DocketNumber: Docket No. 17284-12
Citation Numbers: 143 T.C. 194, 2014 U.S. Tax Ct. LEXIS 43, 143 T.C. No. 10
Judges: MARVEL
Filed Date: 9/23/2014
Status: Precedential
Modified Date: 11/21/2020
Decision will be entered under
In 1997 P-H, an inventor, transferred several patents to T, a corporation. Ps own 24% of the outstanding stock of T. P-W's sister and Ps' friend own the remaining stock. P-H controlled T through its officers, directors, and shareholders. Ps reported royalty income that P-H received from T in exchange for the transfer of the patents as capital gain under
In 2006 P-H paid the engineering expenses of a related corporation. Ps deducted these expenses as professional fees on a Schedule C, Profit or Loss From Business, attached to their 2006 Federal income tax return.
Between 2005 and 2008 Ps advanced $2,046,901 to X, a corporation, under the terms of a working capital promissory note. P-H owned 24% of the outstanding stock of X during the years at issue. X contracted with an Indian company to develop a new product, and it used Ps' loans in part to fund the development of the new product. In 2008 the Indian company abandoned its development of the new product. Ps claimed that X was insolvent and claimed a bad debt deduction under
R determined that (1) the royalty payments P-H received from T did not qualify for capital gain treatment; (2) the engineering expenses were the ordinary and necessary expenses of a related corporation and Ps were not entitled to deduct those expenses; (3) Ps were not entitled to a bad debt deduction for 2008; and (4) Ps were liable for an accuracy-related penalty under
*195 MARVEL,
Some of the facts have been stipulated and are so found. The stipulations of facts are incorporated herein by this reference. Petitioners resided in Nevada when they petitioned this Court.
Mr. Cooper is an engineer and inventor. He has an undergraduate degree in electrical engineering from Oklahoma State University and is the named inventor on more than 75 patents in the United States.5 His patents are primarily for products and components used in the transmission*45 of audio and video signals. Petitioner Lorelei Cooper has an undergraduate degree in communications from Kent State University. She is not the named inventor on any patents.
In 1988 Mr. Cooper consulted Daniel Leckrone, an attorney specializing in patent law and patent licensing, regarding Mr. Cooper's portfolio of intellectual property. These consultations *197 led to an agreement (commercialization agreement)6 among Mr. Leckrone, Mr. Cooper, and Pixel wherein Mr. Cooper and Pixel assigned their portfolio of audio and video patents to VidPro,7 a licensing company formed by Mr. Leckrone.
A number of disputes arose between Mr. Cooper and Mr. Leckrone under the commercialization agreement. In 1997 Mr. Cooper sent Mr. Leckrone notice that he was terminating the commercialization agreement. Mr. Cooper contended that under the terms*46 of the commercialization agreement the patent rights held by VidPro automatically reverted to him as a result of the termination notice. Mr. Leckrone disagreed. Ultimately, this dispute led to litigation between Mr. Cooper and Mr. Leckrone, VidPro, and an attorney on VidPro's board of directors (Cooper-Leckrone litigation).8
Subsequently, petitioners, believing that all rights in VidPro's audio and video patents reverted to Mr. Cooper, incorporatedTechnology Licensing Corp., a California corporation (TLC),9 with Lois Walters and Janet Coulter. Ms. Walters is petitioner Lorelei Cooper's sister and Ms. Coulter is a long-time friend of Ms. Cooper and Ms. Walters. Ms. Coulter and Ms. Walters resided in Ohio from 1997 through *198 2013, and both worked full time with companies other than TLC during the years at issue.10*48 Neither Ms. Coulter nor Ms. Walters had any experience in patent*47 licensing or patent commercialization before their involvement with TLC.
Petitioners incorporated TLC to engage in patent licensing and patent commercialization. They wanted TLC to have the "aura" of a fully operating licensing corporation but also wanted people Mr. Cooper could trust--such as their close friend Ms. Coulter and their relative Ms. Walters--to be the shareholders, officers, and directors of TLC.11
Petitioners engaged Attorney R. Gordon Baker, Jr., to provide advice on forming TLC. Among other things, Mr. Baker advised petitioners on the requirements of
Consistent with Mr. Baker's advice, the outstanding stock of TLC at formation was as follows: petitioners as cotrustees of the Cooper Trust owned 240 shares (24%); (2) Lois Walters owned 380 shares (38%); and (3) Janet*49 Coulter owned 380 shares (38%). Ms. Walters and Ms. Coulter each made an initial contribution of $3,800 to TLC in exchange for their shares while petitioners as cotrustees of the Cooper Trust contributed $2,400 for the trust's shares. Ms. Walters, Ms. Cooper, and Ms. Coulter were the president and chief financial officer, vice president, and secretary of TLC, respectively.12Mr. Cooper was the general manager of TLC.
