The Smith Act, as amended, 18 U.S.C. § 2385 which prohibits the knowing advocacy of the overthrow of the Government of the United States by force and violence, supersedes the enforceability of the Pennsylvania Sedition Act, which proscribes the same conduct. Pp. 498-510.
The precise holding of the court, and all that is before us for review, is that the Smith Act of 1940, [n5] as amended in 1948, [n6] which prohibits the knowing advocacy of the overthrow of the Government of the United States by force and violence, supersedes the enforceability of the Pennsylvania Sedition Act, which proscribes the same conduct.
[t]his Court, in considering the validity of state laws in the light of . . . federal laws touching the same subject, has made use of the following expressions: conflicting; contrary to; occupying the field; repugnance; difference; irreconcilability; inconsistency; violation; curtailment, and interference. But none of these expressions provides an infallible constitutional test or an exclusive constitutional yardstick. In the final analysis, there can be no one crystal clear distinctly marked formula.
Hines v. Davidowitz, 312 U.S. 52, 67. And see Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230-231. In this case, we think that each of several tests of supersession is met.
[t]he scheme of federal regulation [is] so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.
It also contains a legislative finding that the Communist Party is a "Communist action organization" within the meaning of the Internal Security Act of 1950, and provides that "knowing" members of the Communist Party are "subject to all the provisions and penalties" of that Act. [n19] It furthermore sets up a new classification of "Communist-infiltrated organizations," [n20] [p504] and provides for the imposition of sanctions against them.
When Congress has taken the particular subject matter in hand, coincidence is as ineffective as opposition, and a state law is not to be declared a help because it attempts to go farther than Congress has seen fit to go.
touch a field in which the federal interest is so dominant that the federal system [must] be assumed to preclude enforcement of state laws on the same subject.
The Attorney General has been requested by me to instruct the Federal Bureau of Investigation of the Department of Justice to take charge of investigative work in matters relating to espionage, sabotage, and violations of the neutrality regulations.
We are not unmindful of the risk of compounding punishments which would be created by finding concurrent state power. In our view of the case, we do not reach the question whether double or multiple punishment for the same overt acts directed against the United States has constitutional sanction. [n30] Without compelling [p510] indication to the contrary, we will not assume that Congress intended to permit the possibility of double punishment. Cf. Houston v. Moore, 5 Wheat. 1, 31, 75; Jerome v. United States, 318 U.S. 101, 105.
1. Pa. Penal Code § 207, 18 Purdon's Pa.Stat.Ann. § 4207. The text of the statute is set out in an Appendix to this opinion, post, p. 510.
or conduct [intended to] incite or encourage any person to commit any overt act with a view to bringing the Government of this State or of the United States into hatred or contempt.
with intent to defame the . . . government, or either house of the . . . Congress, or the . . . President, or to bring them . . . into contempt or disrepute; or to excite against them . . . the hatred of the good people of the United States. . . .
3. 377 Pa. 58, 104 A.2d 133.
4. 377 Pa. at 69, 104 A.2d at 139.
No question of federal supersession of a state statute was in issue . . . when the Supreme Court upheld the validity of the state statutes in Gitlow v. New York, 268 U.S. 652 (1925), and Whitney v. California, 274 U.S. 357 (1927).
Nor is a State stripped of its means of self-defense by the suspension of its sedition statute through the entry of the Federal Government upon the field. There are many valid laws on Pennsylvania's statute books adequate for coping effectively with actual or threatened internal civil disturbances. As to the nationwide threat to all citizens, imbedded in the type of conduct interdicted by a sedition act, we are -- all of us -- protected by the Smith Act, and in a manner more efficient and more consistent with the service of our national welfare in all respects.
. . . the State knew the conditions which existed and could have a solicitude for the public peace, and this record justifies it. Gilbert's remarks were made in a public meeting. They were resented by his auditors. There were protesting interruptions, also accusations and threats against him, disorder and intimations of violence. And such is not an uncommon experience. On such occasions, feeling usually runs high, and is impetuous; there is a prompting to violence, and when violence is once yielded to, before it can be quelled, tragedies may be enacted. To preclude such result or a danger of it is a proper exercise of the power of the State.
11. See Appendix, post, p. 511. See also the Voorhis Act, passed in 1940, now codified as 18 U.S.C. § 2386 and the Foreign Agents Registration Act, passed in 1938, 22 U.S.C. § 611 et seq.
12. 50 U.S.C. § 781 et seq.
13. Id. § 782(3), (4).
17. Id. §§ 784, 785, 789, 790.
18. 50 U.S.C. (1955 Supp.) § 841.
21. It is worth observing that, in Hines, this Court held a Pennsylvania statute providing for alien registration was superseded by Title III of the same Act of which the commonly called Smith Act was Title I. Title II amended certain statutes dealing with the exclusion and deportation of aliens. The provisions of Title I involve a field of no less dominant federal interest than Titles II and III, in which Congress manifestly did not desire concurrent state action.
22. 50 U.S.C. § 781(15).
23. United States v. Mesarosh [Nelson], 116 F.Supp. 345, aff'd, 223 F.2d 449, cert. granted, 350 U.S. 922.
24. 377 Pa. at 76, 104 A.2d at 142.
25. The Public Papers and Addresses of Franklin D. Roosevelt, 1939 Volume, pp. 478-479 (1941).
27. 377 Pa. at 74-75, 104 A.2d at 141.
Neither the holding of office nor membership in any Communist organization by any person shall constitute per se a violation of subsection (a) or subsection (c) of this section or of any other criminal statute. The fact of the registration of any person under section 787 or section 788 of this title as an officer or member of any Communist organization shall not be received in evidence against such person in any prosecution for any alleged violation of subsection (a) or subsection (c) of this section or for any alleged violation of any other criminal statute.
29. Garner v. Teamsters Union, 346 U.S. 485, 490-491.
30. But see Grant, The Lanza Rule of Successive Prosecutions, 32 Col.L.Rev. 1309.
Congress has not, in any of its statutes relating to sedition, specifically barred the exercise of state power to punish the same Acts under state law. And we read the majority opinion to assume for this case that, absent federal legislation, there is no constitutional bar to punishment of sedition against the United States by both a State and the Nation. [n1] The majority limits to the federal [p513] courts the power to try charges of sedition against the Federal Government.
First, the Court relies upon the pervasivness of the anti-subversive legislation embodied in the Smith Act of 1940, 18 U.S.C. § 2385 the Internal Security Act of 1950, 64 Stat. 987, and the Communist Control Act of 1954, 68 Stat. 775. It asserts that these Acts, in the aggregate, mean that Congress has occupied the "field of sedition" to the exclusion of the States. The "occupation of the field" argument has been developed by this Court for the Commerce Clause and legislation thereunder to prevent partitioning of this country by locally erected trade barriers. In those cases, this Court has ruled that state legislation is superseded when it conflicts with the comprehensive regulatory scheme and purpose of a federal plan. Cloverleaf Butter Co. v. Patterson, 315 U.S. 148. The two cases cited by the Court to support its argument that the broad treatment of any subject within the federal power bars supplemental action by States are of this nature. In our view, neither case is apposite to the Smith Act. The Varnville case dealt with general regulation of interstate commerce making the originating carrier liable to the holder of its interstate bill of lading for damage caused by a common carrier of property. This Court held that the section through the federal commerce power superseded a state right of action against a nonoriginating carrier for damages and a penalty for injury occurring on another line. The pertinent section, 34 Stat. 595, § 7, expressed a controlling federal policy for this commerce. The Rice case dealt with regulations of warehouses. We barred state action in that area because the Act declared that the authority it conferred "shall be exclusive with respect to all persons securing a license" under the Act. 331 U.S. at 224 and 233.
To interfere with the penal laws of a State where they . . . have for their sole object the internal government of the country is a very serious measure which Congress cannot be supposed to adopt lightly or inconsiderately. . . . It would be taken deliberately, and the intention would be clearly and unequivocally expressed.
An army, of course, can only be raised and directed by Congress, in neither has the State power, but it has power to regulate the conduct of its citizens and to restrain the exertion of baleful influences against the promptings of patriotic duty to the detriment of the welfare of the Nation and State. To do so is not to usurp a National power; it is only to render a service to its people. . . .
That declaration springs from the federal character of our Nation. It recognizes the fact that maintenance of order and fairness rests primarily with the States. The section was first enacted in 1825, and has appeared successively in the federal criminal laws since that time. [n11] This Court has interpreted the section to mean that States may provide concurrent legislation in the absence of explicit congressional intent to the contrary. Sexton v. California, 189 U.S. 319, 324-325. The majority's position in this case [p520] cannot be reconciled with that clear authorization of Congress.
