                        T.C. Memo. 2010-222



                      UNITED STATES TAX COURT



                 BARRY LEE FARRIS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6314-09.              Filed October 12, 2010.



     Craig E. Barrere, for petitioner.

     Kimberly A. Kazda, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined a $14,187 deficiency,

a $2,837 addition to tax for failure to file a return timely

under section 6651(a)(1) and a $2,837 accuracy-related penalty

under section 6662(a) with respect to petitioner’s Federal income
                                - 2 -

tax for 2006.1   After concessions, the sole issue before this

Court is whether the payments petitioner received from Cardinal

Health Technologies, LLC (Cardinal Health) in 2006 constituted

ordinary income or long-term capital gain.2   We hold the payments

should be treated as ordinary income.

                          FINDINGS OF FACT

     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 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


     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 -

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.”3    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




     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 -

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 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


     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.,
Smith v. Commissioner, T.C. Memo. 2001-313.
     5
     Petitioner reported the payments he received from Cardinal
                                                  (continued...)
                               - 5 -

report the payments and failed to file a timely Federal 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.

                              OPINION

     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

constitute ordinary income from the performance of sales and

training services described in the representative agreement.     We




     5
      (...continued)
Health in 2004 and 2005 on timely filed Federal income tax
returns. Those years are not at issue nor are they binding.      See
Auto. Club of Mich. v. Commissioner, 353 U.S. 180, 183-184
(1957); Demirjian v. Commissioner, 457 F.2d 1, 6-7 (3d Cir.
1972), affg. 54 T.C. 1691 (1970).
     6
      Petitioner filed his Federal income tax return for 2006
more than three months after the filing deadline.
                                - 6 -

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.

Rule 142(a).    Section 7491(a) shifts the burden of proof to the

Commissioner in certain situations.     Petitioner does not argue

that the burden of proof shifts to respondent under section

7491(a) and has not shown that the threshold requirements of

section 7491(a) were met.   See Higbee v. Commissioner, 116 T.C.

438, 442-443 (2001).   Accordingly, petitioner bears the burden of

establishing that the payments he received from Cardinal Health

constitute long-term capital gain, not ordinary income.

     Generally, income a patent holder receives from the transfer

of substantially all rights to a patent shall be treated as long-

term capital gain.   Sec. 1235(a).   The parties agree that

petitioner transferred all of his rights in the needleless

syringe patents to Cardinal Health and that any income petitioner

received for the transfer of the patents constitutes long-term

capital gain.   The parties differ on whether the payments

petitioner received in 2006 were for the needleless syringe

patents or for tangential sales and training services.

     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.
                               - 7 -

See Ruge v. Commissioner, 26 T.C. 138 (1956); Gable v.

Commissioner, T.C. Memo. 1974-312.     Ancillary and subsidiary

services include providing the transferee with technical

knowledge and consulting services that are an integral part of

the patent transfer.   See Ruge v. Commissioner, supra; Gable v.

Commissioner, supra.   A patent transferor will be deemed to have

received ordinary income, however, when the transferor receives

compensation for services that are unrelated or tangential to the

patent transfer.   Gable v. Commissioner, supra.      Petitioner

contends that the services provided for in the representative

agreement were incidental and subsidiary to the sale and transfer

of the needleless syringe patents.     We disagree.

     We first must determine whether the services rendered were

in connection with the transfer of the needleless syringe

patents.   Petitioner 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
                                - 8 -

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 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.
                               - 9 -

     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. Ruge v. Commissioner, supra

(patent transferor agreed to provide consulting services

affecting the operations of transferor’s patented invention not

to exceed 60 days per year).   We recognize that Cardinal Health

may have hired petitioner because of his extensive knowledge and

experience.   We note, however, that his job duties consisted

primarily of generating sales as opposed to providing Cardinal

Health with technical knowledge about Smart Amp Products.    Cf.

Gable v. Commissioner, supra (patent transferor’s duties included

developing and researching technical information on the patented

invention).   Moreover, petitioner agreed to use his “best

efforts” to perform the enumerated sales and training duties.

The Court has held that income received under similar “best

efforts” provisions constitutes ordinary income.   See Ruge v.

Commissioner, supra; see also Kimble Glass Co. v. Commissioner, 9

T.C. 183 (1947).

     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
                             - 10 -

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 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,


                                           Decision will be entered

                                       for respondent.
