General Communication Co. v. Commissioner

General Communication Company, Petitioner, v. Commissioner of Internal Revenue, Respondent General Communication Co. v. Commissioner Docket No. 67528 United States Tax Court 33 T.C. 640; 1960 U.S. Tax Ct. LEXIS 233; January 8, 1960, Filed *233 Decision will be entered for the respondent. Held, petitioner's alleged liability to R.C.A. under a patent-licensing agreement was neither uncontested nor sufficiently fixed as of the end of the taxable year (Sept. 30, 1954) to justify accrual thereof. Bertram H. Loewenberg, Esq., and Robert S. Jones, Esq., for the petitioner. Chester M. Howe, Esq., for the respondent. Raum, Judge. RAUM *640 The only issue presently in dispute, arising out of respondent's determination of a $ 48,762.07 deficiency in petitioner's income and excess profits tax for the taxable year ended September 30, 1954, is whether petitioner was entitled to accrue a $ 75,000 deduction for that*234 year with respect to royalties allegedly due and owing Radio Corporation of America under a patent license agreement. FINDINGS OF FACT. Certain facts have been stipulated and are incorporated herein by reference. Petitioner, a Massachusetts corporation with principal offices in Boston, filed its income and excess profits tax return for the taxable year ended September 30, 1954, with the director of internal revenue for the district of Massachusetts. It reported its income and kept its books on the basis of an accrual method of accounting with a fiscal year ending September 30. Petitioner was engaged in the manufacture of communications and other electronic equipment for Government and civilian use. It neither maintained a patent department nor retained patent counsel on a regular basis. On January 2, 1947, petitioner, as "licensee," entered into a patent license agreement with Radio Corporation of America. The agreement, which expired December 31, 1954, purported to cover "all" patents owned by R.C.A. as well as certain patents owned by others; however, it did not contain any list of the patents licensed nor was any patent specifically identified. Over 3,000 patents were thought*235 to be embraced by the agreement. *641 Certain specified types of apparatus were referred to as "licensed apparatus," subject to royalty, provided that petitioner employed any patents covered by the agreement in the manufacture thereof. The term "licensed apparatus" was limited in article II of the agreement as follows: Wherever the term "Licensed Apparatus" is used in this License Agreement it means only apparatus of the kinds, and only in the form and condition, and only for the uses, specified and described in this Section 2, and only such apparatus which is covered by, or made under, any unexpired United States Letters Patent now or hereafter issued under which a license is granted hereunder to Licensee. Article II, section 2, listed the following apparatus as subject to license: Radio telegraphy apparatus, direction finders, amateur transmitters, one- and two-way radio telephones, certain combined apparatus, broadcast reception combinations, accessories and converting apparatus, and spare and replacement parts for licensed apparatus. It also purported to describe the particular uses of the foregoing apparatus which were covered by the license agreement. Article II, section*236 3, listed certain items which "shall not be deemed to be portions of the Licensed Apparatus as herein defined and shall not be licensed hereunder nor subject to royalty." Among these items were "(h) accessories and appurtenances for use in connection with Licensed Apparatus," provided they were not essential to the normal method of operation of such apparatus, and provided they were not themselves covered by applicable patents under the agreement; "(k) packing material, boxes, cartons and crates required for shipping purposes; (l) instruction books and drawings furnished with the Licensed Apparatus." Article III provided for the computation and payment of royalties. The base for the computation of royalties on licensed apparatus sold or leased by petitioner was stated to be "Licensee's genuine selling prices at which customers are billed in the usual course of business for Licensed Apparatus, as packed for shipment to customers and including all packing material and boxes, cartons, crates and all contents thereof, without any deductions other than those applicable as hereinafter * * * specified." The specified deductions, to the extent included in invoice price, were (a) the amount*237 of any excise tax paid by the licensee on licensed apparatus; (b) the amount of certain transportation charges paid to others; and (c) the amount of certain charges for installation and engineering services. The agreement also specified a deduction (d) "for radio tubes, spare and replacement parts specified in Section 2 of Article II, or any of the devices listed in subparagraphs (a) to (l) of Section 3 of Article II," if genuine selling prices for such items were included in invoice *642 price; the method for computing this deduction was set forth as follows: the amount so deductible shall be such percentage of the remaining amount of such invoice price after the deductions (if any) under subparagraphs (a), (b) and (c) above, that Licensee's manufacturing cost or purchase price of such tubes, parts or devices * * * shall bear to the manufacturing cost of all the apparatus covered by such invoice price. Licensee's cost of instruction books and drawings shall be the expense of preparation, reproducing and printing thereof, but shall not include any costs of engineering, design or production of the Licensed Apparatus or the working drawing or specifications thereof. Royalties*238 were to be determined according to specified rates