Estate of Paxton v. Commissioner

ESTATE OF FLOYD G. PAXTON, JERRE PAXTON, EXECUTOR, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Estate of Paxton v. Commissioner

Docket Nos. 4639-76, 4644-76, 4645-76, 4647-76, 4648-76.

United States Tax Court

T.C. Memo 1982-464 ; 1982 Tax Ct. Memo LEXIS 285 ; 44 T.C.M. (CCH) 771 ; T.C.M. (RIA) 82464 ;

August 9, 1982 .

*285 Floyd Paxton, the decedent of the petitioner estate invented and patented plastic closures. He licensed the patents to corporation Y which, in turn, granted its subsidiary, petitioner corporation I, non-exclusive licenses to exploit the patents. Paxton later invented and patented plastic closures with labels attached and assigned these latter patents to IDT, a family trust. IDT sold the patents to petitioner corporation Y, which then granted petitioner corporation I an exclusive license to exploit the patents. The corporation granted an exclusive license to another petitioner corporation. Held: The patents for closures with labels are not embodied in the earlier patent for closures without labels; therefore, all of the transactions among the parties are effective for tax purposes.

In an earlier proceeding we held that the income of PFT trust was taxable to petitioner grantor because the grantor's son, a trustee, did not hold a substantial adverse interest. That decision was affirmed, based, in part, upon the size of the son's ownership in the trust which was not the rationale of our holding. In the instant proceeding the son owns a larger interest in the trust. Held: The doctrine *286 of collateral estoppel does not apply because there has been a change in facts which form the basis of the opinion of the Court of Appeals. Held further: Based upon the facts presented in this proceeding the son does not hold a substantial adverse interest and the income of the PFT trust is taxable to the grantor.

Individual petitioners created IDT trust, naming son as trustee. Held: Petitioner grantor's son holds a substantial adverse interest in IDT and tis income is not taxable to individual petitioners.

Meade Emory , Peter M. Lind , W. C. Rutherford , Woolvin Patten, Leon C. Misterek , Richard Hunt, and Daniel Woo , for the petitioners.

Kenneth McWade , for the respondent.

GOFFE

MEMORANDUM FINDINGS OF FACT AND OPINION

GOFFE , Judge: The Commissioner determined the following deficiencies in the Federal income taxes of petitioners for the indicated taxable years: Docket No. Petitioner Taxable Year Deficiency

Ending

4639-76 Estate of Floyd G. Dec. 31, 1969 $179,666.31

Paxton, Jerre Dec. 31, 1970 221,038.60

Paxton, Executor Dec. 31, 1971 246,449.71

4644-76 Grace D. Paxton Same as Estate of

Floyd G. Paxton

(joint returns)

4645-76 International June 30, 1970 $179,974.44

Development Trust June 30, 1971 89,594.21

4647-76 Kwik-Lok Corporation March 31, 1967 $ 36,414.00

of Yakima March 31, 1968 1,826.26

March 31, 1970 16,532.15

March 31, 1971 59,636.05

March 31, 1972 53,251.72

4648-76 Kwik-Lok Corporation March 31, 1970 $120,413.59

of Indiana March 31, 1971 129,147.81

March 31, 1972 134,176.00

*287 After concessions, 2 these are the issues we must herein decide:

(1) whether certain patents which were purportedly sold by International Development Trust to Kwik-Lok Corporation of Yakima, and then licensed by that corporation to its subsidiaries, Kwik-Lok Corporation of Indiana, were, by reason of earlier transactions, already owned by (or licensed to) such corporations;

(2) whether, if such patents were not already owned by or licensed to such corporations, the amounts paid for such patents and licenses were reasonable;

(3) whether, if some portion of the amounts paid to International Development Trust by Kwik-Lok Corporation of Yakima for such patents is not attributable to a reasonable purchase price, such amounts constitute taxable income received directly or indirectly by International Development Trust, a non-shareholder of Kwik-Lok Corporation of Yakima;

(4) whether the petitioners, Estate *288 of Floyd G. Paxton, Jerre Paxton, Executor, and Grace D. Paxton, are collaterally estopped from denying that they are to be treated as the owners of all or a portion of the F. G. Paxton Family organization, a trust, under the grantor trust provisions, because of our decision in Paxton v. Commissioner, 57 T.C. 627 (1972) , affd. 520 F.2d 923 (9th Cir. 1975) ; and

(5) whether Floyd and Grace Paxton are to be treated as having been, during the taxable years involved, the owners of two trusts (International Development Trust and, assuming respondent loses on the collateral estoppel issue, F. G. Paxton Family Organization).

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulations of facts and exhibits attached thereto are incorporated herein by this reference.

Petitioner in docket No. 4639-76 is the Estate of Floyd G. Paxton, deceased (hereinafter Estate of Paxton). Floyd G. Paxton (hereinafter Floyd Paxton) died on December 10, 1975, and his estate was admitted to probate in the Superior Court of Yakima County, Washington. Jerre Paxton is the duly appointed, qualified and acting executor of that estate. At all relevant times, Jerre Paxton was a resident of Yakima, *289 Washington. Floyd Paxton was one of the taxpayers named in the statutory notice of deficiency mailed to Mr. Floyd G. Paxton and Mrs. Grace D. Paxton on February 26, 1976. During the calendar years 1969, 1970 and 1971, he was married to Grace D. Paxton (hereinafter Grace Paxton). During the years just mentioned, Floyd and Grace Paxton resided in Yakima, Washington. For each of these years 1969, 1970 and 1971 they filed joint Federal income tax returns (Forms 1040 and 1040X) with the Internal Revenue Service Center, Odgen, Utah. Floyd and Grace Paxton kept their records and filed their tax returns on the calendar year basis and accounted for their income on the cash basis. Petitioner in docket No. 4644-76 is Grace D. Paxton, one of the taxpayers named in the above-referenced statutory notice of deficiency mailed to Floyd and Grace Paxton on February 26, 1976. Grace Paxton resided, when the petition herein was filed, in Yakima, Washington. The issues involved in docket Nos. 4639-76 and 4644-76 concern the joint and several liability, if any, for deficiencies in Federal income taxes of the Estate of Floyd G. Paxton and of Grace Paxton, arising out of joint Federal income tax returns *290 filed by Floyd G. Paxton and Grace Paxton.

Petitioner in docket No. 4645-76 is International Development Trust (hereinafter IDT). IDT is an inter vivos trust created and existing under the laws of the State of Washington. IDT has its principal place of business in Yakima, Washington. The managing fiduciary of IDT was at all times here pertinent, and is, Jerre Paxton, a resident of Yakima, Washington. IDT kept its records and filed its tax returns on the basis of a fiscal year ending on June 30 and accounted for its income on the cash basis. The fiduciary returns (Forms 1041) of IDT for the taxable year ending June 30, 1970 and 1971 were filed with the Internal Revenue Service Center, Ogden, Utah. The Commissioner issued a notice of deficiency to IDT dated February 26, 1976, in which he determined deficiencies in income tax as set forth above.

Petitioner in docket No. 4647-76 is Kwik-Lok Corporation of Yakima (hereinafter Kwik-Lok Yakima). Kwik-Lok Yakima is a corporation organized under the laws of the State of Washington. At all relevant times, Yakima, Washington, has been the principal place of business for Kiwk-Lok Yakima. At all times here pertinent, Kwik-Lok Yakima *291 kept its books and filed its Federal income tax returns on the basis of a fiscal year ending on March 31 and accounted for its income on the accrual method. Its Federal corporate income tax returns (Forms 1120 and 1120X) for the taxable years ending March 31, 1967, 1968, 1968 amended, 1969, 1969 amended, 1970, 1970 amended, 1971, and 1972 were filed with the Internal Revenue Service Center, Ogden, Utah. The Commissioner issued a notice of deficiency to Kwik-Lok Yakima dated February 26, 1976, in which he determined deficiencies in corporate income taxes as set forth above.

Petitioner in docket No. 4648-76 is Kwik-Lok Corporation of Indiana (hereinafter Kwik-Lok Indiana). Kwik-Lok Indiana is a corporation organized under the laws of the State of Indiana with its principal place of business, at all relevant times, in New Haven, Indiana. At all times here pertinent, Kwik-Lok Indiana kept its books and filed its Federal income tax returns on the basis of a fiscal year ending on March 31 and accounted for its income on the accrual method. Its Federal corporate income tax returns (Forms 1120 and 1120X) for the fiscal years ending March 31, 1970, 1970 amended, 1971 and 1972 were filed *292 with the Internal Revenue Service Center, Ogden, Utah. The Commissioner issued a notice of deficiency to Kwik-Lok Indiana dated February 26, 1976, in which he determined deficiencies in corporate income taxes as set forth above.

In response to each notice of deficiency heretofore described, the taxpayers to whom they were addressed filed timely petitions with this Court.

F. G. Paxton Family Organization (hereinafter PFT) is an inter vivos trust created and existing under the laws of the State of Washington. At all relevant times, Yakima, Washington, has been the principal place of business for PFT. The managing fiduciary of PFT was at all times here pertinent, and is, Jerre Paxton, a resident of Yakima, Washington. PFT kept its records and filed its tax returns on the basis of a fiscal year ending June 30 and accounted for its income on the cash basis. PFT filed fiduciary returns (Forms 1041) for its fiscal years ending June 30, 1968 through June 30, 1972, with the Internal Revenue Service Center, Ogden, Utah. No statutory notices of deficiency were issued to PFT with respect to any of the aforementioned fiscal years.

Floyd Paxton was born March 7, 1918, in Redlands, California, *293 the son of Hale and Geraldine Paxton. The children of this marriage were Floyd Paxton, Allen Dent Paxton and Madeline Paxton.

Floyd Paxton married Eleanor Leighy (hereinafter Eleanor Paxton) on March 7, 1936. The children of this marriage and their birth dates were: Name Date of Birth

Jerre Paxton November 24, 1938

Ted Paxton September 26, 1940

Floyd G. Paxton, Jr. February 23, 1950

Cheryl Paxton March 14, 1952

Floyd and Eleanor Paxton resided in Riverside, California, until about 1954.

Prior to the period here in question, Floyd Paxton and Allen Dent Paxton organized Paxton Machines, Inc., a California corporation engaged in the business of manufacturing box-making and labeling equipment useful primarily in the packaging of fruit. Paxton Machines, Inc., also manufactured a few mechanical items, such as universal joints. This business was located in Riverside, California. This corporation's existence was terminated in about 1960.

Floyd Paxton also operated Paxton Products Co., a sole proprietorship also located in Riverside, California. Floyd and Eleanor Paxton were the sole owners of Paxton Products Co., which engaged in the business of manufacturing products from paper and synthetic *294 materials, principally plant covers and other items connected with agricultural products.

