Unpublished Disposition, 842 F.2d 1294 (9th Cir. 1988)

MEMORANDUM^* 

The Commissioner asserted deficiencies in CIC's taxes for 1975 and 1976, alleging that CIC should have paid personal holding company taxes, and that CIC should have recognized the accrued but unpaid interest on promissory notes as income in 1976. The Tax Court found for the government. We affirm.

The question whether CIC is a personal holding company depends entirely on a pure issue of fact: whether specific amounts of the payments made by Codman to CIC were intended as compensation for the use of Dr. Cloward's name and instrument designs or rather as compensation for his personal services. We therefore review the Tax Court's conclusion for clear error. See Vukasovich v. Comm'r, 790 F.2d 1409, 1411 (9th Cir. 1986); Meyer's Estate v. Comm'r, 503 F.2d 556 (9th Cir. 1974).

The Tax Court concluded that payments from Cloward to CIC must have been royalties. Although we do not agree with all of the Tax Court's reasoning, we find the Tax Court's ultimate conclusion supported.

CIC had the burden of demonstrating that more than 40% of the payments were intended as compensation for Dr. Cloward's services. Although CIC has demonstrated that Codman could have valued Dr. Cloward's services, it has not met this burden. As the Tax Court noted, Dr. Cloward was not obligated to attend meetings to promote his instruments except as his schedule permitted. The Tax Court's conclusion that compensation for services represented a de minimis portion of the payments seems to us adequately supported by this fact. We find implausible the claim that Codman paid 40% of the money in exchange for personal services to which it had no enforceable right beyond whatever services Dr. Cloward's busy schedule permitted him to provide.

CIC attempts to prove that all payments must have been for personal services because nothing else of value was given to Codman. CIC claims that although the exclusive right to use the Cloward name was valuable, a non-exclusive right to use the name had no value. According to CIC, because it had only a non-exclusive right to use the Cloward name, it transferred to Codman only a non-exclusive right, and therefore it gave Codman nothing of value that could be the basis of royalty payments. CIC also maintains that the instrument designs had no value.

We reject CIC's position. Even if CIC's non-exclusive right to use the Cloward name had no value to Codman, in connection with Dr. Cloward's grant of authority to use his name, Codman obtained an exclusive right to use the Cloward name for marketing the instruments--property that CIC admits Codman valued. Therefore Codman did receive a valuable item of property in exchange for the payments made to CIC.

CIC suggests that Dr. Cloward's grant of authority may not be considered as part of the valuable property for which Cloward paid royalties. It argues that under Helvering v. Horst, 311 U.S. 112 (1940), any income received by CIC in exchange for Dr. Cloward's interest in using his name must be taxed to Dr. Cloward, and therefore cannot be considered income to CIC. This argument has no merit. Helvering does not hold that the government must tax the donor of income-producing property, but rather that it may do so. Furthermore, the personal holding company tax does not require that the personal holding company ever have owned the valuable property that is transferred in exchange for a royalty. It applies to corporations that receive royalty payments amounting to 60% of their income, and defines royalties as any "amounts received for the privilege of using patents, copyrights, ... and other like property." See 26 C.F.R. Sec. 1.543-1(b) (3). The government therefore can tax CIC even if the valuable property came exclusively from Dr. Cloward, so long as the royalties were paid to CIC.

CIC also argues that the right to use Dr. Cloward's name cannot be considered property for purposes of Sec. 543. It cites for support Miller v. Comm'r, 299 F.2d 706 (2d Cir. 1962). This case does not apply. The Miller case concerned capital gains treatment of the right to portray a dead person's life. The reasons for limiting property for capital-gains purposes do not counsel limiting the definition of property for purposes of personal holding company tax. The Miller court was concerned that if all things of value became property for purposes of capital gains tax, people would evade the personal income tax. In this case, by contrast, a broad definition of property does not threaten to undermine the legislative intent of the personal holding company tax. In addition, royalties are defined for purposes of personal holding company tax as including money received in exchange for the right to use a trademark. Because Dr. Cloward's name was the subject of a valid trademark, it seems clear that the use of his name falls within the definition of property for purposes of the personal holding tax.

