Cold Metal Process Co. v. Comm'r of Internal Revenue

• Decision Date: 04 December 1951
• Docket Number: Docket No. 22486.
• Citation: 17 T.C. 916
• Parties: THE COLD METAL PROCESS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 916

THE COLD METAL PROCESS COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 22486.

Tax Court of the United States.

Promulgated December 4, 1951.

1. Monies due under settlement agreements made in 1945 compromising claims growing out of alleged patent infringement, none of which were paid to petitioner in that year but which were then largely deposited in court in litigation affecting their disposition, held, not accruable as income for 1945.

2. Attorney's fees for services rendered in 1945 and other years but not determined in amount and billed until 1946, held, not deductible by an accrual taxpayer for 1945. Howard F. Burns, Esq., William H. Fleming, Esq., Warren Daane, Esq., and L. C. Weiss, C.P.A., for the petitioner.

Thomas F. Callahan, Esq., Thomas V. Lefevre, Esq., and A. J. Friedman, Esq., for the respondent.

The Commissioner determined the following deficiencies in petitioner's tax liability for the year ended December 31, 1945:

+-------------------------------------------+
                ¦Tax                          ¦Amount       ¦
                +-----------------------------+-------------¦
                ¦Income                       ¦$ 69,850.36  ¦
                +-----------------------------+-------------¦
                ¦Declared value excess-profits¦1,256,561.95 ¦
                +-----------------------------+-------------¦
                ¦Excess Profits               ¦5,886,384.34 ¦
                +-----------------------------+-------------¦
                ¦Total                        ¦$7,212,796.65¦
                +-------------------------------------------+
                

By amended answer, the Commissioner claimed an increase in the deficiencies in declared value excess-profits and excess profits taxes, asserting each to to be respectively $1,388,561.95 and $6,511,344.34. In reply, petitioner denied liability for the increased amounts.

On petitioner's motion for severance of issues, the trial was confined to the following questions: (1) Whether the settlement of certain patent infringement claims in 1945 resulted in accruable income for that year. (2) Whether, assuming that the first question is answered in the affirmative, such income was attributable to petitioner. (3) Whether petitioner was entitled to accrue as deductions in 1945 certain attorneys' fees in the aggregate amount of $125,000. By reason of the conclusion reached herein as to the first question, it becomes unnecessary to consider or to make findings of fact with respect to the second question.

FINDINGS OF FACT.

The parties have stipulated some of the facts; such facts are hereby found and incorporated herein by reference.

I

Petitioner, The Cold Metal Process Company, an Ohio corporation, was incorporated in 1926 with an authorized capital stock of 2,000 shares. Its initial shareholders and their holdings were as follows:

+--------------------------------+
                ¦Shareholder     ¦No. of Shares  ¦
                +----------------+---------------¦
                ¦Abram P. Steckel¦600            ¦
                +----------------+---------------¦
                ¦Howard S. Lamb  ¦200            ¦
                +----------------+---------------¦
                ¦Venice J. Lamb  ¦600            ¦
                +----------------+---------------¦
                ¦Leon A. Beeghly ¦520            ¦
                +----------------+---------------¦
                ¦W. E. Bliss     ¦40             ¦
                +----------------+---------------¦
                ¦W. H. Kilcawley ¦40             ¦
                +--------------------------------+
                

At all times material petitioner kept its books and filed its returns on the accrual basis of accounting. For 1945 it filed its returns with the collector of internal revenue for the eighteenth district of Ohio.

Petitioner was organized for the purpose of owning, developing, and exploiting certain inventions relating to the hot and cold rolling of metals, and employing these inventions in the manufacture and rolling of iron and steel.

On December 28, 1940, Leon A. Beeghly (referred to hereinafter as ‘Beeghly ‘), one of the shareholders of petitioner, created a so-called charitable trust (referred to hereinafter as ‘the Trust‘), and transferred 150 shares of stock in petitioner to the Union National Bank of Youngstown, Ohio, as trustee (referred to hereinafter as ‘the Trustee‘), in accordance with an agreement entered into between Beeghly and the bank. On December 30, 1944, Beeghly made a further gift to the Trust of one additional share of stock in petitioner.