1. No problem of double punishment exists in this case. See the Court's opinion, p. 499, and its last paragraph, p. 509. See United States v. Lanza, 260 U.S. 377, 382; The Federalist, No. 32. Cf. Houston v. Moore, 5 Wheat. 1, statement at p. 22 with that at pp. 44-45.
2. Hunt, Federal Supremacy and State Anti-Subversive Legislation, 53 Mich.L.Rev. 407, 427-428; Note, 55 Col.L.Rev. 83, 90.
3. Gilbert v. Minnesota, 254 U.S. 325, 328-333; Reid v. Colorado, 187 U.S. 137, 148; Sinnot v. Davenport, 22 How. 227, 243; Fox v. Ohio, 5 How. 410, 432-435.
4. Forty-two States, along with Alaska and Hawaii, now have laws which penalize the advocacy of violent overthrow of the federal or state governments. Digest of the Public Record of Communism in the United States (Fund for the Republic, 1955) 266-306. In hearings before the House Judiciary Committee on the proposed Smith Act, both witnesses and members of the Committee made references to existing state sedition laws. Hearings before Subcommittee No. 3, Committee on the Judiciary, House of Representatives, on H.R. 5138, 76th Cong., 1st Sess., pp. 7, 69, 83-85. Similar comment was heard in the congressional debates. 84 Cong.Rec. 10452. In fact, the Smith Act was patterned on the New York Criminal Anarchy Statute. Commonwealth v. Nelson, 377 Pa. 58, 86, 104 A.2d 133, 147. The original text of the Smith Act is set out in the hearings before Subcommittee No. 3, supra, p. 1, and the New York Act may be read in Gitlow v. New York, 268 U.S. 652, 654-655. Further evidence of congressional notice of state legislation may be found since the passage of the Smith Act. S.Rep. No. 1358, 81st Cong., 2d Sess., p. 9; H.R.Rep. No. 2980, 81st Cong., 2d Sess., p. 2; H.R.Rep. No.1950, 81st Cong., 2d Sess., pp. 25-46 (Un-American Activities Committee). See 67 Harv.L.Rev. 1419, 1420; 40 Cornell L.Rev. 130, 133.
In the Hines case, a federal system of alien registration was held to supersede a state system of registration. But there, we were dealing with a problem which had an impact on the general field of foreign relations. The delicacy of the issues which were posed alone raised grave questions as to the propriety of allowing a state system of regulation to function alongside of a federal system. In that field, any "concurrent state power that may exist is restricted to the narrowest of limits." P. 68. Therefore, we were more ready to conclude that a federal Act in a field that touched international relations superseded state regulation than we were in those cases where a State was exercising its historic powers over such traditionally local matters as public safety and order and the use of streets and highways.
The Davidowitz case is distinguishable on other grounds. Alien registration is not directly related to control of undesirable conduct; consequently there is no imperative problem of local law enforcement. 102 Pa.L.Rev. at 1091. There is also considerable legislative history behind the Alien Registration Act which suggests that Congress was trying to avoid overburdening of aliens; some features of the conflicting state law had been expressly rejected by Congress. 312 U.S. at 71-73. See 39 Minn.L.Rev. 213. It should be noted also that the coincidence between the state and federal laws in the Davidowitz case was so great that no real purpose was served by the state law. 34 Boston U.L.Rev. 514, 517-518.
6. Such efforts may be punishable crimes. Dennis v. United States, 341 U.S. 494, 508-510.
that the exclusion principle is to be more strictly applied when the Congress acts in a field wherein the constitutional grant of power to the federal government is exclusive, as in its right to protect interstate commerce and to control international relations.
Congress has the exclusive power to legislate concerning the Army and the Navy of the United States, and to determine, among other things, the conditions of enlistment. . . .
. . . The States act only under the express direction of Congress. . . .
. . . As exclusive power over enlistments in the Army and the Navy of the United States and the responsibility for the conduct of war is vested by the Federal Constitution in Congress, legislation by State on this subject is necessarily void unless authorized by Congress. . . . Here, Congress not only had exclusive power to act on the subject; it had exercised that power directly by the Espionage Law before Gilbert spoke the words for which he was sentenced. . . . The States may not punish treason against the United States . . . although indirectly acts of treason may affect them vitally. No more may they arrogate to themselves authority to punish the teaching of pacifism which the legislature of Minnesota appears to have put into that category.
9. See note 4, supra.
. . . the Attorney General of the United States recently informed the attorneys general of the several states . . . that a full measure of federal-state cooperation would be in the public interest. See New York Times, Sept. 15, 1955, p. 19.
11. 4 Stat. 115, 122-123; 18 U.S.C.A. § 3231 (Historical and Revision Notes).
WHITE MOUNTAIN APACHE TRIBE et al., Petitioners, v. Robert M. BRACKER et al.
Paul M. SWEEZY, Appellant, v. STATE OF NEW HAMPSHIRE by Louis C. WYMAN, Attorney General.
PEOPLE OF THE STATE OF NEW YORK Petitioner, v. Joseph C. O'NEILL.
UNITED STATES of America, Petitioner, v. William J. BROSNAN et al. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a National Banking Association, Petitioner, v. UNITED STATES of America.


On Appeal from the United States Tax Court; Nos. 96-18735, 96-18736.
J. Timothy Bender, Joseph P. Alexander, ROETZEL & ANDRESS, Cleveland, Ohio, for Appellants.
Teresa E. McLaughlin, Ann Belanger Durney, Paula K. Speck, U.S. DEPARTMENT OF JUSTICE, APPELLATE SECTION TAX DIVISION, Washington, D.C., for Appellee.
The Commissioner of Internal Revenue (hereinafter "Commissioner") issued notices of tax deficiencies to Michael and Madeline Friedman and Edward and Deborah Rosenthal1 (hereinafter "Taxpayers") for the years 1989 and 1990. The notices stated that Taxpayers were not entitled to a loss in the amount of $5,055,116. As shareholders of an S corporation, Taxpayers made claims for net operating losses of their S corporation, New Manchester, by using the corporation's 1992 discharge of indebtedness income (a.k.a. "COD income") to increase their stock basis, and then in turn, using the increased basis to claim net operating losses from prior years. The Commissioner denied Taxpayers' claims for net operating loss deductions, determining that COD income of an insolvent S corporation cannot be used to increase the shareholders' basis.
Taxpayers petitioned the United States Tax Court for redetermination of the tax deficiencies. The Tax Court upheld the deficiencies, holding that there was no discharge of indebtedness income during the relevant tax year, and thus, New Manchester did not realize COD income for the 1992 taxable year. Further, the Tax Court held that even if the S corporation had realized COD income for 1992, such income does not increase the basis of the shareholders.
Taxpayers filed this timely appeal. For the reasons that follow, we AFFIRM the decision of the Tax Court.
New Manchester is a steel service company which processes and distributes flat rolled steel and other related products. It was incorporated on April 17, 1990, and it had elected to be taxed as an S corporation under Subchapter S of the Internal Revenue Code. Mr. Friedman and Mr. Rosenthal each owned 97.5 shares of New Manchester. Their individual percentage stock ownership was 24.375%. The remaining shareholders, Vernon Bremberg and Irwin Kramer, each owned 102.5 shares. Their percentage of stock ownership was collectively 51.250%.
On or about April 17, 1990, New Manchester acquired portions of the assets of Manchester Consolidated Industries, Inc. (a.k.a. Old Manchester), including cash, accounts receivable, equipment, inventory, land, buildings, improvements, fixtures, goodwill, trade name, and the trade mark from Old Manchester. New Manchester also assumed $12.8 million of Old Manchester's liabilities, including a secured trade debt. New Manchester financed such acquisition using the assets purchased from Old Manchester as security. When New Manchester purchased these assets, Old Manchester amended its Articles of Incorporation and changed its name to E&M Investments Co.
New Manchester was not a successful corporation. It suffered significant operating losses due to a variety of factors. In 1991 and in 1992, New Manchester claimed over $10 million in losses from its trade or business activities. In addition, New Manchester had a number of creditors to whom it owed in excess of $30 million. As a result of the continuing losses, on March 3, 1992, an involuntary petition for bankruptcy was filed on behalf of New Manchester pursuant to Chapter 7 of the United States Bankruptcy Code. A trustee in bankruptcy, who was authorized to operate New Manchester's business, was appointed on March 30, 1992. The trustee engaged in a number of activities on behalf of New Manchester, including the following: collecting accounts receivable, seeking buyers for saleable assets, paying claims, and filing reports with the bankruptcy court.
