Tygart Valley Glass Co. v. Commissioner

Tygart Valley Glass Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Tygart Valley Glass Co. v. Commissioner Docket No. 25258 United States Tax Court 16 T.C. 941; 1951 U.S. Tax Ct. LEXIS 208; May 2, 1951, Promulgated *208 Decision will be entered for the respondent. In 1936 petitioner in settlement of litigation brought by Hartford for infringement of patents surrendered certain patents, equipment, and cash to Hartford and agreed to pay royalties to Hartford as licensee of such property. In 1939 action was filed by the United States against Hartford for violation of the anti-trust laws. A receiver was appointed and royalties payable from 1942 from petitioner and many other licensees from Hartford were impounded. In the course of the litigation evidence indicated that petitioner's settlement with Hartford in 1936 was induced by fraud. In 1945 the anti-trust litigation was settled pursuant to opinion therein by the Supreme Court, and Hartford was released from liability by many but not all of the licensees, each participating licensee, including petitioner, receiving an amount equal to 60 per cent of the impounded royalties paid in by it. Held the money was received by petitioner in settlement of claim for royalties, and not in settlement of claim for restitution because of fraud in the 1936 settlement, and is taxable as ordinary income, not capital gain. Norman D. Keller, Esq., for *209 the petitioner. Albert J. O'Connor, Esq., for the respondent. Disney, Judge. DISNEY *942 This proceeding involves deficiencies in corporate income and excess profits taxes for the fiscal year ending September 30, 1946, in the amounts of $ 10,669.10 and $ 51,878.16, respectively. The only question for our determination is whether the amount of $ 241,973.34 received by petitioner under a settlement agreement is taxable as ordinary income or as a long term capital gain. The case was submitted on a stipulation of facts and oral and documentary evidence. The facts as stipulated are hereby found accordingly and the stipulation filed is incorporated herein by reference. FINDINGS OF FACT. The petitioner, Tygart Valley Glass Company, is a corporation organized under the laws of the State of West Virginia and is engaged in conducting a glassware manufacturing business, having its office and principal place of business in Washington, Pennsylvania. Petitioner kept its books and filed its income tax returns on an accrual basis of accounting and on a basis of a fiscal year ending September 30. It filed its income and excess profits tax returns for the tax period here in question with*210 the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh. Hartford-Empire Company (hereinafter referred to as Hartford) is a corporation organized and existing under the laws of the State of Delaware, and since its organization has engaged in the business of manufacturing glassworking machinery and of licensing machinery and methods for the manufacture of glassware. On June 6, 1928, Hartford instituted suit against Hazel-Atlas Glass Company in the United States District Court for the Western District of Pennsylvania, alleging that the operations of Hazel-Atlas Glass Company infringed the Peiler patent owned by Hartford for a method of and apparatus for feeding molten glass. On February 28, 1930, the District Court dismissed Hartford's bill of complaint, the opinion being reported as . Upon appeal the Circuit Court of Appeals for the Third Circuit reversed the judgment of the District Court with instructions to enter a decree holding Hartford's patent valid and the claims sued on infringed, the opinion being reported as .*211 1 *943 On May 1, 1933, Hartford instituted suit against Shawkee Manufacturing Company and certain other defendants in the United States District Court for the Western District of Pennsylvania, alleging that the operations of the defendants infringed the Peiler patent owned by Hartford. The District Court granted a preliminary injunction from which appeal was taken to the Circuit Court of Appeals for the Third Circuit by Shawkee Manufacturing Company and the other defendants. The Circuit Court of Appeals held that infringement had occurred and remanded the case for proceedings in due course, its opinion being reported as . 2 *212 On November 12, 1935, Hartford instituted suit against petitioner in the United States District Court for the Western District of Pennsylvania, alleging that petitioner's operations had infringed Hartford's Peiler patent. On the same date Hartford instituted three additional suits against petitioner in the same court, alleging that petitioner's operations infringed a number of other patents of Hartford relating to the feeding and shearing of molten glass. Petitioner's patent counsel advised petitioner that it need not fear any of Hartford's patents except the Peiler patent but that, by virtue of the opinion of the Circuit Court of Appeals, petitioner was in serious danger of having a preliminary injunction granted unless the suits were settled. On February 18, 1936, petitioner and Hartford entered into two agreements in settlement of the suits above described. Pursuant to the terms of the settlement agreements, petitioner in the year 1936 paid to Hartford the sum of $ 30,000 and transferred