Raytheon Production Corporation v. Commissioner

Raytheon Production Corporation (Raytheon) (plaintiff) originally made tubes used in radio sets. The Radio Corporation of America (RCA) had patents that covered radio circuits and entered into cross-licensing agreements with several companies, including General Electric, Westinghouse, and AT & T. RCA subsequently developed a competitive tube to Raytheon's tube. In 1927, RCA began requiring its licensees to buy tubes from RCA. Raytheon's sales dropped, and Raytheon brought an antitrust action against RCA in federal court. Raytheon alleged that Raytheon's tube business and valuable good will had been destroyed and that it had suffered damages of $3 million. RCA subsequently sued Raytheon for nonpayment of royalties and obtained a judgment for $410,000 against Raytheon. Raytheon then agreed to a $410,000 payment from RCA to settle the antitrust action. Raytheon's officers said that $60,000 of that settlement amount was the worth of Raytheon's patents for its tubes. In its income-tax returns, Raytheon treated the $60,000 as income but treated the remaining $350,000 of the settlement as a return of capital and not as taxable income. The Commissioner of Internal Revenue (defendant) disagreed and informed Raytheon that the $350,000 was taxable income. The Commissioner thus found a deficiency in that amount on Raytheon's tax returns. Raytheon challenged the Commissioner's determination in Tax Court. The Tax Court upheld the Commissioner's determination, and Raytheon appealed to the United States Court of Appeals for the First Circuit.