Historic Tax Case | Raytheon Prod. Corp. V. Commissioner

• Published date: 23 September 2022
• Subject Matter: Intellectual Property, Litigation, Mediation & Arbitration, Tax, Patent, Arbitration & Dispute Resolution, Income Tax, Tax Authorities
• Law Firm: Freeman Law
• Author: Freeman Law

Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110 | July 28, 1944 | Mahoney, Circuit Judge | Docket No. 110380

Short Summary:

Petitioner Raytheon Production Corporation (Raytheon) came into existence through a series of tax-free reorganizations. The 'original' Raytheon was a pioneer manufacturer of a rectifying tube that allowed a radio receiving set to be operated on alternating current instead of on batteries. The Radio Corporation of America (RCA), through its many patents and licensing agreements with companies such as General Electric and Westinghouse, effectively claimed control over almost all of the practical radio circuits.

RCA developed a competitive tube to Raytheon's, and soon began to require its licensees to purchase tubes from RCA. Ultimately, Raytheon was unable to market its product and brought an anti-trust lawsuit against RCA. Raytheon argued that RCA successfully conspired to destroy its well-established business and valuable goodwill through a monopoly, and that Raytheon had suffered damages in excess of $3,000,000.

In the meantime, RCA sued Raytheon for nonpayment of royalties based on a previous licensing agreement between the two parties. The suit returned a $410,000 judgement in RCA's favor. During negotiations for settlement of all claims between Raytheon and RCA, the parties agreed to a payment from RCA to Raytheon, in the amount of $410,000. Included in the settlement agreement were licensing rights and sublicensing rights to approximately thirty patents. The settlement agreement did not clarify the amount paid for the patent rights, and the amount paid to settle the anti-trust action.

Of the $410,000 received, Raytheon included $60,000 in its federal income tax as income from patent licenses. Raytheon treated the other $350,000 as a non-taxable return of capital. The Commissioner of Internal Revenue (Commissioner) concluded that the $350,000 was taxable income as the total settlement amount was never apportioned between payment for patent rights and damages.

Key Issue:

Whether an amount received by a taxpayer in compromise settlement of a suit for damages under the Federal Anti-Trust Laws is a non-taxable return of capital or income under IRC ' 22(a) (1936)?

Primary Holding:

Because the suit was to recover damages for the destruction of goodwill only (the other business assets were not destroyed but used in Raytheon's new business), the $410,000 recovery represents a return of capital. However, to the extent the recovery...