CIC also argues that use of the instrument designs was not valuable property because the ideas were neither patentable nor copyrightable. We need not address this issue because the use of Dr. Cloward's name was valuable property for which CIC was paid. CIC's argument that Codman received nothing of value is therefore incorrect.

CIC computed its income on the cash basis. Although cash-basis taxpayers usually need not recognize income until they receive payment, Sec. 446(b) permits the Commissioner to calculate income under any method that will clearly reflect income. In this case, the Commissioner argues that CIC recognized the interest due on the promissory notes when it distributed the notes at dissolution, even though the interest had not been paid. The Commissioner relies on the assignment-of-income doctrine. Whether the assignment-of-income doctrine governs the facts of this case is a mixed question of fact and law that is more law than fact, and therefore reviewed de novo. See United States v. McConney, 728 F.2d 1195 (9th Cir. 1984).

CIC attempts to distinguish assignment-of-income cases on four grounds. First, CIC argues that because it distributed demand notes that did not become payable until CIC requested payment, the interest had technically not become due before liquidation. On this ground, CIC hopes to distinguish cases such as Williamson v. United States, 292 F.2d 524 (Ct. Cl. 1961), and J. Ungar v. Comm'r, 244 F.2d 90 (2d Cir. 1957). CIC suggests that because it never demanded payment on the interest, it had an incomplete legal right to receive the money. The Tax Court rejected this argument as a triumph of form over substance. We agree. Allowing CIC to avoid corporate tax simply by keeping its assets in the form of demand notes would permit CIC to avoid tax based on a formality. Even if the interest was not technically due, it was certainly earned.

Second, CIC argues that the debtors on the demand notes might not have been able to repay the debts, and that therefore the corporation never really obtained the benefit of the interest payments despite distributing the notes to the shareholders. We reject this argument. The Tax Court pointed out that the burden of proving that the debtors could not pay lay with CIC. The court did not find that CIC had offered any evidence of inability to pay. Because CIC still has offered no evidence, we presume the debts were payable.

Third, CIC argues that Idaho First National Bank v. United States, 265 F.2d 6 (9th Cir. 1959) is inapplicable because in that case the interest accrued was not distributed directly to shareholders as part of a dissolution. Rather, another corporation purchased the taxpayer's stock and then dissolved the taxpayer. CIC understands this case to mean that accrued but unpaid interest can only be realized if the corporation's stock is purchased prior to dissolution. However, this reading is excessively narrow. The court did not reject the possibility that a corporation could receive the benefit of unpaid interest simply by distributing its assets. It preferred not to rely on that theory because no cases had yet addressed that issue. Rather it relied on a theory that had already been approved--that a corporation receives the benefit of anticipated income when it is purchased. See id. at 8. Nothing in the opinion suggests that distributing anticipated income without purchase of the company will not constitute enjoying the benefit of that income. Therefore, although Idaho First National Bank does not really govern this case, it provides no authority against the Commissioner's position.

Finally, CIC relies on United States v. Horschel, 205 F.2d 646 (9th Cir. 1953), which held that the principle of anticipatory assignment of income does not apply to dissolved corporations, but only to corporations remaining in existence after the assignment of income. Although Horschel supports CIC's position, it has not been followed in this or other circuits. See Comm'r v. Kuckenberg, 309 F.2d 202 (9th Cir. 1962) (holding that income due on contracts at liquidation is taxable to liquidated corporation); J. Ungar, 244 F.2d at 93-94 (holding that right to receive commissions distributed at dissolution is taxed to dissolved taxpayer); Williamson, 292 F.2d at 526 (holding that the right to receive income from services rendered distributed at liquidation is taxable to liquidated company); see also Hillsboro Nat'l Bank v. Comm'r, 460 U.S. 370, 398 (1982) (stating that "the 'assignment of income' doctrine has always been applied to distributions in liquidation"). Furthermore, the rule of Horschel makes no sense as a matter of tax policy. The Horschel rule creates an incentive for creating sham corporations. Shareholders could take loans from corporations without intending to repay the principal or the interest, thus deferring individual tax on this money indefinitely, and then dissolve the corporation in order to avoid corporate tax on the accrued but unpaid interest. Because we can see no policy reason for creating such a large exception to the assignment-of-income doctrine, and because Horschel has been superseded by cases such as Kuckenberg, we find the Tax Court's position sound, and AFFIRM.