to Hartford its interest in certain patents and title to 13 glass feeding machines, known as Tygart feeders. Subsequent to the transfer of the aforesaid Tygart feeders to Hartford, petitioner*213 paid royalties to Hartford for the use thereof and for the use of certain Hartford feeders substituted from time to time for Tygart feeders. The aggregate royalties paid by petitioner to Hartford for the use of Tygart feeders from March 1, 1936, to August 31, 1942, amounted to $ 550,263.59. The aggregate royalties paid by petitioner *944 to Hartford for the use of substituted Hartford feeders up to August 31, 1942, amounted to $ 81,131.77. In 1939, the United States instituted a civil action (hereinafter referred to as the anti-trust action) in the United States District Court for the Northern District of Ohio, Western Division, in which Hartford and certain other defendants, not here involved, were ultimately held to have violated the Federal anti-trust laws. The opinion, dated August 25, 1942, is reported as . By order of the District Court a receiver was appointed to take possession of all the property and assets of Hartford, including all patents, and to collect and receive the income of Hartford. The effect of the order was to require the various lessees and licensees of Hartford, *214 including petitioner, to pay to the receiver all rental and royalty payments which were due or became due on or after September 1, 1942, under any agreement for the leasing of machinery or licensing of patents owned by Hartford. The order of the District Court further provided: * * * Receipts from licensees are to be set aside and specially earmarked as coming from each licensee, and, upon confirmation by the Supreme Court of the decree to be entered herein, such receipts so collected and set aside are to be returned, without interest, to the various licensees. Pursuant to the provisions of the order appointing a receiver, petitioner made certain rental and royalty payments to the receiver. The aggregate royalties paid by petitioner to Hartford for the use of Tygart feeders from September 1, 1942, to October 31, 1945, amounted to $ 256,947.60. The aggregate royalties paid by petitioner to Hartford for the use of substituted Hartford feeders during the same period amounted to $ 142,659.85. In its corporate income and excess profits tax returns for each of the taxable years 1942 through 1946, inclusive, petitioner included the rental and royalty payments made to the receiver as *215 a part of the cost of goods sold, and these amounts were duly allowed by respondent as an exclusion from gross income. Upon appeal taken by the defendants in the anti-trust action, the United States Supreme Court on January 8, 1945, affirmed the judgment of the District Court to the extent of finding violations of the anti-trust laws but modified the District Court's decree in many respects. The opinion of the Supreme Court is reported as . Upon petition of the United States for clarification of the Supreme Court's opinion, that Court handed down a second opinion on April 2, 1945, which is reported as . Subsequent to the second opinion of the Supreme Court, a committee was formed, representing the licensees of Hartford which were *945 non-defendants in the anti-trust action, to negotiate a program in conformity with the Court's opinion which could be recommended to the Court as a reasonable and equitable basis of relationship for the future between Hartford and its licensees. The committee held meetings with*216 the various licensees and with representatives of Hartford. Some of the companies stated that they had no claims against Hartford other than the refund claim (claim for the return of rents and royalties). Some companies, including petitioner, contended that they had "outside claims" against Hartford, i. e., claims other than claims arising out of the receivership. One of such companies was The Knox Glass Co. The "outside claims" were not discussed as such in the negotiations between Hartford and the committee. During the negotiations Hartford made an offer to the committee which embodied certain objectives, terms, conditions, and a summary. The objectives enumerated that Hartford sought to make available to the entire glass container industry a comprehensive program of engineering, research and development to enable the industry to meet the postwar competition of other types of containers, and asked, in return, reasonable financial resources with which to serve the industry. The terms enumerated were: (1) Royalty rates were to be reduced on present models of feeders (previously reduced by approximately 23 per cent in 1941) by an additional 50 per cent. This represented an *217 over-all reduction since 1940 of approximately 61 per cent. Rentals on lehrs were to be reduced from $ 2.50 to $ 2 a day; (2) cash refund, subject to due clearance with the appropriate tax authorities, Hartford agreed to return to licensees, in proportion to their respective payments, 60 per cent of the royalties due under the Hartford license contracts which were ordered earmarked by the District Court as of September 1, 1942, and held by the receiver as of October 31, 1945; (3) that Hartford would maintain its research and development program; (4) that Hartford would make certain concessions