On May 7, 1992, New Manchester filed a schedule of assets and liabilities and a statement of financial affairs with the bankruptcy court. The schedule stated that New Manchester possessed tangible assets--real and personal property--valued at $9,241,153 and intangible assets--trade name, customer lists, and covenant not to compete--valued at $3,991,457. The schedule also reported liabilities totaling $30,360,669. On July 2, 1992, the trustee's report of sale of New Manchester's tangible assets was filed.
Several of New Manchester's creditors commenced a proceeding in Bankruptcy Court, on December 10, 1992, alleging potential fraudulent conveyances and/or preferential transfers with respect to New Manchester prior to the filing of the petition for bankruptcy. The creditors claimed that such fraudulent conveyances or preferential transfers rendered New Manchester insolvent or undercapitalized. The creditors sought $11 million from Taxpayers and E&M Investments. The bankruptcy court granted the trustee's request to obtain independent counsel to investigate and prosecute such claim in September, 1993. In February, 1994, Taxpayers offered to settle the creditors' claim for $300,000. The offer, however, upon a motion by the trustee, was refused by the court. Eventually, upon a second motion by the trustee, on April 11, 1995, the trustee was authorized to settle the claim for $2.2 million.
Trustee's Final Report, November 30, 1995. A Supplemental Final Report was filed on January 31, 1996. Subsequently, the bankruptcy court issued its final decree on July 15, 1996, thus closing New Manchester's Chapter 7 proceeding and discharging the trustee.
During the pendency of the bankruptcy proceeding, Taxpayers filed joint federal income tax returns with the Internal Revenue Service for the calendar years of 1989, 1990, and 1992. On October 15, 1993, the Friedmans filed an application for a tentative refund, Form 1045, Application for Tentative Refund. The refunds were claimed for 1989 and 1990 in the amounts of $765,440 and $792,469, respectively. In such application, the Friedmans claimed net operating loss deductions from carrybacks relating to Mr. Friedman's stock interest in New Manchester.
On November 12, 1993, the Rosenthals filed a Form 1045, Application for Tentative Refund. The tentative refunds were claimed for 1989 and 1990 in the amounts of $834,729 and $810,331, respectively. The Rosenthals also claimed net operating loss deductions in its application from carrybacks relating to Mr. Rosenthal's stock interest in New Manchester. The Rosenthals filed an amended tax return for the 1988 tax year, claiming a carryback of a net operating loss for the years 1988 to 1991.
In its federal income tax return for 1991, Form 1120S, New Manchester claimed a loss of $10,102,289. In its tax return for 1992, New Manchester claimed a loss of $10,751,953.
The Commissioner issued notices of deficiencies to Taxpayers for the calendar years 1989 and 1990, on May 29, 1996. The Commissioner stated that Taxpayers owed additional amounts as follows: The Friedmans owed $686,400 for 1989 and $793,860 for 1990; and the Rosenthals owed $617,446 for 1989 and $811,723 for 1990. The notices of deficiencies stated that, for the taxable year ending 1992, Taxpayers were not entitled to a loss in excess of $5 million each from their interest in New Manchester. The Commissioner found that Taxpayers were not entitled to increase their basis in New Manchester by the cancellation of indebtedness income. Thus, Taxpayers' 1992 taxable income was increased accordingly.
Subsequently, Taxpayers filed separate petitions with the United States Tax Court, on August 27, 1996, for a redetermination of their respective income tax deficiencies for the taxable years at issue. In each case, Taxpayers claimed entitlement to the 1992 loss and carried the loss back to their respective tax years of 1989 and 1990. The two petitions were consolidated for the purpose of briefing and opinion in the Tax Court.
On May 27, 1998, the Tax Court issued its opinion, upholding Taxpayers' tax deficiencies. In its opinion, the Tax Court stated that the principal issue before it was whether Taxpayers were entitled to increase their basis in the S corporation's stock as a result of any COD income realized by the corporation. Initially, however, the Court found that pursuant to the plain language of section 108(d)(2) of the Internal Revenue Code, New Manchester had not realized a discharge of indebtedness, or COD income, in 1992. The Court observed that the trustee in New Manchester's bankruptcy case was actively conducting New Manchester's business and disbursing monies to creditors after 1992. The Court noted, in particular, that New Manchester's creditors filed a fraudulentconveyance claim in December of 1992; the claim was not settled until 1995. Further, the Court noted that the trustee's final report, which concluded that all claims pertaining to New Manchester had been settled, was filed in 1995.
The Tax Court, therefore, held that the facts and circumstances as outlined above do not even suggest that New Manchester's underlying indebtedness was extinguished or discharged by the bankruptcy court in 1992. In addition, the Court was not persuaded that New Manchester's insolvency, in and of itself, in 1992, was sufficient to create a de facto discharge, as argued by Taxpayers. Finally, the Tax Court held that even if New Manchester had realized COD income in 1992, such income would not have increased Taxpayers' basis in the corporate stock because section 108(d)(7)(A) of the Internal Revenue Code prevents a pass-through to shareholders of COD income which is excluded from an S corporation's gross income.
Taxpayers' appeal follows the decision of the Tax Court.
The primary issue in this case is whether Taxpayers are entitled to an increase in their basis in an S corporation's stock as a result of the discharge of indebtedness income, or COD income, realized by the corporation. As a threshold matter, however, we must determine whether New Manchester actually realized COD income in 1992, which would, in turn, establish whether Taxpayers may claim, and carry back, a loss in excess of $5 million each.
This Court reviews the Tax Court's findings of fact for clear error and its application of law de novo. Ekman v. Commissioner, 184 F.3d 522, 524 (6th Cir.1999). Regarding the specific question of the timing of the discharge of indebtedness, however, Taxpayers present two possible standards of review.
In the main body of their brief, Taxpayers state that the time of the discharge is essentially a question of fact which would be subject to review for clear error. Taxpayers Br. at 18 (citing Carl T. Miller Trust v. Commissioner, 76 T.C. 191, 195 (1981)("Determination of the point in time at which a taxpayer's obligation has been cancelled, giving rise to income, is essentially a question of fact."); Taxpayers Br. at 24 (concluding that the Tax Court's finding "that no discharge occurred in 1992" is clearly erroneous). However, in the section of their brief entitled "Standard of Review," Taxpayers suggest that "whether sufficient evidence has been submitted to meet a party's burden is a mixed question of law and fact." Taxpayers Br. at 38. Taxpayers appear to reach this conclusion by combining two prior assertions: (1) that the sufficiency of evidence submitted by a party is a question of fact that will not be disturbed unless clearly erroneous4; and (2) that the allocation of the burden of proof is a question of law.
In support of this latter proposition, that the allocation of the burden of proof is a question of law and whether sufficient evidence has been submitted is a mixed question of law and fact, Taxpayers cite two old cases from other circuits, without specific page references: (1) Kendrick Coal & Dock Co. v. Commissioner, 29 F.2d 559 (8th Cir.1928); and (2) Commissioner v. Cecil B. DeMille Productions, Inc., 90 F.2d 12 (9th Cir.1937). In Kendrick, the most relevant language states that "[w]hether a particular finding of fact is supported by any substantial evidence is a question of law." 29 F.2d at 563. The second case cited contains no language that would be beneficial to Taxpayers' position.
Commissioner does little to respond to Taxpayers' propositions concerning the appropriate standard of review with respect to the timing of the discharge. Commissioner states only that Taxpayers "acknowledge" that the timing of realization of discharge of indebtedness "is a question of fact, subject to the clearly erroneous standard of review." Commissioner Br. at 18.
Contrary to Taxpayers' second contention regarding the standard of review, this Court finds that the Tax Court's decision regarding the timing of the discharge should be reviewed for clear error. This circuit recently referred to a determination of whether taxpayers failed to carry their burden of proving that they engaged in activities within the meaning of a statute as a "factual conclusion." See Holmes v. Commissioner, 184 F.3d 536, 543 (6th Cir.1999). Such reference indicates that this circuit views the issue of a whether a party presented evidence sufficient to meet its burden of proof as a question of fact, subject to review for clear error. See also In re Newman, 7 F.3d 234 (Table), 1993 WL 328035, *2 (6th Cir.1993)(unpublished opinion)("The question of whether a particular set of facts satisfies (or fails to satisfy) the requisite burden of proof is an inseparable part of the factfinding process and as such is reviewed -- together with the facts -- for clear error.")(citing 1 Steven A. Childress & Martha S. Davis, Federal Standards of Review §2, 18, at 2-130 (2d ed. 1991)).