Early in 1954, Floyd Paxton and Eleanor Paxton were divorced. Eleanor Paxton was awarded custody of the four children. In the divorce proceedings the assets of Paxton Products were awarded to Eleanor Paxton, who operates the business to this day. With the earnings from this business, Eleanor Paxton supported herself and the children she bore by Floyd Paxton. Jerre Paxton lived with his mother until his marriage to Nancy DeNyse Wheeler (hereinafter Nancy Paxton). In or about 1963, he and his wife moved to Yakima, Washington. Jerre Paxton never lived with Floyd and Grace Paxton.

In or about 1954, Floyd Paxton moved from California to the State of Washington. In July 1954, Floyd Paxton married Grace Douglas (hereinafter Grace Paxton). Grace Paxton was born July 19, 1916. She had formerly been married to Fred Tyler Douglas. Grace had one child by her marriage to Mr. Douglas, a daughter, Diane, who was a teenager in 1954. Diane Douglas (hereinafter Diane Irwin) subsequently married Jere Irwin. Grace and Floyd Paxton had one child, a son named Ande Paxton, born December 7, 1956. After *295 their marriage, Floyd and Grace Paxton lived in Yakima. Grace Paxton's daughter, Diane, lived with them prior to her marriage to Mr. Irwin. No children from Floyd Paxton's first marriage ever lived in the household which Floyd and Grace Paxton established.

On November 12, 1954, Floyd Paxton, together with his cousin Kenneth Paxton and Kenneth's wife, Dorothy Paxton, signed Articles of Incorporation, as incorporators, for Kwik-Lok Yakima. The issued and outstanding stock of Kwik-Lok Yakima consisted of 500 shares of class A voting stock and 1,471 shares of class B nonvoting stock. At the beginning of 1965, Floyd and Grace Paxton, through original issue, stock dividends and purchase, owned all of the outstanding stock of Kwik-Lok Yakima. By March 1965, the outstanding shares of Kwik-Lok Yakima were owned as follows: Recipient Class A Class B

Floyd and Grace Paxton 395 1,147

Jerre Paxton 53 135

Ted Paxton 52 135

Allen Dent Paxton 0 34

Phil Crawford, et ux. (employee) 0 20

Totals 500 1,471

On or about July 14, 1965, Jerre Paxton acquired the 34 class B shares owned by Allen Dent Paxton. Consequently, as of mid-1965, the stock of Kwik-Lok Yakima was held as follows: Class A Class B

Floyd and Grace Paxton 395 1,147

Jerre Paxton 53 169

Ted Paxton 52 135

Phil Crawford 0 20

Total 500 1,471

The *296 principal officers and directors of Kwik-Lok Yakima during the fiscal years ended March 31, 1965 through 1972 were as follows: Dates Directors Officers

3/31/65 Floyd Paxton President Floyd Paxton

to Francis Max Baer Vice President Francis Max Baer

7/6/65 Donald Loudon Secretary -

Jerre Paxton Treasurer Donald Loudon

Allen Paxton

7/6/65 Floyd Paxton President Floyd Paxton

to Francis M. Baer Vice President Jerre Paxton

3/15/68 Jerre Paxton Vice President-

Canadian Op.

Donald Loudon Op. L. E. Peck

Secretary -

Treasurer Donald Loudon

3/15/68 Floyd Paxton President Jerre Paxton

to Francis M. Baer Vice President Lorne House

2/31/72 Jerre Paxton Vice President-

Donald Loudon Canadian Op. L. E. Peck

Secretary-

Treasurer Donald Loudon

On April 20, 1960, Kwik-Lok Indiana was organized under the laws of the State of Indiana. Immediately after its incorporation, Kwik-Lok Indiana's issued and outstanding capital stock consisted of 150 shares of common stock. Kwik-Lok Yakima owned 149 shares and Floyd and Grace Paxton together owned one share. Some time prior to August 1967 Kwik-Lok Indiana declared stock dividends in the ratio of two shares of stock for each share outstanding. As result of this stock dividend, the issued and outstanding shares *297 of the corporation were increased to 450, of which 447 were owned by Kwik-Lok Yakima and three were owned by Floyd and Grace Paxton. The principal officers and directors of Kwik-Lok Indiana for the fiscal years ended 31, 1970, 1971 and 1972 were as follows: Directors Officers

Jerre Paxton President Jerre Paxton

Philip Crawford, Jr. Vice President Philip Crawford, Jr.

Secretary-

Mickey M. Miller Treasurer

Floyd Paxton Mickey M. Miller

On October 1, 1962, Paxton Industries, Inc., was organized under the laws of the State of Washington with a capitalization consisting of five shares of $100 par value, three of which were issued to Floyd Paxton, one to Francis M. Baer and one to Donald Loudon. Prior to August 1967, Floyd Paxton acquired all the shares of Paxton Industries.

In November 1966, Floyd Paxton was hospitalized for advanced arteriosclerosis. He was advised that he would require specific therapy and, probably, bypass surgery.

On March 16, 1968, Floyd Paxton resigned as president of Kwik-Lok Yakima and Kwik-Lok Indiana. On March 29, 1968, he executed a consulting contract with Kwik-Lok Yakima.

Patent Issues

About 1952 or 1953, Floyd Paxton began to make individual bag-closing devices *298 (hereinafter "single loks") out of plastic. These single loks were used to close flexible plastic bags, especially bags made of cellophane, polyethylene and various synthetics. The single lok was a rectangular piece of plastic, with a rounded butt at one end and an aperture at the other end permitting it to be placed around the neck of a flexible bag. The device was later described in U.S. Patent No. 2,705,100 , which covered a bag-closing machine described below, as a "closure of flexible sheet material structurally characterized to enable it to be readily sprung or snapped over a tightly twisted or constricted portion of the bag mouth, in a manner to be securely maintained attached to the bag yet be readily removable and replaceable indefinitely." On July 30, 1953, Floyd Paxton applied for a U.S. patent on the single lok device under application Serial No. 371,229. The application for patent was denied by the U.S. Patent Office.

Sometime prior to 1954, Floyd Paxton and Allen Dent Paxton manufactured a hand-operated machine by which single loks could be fed from a hopper or magazine and used to close plastic bags without having to twist the necks of the bags. Floyd and Allen Dent *299 Paxton applied for a patent on this machine. At the same time this patent application was filed, Floyd and Allen Dent Paxton executed an assignment of the invention to Paxton Machines, Inc. With certain claims in the application disallowed, Patent No. 2,705,100 was issued on March 29, 1955, with Floyd and Allen Dent Paxton being the inventors and Paxton Machines, Inc., being the owner. The basic claim allowed was for a V-shaped device which restricted the opening of the bag sufficiently to allow the attachment of the single lok. On December 14, 1960, Paxton Machines, Inc., assigned Patent No. 2,705,100 to Kwik-Lok Yakima.

When Kwik-Lok Yakima was organized in 1954, one of its corporate purposes was the manufacturing of bag-closing devices. When in 1960 a subsidiary, Kwik-Lok Indiana, was organized, its corporate purposes included manufacturing and distributing the company's product in the eastern part of the United States.

In the early 1960's, the Kwik-Lok corporations were selling primarily the unpatented single loks and hand-applied single loks with labels. The single loks were of two types: "Series A closures" which were plain single loks; and "Series B closures" which bore *300 printed prices or other limited items of information. The single loks with labels consisted of single loks to which larger pieces of tagboard or cardboard had been glued; they also functioned as bag labels.

In the early 1960's, the hand-operated machine covered by U.S. Patent No. 2,705,100 and manufactured by Kwik-Lok Yakima was designated the Type 100A machine. The Type 100A machine was semi-automatic in that, in order to apply single loks to the plastic bags, an operator was needed to insert bags manually into the machine. The Type 100A machine could apply single loks but not single loks with labels. Under optimum conditions, an operator could apply approximately twenty-five single loks per minute using the Type 100A machine.

The Type 100A machine was not a significant financial success because of mechanical difficulties. Five hundred of the single loks which it applied were put on a strand and placed into a hopper or magazine on the machine. Single loks were fed out from the magazine under a gate as each lok was being applied to a bag. This arrangement rendered the Type 100A machine prone to jamming, either because of improper placement by the operator of the single loks in the *301 hopper or because of variations in the thickness of the plastic used for the single loks. Another reason the Type 100A machine was not a significant economic success was that its operation was limited to a semi-automatic state requiring manual insertion of bags by operators.

In the early 1960's, two machines competed with the Type 100A. Both of these machines could apply more single loks per minute than the Type 100A machine. J.H. Platt Co. manufactured and sold a machine capable of automatically applying the Kwik-Lok single loks; the machine was automatic in the sense that the bags to be closed could be passed through the machine and closed without a human operator. The average speed of the J.H. Platt Co. machine was forty to forty-five single lok sapplications per minute. Continental Baking Co. manufactured for its own use a machine capable of applying single loks at a rate of forty to forty-five per minute. Neither of these two competitive machines could apply Kwik-Lok's single loks with labels.

In the early 1960's, around 1962-1963, a competitor of Kwik-Lok also manufactured bag-closing devices similar to the unpatented Kwik-Lok single loks.

About 1960, Dana E. Keech, (herein *302 Mr. Keech) a patent attorney whose address, in 1961, was Los Angeles, California, began handling patent work for Floyd Paxton and for the enter-prises with which Floyd Paxton was connected. Mr. Keech was born before the turn of the century. In his correspondence with Kwik-Lok Yakima or Floyd Paxton, Mr. Keech followed the general trade practice of assigning an office docket number to each invention for which he had undertaken a patent application or prosecution. During all times pertinent herein, patent lawyers in the United States customarily assigned office docket numbers or similar office coding numbers to each invention for which they had undertaken patent applications and prosecutions. Such office docket numbers were used for internal office filing purposes and also for identification of each item of correspondence or document pertaining to the particular invention. When the application or prosecution had reached a point where a U.S. application serial number had been assigned, or where a U.S. patent number had been issued for the invention by the U.S. Patent Office, the application serial number or U.S. patent number would customarily be used by the patent lawyer in addition *303 to or in lieu of the office docket number to identify all items of correspondence and documents pertaining to the invention. The patent lawyer would customarily include in correspondence or documents a descriptive name for the invention, along with other descriptive information when needed, such as date of application, the office docket number, the application serial number or patent number.

In like fashion, Kwik-Lok Yakima kept a separate file folder containing all items of correspondence and documents pertaining to each patent application or patent. Each file folder was first identified on the cover by the name of the country in which the patent application was pending and also the office docket number appearing in Mr. Keech's early correspondence pertaining to the particular patent application or patent. Later, as each became known, the description of the invention, the application serial number, and the U.S. or foreign patent number were added to the cover of the appropriate file folder.