in regard to length of license contracts; and (5) that Hartford would agree to furnish certain services at a reasonable charge. The offer by Hartford was made subject to three conditions, namely, first, that the offer be approved by the District Court; second, all licensees were to agree to pay Hartford the proposed royalty rates for the use of Hartford's patented inventions; and, third, "each licensee concurrently upon receipt of earmarked royalties pursuant to this offer is to execute appropriate covenants ensuring Hartford against further litigation and claims on its part for past transactions. *218 Hartford obviously cannot provide the industry with a worth-while program of research and development if its energies and financial resources are to be dissipated in litigation." The offer was summarized as follows: In other words, all that Hartford asks is that a sufficient sum be taken from the earmarked funds to restore its assets impaired during the receivership and *946 pay taxes, and to be given the opportunity to continue to serve the industry free of litigation for past transactions. On August 22, 1945, the chairman of the committee of non-defendants transmitted a letter to the non-defendant licensees, explaining a "proposal" worked out with Hartford (hereinafter sometimes referred to as the industry settlement formula). The pertinent part of the "proposal" and explanation reads as follows: 2. A cash refund to the licensees, in proportion to your respective payments, of 60% of the earmarked funds held by the Receiver as of October 31, 1945. It is estimated that this will amount to about $ 13,000,000 and will leave Hartford out of these earmarked funds only such an amount as it is calculated will be required to pay taxes and to restore the assets expended during the*219 receivership. This represents an increase of 35% or approximately $ 5,000,000 more than the amount Hartford-Empire originally proposed be returned to the licensees. 3. A sound comprehensive research and development program, and quarterly consultation with respect thereto with a committee of licensees selected by the industry. * * * * 7. In order to start a clean new page in the industry and to enable Hartford to make the proposed large cash refund and substantial reduction in royalties and to carry on its research and development program for the benefit of the industry, unhampered by wasteful litigation, all licensees which have made payments into the earmarked funds will be required to waive all claims against Hartford arising from past activities. It is believed that on the whole this represents the best and most beneficial program which the existing situation will permit. At meetings held in Cleveland, Ohio, on August 28, 1945 and September 4, 1945, the offer made by Hartford was discussed by the various licensees. Petitioner told the committee that "we would not go along," and stated that it would refuse to accept the offer made by Hartford, and emphasized the fact that it had*220 no claim for refund of royalties, and the meeting was adjourned to give petitioner an opportunity to discuss matters directly with representatives of Hartford. As a result, a meeting was held in New York City on or about September 18, 1945, at which the representatives of the petitioner and of Hartford were the only persons present. At this meeting, petitioner claimed that it was in a special situation, because it desired restitution for the property transferred to Hartford under the 1936 settlement and that that was its only claim. Petitioner offered to surrender all claims against Hartford in return for a cash payment of $ 1,000,000. The representatives of Hartford informed petitioner that they disagreed with petitioner's position, and rejected petitioner's offer. They urged petitioner to accept instead the industry settlement formula. At that time, petitioner refused to accept the industry settlement formula, and the meeting broke up without reaching any agreement. No further meetings or discussions took place between Hartford and petitioner in connection with this settlement. *947 By letters dated September 21 and 25, 1945, to all the non-defendant licensees, the chairman*221 of the committee emphasized the importance of all of them executing the proper papers to enable the committee to present the "proposal" to the court on October 5, 1945. The letter dated September 25, 1945, also stated that the refusal of one or more of the requisite licensees to sign the form letter would make it necessary to litigate this matter before the court. The minutes of petitioner's directors' meeting, dated October 1, 1945, contain the following information: Mr. Hinkins made a report on the settlement proposals in connection with Hartford-Empire litigation at Toledo, Ohio, stating that at the Industry meeting held September 18th, he had again reported that our company was not interested in any settlement which involved refund of any royalties heretofore paid the Receiver and would not go along on any settlement which required us to give a release without adequate consideration for the sale and transfer of our patents and material in 1936. He also reported on the meeting with the officials of Hartford-Empire Company held in New York wherein the same matter was reviewed and that they had informed