In 1927 Abram P. Steckel (hereinafter referred to as ‘Steckel‘), one of the shareholders, assigned to petitioner his entire interest in certain inventions covered by a pending patent application. Pursuant to this application, United States Patent No. 1,744,016 (hereinafter referred to as ‘patent '016 ‘) was granted to petitioner on January 14, 1930, and United States Patent No. 1,779,195 (hereinafter referred to as ‘patent '195‘) was issued on a divisional application on October 21, 1930. These patents covered a method and apparatus for cold rolling of sheet-like metals at high speeds, wherein relatively small work rolls, with larger backing rolls having anti-friction bearings, were employed.

The processes covered by patents '016 and '195 gained wide usage in the metal industry, and beginning in 1928 petitioner granted non-exclusive licenses to certain manufacturers to employ the inventions covered by these patents. Numerous other manufacturers, not licensed by petitioner, installed rolling mills which petitioner claimed embodied its inventions and infringed its patents; as a result, petitioner brought numerous suits for infringement against large steel producing companies.

One of the first of these infringement suits was brought in 1934, in the United States District Court for New Jersey, against United States Steel Corporation and one of its subsidiaries, Carnegie-Illinois Steel Corporation (referred to hereinafter as the ‘Carnegie-Illinois suit‘). After extended litigation, the Court of Appeals for the Third Circuit held both patents '016 and '195 to be valid and infringed, Cold Metal Process Co. v. Carnegie-Illinois Steel Corp., 108 F.2d 322 (1939), and the Supreme Court of the United States denied a petition for certiorari and a petition for rehearing, Carnegie-Illinois Steel Corp. v. Cold Metal Process Co., 309 U.S. 665, 697 (1940). Thereafter, the Court of Appeals granted a petition by defendants for rehearing, but before the rehearing could be had, petitioner and Carnegie-Illinois entered into a settlement agreement on August 30, 1940, under which the latter agreed to pay $3,850,000 for past infringement and petitioner granted to Carnegie-Illinois and all other subsidiaries of United States Steel Corporation, on a royalty basis, an unlimited, nonexclusive license under patents '106 and '195 and two other patents owned by petitioner. Carnegie-Illinois paid the amount thus agreed upon to petitioner in two equal installments in 1940 and 1941.

On July 27, 1943, the United States started a suit (hereinafter referred to as the ‘cancellation suit‘) in the United States District Court for the Northern District of Ohio, Eastern Division, against petitioner and Steckel as defendants. In its complaint, the United States alleged that patents '016 and '195 had been procured from the Patent Office through fraudulent misrepresentation or mutual mistake of fact. It was asserted that the suit was brought because of the public interest, and because the United States was paying large sums of money, through suppliers of war materiel, as royalties on these patents. The United States requested the following relief: (1) cancellation entirely and ab initio of patents '016 and '195; (2) if the patents were not cancelled completely, then cancellation of certain specified claims which were important to the Steckel inventions; (3) such other relief to which the United States might be entitled. The defendants filed an answer denying all charges of the complaint.

On April 6, 1944, the United States moved in the cancellation suit for a temporary injunction to prevent receipt by petitioner of monies due or paid in connection with these patents pending decision of the suit, and to have these monies paid into court. In support of the motion, the Government alleged, inter alia, that petitioner would receive various monies and promptly distribute them; that persons paying those monies might be unable to assert the fraud practiced in procuring the patents; that if the Government should prevail in the suit, the United States and the people thereof would be irreparably damaged if these monies continued to be paid to petitioner. Over petitioner's vigorous opposition, the District Court granted the motion as prayed for (and filed an opinion reported at 57 F.Supp. 317), and on October 10, 194, entered an interlocutory order (hereinafter referred to as the ‘impounding order‘) which enjoined petitioner, its representatives and agents, from the following until entry by it of final judgment in the suit: (1) receiving any further monies by way of royalties, payments in settlement of claims, satisfactions of judgments for damages, or otherwise, on account of patents '016 and '195; (2) taking any steps for the collection of payments under these patents or under contracts or judgments relating to them, except that petitioner was permitted to reduce claims to judgment or to settle them, and to direct monies due thereunder to be deposited with the Clerk of the Court; (3) making further distribution to its stockholders of monies received on account of these patents, whether in settlement of claims or satisfaction of judgments or otherwise; (4) transferring in any manner whatsoever patents '016 and '195.

The cancellation suit was tried in the District Court during November and December 1944 and January 1945. On August 13, 1945, the court filed findings of fact, conclusions of law and memorandum (reported at 62 F.Supp. 127), pursuant to which final judgment was entered for petitioner on September 20, 1945, as to all matters in issue, and the complaint was dismissed in its entirety. The court found the facts essentially as petitioner asserted them, and concluded that there had...