## Facts

- Lewis R. Heim invented a rod end and spherical bearing and filed patent applications in 1942.
- Heim executed a written assignment in 1942 transferring the invention and patents (including improvements) to The Heim Company; the assignment was recorded, and patents later issued in the company’s name.
- A 1943 written agreement between Heim and the company provided for royalties on specified products after July 1, 1943, future royalties on new products by agreement, and a cancellation clause allowing reversion of rights if royalties fell below stated amounts.
- Heim later executed assignments to his wife, son, and daughter conveying undivided interests in the company agreement and related rights and benefits connected to the invention and patents.
- The company paid royalties directly to the family members in accordance with their assigned interests, including royalties on later products for which rates were set with participation by Heim and the assignees.
- Heim filed gift tax returns and paid gift tax on the assignments, but excluded the royalties paid to his family from his own income.
- The Commissioner determined deficiencies for tax years 1943–1946 by including in Heim’s income royalties paid to his wife and children, treating the transfers as an anticipatory assignment of income.
- Heim paid the assessments under protest, sought refunds (denied), and sued the collector; on an agreed record, the district court granted summary judgment to the government, and Heim appealed.

## Issues

1. Whether royalties paid to Heim’s wife and children under Heim’s assignments were includible in Heim’s gross income as an anticipatory assignment of income.
2. Whether Heim’s assignments transferred ownership interests in income-producing property (contractual and patent-related rights) sufficient to make the royalties taxable to the assignees.

## Decision

- The Second Circuit reversed the judgment for the government.
- The court held the royalty payments made to Heim’s wife, son, and daughter were not taxable to Heim.
- The court concluded the assignments conveyed bona fide property interests in the royalty-producing agreement and associated patent-related rights, not merely a right to receive future income.
- The court distinguished Helvering v. Eubank on the ground that it involved assignment of income from services rather than a transfer of ownership in income-producing property.

## Legal Principles

- Income is generally taxed to the owner of the income-producing property; a valid transfer of an ownership interest shifts taxation of future income to the transferee.
- The assignment-of-income doctrine prevents avoidance through a mere redirection of future receipts while retaining ownership or control of the underlying income source.
- In evaluating royalty assignments, courts look to whether the transfer includes substantive rights tied to the property or contract generating the royalties (including participation rights and reversionary interests), not just a payment stream.
- Payment of gift tax and formal documentation may support, though not alone determine, that a transaction is a completed transfer of property interests for income tax purposes.

## Conclusion

Because Heim transferred genuine ownership interests in the royalty-producing agreement and related patent-connected rights to his wife and children, the royalties paid to them were their income rather than Heim’s, and the deficiencies based on including those royalties in Heim’s gross income could not stand.


Heim v. Fitzpatrick, 262 F.2d 887 (2d Cir. 1959)