Cascade Designs, Inc. - Page 18




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          the products.  Finally, on May 23, 1996, as a result of                     
          expiration of some of the patents and the introduction of new               
          technology, Cascade and Lea agreed to reduce the payment                    
          percentage to 1 percent of the sales of all products using the              
          technology covered by the patents.                                          
               On April 14, 1998, the 776 patent, the last patent included            
          in the 1982 agreement, expired, and no payments were made to Lea            
          under the agreement for products that were sold thereafter.  The            
          total amount paid to Lea under the 1982 agreement was                       
          approximately $6.5 million.                                                 
          Petitioners' Reporting Positions and Respondent's Determinations            
               Cascade deducted the payments to Lea as patent amortization            
          expenses.  The Leas reported the payments as capital gains from             
          the sale or exchange of the patents.                                        
               In the notice of deficiency issued to Cascade, respondent              
          disallowed the deductions claimed for patent amortization                   
          expenses because Cascade had not established that the payments              
          were ordinary and necessary business expenses or were paid to               
          purchase the patents.  In the notice of deficiency issued to the            
          Leas, respondent determined that the payments Lea received from             
          Cascade were ordinary income from dividends, rather than capital            
          gains.                                                                      










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