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."

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. 1960 U.S. Tax Ct. LEXIS 233">*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 test1960 U.S. Tax Ct. LEXIS 233">*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 33 T.C. 640">*646 petitioner should consider "the three alternatives of (a) paying up, (b) compromise and (c) fighting." 1960 U.S. Tax Ct. LEXIS 233">*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," 1960 U.S. Tax Ct. LEXIS 233">*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 1960 U.S. Tax Ct. LEXIS 233">*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 33 T.C. 640">*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 1960 U.S. Tax Ct. LEXIS 233">*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:

1960 U.S. Tax Ct. LEXIS 233">*251 These computations were not completed until October 1954 when petitioner made the following journal entry which was backdated to September 30, 1954:

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 33 T.C. 640">*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 1960 U.S. Tax Ct. LEXIS 233">*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 suggested1960 U.S. Tax Ct. LEXIS 233">*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:

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.

33 T.C. 640">*649 4. Patent No. 2,101,520, Blocking Oscillation: (Infringed). This patent attempts to obtain coverage in television on the functioning of a tube1960 U.S. Tax Ct. LEXIS 233">*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 for1960 U.S. Tax Ct. LEXIS 233">*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.

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 date1960 U.S. Tax Ct. LEXIS 233">*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 33 T.C. 640">*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. 1960 U.S. Tax Ct. LEXIS 233">*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 research1960 U.S. Tax Ct. LEXIS 233">*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:

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 for1960 U.S. Tax Ct. LEXIS 233">*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 33 T.C. 640">*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 doing1960 U.S. Tax Ct. LEXIS 233">*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 component1960 U.S. Tax Ct. LEXIS 233">*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">326 U.S. 249-264, 67 U.S.P.Q. (BNA) 193.

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 1960 U.S. Tax Ct. LEXIS 233">*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.

33 T.C. 640">*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 1960 U.S. Tax Ct. LEXIS 233">*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. 1960 U.S. Tax Ct. LEXIS 233">*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 33 T.C. 640">*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 licensing1960 U.S. Tax Ct. LEXIS 233">*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.

1960 U.S. Tax Ct. LEXIS 233">*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">320 U.S. 516, 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">280 U.S. 445, 280 U.S. 445">450,1960 U.S. Tax Ct. LEXIS 233">*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 33 T.C. 640">*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 1960 U.S. Tax Ct. LEXIS 233">*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, 1960 U.S. Tax Ct. LEXIS 233">*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 33 T.C. 640">*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 "quite1960 U.S. Tax Ct. LEXIS 233">*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 1960 U.S. Tax Ct. LEXIS 233">*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 and1960 U.S. Tax Ct. LEXIS 233">*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 33 T.C. 640">*656 perhaps for purposes of sound business accounting but too uncertain to permit of deductibility.

Decision will be entered for the respondent.