Based on this Rule, Taxpayers contend that the question of whether the discharge of indebtedness occurred in 1992, as opposed to another year, is a "new matter." Taxpayers argue, therefore, that Commissioner bears the burden of proof. Without resolving this issue, the Tax Court merely concluded that if the burden were shifted to Commissioner, "he would have fulfilled that requirement by a substantial preponderance of the evidence." J.A. at 43.
IT IS DETERMINED THAT FOR THE TAXABLE YEAR ENDING 1992, YOU ARE NOT ENTITLED TO A LOSS IN THE AMOUNT OF $5,055,116.00 FROM THE SMALL BUSINESS CORPORATION KNOWN AS MANCHESTER STEEL, INC. YOU ARE NOT ENTITLED TO INCREASE YOUR BASIS IN THE CORPORATION BY THE CANCELLATION OF INDEBTEDNESS INCOME. INTERNAL REVENUE CODE SECTION 108(d)(7) PROVIDES THAT THE EXCLUSION FOR CANCELLATION OF INDEBTEDNESS INCOME WILL APPLY AT THE ENTITY LEVEL IN THE CASE OF CANCELLATION OF AN S CORPORATION'S DEBT. CONSEQUENTLY, IF THE CANCELLATION OF DEBT IS EXCLUDED AT THE CORPORATE LEVEL, THERE IS NO INCOME ITEM TO FLOW THROUGH TO THE SHAREHOLDERS AND NO INCREASE IN YOUR STOCK BASIS. ACCORDINGLY, YOUR 1992 TAXABLE INCOME IS INCREASED $5,055,116.00.
IN ADDITION, THIS AMOUNT EXCLUDED FROM INCOME, UNDER SECTION 108 OF THE INTERNALREVENUE CODE, IS TAX-DEFERRED INCOME, NOT TAX-EXEMPT. ACCORDINGLY, THERE IS NO INCREASE TO YOUR STOCK BASIS UNDER SECTION 1366 OF THE INTERNAL REVENUE CODE. THEREFORE, SINCE YOU HAD A $0.00 BASIS IN THIS STOCK, YOU ARE NOT ENTITLED TO THE CURRENT YEAR AND/OR SUSPENDED YEAR LOSSES CLAIMED.
IN ADDITION, YOU WOULD NOT BE ELIGIBLE FOR THE LOSS IN THE AMOUNT OF $5,055,116.00 ON YOUR 1992 RETURN SINCE YOU WERE NOT AT RISK FOR THESE LOSSES WITHIN THE MEANING OF SECTION 465 OF THE INTERNAL REVENUE CODE.
J.A. at 19 (Friedman Notice); J.A. at 33 (Rosenthal Notice). According to Taxpayers, the Notice presupposes the fact of the discharge of indebtedness, and it fails to raise a question as to the timing of the discharge; hence, it is a "new matter" pursuant to Tax Rule 142(a). Commissioner, on the other hand, contends that the Notice clearly made Taxpayers aware that Commissioner denied that New Manchester had incurred discharge of indebtedness income in 1992, and it was sufficiently broad to cover both the timing and the occurrence of such income.
As previously stated, petitioners (Taxpayers) generally bear the burden of proof. Tax Rule 142(a); Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933). The respondent (Commissioner), however, bears the burden as to "any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer." Tax Rule 142(a). The issue, therefore, becomes whether the timing of the discharge of indebtedness is a "new matter."
A new position taken by Commissioner is not necessarily a "new matter" if it merely clarifies or develops Commissioner's original determination without requiring the presentation of different evidence, being inconsistent with Commissioner's original determination, or increasing the amount of the deficiency. Achiro v. Commissioner, 77 T.C. 881, 889-91 (1981). In Zarin v. Commissioner, 92 T.C. 1084, 1089 (1989), remanded on other grounds, 916 F.2d 110 (3d Cir.1990), the Third Circuit found that new matter had been raised when the original notice of deficiency asserted a theory of larceny and the answer to the petition in Tax Court raised a theory of income from discharge of indebtedness. In reaching its conclusion, the Zarin Court determined that the latter theory clearly required different evidence from the ground originally asserted in the petition.
The Tax Court specifically addressed a timing issue with respect to "new matters" in Hunter v. Commissioner, 44 T.C.M. (CCH) 385, 1982 WL 10676 (1982). In this case, the question was whether the petitioner's stock became worthless during the year in question. Respondent did not raise the issue in his notice of deficiency or in the pleadings of the case. While the petitioner elicited testimony concerning the timing of the worthlessness of the debt during trial, he argued that the year of the loss was a new matter. The Tax Court agreed with the petitioner and found that a challenge to the ordinary character of a loss does not necessarily encompass a challenge to the fact of the loss. Hunter, 1982 WL 10676, at *20. In reaching its conclusion, the Court reasoned that "the issue of the timing of the loss would appear to be conceded, for if the loss was not properly taken in the year before the Court, the issue of the character of the loss becomes moot." Id.
This Court finds Taxpayers' argument on this point persuasive. The Notice of Deficiency issued to Taxpayers presumes the existence of a discharge of indebtedness in stating: (1) You are not entitled to increase your basis in the corporation by the cancellation of indebtedness income; and (2) If the cancellation of debt is excluded at the corporate level,there is no income to flow through to the shareholders.... (emphasis added). Commissioner's challenge to Taxpayers' loss was aimed at the nature or character of the loss, not the year it allegedly occurred. Commissioner's raising of the general existence of the alleged loss does not necessarily implicate a challenge to the timing of the alleged loss.
Furthermore, Commissioner failed to raise specifically the question of the existence or the timing of the income despite having the opportunity to do so and despite advancing other theories for the deficiencies. Such other theories include the following: (1) the exclusion of Section 108 of the Internal Revenue Code applies at the corporate level, therefore, there is no income to flow through to the shareholders; (2) the amount excluded is tax-deferred income, not tax-exempt income; and (2) Taxpayers were not at risk for the 1992 loss pursuant to Section 465 of the Internal Revenue Code.
Therefore, in light of the foregoing, this Court finds that the issue of the timing of the discharge of indebtedness income is a "new matter" for consideration. The assertion, subsequent to the Notice of Deficiency, that New Manchester did not experience a discharge of indebtedness in 1992 as a basis for disallowing the loss claimed by Taxpayers is new grounds for disallowance; it does not clarify or develop an original determination by Commissioner. The new grounds requires the introduction of different evidence. As such, as justice and fairness require, the burden of proving that the discharge did not occur in the year at issue is on Commissioner.
The Notice of Deficiency issued to Taxpayers states that Taxpayers are not entitled to a loss in the amount of $5,055,116.00 from New Manchester and they are not entitled to increase their basis in the corporation by the cancellation of indebtedness income. In order to resolve this issue, the Court must determine, initially, whether New Manchester realized a discharge of indebtedness income, or COD income, for the taxable year ending 1992.
Taxpayers argue that there was a discharge of indebtedness in 1992 because it was clear at the end of 1992 that $19,471,684 of New Manchester's indebtedness would never be repaid. Taxpayers reached this determination as follows: When the bankruptcy proceeding began, New Manchester had liabilities of $30,360,669 and assets of $9,241,153. By December 31, 1992, as the parties have stipulated, the value of New Manchester's assets was $1,488,985.78, in addition to a fraudulent conveyance claim filed by New Manchester's creditors. The claim had an anticipated value of $2,400,000. Because New Manchester had paid $7 million to one of its creditors in 1992, Taxpayers assert that New Manchester's remaining liabilities, as of December 31, 1992, totaled $23,360,669 (the initial liabilities of $30,360,669 minus $7,000,000). Taxpayers thereby determined that the excess of New Manchester's liabilities over the fair market value of its assets was $19,471,684 ($23,360,669 (liabilities) minus $1,488,985.78 (assets) minus $2,400,000 (anticipated value of the fraudulent conveyance claim)). Moreover, Taxpayers point to the stipulation of the parties whereby Taxpayers and Commissioner stated that "[a]s of December 31, 1992, it was clear that prepetition indebtedness in excess of the value of these assets would never be repaid." J.A. at 64. Thus, Taxpayers contend that since it was stipulated that indebtedness in excess of the value of New Manchester's assets as of December 31, 1992 would never be repaid, there was, effectively, a discharge in the amount of $19,471,684 in 1992.
