W. W. Sly Mfg. Co. v. Commissioner

THE W. W. SLY MANUFACTURING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. W. W. Sly Mfg. Co. v. Commissioner Docket No. 31156. United States Board of Tax Appeals 24 B.T.A. 65; 1931 BTA LEXIS 1697; September 21, 1931, Promulgated *1697 As a result of a decree in equity petitioner was paid by the Pangborn Corporation $30,108,94 in 1923. Held, that the receipt of that money constituted income to petitioner, and was taxable for the year 1923. H. A. Mihills, C.P.A., for the petitioner. John E. Marshall, Esq., and C. R. Marshall, Esq., for the respondent. LOVE *65 This proceeding is for the redetermination of a deficiency in income tax determined by the Commissioner for the year 1923, in the amount of $4,013.62. There is only one issue involved, and that is an issue of law. There is no controverted issue of fact. The issue of law, however, does present several phases which have to be decided separately. The basic issue is submitted in petitioner's one assignment of error, as follows: Respondent has erroneously assessed income taxes against petitioner upon a patent infringement judgment amounting to $30,108.94, payment of which was received during the year ended December 31, 1923. The several phases of the issue may be briefly indicated as follows: 1. Petitioner contends that the receipt of money in settlement of a patent infringement suit is not taxable*1698 income. 2. That income tax was paid on the income here involved by another person, and, hence, is not due a second time. 3. That, in any event, the tax is not due for the year 1923, but, if due at all, is allocable to prior years. FINDINGS OF FACT. Petitioner is a corporation, organized in 1903 under the laws of the State of Ohio, and is engaged in the manufacture of foundry equipment. *66 Petitioner was the owner of a patent, No. 710,624, issued October 7, 1902, covering a dust collector which was useful in handling mineral dust. Petitioner obtained information about 1913 that the Pangborn Corporation, at Hagerstown, Md., was manufacturing and selling a device similar to the one manufactured by petitioner, and apparently covered by its patent. No action, however, was taken by petitioner against the Pangborn Corporation with respect to such infringement until in 1919. In 1919 petitioner brought suit against the Pangborn Corporation in the United States District Court of the District of Maryland, claiming, among other things, "that defendant may be decreed to account for and pay to claimant the profits or income thus unlawfully derived from the violation*1699 of claimant's rights * * *." In a decision rendered March 3, 1920, by the United States District Court of Maryland, it was held that the patent was valid and that the said patent was infringed and the plaintiff was entitled to an accounting, but not an injunction, as the patent had expired. (W. W. Sly Mfg. Co. v. Pangborn Corporation,263 Fed. 394.) On May 3, 1920, an accounting was decreed and on June 3, 1920, the Pangborn Corporation filed a statement showing a net profit of $18,000 less $2,000 loss. The plaintiff declined to accept the defendant's findings and on June 26, 1920, the parties stipulated to agree to the findings of a special accountant appointed instead of a master, and, accordingly, Raymond C. Reik, C.P.A., of Haskins & Sells, was appointed special examiner "for the purpose of ascertaining the profits made by the defendant from the manufacture and sale of screen dust arresters in infringement of the patent involved." The examiner's report was made January 24, 1921, and a supplemental report was made June 16, 1921. He found the net profit made from October 7, 1913, to October 7, 1919, to be $50,543.08. *1700 On August 4, 1920, April 6, 1921, and May 28, 1921, the defendant moved for reopening the case and to take additional testimony, all of which was denied. (W. W. Sly Mfg. Co. v. Pangborn Corporation,276 U.S. 971, 972, 973.) The United States District Court for the District of Maryland on November 25, 1921, rendered its final decision and ordered that a decree be entered in accordance with its findings. The final decree, dated December 30, 1921, required: (1) The payment to the plaintiff of the difference between $50,543.08 and $23,725.36, that is $26,617.72, with interest thereon from January 25, 1921, until paid; (2) the delivery to the plaintiff of a bond, with sufficient surety, acceptable to the plaintiff or approved by the court, in the penalty of $23,725.36, conditional for the payment to the plaintiff of the equivalent of *67 whatever sum, if any, shall be hereafter deducted from the taxes the defendant would otherwise have to pay the United States in consequence of the payment by it of said sum of $26,617.72. An excerpt from the decree follows: Even under such circumstances, it is not impossible to do exact justice. That result can be attained*1701 by entering a decree that the defendant shall pay plaintiff $50,543.08 with interest thereon from January 25, 1921, when the special master's report came in, but with the proviso that such decree shall be released upon the doing by the defendant of both of two things, namely: (1) The payment to the