM reported the award to the Internal Revenue Service (IRS) (defendant) as wages on Form W-2. On their joint tax return, Lehman and his wife (plaintiff) characterized the award as being in respect of the transfer of an invention or patent right and treated it as a capital gain under § 1235 of the Internal Revenue Code. The IRS determined that the award constituted ordinary income, not capital gain, and issued a notice of deficiency. The tax court sustained the IRS’s determination because Lehman had assigned all rights to inventions developed in the course of his employment at IBM without consideration beyond his regular compensation and because the award was not made until 16 years after the transfer. Lehman appealed.

Rule of Law

Issue

Holding and Reasoning (Lumbard, J.)

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