Spireas v. Commissioner of Internal Revenue

Spiridon Spireas (plaintiff) owned, jointly or individually, numerous patents related to the liquisolid technology that was useful in the manufacture of drugs. Spireas and a colleague granted Mutual Pharmaceutical Company, Inc. (Mutual) a license to use the liquisolid technology for the development of new drug products that would later be unanimously selected by the parties and, after such selection, produced and sold in the United States (1998 license). At the time, Spireas was also collaborating with other pharmaceutical companies to develop formulations using the liquisolid technology and planned to explore the use of the technology in the field of nutritional supplements. Thus, the 1998 license denied Mutual the right to use the technology with respect to products that Spireas and his colleagues were developing or were in negotiations to develop with other parties outside the pharmaceutical industry. In March 2000, the parties signed an engagement letter stating that they had selected three drugs for development. On his federal income tax returns, Spireas reported royalty income received from Mutual as long-term capital gain. The Internal Revenue Service (IRS) (defendant) issued a notice of deficiency to Spireas after determining that the royalties should have been reported as ordinary income. Spireas appealed the IRS’s determination.