On February 27, 1961, Floyd Paxton, through Mr. Keech, applied for a U.S. patent for bag closures united in strip form end-to-end (herein end-to-end striploks) and an apparatus for making the *304 same and for dispensing individual bag-closing devices. Mr. Keech gave this application office docket number K-1305. On March 7, 1961, the U.S. Patent Office assigned this application Serial No. 93,888. The application was amended on February 8, 1962, and again on September 19, 1962. On May 22, 1964, application Serial No. 93,888 was substantially amended, with-drawing all claims except the claims numbered 26, 27 and 28. On January 5, 1965, application Serial No. 93,888 was approved by the U.S. Patent Office and U.S. Patent No. 3,164,249 was issued showing Floyd Paxton as the inventor and owner. In the patent itself, after setting forth the specifications of such patent, are these words:

The claims are:

1. In a multi-closure strip, wherein the closures each may have a bag confining mouth and a narrow opening located in a longitudinal side edge thereof and communicating with said mouth for admitting a bag neck into the latter; the structure comprising: a multiple of closures of transversely stiff, thin, sheet material comprising polystyrene or the like, arranged consecutively with their transverse edges in closely spaced relation; and web means integrally connecting with each *305 consecutive pair of closures in frangible areas of union located between opposite ends of said web means and said closely spaced edges of said consecutive closures, said frangible areas being spaced far enough apart length-wise of said strip and being sufficiently restricted in the cross sectional dimension thereof measured transversely of said strip, that compressive forces applied in the plane of said strip from opposite directions res-pectively to said consecutive closures and through said closures to opposite ends of said web means without causing said closures to buckle, will cause the material of said strip to substantially simultaneously crack in said frangible areas of union at the opposite ends of said web means and thus separate said web means from said closures and said closures from each other.

2. In a multi-closure strip, the structure recited in claim 1, wherein the web means integrally connecting each consecutive pair of closures in said strip comprises a pair of transversely spaced webs.

3. In a multi-closure strip, the structure recited in claim 2 wherein portions of each transverse edge of a closure, lying immediately adjacent to and on opposite sides of the area *306 of union between said edge and one of said webs, are transversely aligned and form right angles with said web.

4. In a multi-closure strip, the structure recited in claim 2, wherein the length of each of said webs, which is the distance measured lengthwise of said strip between said areas of union at the ends of said web, is substantially greater than the width of one of said areas of union which is the dimension thereof measured transversely of said strip.

5. In a multi-closure strip, the structure recited in claim 4, wherein said width of said area of union at each end of each web is approximately.039 inch, the length of said web is approximately.0625 inch and the thickness of said strip is approximately.032 inch.

In early 1962, Floyd Paxton, through Mr. Keech, resubmitted an application for a U.S. patent for a method and apparatus for making bag closures united in strip form and for dispensing individual bag closures, based upon claims withdrawn from application Serial No. 93,888. Mr. Keech gave this application office docket number K-1339. The application was assigned application Serial No. 184,472 by the U.S. Patent Office. The application was amended December 11, 1963. *307 On January 5, 1965, application Serial No. 184,472 was granted and U.S. Patent No. 3,163,970 was issued showing Floyd Paxton as the inventor and owner.

In November 1963, Floyd Paxton, through Mr. Keech, applied for a U.S. patent for a multi-closure strip (united side-to-side) (herein side-to-side striploks). Mr. Keech gave this application office docket number K-1426. This application was assigned application Serial No. 325,665 by the U.S. Patent Office. This application was amended on July 7, 1964 and October 1, 1964. On January 5, 1965, application Serial No. 325,665 was granted and U.S. Patent No. 3,164,250 was issued showing Floyd Paxton as the inventor and owner. In the patent itself, after setting forth the specifications of such patent, are these words:

What is claimed is:

1. A matrix in strip form for consecutively producing a series of bag closures comprisong a strip of relatively thin and stiff but springy flat sheet plastic material, said strip being weakened at regularly spaced longitudinal intervals along a transverse line normal to the side edges of said strip by means eliminating the material of said strip bordering said transverse line, with the exclusion of *308 a pair of narrow webs located on said line, said means including a hole bordering said line and having opposite extremities located on said line, said webs being readily frangible upon the imposition of a moderate amount of traction to said strip on opposite sides of said line to separate said strip along said line, said strip having, adjacent each of said holes, an internal aperture which communicates with said hole through a narrow passageway, whereby the separation of said strip along a given line as aforesaid, converts the portion of said strip adjacent said line having said aperture into a bag closure.

2. A matrix in strip form for consecutively producing a series of bag closures as recited in claim 1, wherein said strip is coiled in such a direction that when said strip is separated along any of said transverse lines as aforesaid, as said strip is being unwound from said strip coil a closure is formed as aforesaid on the part of said strip remaining on said coil.

3. A strip of relatively thin and stiff but springy flat sheet plastic material, said strip being weakened at regularly spaced longitudinal intervals along a transverse line normal to the side edges of said strip *309 by a hole bordering said transverse line and having opposite extremities located on said line, and by two notches, one in each of said side edges, with the apices of said notches lying in said line and spaced respectively from said extremities by two narrow webs of unbroken sheet plastic, which webs are readily frangible upon the imposition of a moderate amount of traction to said strip on opposite sides of said line to separate said strip along said line, said strip having adjacent each of said holes an internal aperture which communicates with said hole through a narrow passage, whereby the separation of said strip along a given line as aforesaid converts the portion of said strip adjacent said line having said aperture into a bag closure.

The critical invention in both U.S. Patent Nos. 3,164,249 and 3,164,250 related to a particular and specific means for joining bag-closure devices in strip form. In particular, the critical feature of the claims in the two patents was the means by which the individual closures were joined together--the "web means." The file wrapper histories of the two patents show that originally the applicant asserted claims that were broad in nature and were *310 not limited specifically to the use of web means. However, the patent examiner indicated that claims of the breadth contained in the original applications could not be allowed in light of prior art. 3 In response, the applicant substituted narrower claims that focused specifically on web means as the solution to the problem of joining bag-closing devices together in a strip form such that they could be coiled without accidentally parting, and yet could be applied and parted by the application of longitudinal force. Thereafter, the patent examiner allowed the claims as narrowed. U.S. Patent Nos. 3,164,249 and 3,164,250 , pertaining to the side-to-side and end-to-end striploks, allowed essentially three elements in the claims for each of the two closure devices. The three elements related to:

(1) the stiffness of the closure device material;

(2) the location and shape of the bag opening; and

(3) the frangible (easily breakable) web attachments, or web means, for interconnecting the closure devices.

In February 1965, Floyd Paxton directed Mr. Keech to prepare applications for patents on two label-bearing closures in strip form (herein closures with *311 labels), in the name of Floyd Paxton, as owner and inventor, without assignment to anyone including Kwik-Lok Yakima. This direction by Floyd Paxton conformed with the practice followed at Kwik-Lok Yakima with regard to patent applications. If applications covered inventions by employees of Kwik-Lok Yakima other than Floyd Paxton or inventions by employees of Kwik-Lok Yakima in collaboration with Floyd Paxton, the inventions were assigned by the inventors to Kwik-Lok Yakima at the times patent applications were made, and patents were issued on that basis. For example, this practice was followed with regard to both U.S. Patent No. 3,163,969 (relating to bag-closing devices invented by Allen D. Paxton, Floyd Paxton, and Jere Irwin, the husband of Diane Irwin) and U.S. Patent No. 3,163,972 (relating to bag-closing devices invented by Jere Irwin). If applications covered inventions made by Floyd Paxton alone, the applications were made in the name of Floyd Paxton as inventor and owner (without assignment) and patents subsequently issued showed the same.

On April 15, 1965, Floyd Paxton, through Mr. Keech, applied for a patent covering a multi-closure label-bearing strip (herein side-to-side *312 closures with labels). Mr. Keech gave this application office docket number K-1629. The application was received by the U.S. Patent Office on April 20, 1965, and was assigned application Serial No. 449,574. The application was later amended on March 28, 1966.

Also on April 15, 1965, Floyd Paxton, through Mr. Keech, applied for a patent covering bag closures and individually attached labels united in strip form (herein end-to-end closures with labels). Mr. Keech gave this application office docket number K-1628. This application was received by the U.S. Patent Office on April 20, 1965, and was assigned application Serial No. 449,575.

On September 6, 1966, application Serial No. 449,574 was granted and Patent No. 3,270,872 , showing Floyd Paxton as inventor and owner, was issued. Also, on September 6, 1966, application Serial No. 449,575 was granted and Patent No. 3,270,873 , showing Floyd Paxton as inventor and owner, was issued.

The basic invention in the claims allowed by the U.S. Patent Office in both U.S. Patent Nos. 3,270,872 and 3,270,873 related to a means of attaching labels in a feathered fashion to bag-closing devices united in strip form in such a way that the strips *313 with labels attached could be coiled, stored, and thereafter applied without any interference in the application process due to the presence of the attached large labels. The attachment of labels to striploks covered, respectively, by U.S. Patent Nos. 3,164,250 and 3,164,249 are examples of embodiments of the inventions covered by U.S. Patent Nos. 3,270,872 and 3,270,873 . However, the claims of U.S. Patent Nos. 3,270,872 and 3,270,873 were not limited to the application of labels to striploks. The claims of the patents covering end-to-end and side-to-side closures with labels did not depend on the particular means of connecting bag-closure devices in strip form, were not limited by the particular web means claimed under U.S. Patent Nos. 3,164,249 and 3,164,250 , and could be readily practiced on strips of bag-closure devices other than those claimed under U.S. Patent Nos. 3,164,249 and 3,164,250 . The claims of U.S. Patent Nos. 3,270,872 and 3,270,873 do not coact with or improve any of the essential elements (closure stiffness, bag-grasping opening, and web means of attachment) of the claims of, or address any of the problems discussed in, U.S. Patent Nos. 3,167,249 and 3,167,250 . *314 The inventions covered by U.S. Patent Nos. 3,270,872 and 3,270,873 are not embraced by any of the claims allowed in each of U.S. Patent Nos. 3,164,250 and 3,164,249 .

On July 1, 1965 and May 1, 1966, Mr. Keech billed Floyd Paxton, c/o Kwik-Lok Yakima, $850 and $283, respectively, for legal services rendered in connection with obtaining U.S. Patent Nos. 3,270,872 and 3,270,873 . Sometime prior to September 27, 1968, Kwik-Lok Yakima paid such bills. On that date, Kwik-Lok Yakima billed Floyd Paxton for such expenses, and on September 30, 1968, Floyd Paxton personally reimbursed the corporation for such expenses.

On April 30, 1965, Floyd Paxton, as owner, and Kwik-Lok Yakima, as licensee, executed a License Agreement authorizing Kwik-Lok Yakima to exploit Patent Nos. 3,163,970 , 3,164,249 and 3,164,250 for a period ending on January 5, 1982. The license was to run for the life of the patent (until January 5, 1982), with royalties being paid as follows:

ROYALTY. During the term of this agreement, LICENSEE shall pay LICENSOR cash royalties as follows:

7-1/2% (seven one-half per cent) on the first $1,000,000.00 (one million dollars) of net sales by LICENSEE and its Sublicensees of devices *315 covered by one or more of said patents during each calendar year, the first of which years is to start on May 1, 1965, and conclude April 30, 1966.

6% (six per cent) on the second $1,000,000.00 (one million dollars) of such net sales during said calendar year.

