Chase v. Commissioner, Docket No. 1320-63
| Decision Date | 23 July 1965 |
| Docket Number | 1369-63 — 1374-63.,Docket No. 1320-63 |
| Citation | 1965 TC Memo 202,24 TCM (CCH) 1054 |
| Parties | Ransom W. Chase and Virginia S. Chase, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Ransom W. Chase, for the petitioners in Docket No. 1320-63. Robert M. Barton, E. Talbot Callister, and Robert A. Smith, 4th Floor, Wilshire-Grand Bldg., 611 Wilshire Blvd., Los Angeles, Calif., for the petitioners in Docket Nos. 1369-63, 1370-63, 1371-63, 1372-63, 1373-63, and 1374-63. Marion Malone, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined deficiencies in petitioners' income taxes as follows:
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Taxable Year
Docket No. Ended Amount
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1320-63 Ransom W. and Virginia S. Chase .............................. 12/31/54 $ 2,666.70
12/31/55 1,666.74
12/31/56 1,649.52
1369-63 Caleb Armistead and June Jaquith Motz ........................ 12/31/55 15,975.66
12/31/56 13,985.89
1370-63 June Jaquith Motz ............................................ 12/31/54 2,298.58
1371-63 Estate of Charles S. Gass, Deceased, Sarah E. Gass, Executrix
and Sarah E. Gass .......................................... 12/31/54 9,949.43
12/31/55 9,732.25
12/31/56 8,656.27
1372-63 Caleb Armistead Motz ......................................... 12/31/54 2,298.58
1373-63 Louis D. and Anna O. Statham ................................. 12/31/53 36,439.79
12/31/54 84,710.80
12/31/55 96,723.10
12/31/56 101,781.61
1374-63 Statham Instruments, Inc. (Formerly Statham Laboratories
Inc.) ...................................................... 5/31/54 97,068.63
5/31/55 100,419.84
5/31/56 110,765.23
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The parties have agreed to certain adjustments with respect to the deficiencies. The remaining issues for decision are:
(1) Whether Statham Instruments, Inc., can deduct, during the years in issue, "royalty" payments made to Transducer Patents Company, a limited partnership, as ordinary and necessary business expenses. The answer to this issue is dependent upon the answer to two subsidiary questions:
(a) Whether certain patents sold by Curtiss-Wright were purchased by Transducer Patents Company or Statham Instruments, Inc., and
(b) Whether the payments made to the partnership by the corporation, even if they are considered "royalties," were reasonable in amount; and
(2) Whether the amounts received by the individual partners of Transducer Patents Company from the partnership stemming from the payments made to the partnership by Statham Instruments, Inc., are taxable as "royalty" payments or "dividends."
Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
Petitioners Ransom W. Chase (hereinafter sometimes referred to as Chase) and Virginia S. Chase are husband and wife with business address at 411 West 5th Street, Suite 910, Los Angeles, California. They filed joint Federal income tax returns on the cash method of accounting for the calendar years 1954, 1955, and 1956 with the district director of internal revenue at Los Angeles, California.
Petitioners Caleb Armistead Motz (hereinafter sometimes referred to as Motz) and June Jaquith Motz are husband and wife who presently reside at 1055 Eastern Point Road, Groton, Connecticut. From 1954 through 1956 they resided at 101 South Highland Avenue, Los Angeles, California. For the year 1954 each filed separate Federal income tax returns, and for 1955 and 1956 they filed joint Federal income tax returns, all on the cash method of accounting, with the district director of internal revenue, Los Angeles, California.
Charles S. Gass and Sarah E. Gass were husband and wife during 1954, 1955, and 1956, and resided at 9881 Carmelita Avenue, Beverly Hills, California. They filed joint Federal income tax returns for those years on the cash method of accounting with the district director of internal revenue at Los Angeles, California. Charles S. Gass is now deceased, and Sarah E. Gass, as executrix of the estate of Charles S. Gass, and Sarah E. Gass, individually, are the petitioners in Docket No. 1371-63.
Petitioners Louis D. Statham (hereinafter sometimes referred to as Statham) and Anna O. Statham are husband and wife who reside at 10236 Charing Cross Road, Los Angeles, California. They filed joint Federal income tax returns on the cash method of accounting for the calendar years 1953 through 1956 with the district director of internal revenue, Los Angeles, California.
Petitioner Statham Instruments, Inc. (hereinafter sometimes referred to as Corporation) is a corporation organized under California law in 1946 under the name of Statham Laboratories, Inc. Its business address is 12401 West Olympic Boulevard, Los Angeles, California. In 1957 its name was changed to Statham Instruments, Inc. It maintains its books and records on an accrual method of accounting and reports its income on a fiscal year basis ending May 31 of each year. It filed corporation Federal income tax returns for each of the fiscal years ending May 31, 1952, through May 31, 1956, with the district director of internal revenue at Los Angeles, California.
Statham was an employee of Curtiss-Wright Corporation (hereinafter sometimes referred to as Curtiss-Wright) from February 1943 until September 7, 1943. While in that employment he began working on the development of a new means of making accurate measurements of air pressure by use of a transducer design embodying the unbonded strain gauge as its principal feature. The type of transducer upon which he worked was designed to convert physical energy into a measurable electrical signal of great accuracy.
In September 1943 Statham discontinued his employment with Curtiss-Wright and formed a partnership with his wife, who was not active in the technical side of the business. The partnership was known as Statham Laboratories (hereinafter sometimes referred to as Laboratories). It made and sold transducer devices to Curtiss-Wright and operated under an agreement called "Underlying Agreement." The agreement provided, among other things, that all inventions, and the patent applications and patents issued therefor, became the property of Curtiss-Wright. Statham thereafter assigned to Curtiss-Wright certain claims embraced in the patent applications and letters patent derived from the transducer inventions upon which he was working. The inventions resulted in six patent applications for which five letters patent were eventually issued.
On or about March 9, 1945, Statham in his individual capacity and Laboratories entered into a new agreement with Curtiss-Wright. That agreement (hereinafter called Curtiss-Wright license) provided for the licensing by Curtiss-Wright to the Stathams of the nonexclusive rights to make and sell transducer devices using the Curtiss-Wright inventions. The Stathams and Curtiss-Wright thereafter operated under that agreement until Corporation was organized in 1946. Under the Curtiss-Wright license, the licensee was given a nonexclusive right to make and sell at a royalty rate of 5 percent payable to the licensor.
Corporation was organized on June 6, 1946, and took over the partnership business of Laboratories. Corporation was closely held until 1957. The stockholders thereof and their respective stock interests were as follows for the period January 1, 1952, through May 31, 1956:
Name Shares Owned
Louis D. Statham ............ 9,720
Anna O. Statham ............. 9,000
C. A. Motz .................. 1,800
S. E. Gass .................. 2,000
Gifford White1 ......... 1,800
C. S. Gass .................. 1,000
Stanley Barnes .............. 90
R. W. Chase ................. 90
1 Corporation acquired the 1800 shares of
Gifford White from him on or about June 16
1952, for $27,000. White thereafter was not a
stockholder
In 1957 a public offering of some of Corporation's stock was made. Thereafter, Corporation has been at all times relevant a publicly-held company. Its shares are traded on the American Stock Exchange and certain other exchanges throughout the country.
The directors and officers of Corporation from June 1, 1951, through May 31, 1956, were as follows:
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Fiscal Yr
Beginning
June 1 Directors Officers
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1951 Ransom W. Chase Louis D. Statham, President...To continue reading
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