or if he owns tangible personal property situated in other states, such property is normally subject to tax in the state where situated rather than the state of domicile. In the case of a serviceman dying on active duty, section 514 of the Soldiers and Sailors Civil Relief Act 19 would apply to personal property and it is deemed not to be located, for tax purposes, in any state other than his state of domicile. This adds another reason to those given in JAG NOTICE 5840 of 21 December 1962, for being consistent in treating one state as your domicile. If a serviceman is inconsistent, it is possible his estate may pay death taxes to more than one state on the same property. A serviceman should be sure the state specified in his will is actually his domicile. He could not specify a state in which he has never lived, for example, and thereby make it his domicile. Also, it is normal procedure for records to be checked to see that a decedent has paid applicable state income and property taxes, and if not, the widow may find that such back taxes have been deducted before the estate is distributed to her. Because an individual has escaped state income or property taxes while alive, does not mean his estate will.

Exemptions, tax rates and the many other details involved vary from state to state and it is not possible to discuss them at length in this article. The difference in death taxes between states can be illustrated by considering an uncomplicated estate as it would be taxed if situated in either California, Virginia or Florida (three popular retirement States). For even the most simple situation, it would take many pages to go into detail for each state, but we can mention a few of the more important rules. California is a community property state so that half of everything the husband acquired during marriage (with a number of exceptions) is considered to be the wife's property and that half is therefore not subject to tax on husband's death (and vice versa). A recent amendment to the California law has provided an additional benefit in connection with community property. Effective September 15, 1961, none of the community property transferred to a spouse is subject to the California tax, unless, on the death of the husband, the wife is given by will either a life estate or a general or special power of appointment in conjunction with the one-half of the community property subject to the testamentary disposition of the husband. Virginia and Florida are not community property states, but have other exemptions that California may or may not have. California ex

19. 50 U.S.C. App. § 574 (1958).

empts $50,000 of insurance payable to named beneficiaries whereas Virginia exempts all insurance payable to named beneficiaries. Insurance payable to the estate, so that it would be distributed in accordance with the will, would be taxable in all three states. Virginia, Florida and California follow the federal rule that property owned in joint ownership (assuming it is not community property) is presumed to be the property of the deceased unless the survivor can show he or she actually contributed to or owned a portion or all of the property originally and then, to that extent, it is not taxed as part of the estate of deceased.20 Florida has only a "pick-up" estate tax, so that there is a tax paid to Florida only if the estate is large enough (at a minimum, over $100,000) to qualify for a deduction under federal law for death taxes paid to a state. The Florida tax should result in no additional expense (other than the cost of making up the return) to the estate, because any tax paid to Florida would result in a credit against that owed under the Federal estate tax.21

For purposes of illustration, let's assume a retired serviceman dies leaving property composed entirely of money, taxable securities and real property, all situated for tax purposes in one of the three states we are considering, and an adjusted gross estate, as defined above, valued at about $150,000. If everything is left to the widow the death taxes would be approximately as follows:

Federal Estate Tax-$1,050

California Inheritance Tax-$0 to $6,650 depending
on amount and disposal of community property.
Virginia Inheritance Tax-$950
Florida Estate Tax-None

The above figures would of course change with any of a great number of circumstances and, for the Virginia and California inheritance taxes, with the class of beneficiaries (i.e. children, brothers or sisters, etc.).22 Depending on how the property is owned and willed, the tax in

20. Some states, such as Wisconsin, treat jointly owned property as being owned in proportion to the number of owners, i.e., 50-50 if two owners, regardless of who paid for it. If husband dies, only half the value would be included in his estate even though he paid for all; and if wife dies, half would be taxable in her estate even though she had contributed nothing. In other states, such as Maryland and Pennsylvania, jointly owned property passing to a surviving spouse is entirely exempt from the inheritance tax.

21. Comments are based on state laws as summarized in CCH Tax Reporters of the respective States.

22. Tax rates under the California inheritance tax vary, depending on the size of the estate and class of beneficiary, from 2% to 24%. The rates under the Virginia law vary, depending on the size of estate and class of beneficiaries, from 1% to 15%. Rates under the Florida law depend on the maximum available credit under the Federal estate tax law.

California could be less or more than if living in Virginia. The example is given merely to illustrate that choice of domicile or where an individual is living and domiciled at time of death can make a difference in death taxes.

The impact of state death taxes is even more obvious in larger estates. The following example uses four states and a variation of a situation used in a Prentice-Hall 23 example. Assume that a successful executive leaves an estateafter debts and expenses-of $700,000 to his wife, taking full advantage of the marital deduction. Four state death taxes on such an estate are compared to show how choosing a domicile can affect the size of an estate, after taxes.