applied to the aforementioned base. Article IV provided that on or before the last day of each month, petitioner was to furnish R.C.A. with written statements under oath specifying by kinds the total number of licensed apparatus sold and leased during the preceding month, and to pay the royalties prescribed for such sales or leases. The statements were to show petitioner's selling prices, each deduction claimed therefrom in computing the royalty base, and the amounts of royalties payable. Interest on delinquent royalty payments accrued at an annual rate of 6 per cent. Petitioner was also obligated to keep records necessary for the computation and verification of the royalties to be paid, and to permit R.C.A. or its representatives to inspect such records at any time during usual business hours. By letter dated February 11, 1949, from R.C.A. to petitioner, the royalty rate applicable to commercial radio apparatus sold or leased by petitioner to the United States Government was reduced to 1 per cent of the base amount computed in accordance with the agreement. By letter dated April 1, 1950, R.C.A. waived royalties on specimen apparatus*239 delivered to the Government under "development contracts." Royalties continued to be payable on Government "production contracts," defined as "contracts calling for the delivery of licensed apparatus which has been previously developed and standardized or is manufactured in accordance with Government specifications." Prior to September 14, 1951, petitioner submitted to R.C.A. monthly statements under oath that no R.C.A. patents subject to royalty payments were being utilized. On September 14, 1951, following an examination of petitioner's records in the usual course, R.C.A. advised petitioner that certain apparatus manufactured by it appeared to be covered by the license agreement and requested petitioner to furnish schematic drawings and instruction books in order that R.C.A. might determine which of its patents applied. Petitioner obtained permission from the Department of the Navy, Bureau of Ships, to release classified information in compliance with *643 R.C.A.'s request, and certain instruction books were turned over to R.C.A. during the next 12 months. However, petitioner continued to submit monthly statements denying utilization of R.C.A. patents up to and including*240 October 1952, after which time no statements were submitted. On October 7, 1952, R.C.A. notified petitioner that 10 itemized R.C.A. patents had been utilized in certain electronic equipment denominated UPX-1 which petitioner had produced for the Navy under Contract NOBsr 49224 (petitioner's job series P 249) for use in identifying ships and aircraft; that the apparatus was of a type covered by the license agreement; and that sales of the apparatus should be reported for royalty. On November 19, 1952, F. Stanton Deland, Jr., of Sherburne, Powers & Needham, petitioner's general counsel, advised petitioner by letter that Contract NOBsr 49224 could not be classified as a development contract, that the material and reports demanded by R.C.A. should be submitted; and that "steps be taken to set up some reserve for royalties that may be owing to RCA." The letter disclaimed any opinion as to whether the claimed patents had in fact been used and did not consider the question whether the agreement itself might be invalid. Petitioner did not set up the suggested reserve at that time. On December 3, 1952, John B. Hamre, petitioner's contract administrator, advised R.C.A. by letter that, "The*241 patent problem * * * has taken us by surprise. It has been our impression that our products, manufactured on Governmental orders, are not liable to patent applications." The letter noted the possible necessity of petitioner's consulting with patent counsel, but before doing so a conference was requested between an R.C.A. representative and petitioner's engineers. Hamre also asked for copies of the patents in question and informed R.C.A. that its requests for information with respect to 14 job numbers were being complied with. On January 27, 1953, following receipt of additional information, R.C.A. notified petitioner that seven itemized R.C.A. patents had been utilized in equipment denominated UPM-4A which petitioner had produced for the Navy under Contract NOBsr 43428 (petitioner's job series P 250) and which was related to the UPX-1. Prior to April 27, 1953, petitioner obtained from Washington, D.C., copies of the patents which R.C.A. had cited in its letters of October 7, 1952, and January 27, 1953. William L. Hoyt of petitioner's engineering department examined the patents and drafted a memorandum advising petitioner that there had been a limited use of some of the patents *242 in job numbers P 249, P 249A, P 249B, P 249C, P 250, P 250A, and P 465. All of these job numbers pertained to the same or related equipment. *644 On April 27, 1953, a conference was held at the R.C.A. offices in New York to discuss the royalty situation. Present at the conference for petitioner were Hamre, Hoyt, and Ronald N. Jones, then assistant treasurer and a director of petitioner. Representing R.C.A., among others, was W. C. Moore, license administrator, commercial department. No attorneys were present for either party. During this meeting petitioner's representatives stated to R.C.A. that although a few R.C.A. patents may have been utilized, other patents cited by R.C.A. had either not been utilized or their application to petitioner's equipment was questionable. The remainder of the meeting was taken up by Moore's presentation of R.C.A.'s position. According to a letter dated May 11, 1953, written by Jones and addressed to F. William Andres of Sherburne, Powers & Needham -- At this conference, GCC was told the following things: 1. That