Koons v. Comm'r of Internal Revenue, Docket No. 74965.
| Decision Date | 31 March 1961 |
| Docket Number | Docket No. 74965. |
| Citation | 35 T.C. 1092 |
| Parties | JOHN F. KOONS AND M. E. KOONS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, John F. Koons, purchased and undeveloped invention during the taxable year 1955 for $5,000 and paid $45,000 to a research laboratory for its services in perfection the invention into a patentable and commercial product. In 1958 letters patent were issued to petitioner covering said invention. Virtually all contacts by the laboratory relating to the development of said invention were made with petitioner's so as authorized agent of petitioner. During 1955, petitioner's primary source of income was derived from an advertising agency in which he was an active partner. For many years petitioner had devoted a part of his time to investigating, promoting, and financing various enterprises most of which came to his attention through his advertising business. Held, that the amount of $45,000 was expended in preparing to enter a new business, and was not paid or incurred for research or experimental expenditures in connection with a trade or business of petitioner, and hence, is not currently deductible under section 174 of the Code of 1954. C. Chester Guy, Esq., for the petitioners.
Henry T. Nicholas, Esq., for the respondent.
Respondent determined a deficiency in petitioners' income tax for the year 1955 in the amount of $10,991.04.
The sole issue presented for our consideration is whether expenditures made by petitioners in 1955 in the amount of $45,000 or any part thereof constituted research and experimental expenditures paid or incurred in connection with his trade or business within the intendment of section 174(a)(1) of the Code of 1954.
Some of the facts are stipulated and, together with exhibits filed in accordance with the stipulation, are included herein by reference.
Petitioners John F. and M. E. Koons are husband and wife, residing in Hamilton, Ohio. Their joint return for the calendar year 1955 was filed with the district director of internal revenue at Cincinnati, Ohio. John will be referred to hereinafter as petitioner or Koons.
Petitioner is 64 years old. His principal source of income in 1955 was from the Midland Advertising Agency, of which he has been an active partner since about 1925.
In 1914 petitioner started work as a newspaper reporter, and after entering military service in World War I, edited Shirt & Reveille, the first daily newspaper published by the Armed Forces. Upon discharge from the Armed Forces he wrote and financed the publication and sale of a book entitled ‘Billets & Bullets,‘ containing stories about Army life.
In 1920 Koons went to Texas where he and another individual financed and operated and oil well drilling project.
Upon his return to Cincinnati, petitioner entered into a joint venture with the Cincinnati Automobile Club in editing and publishing Motor Magazine, a travel magazine. Later this magazine was taken over by the American Automobile Association.
Thereafter, petitioner was engaged by a civic committee in Cincinnati to manage a campaign to change the city from the central time zone to the eastern time zone.
In 1922 Koons started a shipping news publication in northern Kentucky, in association with another individual, which was financed and operated by them.
In 1923, petitioner handled the promotion of the Cincinnati Industrial Exposition. Upon completion of that venture, petitioner organized and advertising business in partnership with Ralph H. Quinn under the name of Koons & Company. Later the name of the business was changed to Midland Advertising Agency. Thereafter most of the enterprises in which petitioner engaged resulted from contacts made in the advertising business. When he found a product which he believed had some investment potential and there was a good, competitive market situation, he would put money into the venture.
In 1924 petitioner was retained by Kodel Radio Corporation, hereinafter called Kodel, a manufacturer of radio receivers, battery eliminators, and allied products, to negotiate the acquisition of a radio station. Said radio station was operated by petitioner for approximately 4 years on a fee basis including participation in the profits of the venture. Although petitioner was not an employee of Kodel, he was designated advertising director, had an office in its plant, and spent substantial time in advertising and selling its products. Kodel had purchased a copper oxide rectifier, which had been developed by Leiber Oxide Company. Aware of the sales potential of said rectifier, petitioner bought stock in Kodel, which he subsequently sold at a profit. Midland Advertising Agency advertised the copper oxide rectifier owned by Kodel in trade papers and a national magazine.