*199 On March 15, 1997, Mr. Cooper and Pixel entered into agreements (collectively, TLC agreements) with TLC purportedly transferring all of Mr. Cooper's and Pixel's rights in the patents (subject patents) giving rise to the royalties at issue in this case to TLC. Under each TLC agreement, the licensor (i.e., Mr. Cooper or Pixel) receives 40% of all gross proceeds received by TLC for any sublicense and 40% of all damages received in litigation or settlement of litigation. The licensor then*50 receives 90% of all remaining net proceeds as defined in the TLC agreements.
By 1999 TLC had begun experiencing financial difficulty. It could not effectively license its patents because the patents were the subject of the Cooper-Leckrone litigation and potential licensees were wary of TLC's authority to license the patents. Furthermore, TLC needed legal representation to pursue patent infringement cases.
In an effort to solve TLC's financial difficulties, Mr. Cooper contacted Anthony Brown, who was in the business of helping inventors protect and enforce their patents. Mr. Brown owned IP Innovation, LLC (IP Innovation). Subsequently, TLC, Mr. Cooper, and Pixel entered into an agreement (IP Innovation assignment agreement) with IP Innovation assigning an undivided interest in Patent # 5,424,780 (780 patent) to IP Innovation.13 Then, IP Innovation, Mr. Cooper, Pixel, and TLC engaged the patent law firm of Niro, Scavone, Haller & Niro (Niro firm) to represent their interests with respect to the 780 patent. Mr. Cooper agreed to provide technical assistance to the Niro firm as necessary to assist the firm in interpreting the patents, technology, and devices that would be the subject of the*51 licensing and infringement matters the firm was pursuing. Mr. Cooper was not compensated for providing technical assistance to the Niro firm.
On February 28, 2003, TLC and its shareholders adopted a stock restriction agreement providing in relevant part that *200 TLC's shares could not be sold, assigned, or transferred except according to the terms of the stock restriction agreement. Under the agreement petitioners were permitted to transfer shares of TLC stock to their issue or any trust for the benefit of their issue. No other TLC shareholder (i.e., Ms. Coulter or Ms. Walters) was permitted to transfer shares of TLC stock to her issue or any party other than a shareholder. Mr. Baker drafted the stock restriction agreement in his role as petitioners' estate*52 planning attorney. Despite owning a majority of TLC's outstanding stock and being on the board of directors, neither Ms. Coulter nor Ms. Walters negotiated the terms of the stock restriction agreement.14
In 2004 Anthony Brown formed New Medium, LLC (New Medium), and AV Technologies, LLC (AV Technologies), to pursue patent commercialization. TLC, Pixel, and Mr. Cooper subsequently entered into licensing agreements for certain patents with both New Medium and AV Technologies (collectively, New Medium and AV Technologies agreements). In or about*53 2004 Acacia Technologies Group (Acacia) purchased IP Innovation and IP Innovation became a subsidiary of Acacia. On March 23, 2005, the parties to the New Medium and AV Technologies agreements and the IP Innovation assignment agreement clarified by agreement (letter agreement) that all material decisions (i.e., licensing, litigation, and prosecution) with respect to the New Medium and AV Technologies agreements and the IP Innovation assignment agreement were to be made according to a majority vote of Mr. Cooper, Acacia,15 and Anthony Brown. Under the letter agreement TLC did not have a vote with respect to the material decisions under either the IP Innovation assignment agreement *201 or the New Medium and AV Technologies agreements.16*54
Among the patents transferred by Mr. Cooper to TLC under the terms of the TLC agreements were three patents known as the "Lowe patents". The Lowe patents included the
On January 23, 2006, Mr. Cooper transferred the Lowe patents to Watonga Technology, Inc. (Watonga). The shareholders of Watonga were as follows: the Cooper Trust (1%); petitioners' son (11.5%); petitioners' daughter (11.5%); Ms. Coulter and Ms. Walters (76% combined). Ms. Coulter was the president of Watonga.17 Under the agreement transferring the Lowe patents to Watonga, Mr. Cooper received 55% of all net revenue (as defined in the agreement), and *202 Watonga retained 20% of all net revenue.18Watonga received $120,000 in gross receipts from the license of the
The amount of the royalties paid each year to Mr. Cooper was determined under the TLC agreements by accountants hired by TLC. Neither Ms. Walters nor Ms. Coulter, who were the majority shareholders as well as officers and directors, reviewed and verified the amount of royalties paid to Mr. Cooper each year.20 Similarly, neither Ms. Walters nor Ms. Coulter negotiated the terms of TLC's agreements to licence the subject patents to other companies. Instead, Ms. Walters and Ms. Coulter relied on TLC's attorneys and*57 the technical expertise of Mr. Cooper with regard to TLC's licensing activities. During the years at issue, Ms. Walters and Ms. Coulter's duties as directors and officers consisted largely of signing checks and transferring funds as directed by TLC's accountants and signing agreements as directed by TLC's attorneys. The only compensation Ms. Walters and Ms. Coulter received from TLC was director's fees paid during some years and long-term care insurance policies purchased by TLC in 2003. TLC had no employees and paid no compensation to any party.