both UPX-1 and UPM-4A equipments are covered by the original License Agreement * * *. Comment: "GCC engineers say the descriptions*243 of equipment covered are sufficiently vague so they could or could not apply as the case might be." 2. That, according to RCA, if one teensy little circuit of an equipment is covered by an RCA patent then it makes no difference whether or not any other circuits are covered by patents because a royalty is due on the whole equipment. Comment: "It does not say this in the License Agreement and I wonder whether or not this is true." 3. RCA would like us to sign a new License Agreement, a specimen copy of which is enclosed, since the definitions in this would cover this equipment more thoroughly. Comment: "Maybe good, maybe bad." The letter requested Andres' advice with respect to the following questions: (1) Should G.C.C. accept the applicability of the agreement to the equipment in question, "or should we fight on the basis that these definitions do not apply * * * ?"; (2) Is petitioner obligated to pay 1 per cent of the adjusted sales price of the total equipment, even though only one patented circuit may have been used? Should G.C.C. make an issue of this point?; (3) Should G.C.C. "fight" the applicability of the patents generally? "Our engineers feel that in all *244 of the patented circuits there is room for discussion of our utilizing them"; (4) Would G.C.C. be better off under the new agreement that R.C.A. wanted G.C.C. to enter into? Is it better to pay royalties as a licensee or to operate without a license and risk liability for infringement? "As a general guide, our engineering department feels that the state of the electronic art is such that it is difficult to: (a) not use someone else's circuit in one way or another, or (b) show that two circuits are identical as to kind and function. Many times, the same circuit can be used *645 for different end reasons. I do not know if this absolves one from being under a patent." The letter concluded, as follows: As a general rule of thumb to indicate the extent of RCA's claim for royalties, bear in mind that GCC has produced 875 UPX-1's at an approximate sale price of $ 4,000 each and 625 UPM-4A's at an approximate sale price of $ 3,000 each. Also, I believe RCA is collecting interest at the rate of 6 per cent on unpaid royalties due. Further, we have billed almost all of this equipment. Your decision as to who should handle this for the company is, of course, of paramount importance. *245 If it should develop that patent specialists should be called in then would you advise me who. In October 1953, Andres, who was also a director and vice president of petitioner, conferred with an R.C.A. representative who was seeking access to petitioner's records to enable him to determine the extent of petitioner's royalty liability. The R.C.A. representative stated to Andres that R.C.A. was not interested in any information or audit of petitioner's records prior to June 30, 1951. Petitioner, however, never received any confirmation in writing which might be construed as a waiver by R.C.A. of its claims for royalties accruing prior to that date. In early 1954, after obtaining security clearance, an R.C.A. representative named Zeng made a 3-day audit of petitioner's invoices, salesbooks, and contracts for the P 249, P 250, and related jobs; petitioner assisted in this audit, supplying records which showed shipments made, prices charged, and units remaining to be shipped. In addition to his investigation with respect to the aforementioned job numbers, Zeng examined a manual of information and maintenance data pertaining to a radar beacon, and an instruction book for certain test*246 sets, then being manufactured by petitioner; these items were unrelated to the P 249, P 250, and related jobs. By letter dated March 2, 1954, R.C.A. claimed that petitioner should also report for royalty its sales of the radar beacon and test sets, inasmuch as that equipment allegedly used three and two R.C.A. patents, respectively, covered by the license agreement. Meanwhile, in December 1953, petitioner, on Andres' recommendation, engaged Robert B. Russell of Boston as patent counsel for purposes of determining whether petitioner was liable under the agreement and, if so, the extent of the liability. Sometime after April 1954, Russell obtained the necessary security clearance and, together with petitioner's engineers, studied the applicability of the R.C.A. patents. On July 16, 1954, Russell delivered a written opinion based upon his preliminary investigation to petitioner's general counsel. The opinion advised that petitioner had definitely used four R.C.A. patents in its job number P 249, that R.C.A. patents very probably had been utilized in job number P 250, and that *646 petitioner should consider "the three alternatives of (a) paying up, (b) compromise and (c) fighting." *247 Russell noted that the principal difficulty involved in the payment alternative was determining "which equipments are applicable and to what extent these equipments come under the license," a process which might take "considerable study." In this connection he suggested finding out whether petitioner could recover its royalty payment from the Government in which case the entire problem might easily be disposed of. Failing that, Russell advised an investigation of the tax benefits attendant upon payment. Under the compromise alternative, Russell pointed out that "only minor patents" of R.C.A. had been utilized, and advised that petitioner might offer to pay the difference between the actual cost incurred by it in manufacturing those elements of the equipment which utilized these patents and the price at which petitioner could have obtained such parts from licensed manufacturers on the