us that there were no funds available to settle with us for the 1936 transaction*222 but that the Department of Justice had agreed, in order to meet our objection and that of other companies, to the creation of a general fund to be used as consideration for general releases but that under the decision of the Federal and U. S. Courts, the payment had to be on a pro-rata basis of the fund among the different companies. On motion by A. S. Reese, seconded by B. A. Watts, THAT the Board authorize the proper officers to continue negotiations and conclude an agreement with Hartford-Empire Company, agreeable to all parties concerned. The following is an excerpt from minutes of a directors' meeting of petitioner's directors on November 5, 1945: Counsel for the company reviewed in detail negotiations which had led up to the final offer of compromise of the Hartford-Empire litigation in the Anti-Trust case at Toledo, Ohio, pointing out that since the unit proposal approved by the Court and which all companies must accept to make it operative, required all licensees to elect whether to continue as such; to surrender any right or claim for refund to any royalties paid the Receiver in order to create a cash fund for consideration of a general release which all companies must execute*223 in return for their pro-rata share of the net settlement fund and that in his opinion the fund was no longer ear-marked, as coming from royalties and that the amount coming to our company as consideration for the general release of all claims which in our case would cover our pending claim against Hartford-Empire Company for the balance of the consideration for the transfer of patents, cash and equipment under a fraudulent misrepresentation in 1936 to be approximately from $ 230,000 to $ 250,000. After a thorough discussion on this subject, a motion was made by B. A. Watts, seconded by A. S. Reese THAT the Board authorize the proper officers to execute the necessary transmittal papers, electing to remain as licensees, to surrender all claims for refund of royalties paid the Receiver as well as to execute the general release for the consideration mentioned. Unanimously adopted. After the meeting with Hartford in New York, petitioner reconsidered its position and decided to accept the industry formula for *948 settlement which it had previously rejected at the meetings with the other licensees and at the meeting with Hartford. Petitioner "chose to go along." Petitioner realized*224 that it would not be able to stay in business unless it participated in the settlement. No settlement agreement was entered into between Hartford and petitioner other than, or different from, the one contained in the documents constituting the general industry settlement agreement. By written notices deposited on or about September 29, 1945, with the Committee of Non-Defendant Hartford-Empire Licensees, petitioner and the other non-defendant licensees of Hartford (with the exception of 16 companies, including among others the Hazel-Atlas Glass Co. of Wheeling, W. Va., which was involved in litigation with Hartford) accepted and approved an agreement made with Hartford by the Committee of Non-Defendant Hartford-Empire Licensees on their behalf. The agreement was incorporated in an intervening complaint filed by certain non-defendant licensees in the anti-trust action under date of October 5, 1945. The intervening complaint was filed on behalf of all the non-defendant Hartford-Empire licensees (including petitioner). The United States District Judge signed an order to show cause, that was mailed to each person, firm or corporation who had paid money into the earmarked funds held*225 by the receiver, along with a copy of the complaint, why the agreement made with Hartford by the committee should not be approved. Pursuant to the provisions of the mandate of the Supreme Court, the District Court entered final judgment in the anti-trust action on or about October 31, 1945. In accordance with the final judgment of the District Court, 59 non-defendant licensees, including the petitioner, executed and delivered to the receiver a covenant not to sue Hartford. On or about November 23, 1945, the receiver paid over to each licensee executing and delivering the above-mentioned covenant not to sue an amount equal to 60 per cent of the sum paid to the receiver by such licensee during the period September 1, 1942 through October 31, 1945, less such licensee's pro rata share of the expenses of the receivership and of the Committee of Non-Defendant Hartford-Empire Licensees. The total paid by the receiver to the 59 licensees was $ 12,744,683.78, of which petitioner received $ 241,973.34, calculated as follows: Total royalties paid to receiver by petitioner (September 1, 1942-October 31, 1945) $ 414,049.95 Pro rata share of receiver's expenses 6,914.58 Balance $ 407,135.37 60% of balance 244,281.22 Pro rata share of committee expenses 2,307.88 Amount paid to petitioner $ 241,973.34 *226 *949 The covenants not to sue executed and delivered by the non-defendant licensees were identical with the form of covenant earlier distributed by the committee, and the District Court informed the committee that no change in the language was to be permitted. In arranging for and participating in the settlement agreement, and