We infer from the record and find that substantially all of TLC's decisions regarding licensing, patent infringement, and patent transfers were made either by Mr. Cooper or at his *203 direction. We further find that Mr. Cooper controlled TLC in all material respects. Ms. Coulter and Ms. Walters acted in their capacities as directors and officers of TLC at the direction of Mr. Cooper. They did not make independent decisions in accordance*58 with their fiduciary duties to TLC or act in their best interests as shareholders.
During late 2005 and 2006 Mr. Cooper engaged Mike Holmes of Holmes Development to complete reverse engineering and related services with respect to the
The invoices for the reverse engineering services were addressed to Mr. Cooper individually and not to TLC or Watonga.21 Yet TLC and Watonga were the principal owners of the
Petitioners incorporated Pixel in 1983 for the purpose*59 of designing and manufacturing audio and video signal processing products. Specifically, Pixel designed products to measure and correct errors in the synchronization of sound and video images. Mr. Cooper was the president of Pixel at all relevant times. Ms. Cooper held various positions with Pixel from 1983 to 2004, including the position of vice president.
In September 1995 Pixel executed a working capital promissory note (promissory note) wherein it promised to pay to the Cooper Trust all sums advanced to Pixel by the Cooper *204 Trust up to $1.5 million. On May 14, 2004, Pixel and the Cooper Trust amended the promissory note to increase the maximum loan amount to $2.5 million.
Until some point in 2006 petitioners wholly owned Pixel. In 2006 petitioners transferred 76% of their shares in Pixel to Mirko Vojnovic and Christopher Smith. Mr. Smith was a longtime consultant to Pixel. He and Mr. Vojnovic owned 22% and 54% of Pixel's shares, respectively, during the years at issue.22 They paid nothing or a de minimis amount for their shares. However, in conjunction with the Cooper Trust's transfer of shares to Mr. Smith and Mr. Vojnovic, Pixel transferred certain intellectual properties--including*60 its rights to royalties from the patents Pixel previously licensed to TLC--to Mr. Cooper.
When televisions changed from standard definition to high definition in the mid-to-late-2000s, many of Pixel's products became obsolete. In an effort to better compete in the marketplace, Pixel began developing a product known as Liptracker to correct lip synchronization errors in high definition televisions. Between 2005 and 2008 petitioners as cotrustees of the Cooper Trust advanced funds to Pixel under the terms of the promissory note. These funds were used in part to fund the Liptracker program.
Pixel contracted with an Indian company to complete the software development necessary for Liptracker. Pixel's goal was to have a working and salable Liptracker product for presentation at the National Association of Broadcasters convention in April 2008. Unfortunately, the Indian company could not fulfill its promise to develop the Liptracker software, and Pixel was unable to proceed with the development on its own. Pixel met with representatives from the Indian company in July 2008 who confirmed the company was abandoning its*61 development of the Liptracker software.
In 2008 Pixel faced financial difficulty. It had no new products in development--aside from the stalled Liptracker product--and few older products that were still marketable. Its gross receipts were in excess of $525,000 in both 2005 and 2006 but decreased significantly in 2007 and 2008.