Commissioner, on the other hand, maintains that there was no discharge because there was no identifying event in 1992 demonstrating that a debt had been discharged. In support of his position, Commissioner emphasizes two points: First, the stipulated record demonstrates thatthe bankruptcy trustee was actively administering the bankruptcy estate well into 1995, collecting accounts receivable, seeking buyers for saleable assets, and filing reports with the bankruptcy court. Second, a claim for fraudulent conveyance in the amount of $11 million was initiated by several of New Manchester's creditors. While at one point Taxpayers offered to settle the claim for $300,000, it was eventually settled in 1995 for $2.2 million. Based upon the fluctuation in anticipated value, initial offer, and actual settlement, Commissioner contends that the value of the fraudulent conveyance claim was highly uncertain. Therefore, for all of these reasons, Commissioner maintains that no event had occurred in 1992 to fix a discharge of indebtedness, nor could there have been any certainty at that time as to the amount of any discharge.
The Tax Court agreed with Commissioner in that some sort of identifying event or forgiveness on the part of the creditors was necessary in order to give rise to a discharge of indebtedness income in 1992. Accordingly, the Court held that the evidence supported the conclusion that New Manchester did not realize COD income in the year at issue since no identifiable event occurred.
"Gross income" is defined in the Internal Revenue Code as "all income from whatever source derived...." 26 U.S.C. §61(a). It includes income from discharge of indebtedness, or cancellation of indebtedness (COD income). 26 U.S.C. §61(a)(12). This means that a taxpayer who has incurred a financial obligation, which obligation is later discharged or the taxpayer is released from the indebtedness, has realized an accession to income. 26 U.S.C. §61(a)(12); United States v. Kirby Lumber Co., 284 U.S. 1 (1931). The rationale of this principle is that the discharge of a debt below the face value of the debt accords the debtor an economic benefit equivalent to income. Id.
(a) Exclusion from gross income.
(D) in the case of a taxpayer other than a C corporation, the indebtednessdischarged is qualified real property business indebtedness.
26 U.S.C. §108(a)(1). In the instant matter, the relevant exception is "the discharge occurs in a title 11 case," as Taxpayers filed a petition for bankruptcy on March 3, 1992. Section 108(d)(2) defines a "title 11 case" as "a case under title 11 of the United States Bankruptcy Code (relating to bankruptcy), but only if the taxpayer is under the jurisdiction of the court in such case and the discharge is granted by the court or is pursuant to a plan approved by the court." 26 U.S.C. §108(d)(2).
First and foremost, in order for COD income to occur under section 61(a)(12), the taxpayer must have been discharged from a liability. Such liability, or debt, must be viewed as having been discharged when it becomes clear that the debt will never have to be paid. Cozzi v. Commissioner, 88 T.C. 435, 445 (1987). The test for determining such a moment is a practical assessment of the facts and circumstances relating to the likelihood of payment. Cozzi, 88 T.C. at 445 (citing Brountas v. Commissioner, 74 T.C. 1062, 1074 (1980), supp. opinion to 73 T.C. 491 (1979), vacated and remanded on other grounds, 692 F.2d 152 (1st Cir.1982), aff'd in part and rev'd in part on other grounds sub nom. CRC Corp. v. Commissioner, 693 F.2d 281 (3d Cir.1982)). "Any 'identifiable event' which fixes the loss with certainty may be taken into consideration." Cozzi, 88 T.C. at 445 (citing United States v. S.S. White Dental Mfg. Co., 274 U.S. 398 (1927)).
Taxpayers rely on Cozzi v. Commissioner, supra, in support of their position that in December, 1992, it was clear that part of New Manchester's indebtedness, in the amount of $19,471,684, would never be repaid. Cozzi involved a limited partnership, Hap Production Company ("Hap"), formed for the purpose of producing motion picture films. Hap entered into an agreement with Map Films, Ltd. to produce a film for Map Films in return for annual payments from 1976 through 1981. Another party, Barongreen agreed to produce the film for Hap in exchange for certain annual payments from 1976 through 1979 to Hap on behalf of Map Films. Hap entered into a nonrecourse loan agreement with Sargon Establishment whereby Hap agreed to repay such loan in annual payments between 1976 and 1980.
The film produced by the parties never made a profit. Consequently, none of the annual payments by Map Films, Barongreen, or Hap was ever made. Hap's tax returns for 1976 through 1980 reported no activity. In 1984, the parties entered into settlement agreements whereby each party was released from any contractual obligations, and Sargon received the rights to the film. As a result of the cancellation of its nonrecourse debt to Sargon, Hap reported income for 1984. Petitioner, a limited partner in Hap, reported his distributive share of such income on his tax return for 1984.
The Commissioner issued a tax deficiency, stating that the petitioners received income from Hap in 1980 as a result of Hap recognizing income in that year. As stated by Commissioner, a possible explanation for Hap's recognition of income in 1980 was the fact that Hap's nonrecourse loan from Sargon was discharged. As in the present case, the dispute in Cozzi is not whether a discharge of indebtedness occurred, rather it is in which year such income is recognizable.
In finding that Hap recognized a discharge of indebtedness in 1980, the Cozzi Court looked for an identifiable event to demonstrate the abandonment of security for a debt that would, in turn, show a release from debt and corresponding COD income. In viewing all of the circumstances surrounding the various agreements, the court concluded that Sargon had no intention of enforcing its rights against Hap under the loan agreement, and the scheduled final payment by Hap to Sargon in 1980, under the loan agreement,"was an 'identifiable event' sufficient to evidence Hap's abandonment of the picture." Cozzi, 88 T.C. at 447. With no payment made by Hap to Sargon and no arrangement by the parties to defer such payment, "[t]he final payment under [the loan agreement] was an important event, and the failure to make such payment is clear evidence of abandonment." Id. In so holding, the court noted that the failure to make the final payment was not the only identifiable event, but it was a reasonable choice. Id. Thus, Hap realized a discharge of indebtedness in the taxable year 1980.
Taxpayers also cite Fidelity-Philadelphia Trust Co. v. Commissioner, 23 T.C. 527 (1954) in support of their argument that New Manchester realized a discharge of indebtedness in 1992. In Fidelity-Philadelphia Trust Co., the taxpayer was incorporated as a national bank in 1934. At that time, it acquired various assets and assumed certain liabilities of a liquidated national bank. Among such liabilities were certain depositors' accounts of the liquidated bank.
In 1948, after fruitless searches to locate depositors by mail, advertising, and other means, the taxpayer bank transferred to its surplus account several of the depositors' accounts which were unclaimed, dormant, and inactive. In doing so, the bank closed out its unclaimed deposit accounts. On its tax return for 1948, the monies resulting from the closing of the above accounts was shown as "a Sundry Credit to Earned Surplus," not as income. In assessing a tax deficiency, Commissioner treated this amount as additional income.
While the taxpayer bank maintained that it received no income in the year at issue because the bank was still liable in full to the depositors, the Tax Court held that in exercising control over the accounts, the bank realized income with respect to those accounts. The court determined that the act of a book entry closing out the accounts with old deposits and placing the money in a surplus account created income in the year in which it was done. Fidelity-Philadelphia Trust Co., 23 T.C. at 530. In reaching its conclusion, the court considered the fact that the bank would most likely not have to honor its obligations to the depositors in question, and the probability of having to make payments to the depositors in the future was slim enough that the income could be determined to be in the year of the book entry. Id.
Taxpayers, in the present case, contend that both Cozzi and Fidelity-Philadelphia Trust Co. endorse the proposition that the improbability of future payment is the triggering event for determining the occurrence of a discharge of indebtedness. Taxpayers Br. at 19. As such, because it was clear as of December 31, 1992 that New Manchester's debt of over $19 million would never be repaid, as stipulated by the parties, such debt must be viewed as having been discharged in that year.
Taxpayers, however, are only partly correct. In Fidelity-Philadelphia Trust Co., the Tax Court considered the improbability of the bank ever having to honor the obligation of its depositors in holding that the bank realized income the year it closed the accounts at issue. Fidelity-Philadelphia Trust Co., 23 T.C. at 530. The court reasoned that the possibility that the taxpayer might have to make a payment to a depositor in a later year may give it a right to a deduction in such year; however, "it does not prevent the inclusion of the unclaimed deposits in gross income in the earlier year, when such future payment appears improbable." Id. at 531. Similarly, much later in Cozzi, the court contemplated the likelihood of payment in holding that it was not likely that a future payment on the loan agreement would be made; therefore, the project (and the loan) was deemed abandoned. Cozzi, 88 T.C. at 445-447.