open market. Russell was "reasonably sure that payment on this basis would come to a substantially less figure" than payment computed according to the license agreement. In discussing other factors bearing on the desirability of compromise, Russell referred to "the weakness of RCA's patent position," *248 as follows: While I have previously stated that GCC infringes technically, I am reasonably confident that we are going to be able to find numerous other patents which have either expired or which antedate the RCA patents in question showing circuits so similar to the GCC circuits that we will have a strong argument to the effect that we are practicing the prior art rather than the RCA patents. * * * The argument described above is sometimes referred to as the "expired patent theory." It is based on the term of the agreement which confines its applicability to "unexpired" patents. He also noted that R.C.A.'s right of recovery under the patent laws (as distinguished from its remedy on the contract) was limited to suit against the Government, and that this fact represented "certain bargaining strength in favor of GCC to bring about a compromise settlement." The third alternative, fighting R.C.A., was stated to depend primarily on the discovery of prior art sufficient to cover petitioner's equipment and support the "expired patent theory." This would necessitate an intensive prior art search in Washington, D.C., and Russell estimated his own expenses in making such a search at *249 $ 1,000. As an "additional defense," Russell suggested a public policy argument attacking the contract itself and based on the theory "that the RCA contract is exceedingly oppressive * * * in that it specifies no patent numbers and throws the burden of searching upwards of 3,000 patents upon a small operator who has no staff to carry out the same. It is perfectly apparent to me that *647 the RCA license actually uses a great host of inapplicable patents to secure domination in the industry that is not altogether justified." Russell concluded that, "In my opinion this line of argument renders the RCA contract quite vulnerable, but still I would not consider it wise to fight RCA on this basis alone. The case would be greatly strengthened by good patent arguments supplementing the collateral attack on the contract itself." Beginning in early August 1954, Russell had conferences with Andres and others for discussion of his written opinion. As a result of these conferences, petitioner was advised that it was liable to the extent that it had utilized unexpired R.C.A. patents. However, at the same time, Andres authorized Russell to make a patent search in Washington, D.C., in an *250 effort to develop a basis for compromising or defending against petitioner's liability and, in addition, to give petitioner leverage in bargaining with R.C.A. about a new license agreement. Andres gave no specific advice with respect to actual payment to R.C.A., but petitioner did not intend to take any steps toward payment until Russell came back with his report. Petitioner was further advised by Andres to compute its potential liability and to accrue the resultant amount as an account payable for the fiscal year ending September 30, 1954. The relevant computations were made by Jones for the fiscal years 1950 through 1954; he was advised by Russell and assisted by some of petitioner's employees. The computations were based on the amounts billed by petitioner to the Navy for shipments of equipment designated by job numbers P 249, P 249A, P 249B, P 249C, P 250, P 250A, and P 465. Total billings for the aforementioned job numbers, as shown on the work sheets in evidence, was $ 7,572,012.69 made up of the following amounts for each of the fiscal years indicated below: — 1950 — $ 15,959.82 — 1951 — 625,378.93 — 1952 — 2,992,327.30 — 1953 — 3,093,496.64 — 1954 — 844,850.00 Total 7,572,012.69 *251 These computations were not completed until October 1954 when petitioner made the following journal entry which was backdated to September 30, 1954: Debit royalty $ 75,000 Credit Accounts Payable-Trade to record liability for $ 75,000 royalty payment in accordance with terms of a license agreement with Radio Corporation of America dated January 2, 1947. The accrued liability of $ 75,000 represented 1 per cent of the base figure of $ 7,572,012.69, as rounded off. No adjustments were made *648 in the base figure to reflect possible "deductions" or exclusions allowable under the license agreement, although Russell advised petitioner that deductions might be taken for certain tubes, instruction books, and "perhaps" packing materials. Nor was any amount included in the base figure to reflect the additional claims asserted by R.C.A. with respect to the radar beacon and test sets. As of October 1954, Jones estimated the amount of such possible additional claims at $ 50,000, based on billings of approximately $ 5,000,000. No advice had been received from counsel with respect to petitioner's liability for these additional claims, nor had petitioner made or *252 authorized any investigation with respect thereto. In its return for the taxable year ended September 30, 1954, which was required to be filed by December 31, 1954, petitioner showed a net income of $ 578,259.01, and cash, accounts receivable, and earned surplus in the respective amounts of $ 1,461,066.35, $ 663,013.68, and $ 840,957.42. During October 1954, Russell went to Washington, D.C., to undertake the patent investigation suggested in his written opinion of July 16, 1954, and subsequently authorized by petitioner; while in Washington, Russell was assisted by petitioner's personnel or consultants. On or about November 17, 1954, Russell conferred with Andres about the results of his investigation and submitted a memorandum