5% (five per cent) on all such net sales in excess of $2,000,000.00 (two million dollars) during said calendar year.

Said royalties shall be assessed upon the gross monies paid to and received by LICENSEE and its Sublicensees by their customers and distributors in purchasing said devices, after deducting from said gross monies amounts collected to cover sales, use and excise taxes and transportation charges.

The performance by LICENSEE and its Sublicensees of said patented methods shall be free from the payment of royalties.

On the same day, Kwik-Lok Yakima, as primary licensee under the License Agreement executed on April 30, 1965, executed a Sublicense Agreement with Kwik-Lok Indiana for the exploitation of U.S. Patent Nos. 3,163,970 , 3,164,249 and 3,164,250 . The term of the sublicense extended to January 5, 1982. The term and royalty provisions of the Sublicense Agreement were identical to those of the License Agreement. *316

Mr. Keech drafted both the License and Sublicense Agreements executed on April 30, 1965. In the License Agreement, Mr. Keech described and identified specifically three patents to be licensed for exploitation, i.e., U.S. Patent Nos. 3,164,249 , 3,164,250 and 3,163,970 . In the agreement as drafted, Floyd Paxton, as inventor and owner, also licensed Kwik-Lok Yakima to exploit:

* * * all improvements heretofore or hereafter invented by LICENSOR and embraced by any of the claims of said patents.

The words "said patents" referred to the three U.S. patents described specifically above. The agreements did not otherwise specifically describe, identify or refer to any inventions other than U.S. Patent Nos. 3,164,249 , 3,164,250 and 3,163,970 . Similarly, the Sublicense Agreement granted Kwik-Lok Indiana the non-exclusive right to exploit such patents and "devices covered by said patents including devices embodying any improvements invented by Floyd G. Paxton and embraced by the claims of said patents."

During all times pertinent herein, it was a well-established trade practice for patent lawyers to describe and identify inventions with specificity in legal instruments licensing the right *317 to exploit, assigning or otherwise affecting property rights in the invention. If no patent number or application serial number for a particular invention existed, the instrument would be drafted by the patent lawyer so as to identify the invention by description, date of application for the patent, internal office docket number where applicable, or other specific reference. This trade practice was followed whenever it was possible to identify specifically any invention for which a patent prosecution had been commenced.

On April 30, 1965, Mr. Keech had specific means to describe and identify Floyd Paxton's two inventions covering closures with labels, later covered by U.S. Patent Nos. 3,270,872 and 3,270,873 . These inventions could have been identified by office docket numbers, dates of patent application, application serial numbers or language descriptive of the invention involved. If Floyd Paxton had specifically instructed Mr. Keech to include in the April 30, 1965, License Agreement between Floyd Paxton and Kwik-Lok Yakima a right to exploit Floyd Paxton's inventions of the means of attaching labels to closures (the end-to end and side-to-side closures with labels) for which *318 patent application had been made by Mr. Keech, then the normal practice of a patent attorney in Mr. Keech's position would have been to include in the License Agreement positive and specific reference to the two inventions, including, but not limited to, the following:

(1) the titles or descriptions of the inventions for closures with lables;

(2) the dates on which applications for patents on the inventions were signed;

(3) the application serial numbers and the filing dates with the U.S. Patent Office;

(4) if the application serial numbers were unknown, a description using the filing date and leaving blanks for the application serial numbers to be filled in at a later date; and/or

(5) the office docket numbers K-1628 and K-1629.

The intention of the parties to the April 30, 1965, License and Sublicense Agreements was not to include, and was to exclude, the inventions relating to end-to-end and side-to-side closures with labels to which applications Serial Nos. 449,574 and 449,575 had been assigned.

Neither Kwik-Lok Yakima nor Kwik-Lok Indiana acquired any right to exploit the inventions described in U.S. Patent Nos. 3,270,872 and 3,270,873 (the end-to-end and side-to-side closures *319 with labels) by reason of the License Agreement and the Sublicense Agreement executed on April 30, 1965.

During the years 1965 through 1971, in accordance with the April 30, 1965, License Agreement, Kwik-Lok Yakima paid Floyd Paxton the following amounts of royalties: Year Amount

1965 $38,018.33

1966 96,154.48

1967 131,303.85

1968 125,577.60

1969 100,480.87

1970 118,388.62

1971 134,000.32

Among the products sold which generated some of these royalties during the period from September 6, 1966 (the date the closure-with-label patents were granted), to February 21, 1969 (the date the closure-with-label patents were transferred to Kwik-Lok Yakima and licensed to Kwik-Lok Indiana), were some closures with labels attached using the process patented in U.S. Patent Nos. 3,270,872 and 3,270,873 . During such period, no sales or licensing agreements were executed in connection with the use by the Kwik-Lok corporations of such patented process.

In accordance with the April 30, 1965, Sublicense Agreement, Kwik-Lok Indiana accrued, and later paid to Kwik-Lok Yakima, the following amounts in the following fiscal years ended March 31: Year Amount

1966 $30,133.74

1967 65,381.95

1968 89,005.57

1969 87,646.74

1970 76,308.57

1971 87,411.02

1972 91,781.16

Following *320 an earlier income tax audit of Floyd Paxton and Grace Paxton, an agreement was reached with the Commissioner that amounts received by Floyd and Grace Paxton under the April 30, 1965, License Agreement were taxable as receipts from the sale of Patent Nos. 3,164,249 and 3,164,250 . The tax treatment of these amounts is not in issue in these docketed cases.

On July 12, 1968, Floyd Paxton assigned U.S. Patent Nos. 3,270,872 and 3,270,873 to IDT. The assignment was recorded with the U.S. Patent Office on April 10, 1969, after which date IDT was shown as the assignee and owner of the patents.

On February 21, 1969, IDT executed a Purchase Agreement relating to Patent Nos. 3,270,872 and 3,270,873 conveying them to Kwik-Lok Yakima for $5,000,000, payable without interest in 172 monthly installments of $28,901 each, commencing April 5, 1969, plus a final payment of $29,028, due August 5, 1983. On July 23, 1970, the February 21, 1969, Purchase Agreement was amended to provide that the monthly payments by Kwik-Lok Yakima to IDT would include 4 percent simple interest on the lesser unpaid balances resulting from the inclusion of interest.

On February 21, 1969, Kwik-Lok Yakima executed a License *321 Agreement granting to Kwik-Lok Indiana an exclusive license, covering the District of Columbia and 36 eastern states, to exploit Patent Nos. 3,270,872 and 3,270,873 . The consideration which Kwik-Lok Indiana agreed to pay for the license was $3,350,000 payable without interest in 172 monthly installments of $19,365 each, commencing April 5, 1969, plus a final payment of $19,220, due on August 5, 1983. On July 2, 1970, the License Agreement executed on February 21, 1969, by Kwik-Lok Yakima and Kwik-Lok Indiana was amended to provide for a revised schedule of payments by Kwik-Lok Indiana to Kwik-Lok Yakima for the right to exploit U.S. Patent Nos. 3,270,872 and 3,270,873 .

In accordance with the terms of the February 21, 1969, License Agreement, as amended on July 2, 1970, Kwik-Lok Indiana paid Kwik-Lok Yakima the following sums in its fiscal years ended March 31: Year Amount

1970 $230,640

1971 265,747

1972 277,450

Under the terms of the February 21, 1969, Purchase Agreement by which Kwik-Lok Yakima acquired U.S. Patent Nos. 3,270,872 and 3,270,873 , Kwik-Lok Yakima paid to IDT on the following dates the following amounts in payment of the purchase price: Date Amount

9/ 8/69 $57,802

11/10/69 86,703

12/19/69 115,604

3/30/70 86,703

6/ 1/70 86,703

10/20/70 86,703

11/ 3/70 86,703

3/26/71 86,703

8/19/71 173,406

10/11/71 28,901

11/12/71 28,901

12/12/71 28,901

Kwik-Lok *322 Yakima claimed the following amounts as amortization of the cost of U.S. Patent Nos. 3,270,872 and 3,270,873 in the fiscal years ended March 31: Year Amount

1970 $231,208

1971 346,821

1972 346,821

The side-to-side striploks covered by U.S. Patent No. 3,164,250 were applied by a machine, manufactured by Kwik-Lok Yakima, which was first called the Model 108.1 and later the Model 1081. The Model 108.1 was the first significant and notable improvement in the Kwik-Lok product line over the Type 100A machine which applied single loks. The Model 108.1 was introduced in late 1962. The Mode 108.1 could apply side-to-side striploks automatically at speeds of up to 120 per minute. It could not apply the unpatented single loks, single loks with labels, or closures with labels (either end-to-end or side-to-side). With the introduction of the Model 108.1 Kwik-Lok continued to sell the semi-automatic Type 100A machine for a year or two. Continental Bakeries, however, ceased to manufacture its machine competitive with the Type 100A machine. Also, although J.H. Platt Co. still carried a machine competitive with the Type 100A machine, the J. H. Platt machine sold poorly because of the superiority of the *323 Model 108.1.

Around 1965, Kwik-Lok Yakima introduced and marketed a machine designated as the Model 100.2. The Model 100.2 applied the end-to-end striploks covered by U.S. Patent No. 3,164,249 . The Model 100.2 was semi-automatic in that an operator was required to insert the bags in the machine. Under optimum conditions, the Model 100.2 could apply 25 to 30 end-to-end striploks per minute with one operator. The Model 100.2 could not apply single loks with labels or closures with labels (either end-to-end or side-to-side).

In late 1965 or 1966, Kwik-Lok Yakima introduced and marketed a machine first designated as the Model 108.4 machine and later named the Model 1084 machine. The Model 108.4 could apply either side-to-side closures with labels covered by U.S. Patent No. 3,270,872 or side-to-side striploks covered by U.S. Patent No. 3,164,250 . The Model 108.4 was fully automatic and could apply the side-to-side closures with labels at speeds up to 120 per minute.

In 1967-1968, Kwik-Lok Yakima introduced and marketed a machine later designated as the Model 1006 machine, which could apply end-to-end closures with labels covered by U.S. Patent No. 3,270,873 as well as the end-to-end *324 striploks covered by U.S. Patent No. 3,164,249 . The Model 1006 was semi-automatic in that an operator was required. It could apply bag closures at speeds of up to thirty per minute.

Kwik-Lok Yakima usually sold a machine designated as the Model 1082 bag tensioner along with the Model 1081 and 1084 machines. The bag tensioner is a device which flattens out the plastic bag just prior to the entry of the bag into the bag-closing head of the Model 1081 and 1084 machines. Kwik-Lok Yakima also sold a conveyor which conveyed the packaged product past the Model 1082 bag tensioner, into the bag-closing machine, and onto a take-off conveyor.