There are a great number of ways to reduce the size of an estate to minimize the impact of death taxes, but whether they would accomplish the desires of the owner or testator depends on all the circumstances. The most obvious way to cut down the size of an estate is to make gifts, either via trusts or outright. Here again the laws of the state of domicile would have to be examined to determine whether a state gift tax is applicable.25

For federal gift tax purposes, no gift tax return would have to be filed by any donor unless gifts to any one individual totaled over $3,000 in one year.26 Under various state laws it may be that a return is required for much smaller

23. P-H Executive Tax Rpt., Sept. 18, 1961.

24. See JAG JOURNAL of Feb. 1957, "Residence and Domicile of Servicemen," in which mention is made of the case of Texas v. Florida, 306 U.S. 398, where Texas, New York, Florida, and Massachusetts all claimed a deceased as a domiciliary. If the death taxes of all four states and the federal estate tax had been paid, the entire 44 million dollar estate would have been consumed.

25. Twelve states have gift taxes: California, Colorado, Louisiana, Minnesota, North Carolina, Oklahoma, Oregon, Rhode Island, Tennessee, Virginia, Washington, and Wisconsin (1962 Martindale Hubbell Law Directory, Vol. IV Law Digests).

26. IRC 1954, section 2503, 26 U.S.C. § 2503 (1958).

gifts. Under the federal law, in addition to the $3,000 annual exclusion per donee there is a $30,000 lifetime exemption for gifts." The tax, after exclusions and exemptions, is imposed on the donor. It is his responsibility to file the return if gifts totaling more than $3,000 are made to any donee during the year.

There is a marital deduction for gifts similar to that discussed for the Federal estate tax, so that if a qualifying gift is to the donor's spouse, 50% is exempt. 28 For example, a husband could give $66,000 in one year to his wife without becoming liable for a federal gift tax, although a return would be required. It works out this way-one-half of the $66,000 is exempt by reason of the marital deduction; of the remaining $33,000, $3,000 is excluded under the annual exclusion and the $30,000 lifetime exemption (assuming none of the exemption has been previously used) exempts the remainder.

If a husband makes a gift to a child or any other individual, and if his wife joins in the gift, or consents to gift-splitting, her exemption and exclusion can be added.29 Therefore, a husband, joined by his wife, could make a gift totaling $66,000 in one year to one child without becoming liable for a gift tax, although returns would be required to be filed by both spouses. By filing returns in which one spouse consents to the gift by the other, they are in effect each making gifts of $33,000, each has the $3,000 annual exclusion and a $30,000 specific exemption.

The $30,000 exemption may be used only once, but the $3,000 exclusion applies each year to each donee. If no gifts are made during the year, the "exclusion" is lost. Even though husband and wife have given $66,000 to one child, for example, and used up their respective "exemption", they could in future years each give $3,000 to any number of individuals and take advantage of their annual "exclusions." If they had five children, husband and wife could each give $3,000 to each child tax free, or a total of $30,000 in one year without becoming liable for a federal gift tax. Whether there would be a state gift tax applicable would depend on the law of the state of domicile of the donor or donee, depending on where the gifts were made.

Gifts made within three years of death are presumed to be in contemplation of death for federal estate tax purposes.30 It could be longer or shorter under state death tax laws.

27. IRC 1954, section 2521, 26 U.S.C. § 2521 (1958). 28. IRC 1954, section 2523, 26 U.S.C. § 2523 (1958). 29. IRC 1954, section 2513, 26 U.S.C. § 2513 (1958). 30. IRC 1954, section 2035, 26 U.S.C. § 2035 (1958).

This means that a gift made within three years of death would be included within the estate of =the deceased donor for estate tax purposes unless the estate representative could prove that the gift was not made in contemplation of death. For this reason gift practices of the decedent in prior years are important in rebutting any presumption of a gift made in contemplation of death. Any gift tax paid would be credited toward the estate tax computed on the value of a gift included within the estate.

Assuming gifts over the amount of the annual exclusion and lifetime exemption are made, the gift tax rates basically are 75% of the estate tax rates, but are cumulative in nature. If gifts over the amount of the exclusion and exemption are made so that there are taxable gifts made in successive years, the taxable gifts made in previous years are added before figuring the tax rate on the current year's gifts. This means that a point may be reached where the gift tax would be larger than if the same property passed to beneficiaries by inheritance and was subject to estate taxes.

To avoid being included within an estate for death tax purposes, a gift must be bona fide. It cannot be a sham with the donor retaining a beneficial interest, a reversionary interest or complete control.