plaintiff of the difference between $50,543.08 and $23,725.36, that is to say, $26,617.72, with interest thereon from January 25, 1921, until paid. (2) The delivery to the plaintiff of a bond, with sufficient surety acceptable to the plaintiff, or approved by the Court, in the penalty of $23,725.36, conditioned for the payment to the plaintiff of the equivalent of whatever sum, if any, shall be hereafter deducted from the taxes the defendant would otherwise have to pay the United States in consequence of the payment by it of said sum of $26,617.72. It is possible that some other and simpler form of decree to accomplish the same end may suggest itself to the parties, or either one of them. (164) If so, it can be adopted. In any event, it is likely that the decree will take an unusual form. Equity, however, never becomes too old to conceive and bring forth new remedies or new variants*1702 of old. The Pangborn Corporation appealed to the Circuit Court of Appeals for the Fourth Circuit, which affirmed the decision of the District Court on October 21, 1922. (Pangborn Corporation v. W. W. Sly Mfg. Co.,284 Fed. 217.) A petition for a writ of certiorari to the Circuit Court of Appeals for the Fourth Circuit was denied by the United States Supreme Court on January 15, 1923. (Pangborn Corporationv. W. W. Sly Mfg. Co., #757, cited in 260 U.S. 749; 43 Sup.Ct. 249; 67 L.Ed.) During the year 1923, the Pangborn Corporation paid to the petitioner $30,108.94, representing the $26,617.72 plus interest, in accordance with the final decree of the United States District Court for the District of Maryland. Petitioner reported the amount of $30,108.94 on its corporation income-tax return filed for the year 1923, as nontaxable income. Petitioner's books are kept and its returns for income taxes are filed on the accrual basis. In the audit of the return for 1923, the respondent added to the net income reported on the return the amount of $30,108.94 which was received in the year 1923 by petitioner from the patent infringement, *1703 and the deficiency involved herein arises from the above restoration to income. OPINION. LOVE: Petitioner was the owner of a patent under which it was manufacturing certain devices. The Pangborn Corporation was *68 guilty of an infringement upon petitioner's patent rights. In an equity proceeding in a Federal court in Maryland petitioner obtained a decree awarding it, in effect, the acquisition from the Pangborn Corporation of $26,617.72 with interest until paid. In 1923, with accumulated interest, there was paid to petitioner as a result of that decree $30,108.94, which the Commissioner determined was taxable income to petitioner in 1923. Patent infringements give rise to actions in damages. The cause of action sounds in tort, and is, technically, legal, as distinguished from an equitable cause of action. See R.C.L., vol. 20, pp. 1174-1175, and cases there cited. The measure of damage in such cases is the amount of profits which the owner of the patent has failed to realize by reason of the wrongful act of the infringer. It does not always or necessarily follow that the owner has suffered any damage whatever by reason of such infringement. The amount of damage, *1704 if any, is a matter of proof. The courts, however, have recognized a procedure in equity by which the owner may sue the infringer and ask not a payment for damages which he has suffered, but a decree for the profits which the infringer has realized. See R.C.L., vol. 20, p. 1176, and cases there cited. The last mentioned procedure is the one adopted by petitioner in its suit against the Pangborn Corporation. There was some evidence before the Board at the hearing of this proceeding to the effect that petitioner had suffered some damage by reason of the infringement of its patent rights, but evidently no such evidence was submitted in the case against the Pangborn Corporation. The amount of such damage, if any, was not an issue in that case. The sole issue there was the amount of profits realized by the Pangborn Corporation out of the use by it of petitioner's invention, or one so nearly like it as to constitute an infringement. It follows, therefore, that we are not concerned in this proceeding with reference to the amount of petitioner's damage, if any, caused by such infringement. It was income to petitioner in 1923. The inquiry presented by petitioner is, was it*1705 ever taxable income? Petitioner contends that it does not come within the ambit of the definition of income given by the Supreme Court in Eisner v. Macomber,252 U.S. 189. It is useless to quote that definition here. It is concise, and yet very comprehensive. We believe that the income here involved comes within the definition referred to. No income tax has been paid by petitioner on the $30,108.94 which was received by it in 1923. It was not legally entitled to that money *69 prior to 1923, and never became legally entitled to receive from the Pangborn Corporation any more or any less than $30,108.94. That amount was not an accruable item prior to 1923 and was not accrued on its books prior to that year and, hence, is taxable income for 1923. Judgment will be entered for the respondent.