The primary function of the striploks covered by U.S. Patent Nos. 3,164,249 and 3,164,250 was to close bags. The function of the closures with labels (end-to-end and side-to-side) covered by U.S. Patent Nos. 3,270,872 and 3,270,873 went beyond the physical act of closing a flexible bag and encompassed the sales, marketing, advertising, and promotion of the packaged product or of other products. Prior to the advent closures with labels, the Kwik-Lok Yakima sales department had primarily approached the production and engineering personnel of its customers. *325 Because the function of closures with labels included marketing the packaged product or other products, Kwik-Lok Yakima began approaching its customers' marketing personnel as well. This change necessitated the hiring by Kwik-Lok Yakima of salespersons who could handle and present sales and marketing concepts rather than simply salespersons competent only to promote the bag-closing concept.

To promote the marketing function of the closures with labels, Kwik-Lok Yakima designed different special label programs. For example, for the Christmas season, Kwik-Lok offered various labels with different Christmas scenes or greetings as well as labels which had cut-out line drawings of ornaments for children to color and use as Christmas tree ornaments. Also, Kwik-Lok Yakima developed, among other programs, a Valentine program, a program called "Men of the West" depicting in different labels "good guys" and "bad guys," a program called "Historic Moments in U.S. History" depicting the same, and a program called the "Funny Farm" depicting various cartoon characters. Kwik-Lok Yakima also offered animated cartoons for use in television advertising as a backup to the various label programs. *326

In October 1967, for the first time in its history, Kwik-Lok Yakima joined the Bakers Exposition in Atlantic City to promote and sell the Model 108.4 machine and the closures with labels. At this Exposition, Kwik-Lok Yakima also marketed some special label programs such as the Christmas label programs. The exposition was helpful to Kwik-Lok Yakima in its effort to further penetrate the bakery market. The success also served to show Kwik-Lok Yakima the important appeal of the marketing function of the closure-label strips.

Kwik-Lok Yakima's closures with labels also afforded packaging customers the capacity of cross-advertising, a technique by which a product different from the one sold is promoted to consumers who purchased the product packaged, or of "couponing," in which a coupon can be incorporated in or attached to the label. The closures with labels (end-to-end and side-to-side) could be designed to meet the specific sales and marketing needs of the packaging customer. The labels could give brand identification, capitalize on fad promotions, capture seasonal markets such as Christmas, Valentine's Day, or Halloween, promote special events, cross-advertise, advertise contests, *327 attract sports fans with sports labels, function as coupons, introduce new products, and meet many other sales, marketing, advertising and promotional needs of Kwik-Lok Yakima's customers.

During the pertinent periods herein, the actual and potential marketing function of closures with labels possibly enhanced the sale of the Kwik-Lok corporations' entire line of products, including closures with labels, striploks and the machines capable of applying and needed to apply both closures with labels and striploks. Their sales presentation, which emphasized the marketing, sales and promotional capabilities of the closures with labels, was expected to, and did in fact, induce some customers to choose Kwik-Lok's bag-closing system over other bag-closing machines or systems because of the customers' potential desire to use closures with labels for sales and marketing purposes, and, when not using labels, to be able to apply striploks automatically with the same machinery. In early 1969, prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873 , it expected its possession of the right to manufacture and sell closures with labels (end-to-end and side-to-side) to increase *328 the sales of Kwik-Lok Yakima's entire product line, including bag-closing machinery and striploks.

The following chart indicates the combined sales experience of Kwik-Lok Yakima and Kwik-Lok Indiana during the years ending March 31, 1967, 1968, and 1969: Striploks Closures with

Covered by Labels covered by

Single Loks and U.S. Patent Nos. U.S. Patent Nos.

Fiscal Year Single Locks with 3,164,250 & 3,270,872 &

Ended Labels 3,164,249 3,270,873

3/31/67 $524,760.33 $1,475,496.54 $30,021.07

3/31/68 475,851.01 1,772,917.90 149,278.54

3/31/69 424,788.76 1,409,003.68 141,609.50

Other Automatic Total Gross Sales

Semi-Automatic Bag-Closing for All Products

Fiscal Year Type 100.2 Bag- Machines Sold by (including items

Ended Closing Machine Kwik-Lok Yakima not listed here)

3/31/67 $25,577.46 $503,814.10 $2,561,327.07

3/31/68 18,421.11 324,399.29 2,742,822.07

3/31/69 18,761.73 414,796.90 2,515,765.44

In early 1969 Kwik-Lok Yakima experienced an approximate 50 percent gross profit on sales of its bag-closing machines, bag tensioners, conveyor belts, and other machines.

The five most common commercial means of plastic bag closing in the flexible packaging industry were the following: heat seal, staples, tape, wire ties, and Kwik-Lok bag-closing devices. *329 Each of these means had one or more of the following qualities or capabilities which were commercially significant: reusability, semi-automatic application, fully automatic application, labeling capability with semi-automatic application, labeling capability with fully automatic application, metal detection compatibility, and pricing and coding capability. Metal detection compatibility is the capability of the bag-closing device to avoid triggering metal detection devices used in some food industry production lines to prevent the presence or introduction of metal into the food products being packaged. The following chart indicates the qualities or capabilities possessed by each of the five most common commercial means of plastic bag closing: Means of Plastic Bag Closing

Kwik-Lok

Bag-Closing

Qualities or Capabilities Heat Seal Staples Wire Ties Tape Devices

Reusability x x

Semi-automatic application x x x x x

Fully automatic application x x x x x

Labeling capability with

semi-automatic application * L x

Labeling capability with

fully automatic application x

Metal detection compatability x x x

Pricing and coding capability * L x x

Only Kwik-Lok bag-closing devices had all the commercially significant *330 qualities or capabilities.

In early 1969, the closures with labels (end-to-end and side-to-side) covered by U.S. Patent Nos, 3,270,872 and 3,270,873 held a very strong competitive position in the bag-closing device market, a highly competitive market. This was also true of the Kwik-Lok equipment needed to apply the closures with labels in fully automatic fashion. In fact, the only competitimve product (i.e., wire ties) had limited semi-automatic labeling capability and was believed to be a "sitting duck" for the Kwik-Lok corporations' by Jerre Paxton, the president of Kwik-Lok Yakima.

In early 1969, prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873 it had a sales organization and production staff sufficient to effectively exploit the two closure-with-label patents and to establish a market position which would enable it to take full advantage of these inventions during the after the life of the patents. Prior to the acquisition of the patents, Kwik-Lok Yakima had machines capable of manufacturing the closures with labels, plant capacity to manufacture the product, means to promote and market the product, and machines which it could sell which were *331 capable of automatically applying the closures with labels. Kwik-Lok Yakima fully expected to be able to continue to sell the closures with labels, and the related machinery, after expiration of the patents, and to take advantage of the market dominance which it expected to acquire during the lives of the patents.

In early 1969, prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873 , it expected continued growth in the flexible packaging industry, and continued and increasing demand for plastic bag-closing devices. The production of polyethylene film (used for plastic bags) in the United States had increased from 183 million pounds in 1958 to 615 million pounds in 1965 and was expected to increase to 720 million pounds in 1968.

Prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873 in early 1969, it expected the sales price per thousand of the closures with labels to be at least four times the sales price per thousand of the striploks. Further, Kwik-Lok expected the sales of the closures with labels to equal or exceed, quantitatively speaking, the prior sales of striploks. The following two charts set forth the approximate selling *332 prices, costs, and gross profits experienced in early 1969 by Kwik-Lok Yakima with respect to striploks and closures with labels. As shown, the total production costs of the closures with labels approximated 29.4 percent of their gross sales price.

STRIPLOKS

($ per thousand) Selling Price: $0.950

Production Costs:

Plastic Material for Loks .300

Slitting Labor .005

Packaging .010

Production Machine Labor .035

Total Costs $0.350

Gross Profits (selling price less costs): $0.600

Percentage Gross Profit Margin of Selling Price: 63.2 percent Percentage Total Production Costs of Selling Price: 36.8 percent

CLOSURES WITH LABELS

($ per thousand) Selling Price: $4.500

Production Costs:

Plastic Material for Loks .300

Slitting Labor .005

Packaging .030

Production Machine Labor .140

Label .700

Card Cutting .150

Total Costs $1.325

Gross Profits (selling price less costs): $3.175

Percentage Gross Profit Margin of Selling Price: 70.6 percent Percentage Total Production Costs of Selling Price: 29.4 percent

In early 1969, prior to Kwik-Lok Yakima's purchase of U.S. Patent Nos. 3,270,872 and 3,270,873 , it believed that the closures with labels would be marketable in the future in two possible new markets: the chicken-tagging industry *333 and the net bag industry. Kwik-Lok Yakima based its appraisal (in early 1969) of the value of U.S. Patent Nos. 3,270,872 and 3,270,873 on the in-house expertise of its employees who had a good knowledge of the pastic bag-closing business. Furthermore, in early 1969 Jerre Paxton, as president of Kwik-Lok Yakima, did not think that any independent researcher knew as much about the corporation's business as he did; Kwik-Lok Yakima did not, therefore, use any independent marketing research organization to product a study to determine a purchase price for the two patents.

Based upon the Inwood Method 4 of ascertaining present value, and using a 15 percent interest rate, the payments which the February 21, 1976, Purchase Agreement required Kwik-Lok Yakima to make to IDT in exchange for U.S. Patent Nos. 3,270,872 and 3,270,873 had a discounted present value on February 21, 1969, of $2,006,480.

The terms of the Purchase Agreement dated February 21, 1969, between IDT and Kwik-Lok Yakima conveying U.S. Patent Nos. 3,270,872 and 3,270,873 were reasonable in light of the history set forth above *334 and the expectations which Kwik-Lok Yakima reasonable held at that time.

On February 1, 1979, Kwik-Lok Yakima properly filed for its fiscal years ended March 31, 1970, 1971 and 1972, effective elections pursuant to section 243(b), Internal Revenue Code of 1954 , 5 to treat dividends received by it from affiliated corporations as qualifying dividends.

Grantor Trust Issues

On August 3, 1967, Floyd Paxton, as grantor, and Lorne House and Jerre Paxton, as trustees, executed a Declaration of Trust creating PFT. The Declaration of Trust is reproduced below.

DECLARATION OF TRUST OF THIS CONSTITUTIONAL TRUST

TO BE ADMINISTERED BY NATURAL PERSONS, HOLDING TITLE IN JOINT TENANCY, ACTING UNDER THEIR CONSTITUTIONAL RIGHTS AS CITIZENS OF THE UNITED STATES OF AMERICA

THIS DECLARATION OF TRUST AUTHORIZES ITS TRUSTEES TO OPERATE UNDER THE NAME OF

F.G. PAXTON FAMILY ORGANIZATION

THIS AGREEMENT, CONVEYANCE and ACCEPTANCE, made and entered into at the time and on the date appearing in the acknowledgment hereto attached, by and between FLOYD G. PAXTON, GRANTOR and CREATOR hereof, LORNE HOUSE and JERRE PAXTON, ACCEPTORS hereof *335 in joint tenancy who shall compose the Board of Trustees and Executive Officers for conducting said business.