*205 However, Pixel continued business operations through at least 2012. It was the assignee of many patents in 2008 and thereafter and had an active licensing agreement with TLC.23 Pixel's gross receipts were $92,603, $148,968, $26,912, $22,500, and $22,50024*62 for 2008, 2009, 2010, 2011, and 2012, respectively. Pixel had total yearend assets each year from 2008 through 2012 in excess of $172,000, including more than $319,000 in both 2011 and 2012.
Mr. Cooper continued to advance funds to Pixel under the terms of the promissory note throughout 2008. On December 31, 2008, the outstanding balance on the promissory note was $2,046,901. Mr. Cooper concluded at that time that Pixel could not pay the outstanding balance on the Pixel note, and petitioners treated the balance as a nonbusiness bad debt on petitioners' 2008 Federal income tax return. Petitioners did not initiate any type of litigation25 to recover the amounts they lent Pixel under the terms of the promissory note and it is unclear from the record what demands, if any, they made for payment of the outstanding balance.
Petitioners jointly filed Forms 1040, U.S. Individual Income Tax Return, for each of the years*63 at issue. They reported the royalty payments Mr. Cooper received from TLC as capital gain on Schedules D, Capital Gains and Losses, attached to their Forms 1040. The amounts of royalty payments petitioners reported for 2006, 2007, and 2008 were $3,248,886, $1,933,010, and $1,597,450, respectively. Petitioners also reported income and expenses from Mr. Cooper's patent licensing business on Schedules C attached to their *206 Form 1040 for each of the years at issue. Among the deductions claimed for 2006 was $108,519 for professional fees paid to Holmes Development during 2006. Finally, for 2008, petitioners claimed a bad debt deduction of $2,046,570 on a Schedule D attached to their Form 1040. This deduction was for the purportedly uncollectible loan to Pixel under the terms of the promissory note.
On April 4, 2012, respondent issued the notice of deficiency to petitioners. Respondent determined that (1) the royalties Mr. Cooper received from TLC did not qualify for capital gain treatment under
Ordinarily, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that the determinations are erroneous.
Petitioners do not assert nor have they proven that they are entitled to a shift in the burden of proof under
Respondent does not dispute that (1) the transfer of the patents to TLC under the TLC agreements was other than by gift,*67 inheritance, or devise; (2) Mr. Cooper qualified as a holder of the subject patents; and (3) petitioners owned less than 25% of TLC for purposes of
Neither the Code nor applicable regulations specifically address whether
The Court of Claims in
We agree that retention of control places the holder in essentially the same position as if the patent had not been transferred, thereby precluding the application of
Petitioners rely on the facts regarding control in
In
In
The taxpayer treated the royalties he received from Germane as capital gain under
The court found that although the relationships among the taxpayer, Germane, and the shareholders made more probable the existence of prohibited retained control, the evidence did not establish that the taxpayer was able to exercise such control over Germane.
The court noted, among other things, that the shareholders in Germane all had skills valuable to a small patent licensing company.
By contrast, TLC did not exercise its rights in the subject patents according to its own discretion. Both
As officers and directors of TLC, Ms. Coulter and Ms. Walters took numerous actions that are inconsistent with acting independently and in the best interest of the corporation. Among other things, Ms. Coulter and Ms. Walters approved TLC's transfer of potentially valuable patents to Mr. Cooper for no consideration. At least in one instance, Mr. Cooper almost immediately licensed one of these patents to another related corporation for which that corporation received a royalty of $120,000 in 2007. As shareholders Ms. Coulter and Ms. Walters signed a stock restriction agreement placing restrictions on their ability to transfer shares of stock in TLC to anyone other than petitioners, without receiving any consideration in exchange. The stock restriction agreement did not*75 place similar restrictions on petitioners.
Indeed, it is unclear what material decisions, if any, the officers and directors of TLC made independent of Mr. Cooper.35Mr. Cooper--and not the officers or directors of TLC--provided technical assistance to the Niro firm in interpreting the subject patents and relevant technology and in formulating patent enforcement strategies. Mr. Cooper conducted all technical matters for TLC-which in substance was all or a large part of TLC's activities. Furthermore, in his role as general manager of TLC and under the terms of the letter agreement, Mr. Cooper made all material decisions for TLC with respect to the IP Innovation assignment agreement and the New Medium and AV Technologies agreements.
*213 We do not find credible any testimony by petitioners that TLC was an independent corporation that Mr. Cooper did not control. We conclude that petitioners have failed*76 to meet their burden of establishing that they transferred all substantial rights in the subject patents to TLC pursuant to
Generally, a taxpayer is entitled to deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business.
