SSR 75-19: SECTION 203(f)(5)(D) (42 U.S.C. 403(f)(D)) -- SELF-EMPLOYMENT -- EXCLUSION FROM NET EARNINGS -- ROYALTIES FROM PATENT OR COPYRIGHT IN OR AFTER YEAR BENEFICIARY ATTAINED AGE 65 -- WORK DEDUCTIONS
20 CFR 404.429(b)(2)
This ruling Supersedes SSR 72-12 C.B. 1972, p. 71 (Except for the technical change in the wording of the holding and the footnote, this ruling is a reprint of SSR 72-12.)
- Section 203(f)(5)(D) of the Act excludes from gross income for deduction purposes royalties received by the beneficiary in or after the taxable year in which he attained age 65 where such royalties are attributable to a patent obtained or pending prior to the taxable year he attained age 65 provided he completed all work on, and applied for, the patent prior to the taxable year he attained age 65; However, if the patent application is denied in or after the taxable year he attained age 65 such royalty income must be considered for deduction purposes and any benefits which had been paid to the beneficiary while the patent was pending become subject to adjustment if benefit overpayments resulted from inclusion of the royalties in the beneficiary's gross income.
A question has been raised as to whether royalties received from property by a social security beneficiary after age 65, under a patent pending in or prior to the taxable year in which the beneficiary attained age 65, would be excluded from gross income for annual retirement test (deduction) purposes.
Section 203(f)(5)(D) of the Social Security Act (42 U.S.C. 403(f)(5)(D)) provides, in pertinent part:
(D) IN the case of an individual --
- (i) who has attained the age of 65 on or before the last day of the taxable year, and
- (ii) who shows to the satisfaction of the Secretary that he is receiving royalties attributable to a copyright or patent obtained before the taxable year in which he attained that age 65 and that the property to which the copyright or patent relates was created by his own personal efforts,
there shall be excluded from gross income any such royalties.
In the absence of instructive legislative history, it may reasonably be inferred that the basis for the exclusion of earnings from gross income under the provision above is that an individual should be considered retired for social security purposes if his only earnings result from work undertaken by him before he reached age 65. The test for excluding royalties for purposes of section 203(f)(5)(D) of the Act, is thus whether the beneficiary "completes" work undertaken prior to the taxable year in which he attained age 65 for which work a copyright or patent was obtained.
The reference in this section to a "patent obtained before the taxable year is which he attained the age of "65" (emphasis added) envisages completion by the individual of his work effort and the securing by him of a "patent pending." The term "patent," as used here, refers to a franchise given by the Government to an inventor, conveying and securing to him the exclusive right to make, use and sell his invention for a term of years. Reeves Bros. Inc. v. U.S. Laminating Corp., 282 F.Supp. 118, 134 (E.D. N.Y., 1968) aff'd 417 F.2d 869 (2 Cir., 1969).
The term "invention" as employed in the Patent Act (35 U.S.C. 1, et seq.) comprises the conception of an idea and its "reduction to practice," i.e., converting the mental idea to a tangible form. Jamesbury Corp. v. Worchester Valve Co., 318 F. Supp. 1 (Mass., 1970). The date of filing the application for a patent is presumed to be the date of the invention. Monplastics Inc. v. Caldor Inc., 378 F.2d 20 (2 Cir., 1967). The U.S. Supreme Court has held that patents pending at the time of application are part of the "prior art" and are available as a bar to a second patent application. Hazeltine Research Inc. v. Brenner, 382 U.S. 252 (1965), rehearing den. 382 U.S. 1000 (1966). In Reeves Bros. Inc., supra, at page 872, the filing date of the application was found to be "more relevant to the issue of simultaneous invention than the date of issues of the patent." The filing of the application marks the completion of the individual's creative work product and of his part in the process of obtaining the patent. Thus, an individual should be considered to have reduced his idea to practice as of the date he filed his application. (35 U.S.C. 111 et seq.) At such time, he should be considered to have "obtained" a patent for purposes of Section 203(f)(5)(D) of the Social Security Act.
Accordingly, it is held that any royalties received in or after the taxable year in which a beneficiary attains age 65 must be excluded from his gross income where, prior to the taxable year he attained age 65 he had filed application for a patent on his invention, and the patent is subsequently granted. Further held, denial of the patent application would result in all earnings accruing therefrom being recognized for deduction purposes and any overpayments resulting therefrom would be subject to prescribed adjustment procedures.