THIS INDENTURE OF TRUST, made the 3rd day of August, 1967, by and between the one or more persons subscribing this agreement, parties of the first part, and Jerre H. Paxton and Lorne House, (hereinafter called the "Trustees"), parties of the second part,

WITNESSETH

WHEREAS, the Subscribers are deeply involved in the complex economic social and cultural affairs of the world of today and are aware of the many uncertainties that exist in this changing world and of their responsibilities to friends, relatives, employees, charitable institutions, governmental service organizations and the people of their municipalities states and nation and have determined that this Trust is an instrument designed to best meet said responsibilities for the benefit of all.

WHEREAS, the Subscribers intend that the functions of this Trust shall therefore to be manage and operate as effectively as possible all properties with which the Trustees may from time to time be vested so as to maximize the economic potential thereof for the good of all and to provide employment at the economic level required *336 by the standard of living of this culture as it may from time to time for all employees engaged in the operation of such properties and all persons interested in such operations and the results thereof and from the gross revenues of such operations, to the extent not required for expenditure as aforesaid, to make grants and donations to education, scientific and religious institutions for and in the name of the Trust, and, if the Trustees in their sole discretion so determine, to make distributions from the net revenues of such operations to the account of and in the name of the Holders of Certificates of Interest.

WHEREAS, the Trustees have consented to act as such hereunder on the terms and conditions hereinabove and hereinafter set forth:

NOW, THEREFORE, in consideration of the premises and of the objects and purposes hereinabove and hereinafter set forth and of the sum of One Dollar ($1.00) in hand paid and other considerations of value, the receipt whereof is hereby acknowledged, the Subscribers and the Trustees, each acting severally and not jointly, have and do hereby agree as follows:

FIRST: The name of this Trust and other things of value constituting the Trust Estate, including *337 all rights in reversion, remainder, expectancies or inheritances, wherever situated and other things of value too numerous to mention, shall be held, administered and disposed of in accordance with and pursuant to the provisions of this indenture.

SECOND: The principal place of business of this Trust shall be in the City of Yakima, County of Yakima, State of Washington, and is to be governed in all respects by the laws of the State of Washington.

THIRD: The Trustees, for themselves and their successors in trust, will accept the conveyance and assignment in trust of all of the property to be sold, assigned, granted, conveyed, transferred and set over to the Trustees described in Schedule "A" hereto annexed, all of which property, together with any and all other property and all business projects and operations from time to time held by the Trustees is herein after referred to as the "Trust Estate," upon trust for the uses and purposes hereinabove and hereinafter set forth, said Trustees to hold legal title in joint tenancy with right of survivorship, and not as tenants in common, to those certain properties, business projects and operations constituting from time to time the Trust *338 Estate and in connection therewith said Trustees shall collectively act by virtue of the convenants herein contained as a board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith may deal in properties, business projects, operations underway or contemplated, equities, formulae, entities, parents, copyrights, business goodwill and any and all other business desired to be engaged in by said Trustees in connection with the Trust Estate. The Trustees further agree to the continuing operations of such property and accept all of the terms of the Trust set forth herein and the Trustees do hereby agree to conserve and improve the Trust, to continue the operations of the property constituting the Trust Estate as if such property had not been parted with by the Subscribers in consideration for Certificates of Interest as contemplated by FOURTH hereof, to protect and preserve the assets constituting the Trust Estate, to invest and reinvest the funds of said Trust Estate in the exercise of their best judgment and discretion, to make distribution of portions of the proceeds and income under the Trust Estate as in their discretion and according *339 to the minutes to be maintained by the Trustees should be made, to make complete periodic reports as to the operations of the Trust and business transactions of the Trust and, upon final liquidation of the Trust to distribute the assets constituting the then Trust Estate in accordance with the provisions hereof, and in all other respects to administer the Trust, and the Trust Estate, in good faith strictly in conformity thereto.

FOURTH: In consideration for the sale, assignment, grant, conveyance, transfer and setting over to the Trustees of the property described in Schedule "A" hereto annexed, the Trustees do simultaneously with the exception of and delivery of this indenture authorize, issue and deliver to the Subscribers units reflected by Certificates of Interest to evidence the equitable interest contributing to the Trust Estate, said units reflected by Certificates of Interest being 5,000 in number and said Certificates of Interest being substantially in form hereto attached as Annex I. Said Certificates of Interest shall be nonassessable, nontaxable and negotiable and shall pass by delivery unless registered with the Secretary of the Board of Trustees and such registration *340 noted upon any such Certificate of Interest so registered, after which no valid transfer may be made, until released from such registration by registered transfer to bearer after which any such Certificate of Interest shall again be transferable by delivery. The Secretary of the Board of Trustees shall keep as the office of the Trust books and other facilities for the registration and transfer of Certificates of Interest and upon presentation for such purpose the Secretary of the Board of Trustees shall register or cause to be registered therein and permit to be transferred thereon, under such reasonable regulations as the Secretary of the Board of Trustees may prescribe, any Certificates of Interest issued under this indenture.

FIFTH: Ownership of Certificates of Interest in the Trust shall not entitle the holder thereof, whether or not registered, to any legal title in or to the Trust Estate nor to any undivided interest therein, nor any voice in the management of the Trust, nor to permit or entitle any heir or legal representative of a holder of any Certificate of Interest following his death to demand any partition or division of the property of the Trust or to any special accounting. *341 Death, insolvency or bankruptcy of any holder of a Certificate or Certificates of Interes or the transfer of any Certificate or Certificates of Interest by sale, gift, devise or descent shall not operate as a dissolution of the Trust or in any manner affect the Trust, the operation or mode of business of the Trust or the Trust Estate. The Trustees may, in their sole discretion, at any time and from time to time, make any distribution of income from the operation of the Trust Estate and make any distribution of all or any portion of the assets comprising the Trust Estate for any reason to the holders of Certificates of Interest in the Trust and, except to the extent that the Trustees have given notice of their intention to make any distribution of income or of assets comprising any portion of the Trust Estate, the holders of Certificates of Interest shall have no right, title or interest in or to any portion of the Trus Estate or of any income generated by the Trust Estate for any purpose whatsoever.

SIXTH: It is hereby expressly declared that this instrument and the legal relationship constituted hereby constitutes a trust and that no partnership, association or corporation is hereby *342 created. It is hereby further expressly declared that nothing herein contained shall constitute either the

(a) Trustees alone, or

(b) The Trustees and the agents and representatives of the Trustees when taken together, or

(c) The holders alone of Certificates of Interest present or further, or

(d) The holders of Certificates of Interest, present, or future, when taken together with the Trustees and/or with the representatives and agents of the Trustees,

an association or partners with any other person. It is further expressl declared that none of the Trustees, none of the agents and representative of the Trustees and none of the holders of Certificates of Interest, present or future, have or possess any beneficial interest in the propert or assets from time to time constituting all or any portion of the Trust Estate and that none of such persons shall be personally liable hereunder as partners or otherwise, and that the rights and duties of each such persons or groups of persons are several in accordance with the provisior hereof and not joint. No person acting as Trustee hereby shall be liable for the act or omission of any other person acting as Trustee hereunder or for the act *343 or omission of any other person whatsoever, whether employed by such Trustee or not, or whether employed by the Trustees as an agent or representative of the Trustees, or for anything other than his own personal breach of trust.

SEVENTH: The Trustees shall have, with respect to any and all property constituting the Trust Estate, whether real, personal or mixed at any time held by them hereunder, full authority, in their absolute discretion, at any time and from time to time, to act in the management of this Trust as though the Trustees, acting as a body, where beneficial owner of the Trust Estate, including the authority (without limiting the generality of the foregoing):

A. To retain any such property temporarily or permanently; or to sell or exchange or abandon the same, at public or private sale for cash or upon credit, with or without security, or upon any terms the Trustees deem proper; to grant options upon, to mortgage, or to lease the same for any period or periods whatsoever; and to operate as going concerns or businesses any and all such property and in connection therewith to manage in such manner as any natural person could any such business or operations and to buy, *344 manufacture, sell and perform services in connection therewith and otherwise deal in and with such proper as the Trustees from time to time deem fit;

B. To hold, invest, or reinvest in any securities or other real or personal property (whether domestic or foreing), or undivide interest therein, including shares or interest in investment companies or investment trusts, in any common trust funds, in voting trusts certificates, royalties and other mineral rights, or in real estate or mortgages thereon, or to bid in any proper or choses in action at any foreclosure, without any duty to diversify and without regard to the proportion which any property, or property of a similar character, so held may bear to the entire amount of the Trust Estate and regardless of whether the same would in the absence of this provision constitute a legal investment for trustees or of whether the same is of a speculative nature rather than a convervative investment or of whether the same is productive or unproductive and specifically, but without limiting the generality of the foregoing, to hold, invest, or reinvest all or any part of the entire Trust Estate in common or preferred stocks and even though some *345 or all of such stocks might be considered speculative or might have no ready market and to conduct or engage in or join with others in conducting or engaging in any business, either directly or through one or more partnerships, corporations, or other forms of business organization, or through trusts, or sell or liquidate the same.

In connection with the operation or carrying on of any business or other operations of all or any portion of the Trust Estate the Trustees shall have the authority to manufacture, construct, assemble, fabricate or otherwise produce, purchase or otherwise acquire, design, develop, improve, install, service maintain, repair, experiment with, hold, own, use, sell, lease, pledge, or otherwise dispose of, import, export, and trade and deal in and with, any and all goods, wares, merchandise, materials, machines, apparatus, appliances, products and property of every kind, nature and description and in connection therewith to acquire by purchase, exchange, lease or otherwise and to own, hold, develope, improve, operate, sell, assign, lease, transfer, convey, exchange, mortgage, pledge, or otherwise dispose of or encumber real and personal property of any class and *346 description and any rights and interest therein without limit as to amount and wherever situated, and, further, in connection therewith, to undertake, conduct, manage, assist, promote, engage or participate in every kind of engineering, research, scientific, experimental, design or development work and to act as consultants, operating managers, agents, or representatives of corporations, firms, individuals and others and as such to promote, manage, supervise, operate, develop or extend the business interest or properties constituting the Trust Estate and the business interests or properties of others, including corporations, firms, and individuals, and to acquire by purchase or otherwise, erect, construct, make, improve and operate, or aid in or subscribe towards the erecting, constructing, making, improving and operate, or aid in or subscribe towards the erecting, constructing, making, improving and operating of mills, factories, storehouses, buildings, roads, plants, and works of all kind and to enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government, or colony or *347 dependency thereof, and to adopt, apply for, obtain register, purchase, lease, take assignments and licenses in respect of, or otherwise acquire, and to maintain, protect, hold, own, use, enjoy, control, exercise, develop, operate, introduce, turn to account, grant licenses or other rights in respect of, sell, assign, lease, mortgage, pledge or otherwise dispose of any and all inventions, devices, formulae, processes and all improvements and modifications thereof, any and all letters patent and/or applications therefore of the United States of America or any country and all rights connected therewith or appertaining thereto, any and all copyrights granted by the United States of America or by any other country and any and all trade marks, trade names, trade symbols, goodwill and other indications of origin or ownership granted by or recognized under the laws or decisions of the United States of America or any other country, and, without in any respect limiting the generality of the foregoing, to do any and all things herein set forth to the same extent as fully as natural persons might or could do, in any part of the world, and as principal, agent, contractor, or otherwise, and either *348 alone or in conjunction with any other individuals, firms, associations, corporations, syndicates or bodies politic, including the borrowing of money without limit and upon any terms that the Trustees may determine, giving such security as the Trustees may determine and otherwise to do any and all things necessary and proper for the accomplishment of the purposes herein before set forth of this Trust or necessary or incidental to the protection and benefit of this Trust and in general to carry on any lawful business necessary or incidental to the attainment to the purposes of this Trust, whether such business is similar in nature to the enumeration hereinbefore set forth or otherwise.