Generally, a taxpayer who pays another taxpayer's business expenses may not treat those payments as ordinary and necessary expenses incurred in the payor's trade or business. See
Under the
Petitioners claimed a deduction of $108,519 in 2006 for professional fees paid to Mr. Holmes for reverse engineering services. Respondent disallowed this deduction in its entirety. Respondent contends that these expenses are properly chargeable to Watonga or TLC and are not Mr. Cooper's ordinary and necessary business expenses. Petitioners contend that these expenses are the ordinary and necessary expenses of Mr. Cooper's business as an inventor. Alternatively, petitioners contend that even if we find that the expenses are properly chargeable to Watonga or TLC, petitioners are still entitled to deduct the expenses.
Mr. Holmes' reverse engineering services included the disassembling of televisions and DVD recorders to determine how the products were designed and manufactured and whether any of the products infringed on Mr. Cooper's patents. The invoices for the reverse engineering expenses indicated that the services were completed with respect to the
Respondent does not dispute that Mr. Cooper was in the trade or business of patent commercialization and being an inventor during the years at issue. Mr. Cooper testified that he had a long-term working relationship with Mr. Holmes. The Holmes Development invoices, while referencing that the services were completed with respect to the
Mr. Cooper further testified that the services performed by Holmes Development were necessary in his trade or business to keep him apprised of current developments and current engineering practices for audio and video technology. He further testified that the services performed by Holmes Development helped him ascertain*82 whether certain products infringed on any patents that he had developed and commercialized. We conclude that the reverse engineering expenses were proximately related to Mr. Cooper's business as an inventor and their payment by him was ordinary and necessary.
The question of whether a debt became worthless during a taxable year is determined on the basis of all the facts and circumstances.
A debt is not worthless for purposes of a
An analysis regarding the deductibility of a bad debt must examine whether the debt was truly worthless, and if so, when it became worthless. The conclusions depend on the particular facts and circumstances of the case, and there is no bright-line test or formula for determining worthlessness within a given taxable year.
Petitioners contend that the promissory note became worthless in 2008 following the Indian company's abandonment of the Liptracker program. This action, according to petitioners, gave rise to the conclusion that there was no hope of recovering the outstanding amounts under the promissory note. We disagree.
Pixel had total yearend assets each year from 2008 through 2012 in excess of $172,000, including more than $319,000 in assets in 2011 and 2012 . It appears to us that Pixel remained a going concern well past 2008. The outcome of Pixel's arrangement with the Indian company and the failure of the Liptracker program do not support petitioners' claim that there was no longer any prospect of recovery of their loans to Pixel. More importantly, the proper inquiry in this case is not whether petitioners acted reasonably in their recovery efforts, but whether sufficient objective facts show that the debt became worthless during the year in question.*86 Here, the facts do not support such a determination.
Pixel experienced a decline in its business in 2008, but its gross receipts increased in 2009. Petitioners as cotrustees of the Cooper Trust continued to advance funds to Pixel under *219 the terms of the promissory note throughout 2008. Indeed, petitioners advanced $148,255 to Pixel under the terms of the promissory note between July and December 2008. We do not find it credible that petitioners would have advanced nearly $150,000 to Pixel after July 2008 if they believed the promissory note had been rendered worthless in July 2008 by the difficulties with the Liptracker program.40*87 The evidence shows that Pixel had substantial assets at the end of the 2008 tax year and that its gross receipts increased in 2009. Moreover, at the very least, Pixel was entitled to an indefinitely continuing annual royalty of $22,500 and owned rights in several other patents.
Mr. Cooper claimed that he consulted with Mr. Mitchell and they determined that filing a lawsuit against Pixel would be futile. Mr. Cooper then concluded that the promissory note was worthless. But petitioners failed to introduce evidence proving what information Mr. Mitchell analyzed to determine that litigation against Pixel would be futile and failed to introduce evidence proving the basis on which Mr. Mitchell made his purported conclusion. Petitioners have failed to satisfy their burden of proving that no prospect of recovery existed in 2008 and failed to prove that the promissory note became worthless in 2008.41
The Commissioner bears the initial burden of production with respect to the taxpayer's liability for the
A substantial understatement of income tax exists if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000.