dated November 16, 1954. The memorandum listed grounds challenging all seven of the R.C.A. patents utilized in job number P 250, and five of nine patents utilized in job number P 249, as relying too heavily on prior art and/or expired patents. A sixth patent allegedly involved in job number P 249 was reported as "not infringed." As to the remaining three patents utilized in P 249, which had not been anticipated by prior art or expired patents, Russell suggested*253 that the royalties attributable thereto might be separated from the royalties attributable to the remainder of the equipment. The memorandum is set forth below: P 250 1. Patent No. 2,027,054, Push-Pull: (Infringed). This patent combines the phase splitting function of a resistance coupled triode with an equally old push-pull arrangement. It is very weak and the defense of invalidity is well established. 2. Patent No. Re-21,749, Voltage Regulator: (Infringed). This type of voltage regulation dates back well before the critical date of this patent, and, in my opinion, the patent is actually very little more than a combination of old and fully understood elements of the radio art. 3. Patent No. 2,092,871, Beam Centering: (Infringed). This is a mere shell of a patent having been granted for a gang control of two elements which were previously separately controlled. A very good illustration of my proposition that R C A has been re-patenting old devices under the guise of television and advanced electronics. *649 4. Patent No. 2,101,520, Blocking Oscillation: (Infringed). This patent attempts to obtain coverage in television on the functioning of a tube*254 which was well understood prior to the patent involved. Van der Pol described the phenomenon completely in 1926. The patent was applied for in 1932 and the whole emphasis of this was the application of this phenomenon for synchronizing pulses in television. I do not regard the patent valid because at best it is a new use for an old item. 5. Patent No. 2,121,359, Marker Generator: (Infringed). The only claims in this patent that we infringe are those which are so broad that they are obviously invalid. These claims (specifically claim 6) claim superimposing on the sweep of a cathode ray tube marker pulses generated by a separate time source. This was done as early as 1927, eight years prior to the critical date of this application. 6. Patent No. 2,137,039, Saw Tooth Generator: (Infringed). Saw tooth waves have been generated in many forms prior to this application, and at best this patent is similar to some of the foregoing in that it is merely a use in television of elements previously well understood in cathode ray tube operation for testing and wave analysis. 7. Patent No. 2,307,249, Brilliance Control: (Infringed). This patent covers the brilliance control for*255 television which is precisely the same in its essential function as certain restoration circuits for overloaded grids used in the early days of radio. The defense against this patent is the same as the foregoing, that it is a transportation of radio knowledge into the television field. P 249 8. Patent No. 2,046,237, Automatic Volume Control: (Not infringed). 9. Patent No. 2,113,011, Counting Down: (Infringed). This patent is substantially anticipated by patent No. 2,092,887. 10. Patent No. 2,181,871, Lighthouse Tube * * *: (Infringed). We have no direct anticipation of this circuit, but since it is in one of the components sublet by GCC, it may be easy to segregate a royalty payment on it. 11. Patent No. 2,212,851, Transit Time Damping: (Infringed). This patent is clearly invalid over posthumous patent No. 2,119,351. 12. Patent No. 2,246,331, Grounded Grid Amplifier: (Infringed). This patent is clearly invalid because its structure was fully disclosed in the early 1920's some ten years before its critical date. 13. Patent No. 2,276,565, Clipper (Crosley): (Infringed). This structure was covered in other patents of RCA prior to the critical date*256 of this application, and therefore, in our opinion, it is clearly invalid. 14. Patent No. 2,309,258, Amplitude Limiter: (Infringed). The structure of this patent was fully disclosed in a prior patent No. Re-14,752. 15. Patent No. 2,401,717, Antenna Input on Will (Lost Interference): (Infringed). We have no direct anticipation for this patent, but since it is employed only in an item sublet by GCC, it would seem that we can work out a suitable royalty arrangement thereon segregating it from the rest of the GCC equipment. 16. Patent No. 2,438,832, Lighthouse Tube * * * (Infringed). We have no direct anticipation for this patent, but since it is employed only in an item sublet by GCC, it would seem that we can work out a suitable royalty arrangement thereon segregating it from the rest of the GCC equipment. On November 23, 1954, petitioner's general counsel addressed a letter to R.C.A. stating that petitioner's patent counsel had completed his *650 "preliminary examination" of various patents involved in R.C.A.'s claim and requested a conference with R.C.A. and counsel with respect to "this entire matter." A meeting was arranged but was canceled by Moore of R.C.A. *257 because of the unexpected absence of R.C.A.'s counsel. Since 1946 Zenith Radio Corporation and R.C.A. had been engaged in litigation challenging the validity of the R.C.A. patent structure. The litigation was of considerable scope, involving 20 patents and 5 separate suits. Prior to September 30, 1954, both Andres and Russell were aware of the existence of this litigation, but were of the opinion that it had little or no bearing on the immediate position to be taken by petitioner against R.C.A. On November 19, 1954, the United States of America filed suit against R.C.A. in the United States District Court for the Southern