C. To employ such persons as the Trustees may determine to act as operational officers of the businesses and operations conducted with the property constituting all or any part of the Trust Estate and in connection therewith to employ agents, employees, accountants, brokers and investment counsel, individual or corporate, and to advise with counsel, who may be counsel for any Trustee, individually or with whom any Trustee may be associated and to employ or deal with any firm or corporation with or in *349 which any Trustee may be interested and to pay such salaries, fees, commissions, profits, benefits and allowances, directly or indirectly, in connection with any engagement as the Trustees may from time to time determine.

D. To make all such grants, donations and distributions, in such amounts and when, as and if determined by the Trustees to be made, as are contemplated by the second preamable to this Declaration of Trust.

EIGHTH: The Trustees shall appoint a person, who need not be one of the Trustees, to act as the Secretary of the Trustees to hold such office for such period of time and upon such terms and conditions as shall be determined by the Trustees as the time of such appointment and such Secretary shall maintain, or cause to be maintained, a permanent record of all proceedings of the Trustees. All proceedings and determinations of the Trustees shall, except as hereinafter provided, be made at meetings duly called and provided that notice of each such meeting and the time, place and purpose thereof shall be given at least two days in advance to each of the Trustees. Any Trustee may call a meeting of the Trustees upon the giving of such notice. Such notice may be waived *350 by any Trustee by written instrument execured either before or after a meeting of the Trustees. The Trustees may also take any action, without holding any meeting, by executing a written instrument signed by at least the number of Trustees whose affirmative vote is required for the proposed action and such instrument may be in counterparts respectively signed by the Trustees. The action of the majority of the whole number of the Trustees expressed from time to time at a meeting or in writing, with or without a meeting shall constitute the action of the Trustees and have the same effect as though taken by all. Any Trustee may, at any time, by an instrument of writing, appoint for a limited period of time not exceeding ninety (90) days, any other Trustee as his proxy and attorney, to perform specific duties or to exercise specified rights or to take specific action which the Trustee so appointing, would be entitled to perform, exercise or take as a Trustee. Each such proxy and power of attorney shall be revocable at any time by the Trustee executing the same, but no such revocation shall impair or affect any action taken pursuant thereto prior to such revocation.

Any Trustee may *351 serve as an officer, agent or representative of the Trustees in connection with any businesses or operations carried on by the Trustees in connection with the Trust Estate.

Any Trustee, or any firm or corporation of which such Trustee may be a member, director, or officer, may contract with the Trust or become pecuniarily interested in any matter or transaction to which the Trust may be a party, or in which it may in any way be concerned, as fully as though such person were not a Trustee, provided, however, that the general character and extent of such interest, if any, of any such Trustee shall be disclosed to the other Trustees upon any request therefore.

No Trustee shall be removable from office by the holders of Certificates of Interest for any reason at any time whatsoever. Any Trustee may be removed from office by any court of competent jurisdiction after the exhaustion by the person so proposed to be removed of all his legal and equitable rights and remedies, including the right of appeal. Any Trustee may also be removed as such, but only for cause, upon the vote in favor of such removal of the majority of the remainder of the Trustees at the time in office at a meeting of *352 the Trustees held not sooner than thirty days following the actual delivery of notice of such proposed removal to the person so proposed to be removed as Trustee, which notice shall be accompanied by a detailed written list of particulars alleged to form the basis for the proposed removal.

In the event of the removal of a Trustee or the death or resignation of a Trustee or in the case any vacancy shall be caused in the office of a Trustee for any other reason, a successor Trustee shall be selected and appointed by the remaining Trustees or Trustee, as the case may be, in office at the time. In the event that at any time there shall be only one person holding the office of Trustee, such Trustee shall designate in writing the person to be successor Trustee of the Trust in the event that such Trustee holding office shall cease to be a Trustee prior to his filling of vacancies in the office of Trustees in the manner hereinabove provided prior to the time that such person shall cease to be a Trustee.

Each successor to any Trustee shall forthwith upon appointment become vested with all rights, powers, immunities and duties of his predecessor as Trustee. Notice of the selection and appointment *353 of any net Trustee or of any successor to a Trustee shall be periodically reported in accordance with the provisions of this indenture.

No Trustee shall be required to give any bond or other security for the discharge of his duties as such Trustee.

The initial number of Trustees shall be Two (2) but such number may be increased, or decreased, from time to time for such practical reasons beneficial to the Trust as the Trustees then in office may determine and the Trustees then in office shall fill all vacancies in the offices of Trustee caused by their action increasing the number of Trustees.

The Trustees shall have and shall exercise collectively the exclusive management and control of the Trust, the Trust Estate and all business and operations constituting all or any portion of the Trust Estate.

NINTH: This Trust shall continue for a period of twenty (20) years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their discretion, because of threatened depreciation in value, or other good and sufficient reasons, liquidate the assets, distribute and close the Trust at any earlier date determined by them. The Trust shall be proportionately *354 and in a prorata manner distributed to the beneficiaries. In the event this instrument has been recorded with the Recorder of Deeds, they shall file with said Recorder a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, their administration and distribution has been made in good faith, otherwise a court of competent jurisdiction may be invoked to review and correct any tort or error.

TENTH: At the expiration of this Trust, or any subsequent agreement, then the Trustees, if they so desire and believe that said Trust should not be closed, may renew this agreement for a like or shorter period. A resolution of said renewal shall be entered upon the minutes (and also recorded with the County Auditor's office) at least one hundred twenty (120) days prior to the expiration hereof.

IN WITNESS WHEREOF, the Grantor and Creator hereof and the Acceptors hereof, for themselves, their heirs and assigns, have hereunto set their hands and seals in token of the conveyance, delivery and acceptance of property, assets, or other things of value, and the obligations and duties as herein assumed as Trustees of *355 said Trust and assent to all stipulations herein as imposed and expressed.

COUNTY OF YAKIMA STATE OF WASHINGTON

ss.

I, CITARLES MOOREHEAD, a Notary Public, an officer authorized by law to administer oaths, do hereby certify that FLOYD G. PAXTON, Creator, and LORNE HOUSE and JERRE PAXTON, as Trustees of the F.G. PAXTON FAMILY ORGANIZATION, a Trust, personally appeared before me this day and acknowledged that they signed, sealed and delivered the above and foregoing Trust Indenture for the uses and purposes therein set forth, and that the Trustees by their signatures evidenced the acceptance of the duties, obligations and faithful performance of said Trust Indenture.

F.G. PAXTON FAMILY ORGANIZATION (A TRUST)

SCHEDULE A

(INITIAL TRUST ASSETS)

1. Assets from Floyd and Grace Paxton:

(a) 1,542 shares Kwick Lok Corp. , (Yakima) stock (395 shares Class A, and 1,147 shares Class B)

(b) 35 shares Class A Kwik Lok Corp., (New Haven) stock

(c) 5 shares Paxton Industries, Inc., stock

(d) 125 shares Pacific Reserve Life Insurance Co., stock

(e) 200 shares Landmark Engineering, Inc., stock

(f) 20 shares Yakima Valley Turf Club, Inc., stock

(g) 20 bonds, Yakima Valley Turff Club, Inc

(h) Real *356 and Personal Property, North 92nd Ave., Yakima

(i) U.S. Patent No. 3,067,534

(j) Note Receivable ($8,500.00).

2. From Jerre and Nancy Paxton:

222 shares Kwik Lok Corp. (Yakima) stock (53 shares Class A and 169 shares Class B)

3. From Ted and Sharon Paxton:

187 shares Kwik Lok Corp. (Yakima) stock (52 shares Class A and 135 shares Class B)

4. From Phil and Wanda Crawford:

20 shares Class B Kwik Lok Corp., (Yakima) stock

Between September 20, 1967 and October 22, 1967, the following individuals transferred the assets described below to PFT:

FLOYD AND GRACE PAXTON

395 shares of class A stock of Kwik-Lok Yakima

1,147 shares of class B stock of Kwik-Lok Yakima

5 shares of capital stock of Paxton Industries, Inc.

125 shares of capital stock of Pacific Reserve Life Insurance Co.

3 shares of capital stock of Kwik-Lok Indiana

200 shares of capital stock of Landmark Engineering, Inc.

20 shares of capital stock of Yakima Valley Turf Club, Inc.

20 bonds of Yakima Valley Turf Club, each in the face amount of $1,000

Real and personal property located at North 92nd Avenue, Yakima, Washington

U.S. Patent No. 3,067,534

Note receivable in amount of $8,500

PHILL AND WANDA CRAWFORD

20 shares of class *357 B stock of Kwik-Lok Yakima

JERRE AND NANCY PAXTON

53 shares of class A stock of Kwik-Lok Yakima

169 shares of class B stock of Kwik-Lok Yakima

TED AND SHARON PAXTON

52 shares of class A stock of Kwik-Lok Yakima

135 shares of class B stock of Kwik-Lok Yakima

As a result of these transfers, by October 22, 1967, PFT held all of the issued and outstanding stock of Kwik-Lok Yakima. In exchange for the transfers described above, on September 23, 1967, identical certificates of beneficial interest for units of interest were issued as follows: Number of Percentage

Holder Units of Total

Floyd Paxton 2,159-1/2 43.19

Grace Paxton 2,159-1/2 43.19

Jerre Paxton 192 3.84

Nancy Paxton 192 3.84

Ted Paxton 129-1/2 2.59

Sharon Paxton 129-1/2 2.59

Phil Crawford 19 .038

Wanda Crawford 19 .038

On March 18, 1971, the certificates of beneficial interest in PFT were held as follows: Number of Percentage

Holder Units of Total

Floyd Paxton 1,250-1/2 25.01

Grace Paxton 1,250-1/2 25.01

Jerre Paxton 495 9.90

Nancy Paxton 192 3.84

Ted Paxton 432.5 8.65

Sharon Paxton 129.5 2.59

Phil Crawford 19 .038

Wanda Crawford 19 .038

Floyd Paxton, Jr. 303 6.06

Ande Paxton 303 6.06

Cheryl Paxton 303 6.06

Diane Irwin 303 6.06

The trustees of PFT were as follows for the periods *358 indicated: Period Trustees

August 1967 to

October 1967 Jerre Paxton, Lorne House

October 1967 to

September 1969 Jerre Paxton, Lorne House,

Diane Irwin, Donald Tait,

Donald Loudon

September 1969 to

November 1969 Jerre Paxton, Lorne House,

Diane Irwin, Robert Glaspey,

James Shrader

November 1969 to

end of period

here involved Jerre Paxton, Lorne House,

Diane Irwin, James Shrader

Donald Tait and Robert Glaspey were business acquaintances of Floyd Paxton, both engaged in the publishing business in Yakima, Washington. James Shrader was a Certified Public Accountant who practiced accounting in Yaima, Washington. Neither Floyd Paxton nor Grace Paxton was ever a trustee of PFT.