While the cases cited above do rely on the importance of, among all the facts and circumstances of the particular case, the improbability that a debt will actuallyhave to be paid, these cases also stand for the proposition that there must also be some identifiable event which fixes the loss with certainty. See Cozzi, 88 T.C. at 445. The Tax Court considered the likelihood of payment on the debts in the above cases cited by Taxpayers; however, as Commissioner correctly notes, both cases also contain some identifiable event from which the Tax Court determined that a discharge of debt had occurred. In contrast to Cozzi and Fidelity-Philadelphia Trust Co., there is no identifiable event in the instant matter from which this Court can determine that a loss was fixed with certainty, or that a discharge of debt occurred.
The record demonstrates that not only was the bankruptcy proceeding still pending as of December 31, 1992, the bankruptcy trustee was actively conducting New Manchester's business at that time and well into the next couple of years. Such activity included collecting accounts receivable, seeking buyers for saleable assets, and filing periodic reports with the bankruptcy court concerning assets, receipts, and disbursements. In fact, in addition to a report filed in August of 1992, the trustee filed reports with the court in January, 1993, and January, 1995. Moreover, the trustee filed his Final Report on November 30, 1995. The report included a "Cash Receipts and Disbursement Record" which identified numerous transactions in New Manchester's bank accounts throughout 1994 and 1995. The trustee filed a Supplemental Final Report in 1996.
Further evidence that a discharge had not occurred in 1992 is the fraudulent conveyance claim filed in December, 1992, by several of New Manchester's creditors for $11 million. The trustee obtained independent counsel to investigate the claim in September, 1993. While Taxpayers initially offered $300,000 in February of 1994, to settle the creditors' claim, this offer was refused by the bankruptcy court. The claim was eventually settled on or about April 11, 1995, for $2.2 million. These facts demonstrate that not only was the fraudulent conveyance claim still pending after 1992, but the value of the claim was in dispute well into 1995. Thus, because the value of the claim was uncertain in 1992, the actual amount New Manchester's estate would realize from the claim was not ascertainable in that year. Therefore, the total debt that would be discharged could not have been discerned in 1992.
In light of the above, regardless of how improbable it was that all of, or any of, New Manchester's outstanding liabilities would be paid, the fact remains that no identifying event occurred from which this Court can determine the debt was discharged8. See Cozzi, 88 T.C. at 445. Onthe contrary, the evidence shows that the bankruptcy trustee was actively administering New Manchester's estate well into 1995, collecting and disbursing monies. Moreover, some of New Manchester's creditors were, in fact, actively pursuing payment owed them as evidenced by the fraudulent conveyance claim filed in December, 1992.
In view of all the circumstances, this Court finds that no identifying event occurred in 1992 to fix the date of discharge of indebtedness in that year. The absence of anything in the record, including the stipulation of the facts by both Commissioner and Taxpayers, even suggesting an identifiable event in 1992, satisfies Commissioner's burden in that regard. Accordingly, the Tax Court did not commit clear error in finding that a discharge of indebtedness did not occur during the 1992 taxable year.
Taxpayers also contend that the income from the discharge of indebtedness passes through to them as shareholders of New Manchester, an S corporation. As a result, Taxpayers contend, the basis of their stock in New Manchester increases. Because the Court found herein that Taxpayers did not realize a discharge of indebtedness, or COD income, in 1992, there is no need to address the pass-through issue at this time. Should Taxpayers, however, wish to claim the COD income for a different year, they can refer to Gaudiano v. Commissioner, No. 99-1294, in which this Court decided the issue concerning a shareholder's COD income and his stock basis, for guidance.
In sum, the Court finds that the Tax Court did not commit clear error in holding that New Manchester did not realize COD income for the 1992 taxable year. Accordingly, we AFFIRM the judgment of the Tax Court.
Appellants' counsel filed notice with the Court that Michael Friedman passed away recently; however, counsel stated that Mr. Friedman's death would not affect the continuation of this matter.
A Subchapter S corporation is a small corporation that has elected, under the Internal Revenue Code ("IRC"), to be taxed similarly to partnerships. When a corporation has elected to be taxed under Subchapter S, the corporation itself is not subject to income tax. Rather, the income tax is imposed directly on the shareholders on a pro rata basis. In other words, the corporation's income "passes through" to the shareholders, who then report that income on their individual tax returns. See 26 U.S.C. §1366.
Hereafter, "Taxpayers" shall refer to Michael Friedman and Edward Rosenthal.
Taxpayers cite Hoover v. Commissioner, 102 F.3d 842 (6th Cir.1996), which supports only the portion of the assertion that a question of fact is reviewed for clear error. See Hoover, 102 F.3d at 844.
The burden of proof does not change when a case is fully stipulated, as is presently the case before this Court. See Tax Rule 122(b); Zarin v. Commissioner, 92 T.C. 1084, 1088 (1989), remanded on other grounds, 916 F.2d 110 (3d Cir.1990).
Perhaps Commissioner could have stipulated that "it was clear that prepetition indebtedness in excess of the value" of specific assets and the fraudulent conveyance claim would never be repaid, in order to address the indebtedness without committing to an assertion that over $19 million would clearly never be repaid.
Without considering the requirement of an identifiable event, the Court notes first, as a technical matter, that according to the United States Bankruptcy Code, a "discharge" may not be granted in a chapter 7 proceeding to a corporation. 11 U.S.C. §727(a)(1). Section 727(a)(1) states that "[t]he court shall grant the debtor a discharge, unless...the debtor is not an individual." 11 U.S.C. §727(a)(1). Therefore, New Manchester, as a corporate debtor, cannot obtain a "discharge" under the chapter 7 petition it filed with the Bankruptcy Court on March 3, 1992.
Taxpayers also argue that by virtue of New Manchester's insolvency, as effectively stipulated by the parties, there was a de facto discharge, pursuant to 26 U.S.C. §108(a)(1)(B). While it may be true that because of New Manchester's insolvency its liabilities would unlikely be paid, the result is the same. There must be some identifiable event to demonstrate that the debts were, in fact, discharged. Cozzi, 88 T.C. at 445. In this case, there was no such event. This Court agrees with the Tax Court's disposition in that regard.


Pharmaceutical patents come in many different forms. Some forms include method-of-use patents, namely, a method of administering this drug to treat that disease. Sometimes those method-of-use patents contain a diagnostic determination. For instance, the claim may take the form: measure the patient’s X, and if X is above or below a certain threshold, then administer a lower or higher dosage of drug Y.
Often times, the diagnostic components of these patents—measuring some criteria in the patient before determining how to administer the drug—is based upon a discovery by the inventors. For instance, in Endo Pharmaceuticals, Inc. v. Teva Pharmaceuticals USA, Inc., 2017-1240 (Mar. 28, 2019), the asserted patent was based upon the purported discovery that patients with renal impairment required less oxymorphone to sustain the same blood concentration levels. More specifically, the patent disclosed a study showing that plasma AUC for oxymorphone correlated with the degree of a patient’s renal impairment, which was indicated by their creatinine clearance rate. Given that discovery, the patent was directed to a method of “measuring a creatinine clearance rate of a patient” and, based upon that measurement, administering a lower dosage of oxymorphone to sustain an average 12-hour AUC of about 21 ng-hr/mL.
The issue with these types of patents is that the inventor’s discovery, namely, the relationship between the patient’s measured criteria and the condition, is technically a law of nature. And under Section 101 of the Patent Statute, laws of nature cannot be claimed in a patent. The theory is that is laws of nature could be patented, that would preempt whole fields of scientific research. Likewise, when courts wrestle with the question of whether a diagnostic patent is directed to ineligible subject matter, they fundamental inquiry is whether the patent simply claims a law of nature. Indeed, in the Endo case, the district court originally found the patent simply covered a law of nature—the relationship between the severity of renal impairment and the bioavailability of oxymorphone—to determine the correct dose.
The Federal Circuit disagreed. In finding the patent was not directed to ineligible subject matter under § 101, the Court explained that patent may have been based upon the inventor’s discovery of a law of nature—namely, the relationship between renal impairment and oxymorphone’s bioavailability. But the patent did not simply claim that law of nature. Rather, it was directed to a specific method of treatment, namely, a method to treat pain in renally-impaired patients.