District of New York alleging, among other things, that R.C.A.'s patent-licensing agreements violated certain provisions of the antitrust laws and praying that such license agreements between R.C.A. and its licensees be adjudged illegal and in restraint of trade, and for certain other relief. Andres and Russell subsequently discussed the bearing of this suit on petitioner's position. Russell was convinced that the Government's suit was "very weak." He thought the Government was proceeding on the wrong theory in arguing that R.C.A. was inhibiting basic research*258 and limiting competitive licensing in the radio field; instead, Russell felt, the Government should have argued that "RCA was extracting royalties from the licensee from the mere practice of expired patents." On March 18, 1955, Russell met with Moore and Zellars of R.C.A. in New York. Andres and Deland were unable to attend because of weather conditions in Boston. Russell prepared a memorandum of the conference indicating that petitioner was concerned not only with negotiating a new license agreement, but also with defending against or settling its alleged liability under the license agreement of January 2, 1947. Pertinent parts of the memorandum are set forth below: III. Points of Interest Several constructive things appeared. One related to a possible avenue of settlement with them, and the others related to the development of several new defenses in the event of suit. (A) Possible Avenue for Settlement. At this point RCA is taking a very strong stand against any monetary settlement of past operations under their license and they claim that they follow a "most favored nations" policy. * * * They said that they were very easy with licensees as regards terms for*259 payment, and the inference was that they would give GCC plenty of time to make a payment if that was desired. * * * I asked whether or not they ever gauged the royalty on a contract in relation to what the royalty might have been if the infringing items had been *651 subcontracted to RCA licensees. They said that they had never done that and that industry did not want such a pattern * * *. However one alternative did appear, in circumstances where a licensee can offer RCA cross licensing privileges under certain patents, then RCA feels it can upset its so-called most favored nations policy because other licensees are not in a position to grant such cross licensing privileges. This lead me to believe that GCC might make a settlement of this situation by obtaining licensing rights under certain patents for a small amount and use such patents as a means for bargaining on the entire proposition. Incidentally, they did state that the RCA policy was definitely not to sue if they could avoid suit. In addition, Moore refused to admit that there was anyone who was presently flouting their patents and refusing to take a license. I happen to know that there are several who are doing*260 just that. Perhaps the way Moore justifies this is by saying that they have not finally refused to take a license. Perhaps the way that GCC can handle this situation is by saying they never flatly refused to take a license, but on the other hand, to continue stalling and never agree to take a license. (b) New Defenses. It seems to me that now that the RCA pool does not have any patents of any substance covering systems for radio and radar, their licensing policy of refusing to permit royalties to be gauged on components is an actual extension of the patent rights available to them. In other words they are, in effect, getting a royalty on expired system patents and making industry pay this royalty on the basis of component patents. Moore admitted to me that some day such a situation would arise, but in his opinion it had not yet arisen. I believe that we can establish, if we ever have to, that that day has already arrived. The second new defense is somewhat similar to the foregoing and relates to the policy of permitting licensees to reduce the royalty payment in connection with goods purchased from RCA licensees. If a royalty has already been paid to RCA on a component*261 part used by GCC, GCC can deduct that portion from the royalty payment to RCA. The way this works out, however, amounts to an extension of monopoly because once the patent upon which the supplier has been paying its royalty expires, the supplier no longer pays the royalty and GCC commences to pay it. In other words, this amounts to a provision whereby GCC commences to pay a portion of royalty based on an expired patent. This procedure was held to be illegal in the case of Scott v. Marcalus, 326 U.S. 249-264, 67 USPQ 193. IV. Conclusion At the conclusion of the conference Moore suggested that I get together with the RCA patent people and discuss the question of infringement or lack of infringement by GCC. I told them that I did not know whether or not my principals would want me to do this and that they would be hearing from us one way or the other within a month or so. Personally, I am not anxious to do this because it is quite apparent that all that would happen would be to have RCA make a further search and cite additional patents, creating a cause for additional expense by RCA. [sic] On the other hand, we may not be *262 able to avoid such an additional search in any event. The one clear thing appearing from the conference was that, at least for the moment, there is no easy approach to settling this matter quickly or peacefully. Russell also questioned the R.C.A. representatives about the Government's antitrust action then pending against R.C.A., but they belittled its significance. *652 Early in 1955, Andres advised petitioner to defer making any royalty payments to R.C.A. under the license agreement pending further advice as to the possible