in intervening in the anti-trust action, the principal purpose and motive of the non-defendant licensees at all times was to make sure that Hartford was able to continue in the business of manufacturing and supplying glass-working machinery to its licensees, and was able to continue to act as a research, maintenance and service organization for the benefit of the licensees. OPINION. The only question for our determination is whether the amount of $ 241,973.34 received by petitioner on or about November 23, 1945, under a settlement agreement is taxable as ordinary income or as a long term capital gain. The petitioner alleges that the sole claim that it asserted against Hartford in 1945 was a claim based upon the fraudulent taking of its cash and assets by Hartford in 1936 (hereinafter sometimes referred to as the fraud claim), and that the amount of $ 241,973.34*227 received in the settlement with Hartford constituted a return of capital and consideration for the sale of capital assets and not, as contended by the respondent, a return of rents and royalties. The claim for the return of rents and royalties by the licensees of Hartford will hereinafter sometimes be referred to as the refund claim. In short, the petitioner argues that it had no refund claim, while the respondent urges that the fraud claim was abandoned. In the alternative, the petitioner contends that if the fraud claim was not the only claim settled, that both the fraud claim and refund claim were settled, and that the $ 241,973.34 should be allocated between them. Though both parties have argued at some length as to the validity of each claim, we consider it unnecessary to decide upon such validity, as to either for our question is not their validity, but the nature, for tax purposes, of an amount received in settlement, which rests not upon the validity but upon the nature of the matter settled. ; , affd., ,*228 certiorari denied, . Moreover, we do not find in the record before us sufficient facts from which we could decide upon the validity of either claim. We proceed to determine the nature of the matter settled in consideration of the moneys paid and here involved. By order of the District Court, the amount of rental and royalty payments made to the receiver by the various licensees of Hartford *950 was to be set aside and specially earmarked as coming from each licensee, and * * * upon confirmation by the Supreme Court of the decree to be entered herein, such receipts so collected and set aside are to be returned, without interest, to the various licensees. It is clear from the language of the District Court's opinion, , that the payments made by the licensees of Hartford (including petitioner), after the court's order, were made with the expectation under the order that at least some of the amount would be returned. The opinion gave that right. The matter was not fully disposed of by the Supreme Court until April 2, 1945, the date of the rendering of*229 the second Supreme Court opinion on the matter. The first Supreme Court opinion, dated January 8, 1945, , stated that the royalties that had been paid to the receiver by Hartford's licensees may, in the absence of certain conditions, none of which apparently apply here, be paid over to Hartford. The second Supreme Court opinion, dated April 2, 1945, , pointed out that the licensees ought not to be put into the position of recovering from Hartford royalties paid to the receiver. After further explanation of the situation in regard to the payment of royalties the Court said: In view of the modifications required by the opinion of this court, such licensees must pay reasonable rental and service charges on a quantum meruit basis (leaving out of consideration any amount otherwise payable for the privilege of practicing the patented inventions involved) in respect of the machines used in the interim. Unless Hartford, since the entry of the decree by the District Court, has been guilty of some added*230 violation of the anti-trust laws, licensees must elect (a) to remain licensees on such reasonable rental and royalty basis for the future as the District Court may fix, or (b) repudiate the leases and litigate their rights as against Hartford to retain any portion of the rents and royalties paid. Depending upon such election of each of the lessees, the District Court may, on the application of each, make an appropriate order for the disposition of the fund in the light of the licensees' election and the principles stated in the opinion of this Court. The petitioner, on brief, points out that a dissent filed in the second Supreme Court opinion states that the opinion as written by the majority of the Court is not clear in regard to the disposition of the royalties paid by the licensees to the receiver. Notwithstanding the dissent, Hartford through its representatives worked with a committee representing the non-defendant licensees of Hartford, i. e., the licensees that had paid the fund into the hands of the receiver, to negotiate a program in conformity with the Court's opinion which could be recommended to the Court as a reasonable and equitable basis of relationship for the future*231 between Hartford and its licensees. *951 The negotiations were not restricted to discussing the future relationship between