GIFTS TO MINORS

A relatively recent development in the gift field is the Uniform Gifts to Minors Act which has been adopted by 47 States and the District of Columbia. The other 3 States (Alaska, Georgia and New Jersey) have Model Gift Laws, so that it is possible in any state to make gifts to minors without formal trust or guardianship complications. Under the Uniform Act, a gift of registered securities may be made by a donor's buying stock, for example, and registering it in his own name as custodian, under the Uniform Gifts to Minors Act of his domiciliary state, for the named minor. The Uniform Act prescribes details, which may vary slightly from state to state, concerning powers of the custodian to sell and reinvest, requirements concerning delivery of property to the donee or successor custodians, procedure to follow in case of death of donor-custodian or donee, etc.

Bearer securities may be given by naming a third party as custodian, who could be an adult member of donee's family or a guardian of the minor in Model Law States or any other adult person or a trust company in Uniform Act States. The gift of bearer securities is accomplished by their delivery to the designated cus

todian accompanied by a Deed of Gift, the form for which is specified by the state law. The donor cannot make himself custodian of bearer securities.

Gifts under the Uniform Act are irrevocable. A parent cannot register securities in the name of his son, with the parent as custodian, and then later change his mind and use the stock for his own, the parent's, purposes. The Internal Revenue Service has ruled that if income from stock given in this manner is used in discharge of a legal obligation of any person to support a minor, such as for the support, education or other expenses normally required from a parent for his child, such income is taxable to the one liable for support. The Service has also ruled that if the donor-custodian dies before the child reaches 21, the value of the stock or security is included in the estate of the donor for estate tax purposes.82

31

Income received from securities or investments given under the Uniform Act is taxable to the minor-owner currently, not to the donor or custodian, unless the income is used to relieve a legal obligation of the parent. The income need not be distributed but may be accumulated for delivery to the donee when he or she reaches 21. Assuming the income and/or principal are used for college in later years, if the child's income or principal used for his education are in a greater amount than that contributed by the parent, it could be that the child will no longer qualify as a dependent because of the 50% support test.33

CONCLUSION

There are almost unlimited possibilities and arrangements that may be followed to take advantage of exemptions or to reduce the size of estates through inter vivos trusts and gifts so as to avoid death taxes, but these should not be attempted without expert advice, preferably from lawyers specializing in estate planning. There is always the danger that attempts to avoid taxes may result in defeating the overall (Continued on page 218)

31. Rev. Rul. 56-484 and Rev. Rul. 59-357. 32. Rev. Rul. 57-366 and Rev. Rul. 59-357. 33. "... in the area of higher education, it is safe to say that the parent's obligation to provide support for education would end, in every state, prior to the college level...

The amount of trust income used in paying the tuitional cost of a college education for the child would not be taxable to the parent because the payments do not discharge any legal obligation imposed upon the parents by local law. However, the parent would be chargeable with the portion of trust income used in paying the child's room and board at college, since these payments would be in discharge of his legal obligation to provide support." (Commerce Clearing House, Inc. Standard Federal Tax Reports, Vol. XLIX, No. 24, 16 May 1962, Part I, p. 12).

That reminds me to remark, in passing, that the very first official thing I did, in my administrationand it was on the very first day of it, too-was to start a Patent Office, for I knew that a country without a Patent Office and good patent laws was just a crab, and couldn't travel any way but sideways or backways. The first thing you want in a new country is a Patent Office; then work up your school system; and after that, out with your paper. MARK TWAIN, A Connecticut Yankee at King Arthur's Court

A

PATENT, LIKE a doctor's prescription, is a mysterious entity to most people, including many competent lawyers and engineers. This aura of mystery may result from the complexity of the involved technology including the requisite descriptive vocabulary, the rigid legalistic language in which patents are normally phrased or varying ideas as to what constitutes an invention (a technical word meaning an idea for a better way to do something). An attorney may understand the legalistic language but not the technology, an engineer the technology but not the legalistic language and either one or both may not fully comprehend the technical requirements for an invention.

ORIGIN

The word patent is derived from "litarae patentes" meaning "open letters" (public disclosures). Its use is not confined to matters of technology but may concern the grant of a commission, office, charter, title of nobility, title to public land, trade monopoly or the right to engage in an exploratory voyage. Patents were originally issued by monarchs in England as a matter of royal whim to settle indebtedness of the Crown or to compensate those who gained its favor but use of a patent system, as a means to encourage commerce and industry, did not begin until the 14th Century when letters of protection were granted by the English Crown to encourage foreign craftsmen to migrate to England from the European continent. Queen

*Captain Jack C. Davis, USN, is currently assigned to the Office of Naval Research as Assistant Chief of Naval Research for Patents. He holds the B.S. (Engineering) and LL.B. degrees from George Washington University. Captain Davis is admitted to practice before the U.S. Supreme Court, the U.S. Court of Claims, the U.S. Court of Military Appeals, the Court of Customs and Patent Appeals and the U.S. Patent Office.

