Raytheon sued RCA for antitrust violations that destroyed Raytheon's business and goodwill. They settled for $410,000, with $60,000 for patent licenses and $350,000 in damages. Raytheon claimed the $350,000 was not taxable as it recovered lost capital. However, the CIR argued it was taxable income. The court ultimately ruled that the $350,000 was taxable income because Raytheon failed to establish the value of its lost goodwill and business through evidence, so its basis was treated as zero. Any excess damages beyond basis are considered taxable realized appreciation.
Raytheon sued RCA for antitrust violations that destroyed Raytheon's business and goodwill. They settled for $410,000, with $60,000 for patent licenses and $350,000 in damages. Raytheon claimed the $350,000 was not taxable as it recovered lost capital. However, the CIR argued it was taxable income. The court ultimately ruled that the $350,000 was taxable income because Raytheon failed to establish the value of its lost goodwill and business through evidence, so its basis was treated as zero. Any excess damages beyond basis are considered taxable realized appreciation.
Raytheon sued RCA for antitrust violations that destroyed Raytheon's business and goodwill. They settled for $410,000, with $60,000 for patent licenses and $350,000 in damages. Raytheon claimed the $350,000 was not taxable as it recovered lost capital. However, the CIR argued it was taxable income. The court ultimately ruled that the $350,000 was taxable income because Raytheon failed to establish the value of its lost goodwill and business through evidence, so its basis was treated as zero. Any excess damages beyond basis are considered taxable realized appreciation.
Act of 1936 and thus a taxable income. Raytheon (original company) was a pioneer However, compensation for the loss of goodwill manufacturer of rectifier tubes which are used in excess of its cost is gross income. The law in radio receiving sets (using alternating ISSUE: Whether or not damages for loss of does not exempt compensatory damages just current instead of batteries). The Radio business good will are a nontaxable return of because they are a return of capital. The tax Corporation of America developed a capital or income. exemption applies only to the portion that competitive tube, with the same effect as the recovers the cost basis of that capital; any Raytheon tube. RCA owned many patents HELD: No. They are not taxable in general. excess damages serve to realize prior covering radio circuits. In the early of 1927, it Damages for violation of the anti-trust acts appreciation, and should be taxed as income. entered into cross licensing agreements with are treated as ordinary income where they In addition, evidence must be produced to radio set manufacturers and in their agreement represent compensation for loss of profits. establish the value of the goodwill and it includes a clause particularly clause 9, which Jurisprudence provides that Damages for business. required the manufacturers to buy their tubes violation of anti- trust acts are treated as an only from RCA. Later on those manufacturers In this case, Raytheon was not able to ordinary income in which this represent the were operating under RCA and as a result, establish the value of its goodwill and compensation for loss of profits. Raytheon’s sales gradually declined. business. It did not produce enough evidence The test is not whether the action was one in to such effect. The amount of nontaxable It decided to enter into RCA but in the tort or contract but rather the question to be capital cannot be ascertained. Since Raytheon condition that Raytheon will drop the case asked is "In lieu of what were the damages could not establish the cost basis of its good against the latter for the illegal acts on the awarded?" Where the suit is not to recover lost will, its basis will be treated as zero. The Court ground of clause 9 and Raytheon shall pay profits but is for recovery in injury to good will, concludes that the $350,000 of the $410,000 royalty basis. the recovery represents a return of capital and, attributable to the suit is thus taxable income. However, Raytheon (new company that bought with certain limitations (necessity of original company) brought an action against proof/evidence), is not taxable. RCA for violating anti-trust laws, as well as for In the case at bar, the suit by Raytheon was destruction of Raytheon’s profitable business not one of recovering lost profits (business and goodwill alleging that due to the acts of completely destroy and likewise the property RCA, Raytheon sales decline, which result to its good will of Raytheon because of the illegal downfall and that CIR here conspired to acts of RCA). From its allegations, Raytheon’s destroy its business. suit was for the destruction of its goodwill. The Both parties finally agreed on a $410,000 presentation of evidence of profits was merely settlement of the anti-trust case, with RCA used to establish the value of good will and the acquiring patent license rights and sublicensing business, since such value is derived by a rights. Raytheon counted the $60,000 from the capitalization of profits. Therefore, a recovery amount as income from patent licenses, while on goodwill and business represents return of the remaining $350,000 were counted as capital. damages, and therefore not subject to income The fact that the case ended in settlement is of tax. The income from patents was determined no moment. The determining factor is the from the cost of the development of such NATURE of the basic claim from which the patents, and the fact that few of them were compromised amount was realized. being used and none were earning royalties. Thus, the value of patents and the goodwill was backed by evidence during trial.