Decision will be entered for respondent.
KROUPA,
Some of the facts have been stipulated and are so found. The stipulation of facts and the stipulation of settled issues and their accompanying exhibits are incorporated 2010 Tax Ct. Memo LEXIS 255">*256 by this reference. Petitioner resided in Pollock Pines, California at the time he filed the petition.
Petitioner invented a method and apparatus for transferring fluid from a vial into a syringe without using a needle (needleless syringe). The needleless syringe made it possible to fill a medical syringe without exposing the liquid contents to airborne contaminants. Petitioner applied for and received four patents with the United States Patent and Trademark Office (PTO) for the needleless syringe (needleless syringe patents).
In March 2004 petitioner assigned his entire right, title and interest in and to all needleless syringe patents to Cardinal Health, a pharmaceutical manufacturing and packaging business, for "$1 and for other good and valuable consideration." The assignment agreement did not define "other good and valuable consideration" or provide for any other compensation or payment. Instead, it stated that petitioner's "receipt of * * * [the $1 and other good and valuable consideration] is hereby acknowledged." 32010 Tax Ct. Memo LEXIS 255">*257 The parties recorded and filed the assignment agreement with the PTO in July 2005.
Three months after signing the assignment agreement, petitioner entered into a sales representative agreement (representative agreement) with Cardinal Health. The representative agreement stated that petitioner would devote approximately forty hours per week for two years performing services as an independent contractor for Cardinal Health. All petitioner's services related solely to Cardinal Health's Smart Amp Products. The representative agreement did not define "Smart Amp Products." It stated, however, that petitioner had "extensive knowledge and experience" regarding such products. Petitioner agreed to use his "best efforts" to perform all normal, routine services of a sales representative and train Cardinal Health personnel on the use of Smart Amp Products. 4 The representative agreement enumerated several services petitioner would perform including developing a strategy for generating sales for Smart Amp Products and establishing business relationships with potential customers. Cardinal Health agreed to pay petitioner $7,500 per 2010 Tax Ct. Memo LEXIS 255">*258 month, which represented "full consideration for the services * * * [petitioner] * * * rendered." The representative agreement contained an "Entire Agreement" clause stating that "the [representative] [a]greement constitutes the entire agreement between the parties" relating to petitioner's services and Cardinal Health's payments, and the parties have no other agreements relating to the representative agreement's subject matter. The representative agreement stated that petitioner would begin providing services to Cardinal Health in May 2004, even though the agreement was not signed until June 2004, and the parties treated June as the start of the 2-year contract.
Petitioner received the final five monthly checks from Cardinal Health totaling $37,500 in 2006. 5 Petitioner failed to report the payments and failed to file a timely Federal 2010 Tax Ct. Memo LEXIS 255">*259 income tax return for 2006. 6 Respondent examined petitioner's Federal income tax return for 2006 and issued petitioner the deficiency notice.
Petitioner timely filed a petition with this Court. The parties filed a stipulation of settled issues in which petitioner admitted that he received $37,500 from Cardinal Health in 2006. Petitioner challenges only the characterization of the unreported income.
We are asked to decide whether the payments petitioner received from Cardinal Health constitute ordinary income or long-term capital gain. Petitioner claims that the payments he received in 2006 were from the sale of the needleless syringe patents and should therefore be characterized as long-term capital gain. Respondent argues that the payments received 2010 Tax Ct. Memo LEXIS 255">*260 constitute ordinary income from the performance of sales and training services described in the representative agreement. We shall consider the parties' arguments after first addressing the burden of proof.
The Commissioner's determinations are generally presumed correct, and the taxpayer bears the burden of proving otherwise.
Generally, income a patent holder receives from the transfer of substantially all rights to a patent shall be treated as long-term capital gain.
A patent transferor may render ancillary and subsidiary services in connection with the sale and transfer of a patent without affecting the capital nature of the total sale proceeds. See
We first must determine whether the services rendered were in connection with the transfer of the needleless syringe patents. Petitioner 2010 Tax Ct. Memo LEXIS 255">*262 transferred the needleless syringe patents to Cardinal Health in the assignment agreement. Petitioner acknowledged in the assignment agreement that he had received full consideration for the needleless syringe patents. The assignment agreement did not refer to any additional consideration or any future agreement that the parties would enter or any other agreement regarding the transfer of the patents.
Petitioner and Cardinal Health entered into the representative agreement more than three months later. The representative agreement did not refer to any transferred patents or previous agreements. Rather, the representative agreement dealt only with petitioner's services as a sales representative and employee trainer for Cardinal Health's Smart Amp Products. Cardinal Health paid petitioner under the representative agreement for "full consideration for services rendered." Moreover, the "Entire Agreement" clause stated that the representative agreement constituted the entire agreement between the parties related to petitioner's performance of services and that the parties had no other agreements affecting petitioner's performance of services.
Petitioner argues that the Smart Amp Products 2010 Tax Ct. Memo LEXIS 255">*263 are synonymous with the needleless syringe patents and that any services performed were connected to the sale of the patents. Neither agreement between petitioner and Cardinal Health makes this comparison, however, and petitioner has failed to provide the Court with any documents or other evidence to support this contention. Moreover, petitioner failed to testify or present any other evidence that would show that he and Cardinal Health intended the service payments to be in exchange for the patents. Absent evidence to the contrary, we find that petitioner assigned his needleless syringe patents in the assignment agreement and the services performed under the representative agreement were not in connection with the transfer of any patent.
Moreover, we find that services petitioner performed under the representative agreement were not ancillary and subsidiary to the sale of the patents. Petitioner agreed to work forty hours per week for two years as a sales representative for Cardinal Health's Smart Amp Products. Cf.
We find that petitioner has not presented evidence to show that the services he performed were ancillary and subsidiary to the transfer of the patents. Petitioner has the burden of proof, and he has failed to meet his burden. We find that the payments petitioner received from Cardinal Health in 2006 were for services performed, as stated in the representative agreement, and not for the sale of the patents. Accordingly, we hold that petitioner received 2010 Tax Ct. Memo LEXIS 255">*265 the $37,500 as ordinary income from Cardinal Health in 2006.
We have considered all arguments made in reaching our decision, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
1. All section references are to the Internal Revenue Code in effect for 2006, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩
2. Petitioner concedes liability for the deficiency, addition to tax for failure to file a return timely and accuracy-related penalty.↩
3. Petitioner's counsel stated at trial that Cardinal Health paid petitioner an up-front lump sum. The assignment agreement does not reference a lump sum payment, however, and petitioner failed to present evidence regarding any such payment.
4. Petitioner's counsel at trial stated that petitioner never performed the services described in the representative agreement. Petitioner presented no evidence, however, to suggest the parties failed to abide by the representative agreement, and this Court will not accept counsel's bald assertion as fact. See, e.g.,
5. Petitioner reported the payments he received from Cardinal Health in 2004 and 2005 on timely filed Federal income tax returns. Those years are not at issue nor are they binding. See
6. Petitioner filed his Federal income tax return for 2006 more than three months after the filing deadline.↩