## Facts

- Curtis Busse and his brother, Gilbert Busse, operated Busse Brothers as a partnership and, after World War II, manufactured equipment used by canning companies.
- In the 1950s, as the canning industry expanded and moved toward automated bulk handling, the brothers invented a machine that arranged cans onto pallets (a “palletizer”) and obtained a patent for it.
- The palletizer was highly successful; from 1957 to 1970, Busse Brothers produced a large majority of the palletizers sold in the United States.
- The palletizer’s success also created demand for a second product that removed cans from pallets (a “de-palletizer”). Busse Brothers did not have a patent on the de-palletizer, but many customers bought both machines because they were used together.
- Gilbert died in 1962, and his partnership interest passed to his wife, Marcella Busse.
- After Gilbert’s death, the business was incorporated as Busse Brothers, Inc. Curtis and Marcella each owned more than 25% of the corporation’s stock.
- In 1967, Curtis and Marcella assigned the palletizer patent to the corporation in exchange for payments equal to 5% of the corporation’s sales of both palletizers (patented) and de-palletizers (unpatented).
- Under the agreement, the corporation paid substantial amounts to the taxpayers in 1968 and 1969 (approximately $45,500 and $46,900, respectively, based on the formula).
- The taxpayers reported the payments as proceeds from the transfer of a capital asset, while the IRS recharacterized the amounts as ordinary income and treated the corporation’s payments as nondeductible dividends; the IRS also asserted that part of the payments was “imputed interest” under I.R.C. § 483.
- The IRS assessed additional taxes (totaling $115,940.25 for the relevant years). The taxpayers paid, filed refund claims that were denied, and then brought this refund suit; the case was tried to the court.

## Issues

1. Whether the payments made by Busse Brothers, Inc. to Curtis and Marcella under the 1967 patent-assignment agreement were consideration for a bona fide patent transfer (royalty/purchase-price type payments), or instead disguised dividends taxable as ordinary income and nondeductible by the corporation.
2. Whether using a 5%-of-sales formula measured by sales of both the patented palletizers and the unpatented de-palletizers made the patent-assignment price unreasonable such that the payments should be recharacterized as dividends.
3. Whether any portion of the contingent, sales-based payments should be treated as imputed interest under I.R.C. § 483.

## Decision

- The court ruled for the taxpayers on the key characterization questions and directed entry of judgment consistent with its findings, entitling the plaintiffs to recover the disputed assessments in accordance with the court’s calculations.
- The court found the 1967 transfer to be a real assignment of a valuable patent to the corporation for consideration, rather than a sham distribution of corporate earnings.
- The court rejected the government’s argument that the payments were dividends, concluding that the record did not show the pricing formula to be so unreasonable as to justify dividend recharacterization.
- The court accepted that including de-palletizer sales in the royalty base reflected the business reality that sales of the unpatented machine were closely tied to the patented palletizer’s market.
- The court rejected the IRS’s attempt to treat portions of the payments as imputed interest under § 483, reasoning that the payment stream was contingent on future sales rather than a fixed deferred purchase price with unstated interest.

## Legal Principles

- Tax treatment follows the substance of a transaction: payments by a closely held corporation to shareholder-inventors may be treated as royalties or purchase-price consideration when supported by a bona fide transfer of patent rights and commercially reasonable terms.
- The government may seek dividend recharacterization where payments to shareholders are excessive in relation to the value received by the corporation, but a mere overlap between shareholders and payees does not by itself convert patent consideration into a dividend.
- A sales-based measure of patent consideration can account for revenue from an associated, unpatented product when the patented technology materially drives demand for the associated product and the pricing approach reflects how the products are sold in the market.
- I.R.C. § 483’s imputed-interest rules are generally aimed at fixed deferred-payment sales with unstated interest; contingent payments keyed to future sales (royalty-like payments) do not fit that pattern and ordinarily are not split into principal and imputed interest.

## Conclusion

Busse v. United States held that payments made by a closely held corporation to its shareholder-inventors under a 5%-of-sales patent-assignment agreement were properly treated as consideration for the patent transfer rather than dividends, that including sales of a related unpatented machine in the payment base was not shown to be unreasonable on the record, and that § 483 did not apply to reclassify part of these contingent sales-based payments as imputed interest.


Busse v. United States, 437 F. Supp. 928 (1977)