Joe L. Schmitt, Jr., and Helen N. Schmitt v. Commissioner of Internal Revenue

The crucial question in this case is whether for income tax purposes an agreement executed by the taxpayer constituted a sale of patent rights, and income derived therefrom was therefore long term capital gain; or whether the contract constituted a license, and hence income derived therefrom ordinary income .

The Tax Court held there was not a sale of all substantial rights in and to the patent, and hence the income was taxable as ordinary income. The taxpayer appeals. This Court has jurisdiction.

Joe L. Schmitt, Jr. engaged in accounting work in Arizona for many years. He developed a procedure (described as Exact-O-Matic System) which was an automatic, mechanical process or accounting method, using tabulating cards and electrical circuits (a special wiring unit invented by taxpayer) to evaluate single entry information and convert that information into double entry records and accounting statements.

During the years in question (1949, 1950 and 1951), taxpayer entered into eleven substantially similar agreements whereby he transferred to assignees certain rights in certain specified territorial areas.

In return for said assignments, taxpayer received payment in two forms—…