Respondent has introduced sufficient evidence to demonstrate that petitioners have substantially understated their income tax liability for each of the years at issue. Petitioners have not alleged nor have they proven that they had substantial authority for all or any portion of the understatements or that they adequately disclosed their tax positions on their returns. Accordingly, if the
The term "negligence" includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws, and the term "disregard" includes any careless, reckless, or intentional disregard.
Respondent has met his burden to show that petitioners acted negligently or with careless disregard of rules and regulations with respect to the royalty payments Mr. Cooper received from TLC and with respect to the bad debt deduction for the promissory note. We have found that Mr. Cooper did not transfer all substantial rights to TLC within the meaning of
Taxpayers may avoid liability for the
Petitioners contend that they acted with reasonable cause and good faith based on their reliance on professional advice and therefore no
Mr. Baker testified with respect to the royalty payments and petitioners' compliance with
With regard to the bad debt deduction, petitioners have failed to introduce evidence regarding what information they provided to Mr. Baker and Mr. Mitchell to enable them to determine whether the promissory note was worthless within the meaning of
Because respondent has met his initial burden of production under
*224 We have considered*95 the remaining arguments made by the parties and, to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit.
To reflect the parties' concessions and the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Some monetary amounts have been rounded to the nearest dollar.
2. The parties stipulated or conceded that petitioners are entitled to deduct on Schedule C, Profit or Loss From Business: (1) travel expenses of $30,072, $18,432, and $21,444 for 2006, 2007, and 2008, respectively; and (2) professional fees of $82,585, $241,153, and $109,007 for 2006, 2007, and 2008, respectively.↩
3. The
4. The parties stipulated that on December 31, 2008, the outstanding balance on the promissory note was $2,046,901. However, petitioners claimed a nonbusiness bad debt deduction for the outstanding balance on the promissory note of $2,046,570 for 2008.↩
5. Mr. Cooper is also a patent agent entitled to represent third parties before the U.S. Patent and Trademark Office.↩
6. The commercialization of a patent generally includes finding companies to manufacture products using the patent as well as finding and suing patent infringers for damages.↩
7. At the time the commercialization agreement was signed VidPro was known as VideoTech.↩
8. The Cooper-Leckrone litigation ended in 2004 when a final arbitration award was entered determining, among other things, that the commercialization agreement was properly terminated as of January 21, 1997, and all rights, title, and interest that VidPro claimed in the patents were returned to Mr. Cooper or his assignee.↩
9. Petitioners moved their principal residence from California to Nevada in November 2003. Petitioners, Ms. Walters, and Ms. Coulter then formed a second Technology Licensing Corp. with the Nevada secretary of state (TLC Nevada). Petitioners as cotrustees of the Cooper Trust U.D.T. December 11, 1991 (Cooper Trust), contributed $240 to TLC Nevada in exchange for 240 shares in TLC Nevada, and Ms. Walters and Ms. Coulter each contributed $380 to TLC Nevada in exchange for 380 shares in TLC Nevada (38%). Ms. Walters, Ms. Cooper, and Ms. Coulter were the president and chief financial officer, vice president, and secretary of TLC, respectively. On February 24, 2004, TLC merged into TLC-Nevada with TLC-Nevada as the surviving corporation. We refer to TLC Nevada as TLC unless otherwise indicated.↩
10. Ms. Walters has a B.A. degree in finance from Cleveland State University. During the years at issue she was an employee of the National Multiple Sclerosis Society in Independence, Ohio. Ms. Coulter has a B.S. degree in animal science from Ohio State University and an M.S. in agricultural economics from the University of Wyoming. She owns her own construction company, Multi-Maintenance, Inc., in Ohio and was an employee of Multi-Maintenance during the years at issue.
11. TLC did not have an office or other formal business location.↩
12. Beginning in 2004 or 2005 and continuing through the years at issue, Ms. Coulter performed most of Ms. Walters' duties at TLC. At that time, Ms. Walters was working more than 50 hours per week for the National Multiple Sclerosis Society and spending substantial time caring for her ill father.↩
13. On August 12, 2002, TLC, Pixel, Mr. Cooper, and IP Innovation executed an agreement (exclusive license agreement) expanding IP Innovation's license beyond the 780 patent by providing an exclusive, perpetual, and irrevocable license to several additional patents. TLC, Pixel, Mr. Cooper, and IP Innovation amended the exclusive license agreement on October 31, 2002, and on November 12, 2004, the exclusive license agreement was terminated.↩
14. Neither Ms. Coulter nor Ms. Walters consulted an attorney before signing the stock restriction agreement, and neither could recall the circumstances of her signing the agreement. They did not receive any consideration for giving up their right to transfer their shares in TLC. Mr. Baker testified that the restrictions on Ms. Walters' and Ms. Coulter's ability to transfer shares in TLC were inadvertent and done in error. We find Mr. Baker's testimony unconvincing in the light of our finding that Mr. Cooper indirectly controlled TLC.