outcome of the antitrust action. On July 22, 1955, Andres submitted to Russell a memorandum of law prepared by another attorney on the question of whether title 28, United States Code, section 1498, provided petitioner with a defense to a suit for royalties by R.C.A. The memorandum stated that section 1498 did not provide a defense to a suit for royalties due under the license agreement, but that it provided a good defense to an infringement suit based on sales to the Government after the expiration of the license agreement. With respect to the latter sales, the memorandum confirmed the advice in Russell's written *263 opinion of July 16, 1954, namely, that R.C.A.'s exclusive remedy under the patent laws (as opposed to a suit based on the license agreement) was a suit for damages against the Government in the United States Court of Claims. On November 7, 1955, a conference was held in Boston between Russell, Andres, Jones, and Deland, representing petitioner, and Zeng and a person named Thorpe, representing R.C.A. At this conference, petitioner informed the R.C.A. representatives that it would make no royalty payments to R.C.A. while the Zenith suit and the antitrust suit were pending against R.C.A. According to the memorandum of this conference, prepared by Russell and dated November 16, 1955, the parties also discussed without reaching a conclusion the possibility of a new license agreement permitting G.C.C. to sublet those elements of its equipment which were covered by R.C.A. patents. Petitioner's representatives also suggested an arrangement whereby petitioner would pay a royalty on Government work providing the Government approved the royalty; Thorpe pointed out that Hughes Aircraft Company had such a license from R.C.A. and agreed to send petitioner a form of license along those lines. *264 As an alternative, Thorpe stated that petitioner might obtain a license for only one or a few of the R.C.A. patents. Thorpe also offered to waive R.C.A.'s claim against petitioner for royalties from December 31, 1954, to the time of execution of a new license agreement. The conference concluded as set forth in the following excerpt from the memorandum: We concluded the meeting by saying that we did not admit liability under the contract, but that we would be glad to entertain any proposals that RCA might care to make along the lines of the Hughes Aircraft Company license. In addition, during the conference I had pointed out to Mr. Thorp that the principal point of vulnerability of the RCA pool was the fact that it definitely seemed to be exacting a royalty on expired patent constructions. Mr. Thorp expressed great interest in this approach and suggested that I bring my material to New York and discuss the matter with RCA patent counsel. At the *653 conclusion of the meeting it was tentatively agreed that we would be sent a Hughes Aircraft Company type of license for consideration. Thereafter we would go to New York bringing any patents belonging to GCC for cross licensing*265 evaluation by RCA and to discuss * * * the proposed GCC defenses against RCA in a possible future suit. After concluding this phase of the conference, we discussed in detail the question of whether or not the remote control box part of the GCC equipments sold to the Government should be included in the royalty determination. Mr. Thorp agreed that it should not be included because of the fact it was an accessory. "About a year" after petitioner concluded its October 1954 computations, it computed the amount of permissible deductions from the royalty base to be $ 900,000, taking into account costs attributable to instruction books, tubes, and packing material. The pertinent computations were presented to R.C.A., but it did not agree that they represented permissible deductions. A $ 900,000 deduction from royalty base would have meant a $ 9,000 reduction in the accrued royalty liability of $ 75,000. Part of the Zenith litigation was settled in 1957. On October 28, 1958, the Government's antitrust suit against R.C.A. was terminated by a consent decree, and petitioner was advised by counsel that the decree absolved petitioner of any liability for royalties under the license agreement. *266 Petitioner has never paid any royalties to R.C.A. During the fiscal year ending September 30, 1958, petitioner canceled the accrued royalty liability on its books and included the $ 75,000 as income for that year. However, losses reported by petitioner for the fiscal year 1958 absorbed that amount, and no tax was in fact paid in respect thereof. OPINION. We have carefully considered the testimony and documentary evidence of record and have come to the conclusion that the accrued royalty liability in question was not sufficiently fixed or definite as of September 30, 1954, to warrant deduction at that time. The requirements for the deductibility of accrued liabilities have been variously stated. In Dixie Pine Products Co. v. Commissioner, 320 U.S. 516, 519, it was regarded as settled law "that in order to truly reflect the income of a given year, all the events must occur in that year which fix the amount and the fact of the taxpayer's liability for items of indebtedness deducted though not paid; and this cannot be the case where the liability is contingent and is contested by the taxpayer." And in Lucas v. American Code Co., 280 U.S. 445, 450,*267 it was stated that an accrued liability is not to be regarded as fixed unless there is "a definite admission of liability, negotiations for *654 settlement are begun, and a reasonable estimate of the amount of the loss is accrued on the books." Without deciding whether the estimate accrued on petitioner's books was reasonable, we are satisfied from the record that petitioner had not admitted its liability as of the close