In another recent case, Natural Alternatives Int’l Inc. v. Creative Compounds, the Federal Circuit applied the same reasoning to reverse a district court’s finding that a method-of-use patent was also simply claiming a natural law. 2018-1295 (Fed. Cir. Mar. 15, 2019). The patents covered a method of administering beta-alanine, which is an amino acid, to increase the anaerobic working capacity of an athlete’s muscles. (Another asserted patent involved ingesting beta-alanine to regulate hydronium ion concentration in tissue.) The district court held the patents simply covered a natural law—namely, beta-alanine, a natural substance, will increase a human’s anaerobic working capacity by increasing carnosine concentration in human tissue.
The Federal Circuit disagreed. Much like in Endo, it held that the patent does not simply embody the discovery that ingesting bet-alanine will increase levels of creatine, and thus, improve an athlete’s performance. Rather, the patens “require that an infringer actually administer the dosage form in the manner claimed.” (Slip Op. at 8). In other words, the patents required an affirmative treatment step.
In both cases, the Court relied heavily on Vanda Pharmaceuticals Inc. v. West-Ward Pharmaceuticals Int’l Ltd., 887 F.3d 1117 (Fed. Cir. 2018), and held the claims legally indistinguishable. In Vanda, the patent was based upon the discovery that patients who are poor CYP2D6 metabolizers can be treated more safely—and avoid risks of cardiac problems—with lower dosages of iloperidone. The patent covered a method of treating schizophrenia with iloperidone, where the dose is adjusted based on whether the patient is a CYP2D6 poor metabolizer.
In both Vanda and Endo, for instance, the patent included a testing step and an administration step. In Vanda, the testing step was genetic testing to determine if the patient was a CYP2D6 poor metabolizer, and the administration step was administering 12 mg/day of iloperidone if the patient is a CYP2D6 poor metabolizer, and more if the patient is not. In Endo, the testing step was measuring a patient’s creatinine clearance rate to determine the degree of the patient’s renal impairment, and the administration step was administering a lower dosage based on the patient’s degree of renal impairment to sustain average AUC of oxymorphone over 12 hours at a specified amount.
In Endo, the Court also distinguished the Supreme Court’s decision in Mayo Collaborative Servs. v. Prometheus Labs., Inc., 566 U.S. 66 (2012), where the patent was deemed to be subject to ineligible subject matter. Most importantly, the Court found that the patent in Mayo was not directed to actually treating a patient—“the claim as a whole was not directed to the application of a drug to treat a particular disease.” (Endo, Slip Op. at 12).
The patent claim in Mayo did, in fact, have an administering step, which recited, “administering a drug providing 6-thioguanine to a subject having said immune-mediated gastrointestinal disorder.” Yet, the Court in Endo distinguished Mayo’s administering step from the administering steps in Endo and Vanda. Specifically, in Endo and Vanda, the administration step—the step involving actually giving the drug to a patient—was based upon the results of the testing step. Indeed, the testing step preceded the administration step. By contrast, the administration step in Mayo was the first step in the claim. It was not based upon prior testing. Rather, in Mayo, the drug is first administered to the patient, and next, the patient’s level of 6-thioguanine is measured, and the results of that measurement “indicates a need” to either increase or decrease the dosage.
Similarly, the Court in Endo also distinguished Ariosa Diagnostics, Inc. v. Sequonom, Inc., 788 F.3d 1371 (Fed. Cir. 2015). There, the patent was directed not to a method of treatment, but rather to a method of detecting paternally-inherited cell-free fetal DNA. That, the Court held, was simply directed to applying routine techniques to detect what the inventors purported to discover—namely, the presence of cell-free fetal DNA in maternal plasma or serum. The take-away is that a patent directed to detecting an aspect of a patient is presumably not eligible, whereas a patent directed using that detection to change some aspect of the patient is eligible.
These cases thus provide guidance for when disagnostic, method-of-treatment patents will pass muster under Section 101. In short, to avoid claiming ineligible subject matter, it is helpful that the patent is directed to treating a specific condition. In Natural Alternatives, the Court stated that the claims “require specific steps to be taken in order to bring about a change in a subject, altering the subject’s natural state.” (Slip Op. at 10-11).


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Persons under the age of 16 should not submit any personal data to us without the consent of their parents or guardians. We do not solicit personal information from children and adolescents, do not collect them and do not share them with third parties.
Your data entered in the newsletter registration will remain with us until you unsubscribe from our newsletter. Unsubscribing is possible at any time by using the link provided in the newsletter or a corresponding message to us. With the unsubscription you object to the use of your e-mail address. Your e-mail address, your last name as well as other data transmitted in connection with the newsletter registration will be deleted immediately.
The processing takes place on the basis of a consent by the respective recipient in accordance with Art. 6 para. (1) (a), Art. 7 GDPR i. V. m. § 7 para. 2 No. 3 UWG or § 7 para. 3 UWG. The proof of the user's registration for our newsletter is based on our legitimate interest in accordance with. Art. 6 para. 1 lit. f) GDPR, as this allows us to prove consent. The e-mail address, which must absolutely be specified by the user, is stored for this purpose until the user revokes their consent to receive the newsletter.
We set up a password protected direct access to their stored stock data (customer account) for each customer who registers accordingly. Here you can view data about your completed, open and recently sent orders and manage their address details, bank details and newsletter. You agree to treat the personal access data as confidential and to not make it accessible to unauthorised third parties. We cannot accept liability for misused passwords unless we are responsible for the misuse.
With the function “remain logged in” we would like to make your visit of our web pages as pleasant as possible. This feature allows you to use our services without having to log in again each time. For security reasons, however, you will be asked again to enter your password, for example, if you want to change your personal information or if you want to place an order. We recommend that you do not use this feature if the computer is shared by multiple users. Please note that if you use a setting that automatically deletes stored cookies after each session, the “remain logged in” feature will not be available.
You can send us your data via contact form, as long as it is still available on our online offer. This is done by means of a state of the art appropriate encryption method. If you send us your application data via e-mail, please note that e-mails are not sent in encrypted form and that you as the applicant must provide encryption yourself. For this reason we can take no responsibility for the transmission of your data in this way and recommend for this reason postal delivery, because apart from transmitting your documents by e-mail or if necessary through an online form, you still have the possibility to send documents via postal delivery.
If the application for one of our job offers is unsuccessful, your data will be deleted after six months, unless you have declared a legitimate revocation prior to expiration of this period or have given us consent to store your data for a longer period. This is necessary in order to be able to fulfil our obligations under the General Equal Treatment Act if necessary. If you have submitted invoices for reimbursement of travel costs with us, these will be stored in accordance with the statutory provisions and will be deleted after the expiry of the statutory periods of storage.
We will process your data for the sole purpose of processing for the application process. This is done on the basis of Art. 6 para. 1 lit. b) GDPR, or if processing in legal proceedings becomes necessary, based on Art. 6 para. 1 lit. f) GDPR and § 26 BDSG (Federal Data Protection Act). Should you also provide us with special personal data, such as: e.g. when submitting health data voluntarily, we process this data on the basis of Art. 9 para. 2 lit. a) GDPR. If this is necessary for the intended profession, we require special categories of personal data on the basis of Art. 9 para. 2 lit. b) GDPR.
For customer service and to improve the user experience, we use the CRM module of Salesforce.com, represented in Germany by: Salesforce.com Germany GmbH, Erika-Mann-Str. 63, 80636 Munich, Germany. The address of the US parent company is: The Landmark @ One Market Street, Suite 300, San Francisco, CA 94105, United States.
Users' personal information will be used by Salesforce to process the requests and will not be shared with third parties. It may be necessary for the processing of the request, that the following data will be processed, e.g. e-mail address, name, address. If you contact us via the contact form on our website, the data collected there will be stored in Salesforce.
If users do not wish Salesforce to process their personal data, we offer alternative communication options for inquiries (post, e-mail, telephone, fax).
Legal basis for processing are our legitimate interests in an efficient processing of user requests in accordance with Art. 6 para. 1 lit. f) GDPR.
Salesforce.com, Inc. itself is certified under the EU US Privacy Shield (https://www.privacyshield.gov/participant?id=a2zt0000000KzLyAAK&status=Active), thereby ensuring compliance with the requirements of European Data Protection Law.
For the dispatch of your order, we will forward your address data and, if applicable, your e-mail address and telephone number for an appointment to the logistics company commissioned with the delivery. The transfer of your data occurs for the execution of the contract on the basis of Art. 6 para. 1 lit. b) GDPR.
Some products are shipped directly from the manufacturer to you. In this case, we will pass on your address data to the manufacturer for the delivery of your ordered goods. The transfer of your data occurs for the execution of the contract on the basis of Art. 6 para. 1 lit. b) GDPR.