15. Under the letter agreement Acacia was defined as IP Innovation, New Medium, and AV Technologies.↩
16. The letter agreement provides that "all material decisions with respect to the * * * [IP Innovation assignment agreement and the New Medium and AV Technologies agreements] will be made by a majority of Cooper, the Acacia Companies, and Anthony Brown, including without limitation, all licensing, litigation, and prosecution decisions." Petitioners contend that the above-referenced provision in the letter agreement mistakenly uses the term Cooper instead of "Cooper Parties". "Cooper Parties" was defined in the letter agreement to include TLC, while "Cooper" was defined as J. Carl Cooper (petitioner James C. Cooper).
Generally, where the terms of a contract are unambiguous, we presume that the contracting parties intended what they stated and will interpret the contract as written.
17. Although she was Watonga's president, Ms. Coulter testified that she did not know whether Watonga licensed any patents during 2006.↩
18. The remaining 25% of net revenue was payable to Virgil Lowe or his nominee. Mr. Lowe was the original owner of the Lowe patents. He sold the Lowe patents to Mr. Cooper in 1995 for $40,000 and 25% of all net revenue received from any third party in connection with the license of the patents.↩
19. Watonga purportedly paid TLC $72,000 in 2007 with respect to the
20. Ms. Coulter testified that her review of the royalties paid annually to Mr. Cooper consisted solely of reviewing the statement provided by the accountants regarding the amount of royalties to be paid and agreeing with it.↩
21. Mr. Cooper transferred the
22. Mr. Vojnovic sold all of his Pixel shares to Mr. Smith in April 2011 for $1.↩
23. Pixel was the assignee or assignor on a number of filings with the U.S. Patent and Trademark Office from 2010 through 2012. Mr. Cooper testified that these assignments were confirming assignments that had occurred many years before and did not transfer anything new of value to Pixel. According to Mr. Cooper, these confirmatory assignments were necessary to show proper chain of title.↩
24. The gross receipts of $22,500 in 2011 and 2012 consisted of a single annual trademark royalty that will continue for the foreseeable future.
25. Mr. Cooper testified that he consulted attorney Mitch Mitchell, who had previously represented Mr. Cooper in the Cooper-Leckrone litigation, regarding pursuing litigation against Pixel for the balance due on the promissory note. Mr. Cooper claimed that he subsequently determined that litigation against Pixel would be futile.↩
26. The term "Secretary" means the Secretary of the Treasury or his delegate.
27. The term "holder" includes any individual whose efforts created such property.
28. Generally, an assignment is a transfer of all substantial rights to a patent,
29. We have previously stated that transactions between shareholders and their closely held corporations should be closely scrutinized in determining whether there has been a transfer of all substantial rights in a patent.
30.
31. In determining whether a transfer of all substantial rights to a patent has occurred, the language of the transfer agreement is not controlling.
32. The Federal Courts Improvement Act of 1982,
33. In
34. The court in
35. Ms. Coulter testified that she often followed the advice of TLC's attorneys, but she did not know who at TLC was directing TLC's attorneys. We infer from the record and find that TLC's attorneys drafted licensing agreements and patent infringement agreements largely at the direction of Mr. Cooper.↩
36. Additionally,
37. The parties filed a stipulation of settled issues on June 10, 2013, stating that "[t]he legal and professional services expenses not allowed by respondent for taxable year 2006 in the amount of $108,518.60 are attributable to expenses charged by Holmes Development for works performed by Holmes Development during the period from December 15, 2005 through November 30, 2006 with respect to
38. The Holmes Development invoices further support our conclusion that Mr. Cooper controlled TLC and his portfolio of patents.
39. A business bad debt is deductible as an ordinary loss to the extent of the taxpayer's adjusted basis in the debt.
40. Generally, advances made to an insolvent debtor are not debts for tax purposes but are characterized as capital contributions or gifts.
41. Pixel's liabilities to petitioners under the terms of the promissory note comprised substantially all of Pixel's liabilities in 2008.↩
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