Hartford and the licensees but also considered the question of a cash refund of a portion of the amount paid by the licensees to the receiver. For the petitioner, its general counsel testified that the only claim asserted by the petitioner against Hartford was its fraud claim 3 and that petitioner made no claim for a return of royalties. Such testimony is not conclusive. We may not rely on it alone to decide the point, but must consider the payment of the amount here in question in the light of all the circumstances and determine the motive behind the payment. Petitioner cites , as "seemingly" authority for the principle that if a taxpayer asserts but one claim, although he might have several, the amount received in settlement is taxable according to the claim asserted. As we read the Inaja case, such an interpretation is too broad. The Court there held that the petitioner had "satisfactorily established" that the consideration paid was for the property right (the one claim) alleged*232 by the petitioner. Our question here is whether the petitioner has so established, contrary to the Commissioner's determination that royalty refunds were received. In this connection, petitioner, on brief, also argues that Hartford was negotiating with its own money, to which the petitioner had no legal claim whatsoever. We can not see reason in such a view. The final opinion of the Supreme Court, even if we assume that it was not altogether definite as to disposition of the impounded royalties, did not award the fund outright to Hartford nor deprive the licensees of all claims to it. Again the petitioner suggests that the licensees, including petitioner, acquired no right to a return of the royalties as such, so that in receiving the $ 241,973.34 it was not receiving a return of royalties. As authority, ,*233 is cited, but we find it of no assistance to the petitioner. The court merely pointed out that the question of the payments being made as a matter of right did not of itself affect the taxability of the amount of the recovery in the light of the governing principle, i. e., that amounts expended and deducted in prior years are income when recovered. In short, the moneys were recovered, whether as of right or not, and therefore were taxable, and the court held that the payments to the taxpayer constituted a return of rental and royalty payments that had been previously deducted in computing Federal income tax for prior years and that the amount so recovered was taxable as income in the year of recovery. *952 We note at this point that the Buck case contradicts petitioner's further argument, in substance, that the fact that the licensees were each to receive a "sum equal to" 60 per cent of the impounded fund paid in by it, indicates that there was no return of royalties. Pointing out that the moneys were earmarked by the order of the District Court, as paid in by each individual licensee, that had the licensees not continued the royalty payments there would have been *234 no fund for distribution, and that in its final order the District Court directed return to the taxpayer of 60 per cent of the funds held in its name (less expenses), the Court says that the agreement "did in fact provide for a return to Taxpayer of 60% of the funds held by the receiver in its name," and adds: * * * Nor is that fact altered by the language of the agreement, embodied in the judgment, to the effect that each licensee was to receive "a sum equal to" 60% of the funds earmarked as coming from it. Since the Buck case grew out of the same receivership proceedings against Hartford as here involved and decided the same question except for the "outside claim" it is clear that the above language therefrom negatives petitioner's view that there was no return to petitioner of its own funds, because of the expression in the agreement. The same conclusion applies to the petitioner's argument, in substance, that the use of the expression "which for purposes of such computation only" preceding "is designated as an amount equal to sixty per cent (60%) of the balance" indicates that the money received was not refund of royalties. These conclusions, however, do not settle the *235 question as to whether, in fact, the recovery by compromise was of refund, or, on the other hand, for fraud. The petitioner, in fact, received the same percentage as the large number of other licensees receiving 60 per cent of royalties paid to the receiver -- and obviously the fact is significant. The fact that the percentage received was common to all indicates settlement of a claim common to all so receiving it. But the licensees did not all possess a common claim as to anything except royalties, for some, such as petitioner and Knox Glass Company, had "outside claims," amounting in petitioner's case to about $ 1,000,000. The amount of other "outside claims" does not appear. Thus, it appears that the only common claim was for return of royalties, and that in compromise thereof a percentage, common to all participating, was received. Moreover, petitioner's directors' minutes of October 1, 1945, indicate recognition by petitioner at that time that Hartford took the view that "there were no funds available to settle with us for the 1936 transaction"; yet the same minutes show authority to conclude an