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Income from sales of the new products may not receive the special treatment provided by I.R.C. § 456. "Discovery" in § 456 means only the discovery of mineral resources. "Discovery" is not meant to include the development of patentable products.
A drug manufacturer and an inventor and producer of a new type of camera and film, and a device for viewing three-dimensional motion pictures, sought relief from excess profits taxes under 456(a) of the Internal Revenue Code of 1939, which allowed allocation to other years of income "resulting from exploration, discovery, or prospecting," or income "from the sale of patents, formulae, or processes." In No. 151, the drug manufacturer paid the tax and sued for a refund in the United States District Court for the Northern District of Illinois, which dismissed the complaint, but the Court of Appeals for the Seventh Circuit reversed. In No. 169, the camera manufacturer computed its income on the assumption that 456 was applicable; the Commissioner of Internal Revenue determined that 456 was not applicable, and this determination was upheld by the Tax Court, and the Court of Appeals for the First Circuit affirmed. Certiorari was granted.
Was the “development of new products” included in the definition of “discovery” under 456(a) of the Internal Revenue Code of 1939?
The Supreme Court reversed the judgment of the Court of Appeals for the Seventh Circuit (No. 151) and affirmed the judgment of the Court of Appeals for the First Circuit (No. 169). The court rejected both taxpayers' claims that the income from the sales from their inventions was included in the definition of "discovery," the income from which was protected under § 456. The court further held that the plain meaning of § 456 showed that the term "discovery" in § 456 meant only the discovery of mineral resources and was not meant to include the development of patentable products.