Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 55-58

1955-1 C.B. 97

Caution: Revoked by Rev. Rul. 58-353

Full Text

Rev. Rul. 55-58

Many requests have been received for reconsideration of Mimeograph 6490, C. B. 1950-1, 9, relating to the treatment of amounts received by inventors from the assignment of a patent, or the exclusive right to make, use and sell a patented article under a license agreement, where such amounts are not subject to the provisions of section 1235 of the Internal Revenue Code of 1954.

Mimeograph 6490, supra, holds that, effective for taxable years beginning after May 31, 1950, payments received by inventors from the assignment of a patent or the license of the exclusive right to make, use and sell a patented article under an agreement whereby payments are measured by production, sale, or use by the transferee, or are payable periodically over a period generally coterminous with the transferee's use of the patent, constitute ordinary income.

A careful study of the problem has been made, taking into consideration, among other things, recent court decisions which support the position taken by the Internal Revenue Service in 1950. See Bloch v. United States, 200 Fed. (2d) 63, certiorari denied, 345 U.S. 935; and Broderick v. Neale, 201 Fed. (2d) 621. Accordingly, it is concluded that Mimeograph 6490, supra, should not be disturbed. In reaching this conclusion, the Revenue Service has considered the decisions in Edward C. Myers v. Commissioner, 6 T. C. 258; Commissioner v. Celanese Corp. of America, 140 Fed. (2d) 339; and Allen v. Werner, 190 Fed. (2d) 840.

Although section 1235 of the Internal Revenue Code of 1954 specifically provides that, with specified exceptions, such payments received in 1954 and subsequent years will receive capital gains treatment in the hands of the inventor, this provision of the 1954 Code is applicable only to amounts received in taxable years beginning after December 31, 1953, and therefore does not apply to amounts received in taxable years beginning after May 31, 1950, and before January 1, 1954.

Accordingly, except as section 1235 of the Internal Revenue Code of 1954 applies, the Internal Revenue Service will continue to treat as ordinary income the payments received by inventors during taxable years beginning after May 31, 1950, from such transfers