In order to be able to provide you with advance payments (payment on account, instalments, etc.), we must ensure that this type of payment transaction does not lead to misuse and protects consumers from economic overload. Our company is therefore affiliated with the credit reporting system of the credit bureau for protection against insolvency-based defaults, abuses due to unwillingness to pay as well as improper use by third parties (SCHUFA Holding AG, Kormoranweg 5, 65201 Wiesbaden, Association of Clubs Creditreform eV, Hellersbergstraße 12, 41460 Neuss; CRIF Bürgel GmbH, Radlkoferstraße 2, 81373 Munich; Bundesanzeiger Verlag GmbH, Amsterdamer Strasse 192, 50735 Cologne).
Due to our legitimate interests in accordance with Art. 6 para. 1 lit. f) GDPR to communicate and inform the users and interested parties of our services, we maintain various presences on social networks. To the extent that the providers of the respective platform obtain the consent of the users in the processing of personal data, this is done on the basis of Art. 6 para. 1 lit. a), Art. 7 GDPR.
It is not impossible that personal data of users outside the European Union or the European Economic Area can be processed. This may make it difficult for those affected to enforce their services. Some social media platform providers are certified under the EU US Privacy Shield, which requires them to comply with European privacy standards.
The processing of personal user data takes place regularly for market research and advertising purposes. Based on the user data, profiles are created that make it possible, for example, to display advertisements that correspond to the alleged interests of the respective user. This is done regularly by placing cookies on the device used by the user.
Requests for information and the assertion of your rights should be made directly to the respective providers listed below, as only they have access to personal data of the users and can take appropriate measures and provide information.
If you still need help in exercising your rights, you can of course contact us.
This website uses Google Analytics, a web analysis service of Google Inc. (“Google”). Use includes the Universal Analytics mode; this allows data, sessions and interactions across multiple devices to be assigned to a pseudonymous user ID so that the activities of a user can be analysed across devices.
Google will use this information on our behalf to evaluate your use of the website, compile reports about website activity and render other services for us, the website operator, associated with website and internet use.
Data will be processed based on your consent pursuant to Art. 6 (1) (1) a of the GDPR.
The recipient of the processed data is Google.
The personal data will be transmitted to the United States under the EU-US Privacy Shield based on the adequacy decision by the European Commission. You can view the certificate at https://www.privacyshield.gov/participant?id=a2zt000000001L5AAI.
The data sent by us and linked to cookies, usernames (such as user ID) or advertising IDs will be automatically erased after 14 months. Data for which the retention period has expired will be automatically erased once per month.
You may revoke your consent at any time with effect for the future by preventing the storage of cookies through the appropriate setting on your browser software; however, please be aware that if you do so, you may not be able to use all the functions of this website to their full extent.
In addition, you can prevent the data generated by the cookie related to your use of the website (including your IP address) from being collected and processed by Google by downloading and installing the browser plug-in available under the following link: http://tools.google.com/dlpage/gaoptout?hl=de.
You can also prevent your data from being collected during future visits to this website by using opt-out cookies. To prevent Universal Analytics from collecting data across different devices, you will need to perform the opt-out on all systems you use.
By using our website, you agree to the processing of data collected about you will be processed by Google and to the methods of data processing described above as well as the purpose specified. You can prevent the storage of cookies through the appropriate setting on your browser software; however, please be aware that if you do so, you may not be able to use all the functions of this website to their full extent. In addition, you can prevent the data generated by the cookies related to your use of the website (including your IP address) from being collected and processed by Google by downloading and installing the browser plug-in available under the following link below the heading DoubleClick Expansion Deactivation. Alternatively, you can disable the Doubleclick cookies with this opt-out.
Pursuant to Art. 15 of the GDPR, you can obtain from us information and a copy of the personal data about you stored and processed by us at any time, free of charge.
This right of access includes information about the purposes of processing, the categories of personal data concerned, the recipients or categories of recipient to whom the personal data has been or will be disclosed, where possible, the envisaged period for which the personal data will be stored or, if not possible, the criteria used to determine that period, the existence of the right to request the rectification or erasure of personal data concerning you or restriction of processing by us or to object to such processing, the existence of the right to lodge a complaint with a supervisory authority and, where personal data is not collected from you, any available information as to its source and the existence of automated decision-making, including profiling, referred to in Art. 22 (1) and (4) of the GDPR and - at least in those cases - meaningful information about the logic involved, as well as the significant and the envisaged consequences of such processing.
You also have the right to obtain information as to whether your personal data is transferred to a third country or to an international organisation and which appropriate safeguards are in place relating to the transfer.
In addition, pursuant to Art. 16 of the GDPR, you have the right to obtain without undue delay the rectification of inaccurate personal data concerning you. Taking into account the purposes of the processing, you also have the right to have incomplete personal data completed.
Pursuant to Art. 17 of the GDPR, you also have the right to obtain the erasure of data stored by us concerning you without undue delay where one of the following grounds applies: The personal data is no longer necessary for the purposes for which it was collected or otherwise processed; you withdraw your consent on which processing is based according to Art. 6 (1) a or Art. 9 (2) a of the GDPR and where there is no other legal ground for processing; you object to the processing pursuant to Art. 21 (1) of the GDPR and there are no overriding legitimate grounds for processing, or you object to processing pursuant to Art. 21 (2); the personal data has been unlawfully processed; the personal data must be erased for compliance with a legal obligation in Union or Member State law to which we are subject; the personal data was collected in relation to the offer of information society services referred to in Art. 8 (1).
Where we have made the personal data public and are obliged pursuant to Art. 17 (1) of the GDPR to erase it, we shall take reasonable measures to inform other controllers who are processing the personal data that you have requested the erasure of any links to, or copies or replication of, this personal data.
Processing is unlawful and you oppose erasure of the personal data and request the restriction of its use instead; we no longer need the personal data for the purposes of processing, but you require it for the establishment, exercise or defence of legal claims; or you have objected to processing pursuant to Art. 21 (1) pending the verification of whether the legitimate grounds of our company override yours.
Pursuant to Art. 20 of the GDPR, you have the right to receive the personal data concerning you that you have provided to us at any time, in a commonly used and machine-readable format. Furthermore, you have the right to transmit this data to another controller without hindrance from us, where processing is based on consent pursuant to Art. 6 (1) a or Art. 9 (2) a of the GDPR or on a contract pursuant to Art. 6 (1) b of the GDPR and the processing is carried out by automated means, insofar as processing is not necessary for performing a task carried out in the public interest or in the exercise of official authority vested in us.
In addition, you may the personal data stored by you transmitted directly from us to another controller, where technical feasible and where this does not affect the rights and freedoms of others.
Pursuant to Art. 20 of the GDPR, you have the right to object, on grounds relating to your particular situation, at any time to processing of personal data concerning you which is based on Art. 6 (1) e or f. This also applies to profiling based on these provisions.
If you object, we shall no longer process the personal data unless we can demonstrate compelling legitimate grounds for processing that override your interests, rights or freedoms or serves the establishment, exercise or defence of legal claims.
Where we process your personal data for direct marketing purposes, you shall have the right to object at any time to processing of personal data concerning you for such marketing; this also applies to profiling to the extent that it is related to such direct marketing. Where you object to processing for direct marketing purposes, we shall no longer process the personal data for such purposes.
You have the right to object, on grounds related to your particular situation, to the processing of personal data concerning you for scientific or historical research purposes or for statistical purposes pursuant to Art. 89 (1) of the GDPR, unless such processing is required to perform a task carried out for reasons of public interest.
It is within your discretion to exercise your right to object to automated procedures in which technical specifications are used that relate to the use of services of the information society and irrespective of Directive 2002/58/EC.
You may revoke consent to processing of your personal data at any time with effect for the future, pursuant to Art. 7 (3) of the GDPR.
You have to right to obtain confirmation as to whether or not personal data concerning you is being processed.
To exercise any of the rights specified, you can contact our data protection officer directly at datenschutzbeauftrager@ssi-schaefer.com or +49 2735 70-619 or any other employee.
In addition, you have the right to lodge a complaint with a supervisory authority pursuant to Art. 77 of the GDPR. You can generally contact the supervisory authority in your regular place of residence or workplace or our headquarters.

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Art. 25
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Art. 6
Art. 6
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Art. 9
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Art. 6
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Art. 6
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Art. 16
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Art. 6
Art. 9
Art. 21
Art. 21
Art. 8
Art. 17
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Art. 6
Art. 9
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Art. 20
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Art. 89
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Art. 77