In 1927, Midland Advertising Agency handled the advertising for the Cooper Tire Company relating to a waterless battery trickle charger, which also was a rectifier.
In 1928, Koons became associated with an individual who was developing a switch for neon signs. Koons financed the development of the invention under an arrangement whereby he would have a one-half interest in the company in the event the invention was successful.
In connection with the handling of advertising for a client, Burger Brothers Company (now Burger Brewing Company), Midland Advertising Agency developed the theory that a chocolate malt drink would be salable and had the product made by Standard Brands. In the course of the promotion of the product, it was found that the name was already in use by a candy manufacturer who stopped them from using it. By that time, repeal of prohibition had come along and Midland purchased Burger Brewing Company. Petitioner acquired a substantial stock interest in the Burger Brewing Company and is vice president and a director of said company.
In 1928 or 1929, Midland Advertising Agency provided the funds and handled the advertising, manufacture, and selling of a patented leather hair curler in which petitioner had a percentage interest. The project was successful until short hair became stylish and the demand for the product was curtailed.
Petitioner, right after repeal, entered into a partnership for the promotion of a seltzer product known as Bromo-Fizz. Petitioner advanced all the funds for the promotion of the product in which he had a one-half interest.
In 1937, petitioner and another individual acquired the stock of Spokesman Publishing Company, publisher of trade papers known as Auto Body and The Reconditioned Car, and later petitioner and his family acquired the remaining outstanding shares of said company.
In association with his brother-in-law, who had become a distributor of bottled propane gas for use in areas where natural gas was not available, petitioner organized a distributing company known as Rural Natural Gas Company. Subsequently, they acquired and organized three additional companies which serviced propane gas distribution in areas of Ohio, Indiana, West Virginia, Kentucky, and Tennessee. Petitioner is vice president and treasurer of said companies.
Koons also became interested in the insurance business. He is president of the Automobile Insurance Agency of Cincinnati and the Automobile Club Insurance Agency of Kentucky. Koons is also treasurer of the Automobile Club Insurance Company of Columbus, Ohio, which is the parent of the aforesaid insurance companies.
Beginning in 1952 petitioner engaged in joint oil operations with other individuals by providing funds for drilling wells on leases which had been acquired by the group. This activity continued during the taxable year 1955.
Petitioner is a partner in Ager-Ager, Ltd., an operation in Santiago, Chile, engaged in the processing of seaweed into ager (agar), which is sold to meat packers and ice cream manufacturers. Said enterprise is still in existence.
Also, Koons owns a real estate development in St. Croix, Virgin Islands, which was acquired in 1954 or 1955.
In 1955, petitioner was contacted by a representative of Research Laboratories of Colorado, Inc. (hereinafter sometimes called Research Laboratories), a group of chemists, physicists, and scientists doing various types of research and discovery, to solicit his financial assistance in the further development of a titanium subdioxide rectifier. Petitioner was aware of the successful development of silicon and electrolitic rectifiers and was of the opinion that there was a good market for rectifiers.
Petitioner agreed to buy the invention known as the titanium subdioxide rectifier for $5,000 and to pay $45,000 to Research Laboratories for its services in various respects including developing the rectifier into a patentable and commercial product. (See terms of ‘Development Contract’ executed March 11, 1955.)
On March 11, 1955, a ‘Sales Contract’ was executed to cover the purchase of the invention which read, in pertinent part, as follows:
For the sum of five thousand dollars ($5,000.00), receipt of which is hereby acknowledged, Research Laboratories of Colorado, Inc., does hereby transfer and sell all right, title and interest in the ownership of an invention known as the ‘titanium subdioxide rectifier’ including all improvements as developed by Research Laboratories of Colorado, Inc., and as recorded in portions of their bound laboratory notebook, designated as ‘Notebook Number 5,’ * * *
Also, on March 11, 1955, a ‘Development Contract’ was executed to cover the development of the aforesaid invention which reads, in pertinent part, as follows:
DEVELOPMENT CONTRACT
Be it then agreed that for the...
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