Elizabeth and her successors, as well as concurrent European authorities, granted exclusive manufacturing and sales privileges to citizens who had invented new processes or tools to stimulate indigenous technology.

Lord Coke, Chief Justice of England, established the first of two important principles relating to patents in 1602 when he held that the patenting of an invention, though it gave exclusive rights to individuals, could not in any way infringe upon man's liberty, for it took nothing away from society; instead, it brought into use something that had not existed before. The second resulted from abuse, by some court favorites and creditors, of royal grants of monopoly control over age-old products. Fortunes were thereby amassed through excessive charges for use of such materials as salt, starch, paper and the like. The Crown, in recognition of protests from a righteously indignant public, decreed that monopoly rights could be awarded only to those who created or introduced something unique. These two principles remain bulwarks of most present patent systems.

The Statute of Monopolies (similar in the patent area to the Magna Carta in the individual rights area) which was enacted in England in 1623, limited patent grants to a maximum of 14 years for making or working new manufactures, inaugurated the concept of granting patents to the bona fide and initial inventor only, and established the principle that not all important discoveries can be patented.

DEVELOPMENT

Patent law in the United States, as it relates to commerce and industry, began with state grants prior to the Revolutionary War. Massachusetts, the first of such states, granted a patent to Samuel Winslow for a new method of making salt in 1641.

The United States Constitution, Article I, Section 8, states in part: "The Congress shall have the power . . . to promote the progress of Science and Useful Arts by securing for limited times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." President Washington signed the First Patent Act in 1790 and under its provisions the power to grant patents was vested in

a three-member commission called the "Commissioners for the Promotion of Useful Arts." The present U.S. Patent Office, which issues all U.S. patents, was established as an independent bureau under the direction of a Commissioner by a general revision of patent laws enacted by Congress on 4 July 1836.1 It became a bureau of the Department of Commerce by Executive Order on 1 April 1925 in accordance with authority contained in the Act of 14 February 1903. The Patent Office continued as a bureau (primary unit under Secretary of Commerce) when the patent laws were codified by the Act of July 19, 1952, effective 1 January 1953.3

The Patent Office currently employs about 2,500 persons including an elite corps of 1,000 examiners (graduate engineers) whose salaries range from $6,000 in the beginning to $17,000 per year upon completion of 15-20 years' service. They frequently earn law degrees during their service as examiners and shortly thereafter many readily succumb to very profitable opportunities in private enterprise. There are about nine million patents (3 million U.S. of which 650,000 are active-and at least 6 million foreign from 20 associated nations) filed in the Washington Office in four main groups: chemical, electrical, mechanical, and general engineering and industrial arts. These are further broken down into over 300 classifications and approximately 58,000 subclassifications. Provision is also made for applications or patents containing classified information and for emergency stowage of microfilm reproductions.

giving an inventor (irrespective of age, sex or nationality) the right to exclude all others for a period of 17 years (312, 7 or 14 years in the case of design patents) from making, using or selling his invention within the United States, its territories or possessions. It may be granted on any new and useful process, machine, manufacture or composition of matter or any new and useful improvement thereof, or on any distinct and new variety of plant, other than a tuber propagated plant, which is asexually reproduced, or on any new, original and ornamental design for an article of manufacture. It may not be granted on printed matter, a method of doing business, an improvement which is only the result of mechanical skill, an inoperable machine nor a mere idea or suggestion. It may not be granted if it has been described in a printed publication anywhere in the world more than a year before the present application is filed.

GENERAL PROCEDURE AND USE

The Patent Office files should be carefully searched to determine probable novelty of an invention prior to filing a patent application. Anyone may have access to these files during official hours but only the specific inventor or attorneys or agents, who have qualified by duty as an examiner in the Patent Office for a prescribed period or by examination and are accordingly registered to practice before this office, may prosecute applications for patents. Patent Office examiners will search this file on behalf of the Government after an application is filed, but are not available to the general public for this purpose or on a "consultant" basis except in response to specific queries. Questions pertaining to scope or validity of a patent after issue come within the jurisdiction of United States courts, not the Patent Office. Inventions should be well documented with ample authentication during their embryonic stages to insure subsequent establishment of priority if questioned.

There are widely varying estimates as to the number of patents that are actually used prior to expiration. Suffice to say, major industries resulted from Bell's telephone patent in 1876, Edison's electric lamp in 1880, Mergenthaler's linotype in 1800 and Wright's flying machine in 1903. Several famous people little known for their inventive genius have been issued patents. Abraham Lincoln patented a device to lift vessels over shoals with air inflated bellows in 1849. John Jacob Astor invented a road sweeper; Lillian Russell an improved trunk; Max Carey, safety pads; Gertrude Ederle, swimming gog