White v. Fitzpatric

Facts

White(P) manufactured chokes for use on the barrels of shotguns. Beginning in 1939, the company occupied three factories, a garage and an office under a lease with a nontransferable option to purchase for $15,370. P developed a basic invention for his chokes and obtained a patent for it in 1932. In 1942, P entered into a written agreement with his wife to transfer the entire right title and interest in the patent to her for consideration of $10. The next day, P's wife licensed the exclusive manufacturing rights back to him for the full term of the patent subject to cancellation if the payments were more than 60 days in arrears or bankruptcy was forced upon him, or other financial difficulties made it impossible for P to carry on the business. The contract called for royalties of $1 on each product marketed. P paid his wife some $60,000 in royalties from 1941 to 1944. At the same time, P's wife bought the property on which the company was located for $16,800 and immediately executed an oral lease. The next day P made a gift of the purchase price less about $725 and then filed a gift tax return for that same amount. Rental payments for the land were $1,500 per year. P deducted both rental payments and royalty payments as business expenses. The IRS got wise and eventually issued a deficiency notice. P paid the $47,000 deficiency and sued for a refund. The court found that P's sole motive was for tax minimization in the family group and that the agreements were sham agreements as it was not expected that wife would ever exercise her options against P. The court also found that P retained effective control of the property. P claims that the assignment was legally valid and the land was purchased in his wife's name only, and because these were absolute transfers subject to no conditions, they were valid and he should be allowed deductions. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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