Appeal from the District Court of the United States for the District of New Jersey.
Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.
Earl and his wife agreed that any property which either of them had or might thereafter acquire "by earnings (including salaries, fees, etc.) * * *" should be received, held and owned by them as joint tenants. Pursuant thereto Earl for many years and in the tax years in question divided his salary and fees between himself and his wife and returned his half as taxable income. The Commissioner of Internal Revenue, acting under the provision of the Revenue Act of 1918 (section 213(a), 40 Stat. 1065), which taxed the income of every individual, including "income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid," held that the husband's salaries and fees were his income and, notwithstanding the agreement, the whole was taxable to him. The Supreme Court, in Lucas v. Earl, 281 U.S. 111, 50 S. Ct. 241, 74 L. Ed. 731, sustained the Commissioner on the theory that "the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skilfully devised to prevent the salary when paid from vesting even for a second in the man who earned it." Continuing, the court said: "That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew."
The defendant-collector says the case at bar, arising under the same provision in the Revenue Act of 1918 and like provisions in the Revenue Acts of 1916 (39 Stat. 757, § 2(a) and 1921 (42 Stat. 237, § 213(a), is squarely ruled by the Lucas-Earl Case.We have therefore made this brief summary of the Earl Case so that the facts of the instant case may be viewed in the light of that decision.
The story of this case, brought to recover additional taxes paid under protest, appears in the special findings of fact made by the court in the trial without a jury. As there were no exceptions to the findings, we shall assume all facts to true. The plaintiff-taxpayer had judgment, and the collector appealed.
Harry R. Nelson, while in the service of Warner Chemical Company, obtained letters patent for an invention pertatining to electrolytic cells. Desiring that his invention be exploited, Nelson, on March 1, 1915, entered into a contract with the Warner Company whereby they agreed that Nelson should assign the patent to the company without right to sell it except with his consent; that the company should exploit the invention; that of the net profits realized one-third should be paid to Nelson and two-thirds retained by the Warner Company; that if the income to Nelson should be less than an average of $1,000 a year for 1915 and 1916 or less than an average of $2,000 a year for any succeeding period of two years, Nelson should have the privilege to request a reassignment of the patent and terminate the contract; and that, should the Warner Company at any time discontinue Nelson's services under his contract of employment, the patent should, at his request, be reassigned to him and the cell contract terminated. Pursuant to his engagement, Nelson, on July 15, 1916, "sold, assigned and transferred" his patent to the Warner Company subject to the conditions of the contract of March 1, 1915.
On Christmas Day 1916, Nelson orally and by appropriate words transferred and assigned to his wife all his interest in the profits from the cell contract and later orally informed an official of the Warner Company of his action. The latter suggested that it would be better for all concerned to have the arrangement in writing. Thereupon Nelson went home and drafted, without the aid of counsel, a contract between himself and his wife, bearing date March 7, 1917, by which, after referring in the preamble to all that had transpired, he agreed, in consideration of one dollar paid by his wife and of mutual promises, as follows:
"Harry R. Nelson hereby waives his right to receive all profits from the manufacture and sale of Electrolytic Cells as outlined in his agreement with the Warner Chemical Co., dated March 1, 1915, in favor of Anna Estelle Nelson during the life of that Agreement, and he further agrees to authorize the Warner Chemical Co. in writing to pay all such profits to Anna Estelle Nelson from the date of the signing of this agreement."
Anna Estelle Nelson, the wife, agreed on her part to "further cooperate with said Harry R. Nelson (her husband) in his desire to assist in exploiting said inventions and not to object if this entails prolonged absences from home or change of residence."
On the same day Nelson notified the Warner Company in writing to pay his wife "all moneys that may become due on account of my contract with you in relation to the Nelson Electrolytic Cells."
And thus matters stood until after the date of the tax question in suit, payments of one-third of the net profits being regularly made by the Warner Company to Anna Estelle Nelson, the wife.
The court found as facts that, though there was a nominal consideration of one dollar, the real consideration in the contract between husband and wife was love and affection; that Nelson by executing and delivering the contract intended to make provision for his wife so that if the cell contract should turn out to be valuable she might during his life have property of her own; that Nelson's intent was to transfer and vest in her all the profits which under the contract would otherwise be his; that the wife received the profits and both she and her husband always treated them as her separate property; that Nelson filed his returns for taxable income for the years 1917, 1918, 1919, 1920 and 1921 not including income from the cell contract and paid taxes on his other income; that Anna Estelle Nelson, the wife, made income tax returns for the same years including income from the cell contract and paid taxes thereon; that the Commissioner of Internal Revenue, conceiving that Anna Estelle Nelson had included in her returns non-taxable income and had improperly paid taxes thereon, refunded to her the amounts of taxes she had paid on the electric cell profits and, placing these profits in the returns of Harry R. Nelson, assessed thereon additional taxes and collected the same.
Evidently the electrolytic cell invention was much more valuable and the profits on the cell contract were very much greater than anyone had expected. The payments made to Anna Estelle Nelson during the five years in question aggregated $225,841.69, which when taken from her returns and put into the returns of Harry R. Nelson occasioned additional taxes assessed against him in the total of $102,319.72, the several items of ...