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OPINION
Issue 1. Whether the Payments Were for the Purchase of Patents
Cascade asserts that the 1982 agreement is a valid and
legally enforceable contract and the amount paid for the patents
was reasonable. Consequently, Cascade argues, the payments are
deductible under section 167 as allowances for depreciation of
intangible property.7
On brief, respondent contends that the 1982 agreement must
be disregarded as it was neither fair nor reasonable; rather, it
was a mere vehicle to disguise distributions of corporate profits
for favorable tax benefits. Consequently, respondent asserts,
any payments made to Lea in excess of the amount provided in the
1979 sales agreement are nondeductible disguised dividends.
7Sec. 167(a) allows as a depreciation deduction "a
reasonable allowance for the exhaustion, wear and tear (including
* * * obsolescence) * * * of property used in the [taxpayer's]
trade or business". Patents constitute intangible property,
which may be the subject of a depreciation allowance
(amortization) under this section over their useful lives. See
sec. 1.167(a)-3, Income Tax Regs.
Sec. 167(c) (which was designated sec. 167(g) in 1979 and
1982), specifies the basis for depreciation of any property
"shall be the adjusted basis provided in section 1011, for the
purpose of determining the gain on the sale or other disposition
of such property." Sec. 1012, when read with sec. 1011, provides
that the adjusted basis of the property is its "cost".
If the purchase price of a patent is expressed by formula by
which a fixed dollar amount cannot be ascertained until future
years, such as a purchase price that is a fraction of sales, the
purchaser may deduct each year as depreciation only the amount of
the purchase price actually paid or payable. See Newton Insert
Co. v. Commissioner, 61 T.C. 570, 581 (1974), affd. per curiam
545 F.2d 1259 (9th Cir. 1976); Associated Patentees, Inc. v.
Commissioner, 4 T.C. 979 (1945).
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