of the taxable year, nor had it entered into negotiations for settlement. Petitioner argues that in the absence of a previous denial of liability, such as by judicial contest or express repudiation, the requirement of admission is superfluous and unrealistic. We cannot agree. The taxpayer has the burden of proving that the asserted liability was in fact uncontested. The presence of an admission, express or implied, serves as direct proof that the taxpayer was not contesting liability. But absence of an admission, while not conclusive proof of a contest, certainly leaves a gap in petitioner's proof in the circumstances of this case. 1 A taxpayer may resist payment of an asserted claim in more subtle ways than express denial of liability or adoption of a *268 litigious attitude. The facts of the instant case are an excellent example of this, for without evidencing express denial, they strongly indicate that petitioner intended to resist payment, in an effort either to compromise its liability or, if necessary, defend against it. By letters dated October 7, 1952, and January 27, 1953, R.C.A. demanded that petitioner report the sales of the equipment in question for royalty. As of September 30, 1954, petitioner had not submitted even a tentative report or computation to R.C.A. To the contrary, on December 23, 1952, it notified R.C.A. of its prior assumption that products manufactured on governmental orders were not subject to patent applications, and that it might be necessary ultimately to employ patent counsel. At the conference of April 27, 1953, petitioner made no effort to open settlement negotiations, but merely listened to the presentation of R.C.A.'s position with regard to interpretation of a difficult and complex license agreement. Although petitioner may have conceded the limited use of a few R.C.A. patents, it denied or questioned the use of others and made no concessions with respect to the validity of the patents in question, *269 including those it had used. Such concession of limited use would hardly constitute an admission of general liability for royalties; petitioner itself indicated as much when Jones, in his letter to counsel summarizing the conference, stated petitioner's serious doubts as to the correctness of R.C.A.'s position under the agreement, asked counsel to investigate an entire range of questions bearing on the *655 issue of liability, and adverted again to the possibility of having to employ patent specialists. As of December 1953, petitioner's general counsel thought it necessary to employ patent counsel, and the questions of liability and the extent thereof were accordingly submitted to Robert B. Russell. Russell's written opinion of July 16, 1954, indicated definite optimism with respect to the possibilities of compromising or, if necessary, defending against R.C.A.'s claim. In confident terms, he referred to "the weakness of RCA's patent position" and his expectation of developing "a strong argument to the effect that we are practicing the prior art rather than the RCA patents." He also suggested a public policy argument which, in his opinion, rendered the license agreement "quite*270 vulnerable" when combined with his "expired patent theory." And, in discussing compromise, Russell advised an alternative method of computation which, he was "reasonably sure," would come to a substantially less figure than the method provided in the agreement. To develop these theories, Russell suggested he make a patent investigation in Washington, D.C., and petitioner authorized such an investigation. We cannot believe, as petitioner suggests, that it had ceased resisting payment as of September 30, 1954, which was prior to Russell's patent investigation. That view, expressed in Andres' testimony, is inconsistent with the optimism expressed in Russell's opinion. Russell himself admitted on cross-examination that one purpose of his Washington trip was to investigate a basis for compromising petitioner's liability and that "accordingly the company took no steps to make payment of the liability pending my further advice." Moreover, that view is not borne out by subsequent events. Russell's memorandum of his Washington trip indicates on its face that he had made considerable progress in developing the prior art, and renews the suggestion that a separate computation of royalty *271 might be made with respect to those patents not anticipated by prior art. At the conference of March 18, 1955, Russell was still concerned with a "possible avenue for settlement" in regard to "past operations" and with "new defenses." Petitioner suggests that these terms were used in regard to a possible R.C.A. suit for infringements occurring after December 31, 1954, when the license agreement expired; we do not agree. We have carefully studied the record and*272 are fully satisfied that these terms were not used in any such attenuated sense but were intended to refer to the basic controversy between petitioner and R.C.A. relating to petitioner's liability under the license agreement. We are of the opinion that the liability which petitioner attempted to accrue as of September 30, 1954, was neither fixed nor uncontested at that time; it was in the nature of a reserve for contingencies, justified *656 perhaps for purposes of sound business accounting but too uncertain to permit of deductibility. Decision will be entered for the respondent. Footnotes 1. Producers Fuel Co., 1 B.T.A. 202, cited by petitioner, is not in point since in that case settlement negotiations began, and offers of settlement were made, during the taxable year. Cf. Sunset Color Works, 21 B.T.A. 304; Hidalgo Steel Co., Inc., 8 B.T.A. 76; Bump Confectionery Co., 4 B.T.A. 50; New Process Cork Co, 3 B.T.A. 1339; Lucas v. American Code Co., 280 U.S. 445↩.