TAXATION-INCOME TAX-TAXABLE PERSONS--ASSIGNMENT OF LICENSE ROYALTIES

Authors

J. R. Mackenzie S.Ed., University of Michigan Law SchoolFollow

Abstract

X contracted with a corporation controlled by him for the manufacture of machines on which he held patents. No minimum was established with respect to production or the payment of royalties. The contracts were terminable by either party upon notice, and X was free to make similar contracts with other manufacturers. X assigned all his interest in the contracts and exclusive title and power over the royalties to his wife, who thereafter received all payments and reported them as her income. The Tax Court ruled that since X could cancel the contracts directly, and could indirectly control the contracts through the corporation, the royalties were taxable to him. The circuit court of appeals reversed, holding that there was a complete assignment of the contracts, and that X should not be taxed because of his indirect control, absent fraud. On certiorari, held, reversed. The Supreme Court noted, first, that control of the corporation gave X power to control the flow of royalties to his wife, and even to terminate the contracts, without perpetrating any fraud; second, that X could negotiate other contracts, which would tend to reduce the amount of royalties paid to his wife; third, that X indirectly benefited from payments made to her. Commissioner v. Sunnen, 333 U.S. 591, 68 S.Ct. 715 (1948).

Recommended Citation

J. R. Mackenzie S.Ed., TAXATION-INCOME TAX-TAXABLE PERSONS--ASSIGNMENT OF LICENSE ROYALTIES, 47 Mich. L. Rev. 434 (1949).
Available at: https://repository.law.umich.edu/mlr/vol47/iss3/25