agreement. Obviously, therefore, there was some thought of settlement on some*236 basis not involving the 1936 fraud transaction. Likewise, the minutes of November 5, 1945, show recognition that the court required *953 the licensees "to surrender any right or claim for refund" and show authority given petitioner's officers to surrender all claims for refund of royalties paid the receiver as well as to execute the general release for the consideration mentioned. Thus, it appears that there was intentional surrender by petitioner of claims for refund of royalties (even if along with general release) contrary to petitioner's primary contention now that there was no such claim, or release of such claim. It is true, of course, that the minutes of November 5, 1945, recite the opinion of counsel that the fund was no longer earmarked as coming from royalties, and mention the net settlement fund; but the fact remains that the minutes of October 1, 1945, disclose intent further to consider the matter. In this connection we find significance in the fact that though on September 4, 1945, the committee was told that petitioner would not "go along" and that the minutes of October 1, 1945, show a report that the Industry meeting had been told by petitioner's representative*237 on September 18 that petitioner would not "go along" with any settlement requiring release without consideration for the 1936 matter, nevertheless negotiations for an agreement were ordered continued, and, after the Industry meeting, convinced that it would have to "go along with the industry," petitioner "chose to go along"; and petitioner did "finally join in the industry settlement." Except for the minutes, the quotations are from the testimony of petitioner's general counsel. In other words, there was reversal of the previous position. Hartford had taken the view that it did not agree with petitioner's position asking restitution for the patents and feeders and money paid, in the amount of about $ 1,000,000, and had urged petitioner to accept the same formula of settlement as the balance of the industry. Petitioner's decision to "go along" appears reasonably as not only a joinder in the same position as the other licensees accepting settlement, but an abandonment of the previous claim for restitution for the 1936 matter. The crux of the previous difference between Hartford and petitioner was whether basis of settlement should be the restitution of cash, patents and feeders*238 because of fraud, or the participation with the industry, in the royalty refund. Petitioner decided to go along -- which means to us go along with the other licensees in common acceptance of a percentage of the refund of royalties. The petitioner's previous contention then became immaterial. What was desired was a settlement, and it was effected, not on the basis of petitioner's earlier contention, but the alternative, urged by Hartford and the committee, and finally accepted. The nature of the settlement was not the same as the prior contention of the petitioner, for it was to "go along," that is, it acceded to a *954 different basis of settlement. In our view, neither mention of the previous demand, in the minutes of October 1, 1945, nor the opinion of petitioner's counsel, set forth in those of November 5, 1945, when the matter was being closed, in effect that the amount received would cover the 1936 claim, is sufficient to overcome the realities of the situation, that the former view had been abandoned. Had it not been so, there apparently would have been no settlement. Nothing before us is convincing that petitioner merely received $ 241,973.34 on its claim for about*239 $ 1,000,000. It in fact participated with and received the same percentage as those licensees who had nothing but claim for refund. Petitioner, if it had had no "outside" claim, would have received $ 241,973.34, as it did. The petitioner in urging that it settled with Hartford a claim for feeders, patents, and cash, had the burden of so showing. Petitioner's witness Eldred was vice president in charge of operations of Hartford. He was not asked and did not state what claim was settled, but stated only the position taken by Tygart at the meeting in September 1945, to the effect that Tygart took the position that it could not entertain settlement under the terms offered, that Tygart felt it had a special situation and wanted restitution for patents, feeders, and damages paid to Hartford, but that Hartford did not agree with such position and urged acceptance of the formula accepted by the industry. With Hartford's representative on the witness stand it would appear that petitioner could, had he been willing to support petitioner's view, have elicited from him whether the feeder-patent-cash claim was settled. Such evidence would tend to support the petitioner, and failure so to*240 inquire is noticeable. It may well be that Hartford had reason to wish to settle the royalty claim instead of the 1936-fraud allegedly capital transaction -- for instance, because of possibility of deduction or exclusion by it of royalty payments involved in the refund, an element not applicable to settlement of a capital transaction. It would appear that Hartford would otherwise not have been averse to a settlement of the fraud claim, for the same amount of money payable under the refund claim, and that the settlement could definitely, in such case, have so stated. It does not do so. Any such self-interest against settlement of the 1936-fraud claim, on the part of Hartford, would tend to explain its refusal to settle that claim with petitioner; and the record shows a change of mind not on the part of Hartford, but on the part of petitioner -- a change away from its proposal of settlement of the allegedly capital matter. That Hartford was not without tax consciousness at the time of the settlement in 1945 is indicated by the reference to payment of taxes, in Hartford's proposition, and in the letter from the committee to the non-defendant licensees both of which refer to the *241 payment of taxes. *955 Again, though petitioner contends that the payment of the amount here in question was in settlement of its fraud claim, petitioner's own witness testified that the "outside claims" were never discussed "as such" between the committee and Hartford's representatives. Since Hartford, as above seen, urged petitioner to accept the same formula for settlement that the balance of the industry had accepted it would appear from this testimony that the refund claim of petitioner was, when the industry formula was accepted by petitioner, at least the primary matter settled. As explanation of why the industry formula of settlement was accepted by petitioner, it is argued that all non-defendant licensees were in effect required to do so. One of petitioner's witnesses testified that the judge of the District Court advised the industry that unless there was a 100 per cent acceptance of the industry settlement formula the entire settlement would fall through. 4 But the fact is that 16 non-defendant licensees did not join the others in the settlement, which proves that a 100 per cent acceptance of the industry settlement formula was not required. One of the 16 was Hazel-Atlas*242 Glass Co. which apparently had a situation considerably analogous to that of petitioner, for it was because of the judgments against it, and Shawkee Manufacturing Company, in Hartford's favor, that counsel for petitioner advised the settlement in 1936. Thus, it appears that petitioner has not shown that its joinder in the settlement in 1945 was involuntary. After careful study of all of the various arguments made, and the extensive facts involved, though we have not considered all necessary of discussion, we are not convinced that there is showing that the fraud claim was the basis of the settlement made, but, in our view, that claim was abandoned, and settlement made on the basis of the royalty refund. In our view, there is illogic in a contention that a settlement was*243 negotiated with a committee representing a group of licensees on the basis of giving the individual members of the entire group the same percentage of the amount of rents and royalties they had previously paid in to the earmarked fund, but that as to one of the group (petitioner) the settlement was made on the basis of an "outside claim" (the fraud claim) which was never discussed "as such" between Hartford and the committee. The realistic approach appears to us to be that the settlement was made on the basis of the refund claim which in reality determined the amount that each licensee should receive. We hold, therefore, that the real basis of the settlement was the refund claim and that the amount received constituted a return of *956 rental and royalty payments that had been previously deducted in computing Federal income taxes for prior years, and that the amount here in question was ordinary income, not capital gain, for the fiscal year ending September 30, 1946. This conclusion makes it unnecessary to consider petitioner's theory of allocation or valuation of the fraud claim. Decision will be entered for the respondent. Footnotes 1. See footnote 2, infra↩. 2. Thereafter in the year 1943 Hazel-Atlas Glass Co. and Shawkee Manufacturing Co. filed petitions in the Circuit Court of Appeals for the Third Circuit asking that court to vacate and set aside its orders reversing and affirming the District Court decrees in the proceedings on the ground that the decisions of the Circuit Court of Appeals were procured by fraud of Hartford. The Circuit Court of Appeals dismissed the petitions of each company, its opinion being reported as Hartford-Empire Co. ↩v.. Petitions for writs of certiorari thereafter filed by Hazel-Atlas Glass Co. and by Shawkee Manufacturing Co. were granted by the United States Supreme Court and on May 15, 1944, the United States Supreme Court reversed the decision of the Circuit Court of Appeals with directions to set aside its prior judgments, recall its mandates and issue mandates to the District Court directing it to set aside its judgments and to enter judgments denying all relief to Hartford, the opinions of the Supreme Court being reported as , and . 3. Contrary to petitioner's argument, Eldred, vice-president of Hartford, did not denominate the fraud claim as petitioner's only claim.↩ 4. The witness also stated: "However, later on there were a few companies who had minor claims which were dropped out of the settlement." No further explanation is given why 100 per cent acceptance was required, yet a few companies were dropped out.↩