On August 4, 1967, Lorne House and Jerre Paxton, the original trustees of PFT, Unanimously took the following action as trustees:

Jerre Paxton was appointed as First Trustee and Trust Manager to handle individually all the affairs and business of the trust estate, to make distributions of portions and proceeds and income of the trust in his sole discretion, the right to appoint his successor as First Trustee, and to preside at meetings of the Board of Trustees. No official action by the trust may be taken without his consent.

On October *359 25, 1969, the trustees of PFT, upon the advice of its attorney, purported to "correct, nunc pro tunc," the trust instrument by amending paragraph NINTH to read as follows:

NINTH: This Trust shall continue for a period of twenty (20) years from date, unless the Trustees shall unanimously determine upon an earlier date.The Trustees may at their discretion, because of threatened depreciation in value, or other good and sufficient reasons, liquidate the assets, distribute and close the Trust at any earlier date determined by them. Upon the dissolution of the Trust and the winding up of its affairs, the Trust Estate shall be distributed exclusively to one or more either charitable, religious, scientific, literary or educational organizations (as selected by the Trustees) which would then qualify under the provisions of Section 501 (c)(3) of the Internal Revenue Code and its Regulations as they now exist or as they may hereafter be amended. In the event this instrument has been recorded with the Recorder of Deeds, they shall file with said Recorder a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, *360 their administration and distribution has been made in good faith, otherwise a court of competent jurisdiction may be invoked to review and correct any tort or error.

On April 6, 1971, the trustees of PFT authorized a distribution of $5,000 to the holders of certificates of beneficial interest in proportion to their respective holdings. On May 19, 1971, the trustees authorized a distribution of $2,000 to Jerre Paxton alone and nothing to the other holders of certificates of beneficial interest.

Proposals pertaining to disbursements of funds made by Jerre Paxton were always approved by the other trustees. During the relevant periods herein, PFT, through the actions of Jerre Paxton alone, as First Trustee, made charitable donations of $5,000 to the University of Plano, Plano, Texas, and other sums to the Salvation Army and the Union Gospel Mission in Yakima, Washington. The trustees and the certificate holders in PFT believed that the certificates of beneficial interests conveyed to the holders no more interest than a mere possibility of receiving disbursements of income or corpus from PFT at the sole discretion of the trustees.On June 17, 1970, the Commissioner of Internal Revenue *361 mailed to Floyd G. Paxton and Grace D. Paxton a statutory notice of deficiency covering income taxes for the taxable year 1967 in which he determined that the grantors of PFT were taxable on the net income of PFT for the period from October 1, 1967, through December 31, 1967, because "they granted a nonadverse party a power to revoke."

On February 15, 1972, this Court filed its opinion in Paxton v. Commissioner, 57 T.C. 627 (1972) , in which we sustained the Commissioner's determination covered by his statutory notice of deficiency mailed June 17, 1970.

On May 30, 1972, the trustees of PFT purported to "clarify" the declaration of trust of PFT. A "restatement declaration of trust" was prepared and executed by the grantor and the then trustees on May 30, 1972. It was ratified by all of the holders of certificates of beneficial interest in PFT. The May 30, 1972, declaration of trust is reproduced below.

DECLARATION OF TRUST OF THIS CONSTITUTIONAL TRUST

TO BE ADMINISTERED BY NATURAL PERSONS, HOLDING TITLE IN JOINT TENANCY, ACTING UNDER THEIR CONSTITUTIONAL RIGHTS AS CITIZENS OF THE UNITED STATES OF AMERICA

THIS DECLARATION OF TRUST AUTHORIZES ITS TRUSTEES TO OPERATE UNDER THE NAME *362 OF

F. G. PAXTON FAMILY ORGANIZATION

THIS AGREEMENT, CONVEYANCE and ACCEPTANCE, made and entered into at the time and on the date appearing in the acknowledgment hereto attached, by and between FLOYD G. PAXTON, GRANTOR and CREATOR hereof, LORNE HOUSE, JERRE PAXTON, JAMES B. SHRADER, and DIANE IRWIN, ACCEPTORS hereof in joint tenancy who shall compose the Board of Trustees and Executive Officers for conducting business.

THIS INDENTURE OF TRUST, made the 30th day of May, 1972, by and between the one or more persons subscribing this agreement under the heading at the end hereof entitled "Subscribers, Grantors, and Assignors" (such persons being hereinafter called the "Subscribers"), parties of the first part, and Lorne House, Jerre Paxton, James B. Shrader and Diane Irwin (such persons being hereinafter called the "Trustees"), parties of the second part,

WITNESSETH

WHEREAS, the Subscribers are deeply involved in the complex economic, social and cultural affairs of the world of today and are aware of the many uncertainties that exist in this changing world and of their responsibilities to friends, relatives, employees, charitable institutions, governmental service organizations and the *363 people of their municipalities, states and nation and have determined the this Trust is an instrument designed to best meet said responsibilities for the benefit of all such beneficiaries.

WHEREAS, the Subscribers intend that the functions of this Trust shall therefore be to manage and operate as effectively as possible all properties with which the Trustees may from time to time be vested so as to maximize the economic potential thereof for the good of all beneficiaries, to make grants and donations to educational, scientific and religious institutions for and in the name of the Trust, and, if the Trustees in their sole discretion so determine, to make distributions from the net revenues of such operations to the account of and in the name of the Holders of Certificates of Interest.

WHEREAS, the Trustees have consented to act as such hereunder on the terms and conditions hereinabove and hereinafter set forth:

NOW, THEREFORE, in consideration of the premises and of the objects and purposes hereinabove and hereinafter set forth and of the sum of One Dollar ($1.00) in hand paid and other considerations of value, the receipt whereof is hereby acknowledged, the Subscribers and the Trustees, *364 each acting severally and not jointly, have and do hereby agree as follows:

FIRST: The Subscribers do hereby irrevocably sell, assign, grant, convey, transfer and set over to the Trustees, to be held in joint tenancy with right of survivorship, the property described in Schedule "A" hereto annexed and made a part hereof, the receipt of which is hereby acknowledged by the Trustees, all of which property, together with any and all other property from time to time held by the Trustees under this indenture is hereinafter referred to as the "Trust Estate", upon trust for the uses and purposes hereinabove and hereinafter set forth, said Trustees to hold legal title in joint tenancy with right of survivorship, and not as tenants in common, to those certain properties constituting from time to time the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust *365 Estate and in connection therewith may deal in properties, operations underway or contemplated, equities, formulae, entities, patents, and copyrights.

SECOND: The name of this Trust and other things of value constituting the Trust Estate, including all rights in reversion, remainder, expectancies or inheritances, wherever situated and other things of value too numerous to mention, shall be held, administered and disposed of in accordance with and pursuant to the provisions of this indenture.

THIRD: The principal place of business of this Trust shall be in the City of Yakima, County of Yakima, State of Washington, and is to be governed in all respects by the laws of the State of Washington.

FOURTH: The Trustees, for themselves and their successors in trust, do hereby accept the conveyance and assignment in trust and acknowledge delivery of all of the property sold, assigned, granted, conveyed, transferred and set over to the Trustees described in Schedule "A" hereto annexed and the continuing operations of such property and accept all of the terms of the Trust set forth herein and the Trustees to hereby agree to conserve and improve the Trust, to continue the operations of the property *366 constituting the Trust Estate as if such property had not been parted with by the Subscribers in consideration for Certificates of Interest as contemplated by FIFTH hereof, to protect and preserve assets constituting the Trust Estate, to invest and reinvest the funds of said Trust Estate in the exercise of their best judgment and discretion, to make distribution of portions of the proceeds and income under the Trust Estate as in their discretion and according to the minutes to be maintained by the Trustees should be made, to make complete periodic reports as to the operations of the Trust and business transactions of the Trust, and, upon final liquidation of the Trust to distribute the assets constituting the then Trust Estate in accordance with the provisions hereof, and in all other respects to administer the Trust, and the Trust Estate, in good faith strictly in conformity hereto.

FIFTH: In consideration for the sale, assignment grant, conveyance, transfer and setting over to the Trustees of the property described in Schedule "A" hereto annexed, the Trustees do simultaneously with the exception of the delivery of this indenture authorize, issue and deliver to the Subscribers units *367 reflected by Certificates of Interest to evidence the equitable interest contributing to the Trust Estate, said units reflected by Certificates of Interest being 100 in number and said Certificates of Interest shall be nonassessable, nontaxable and shall only be negotiable with the express prior consent of the Trustees under such regulations, if any, as shall be prescribed by the Board of Trustees. When and if authorized by the Board of Trustees but not otherwise, said Certificates of Interest shall pass by delivery. No Certificate of Interest which is registered with the Secretary of the Board of Trustees may in any other manner be transferred and any attempt to transfer any Certificate of Interest without the prior consent of the Trustees shall be null and void and of no force and effect. The Secretary of the Board of Trustees shall keep at the office of the Trust such books and other facilities for the registration and transfer of Certificates of Interest as shall be necessary for the purposes hereof, specifically including provision therein for the recordation of any consents to transfer at any time or from time to time given. Upon presentation for transfer of a Certificate *368 of Interest, the Secretary of the Board of Trustees shall present to the Board of Trustees the request for such transfer and the Board of Trustees shall, at a meeting appropriately called, determine whether or not to permit any such transfer to be made; Board of Trustees shall have the power to determine at any such meeting whether to decline the transfer of any such Certificate of Interest, to authorize the transfer of any such Certificate of Interest, or to elect to purchase for this Trust from the then holder of the Certificate of Interest at such price as the Board of Trustees in their sole and arbitrary discretion shall determine, regardless of market values, book values or other criteria for fair value, the units represented by such Certificate of Interest and to cancel such Certificate of Interest, without any right in the holder of such Certificate of Interest, so presenting the same for transfer to receive for the units of such Certificate of Interest any amount in excess of the repurchase price declared applicable thereto by the Board of Trustees.The units represented by such Certificates of Interest acquired by the Board of Trustees pursuant to the foregoing shall be cancelled *369 and not outstanding and shall at no time and under no circumstances ever be reissued to any person.

SIXTH: No person whomsoever shall have any right or interest in any Certificate of Interest except the person named therein as the registered holder thereof. The registered holder of any Certificate of Interest shall have only the rights relating thereto which are specifically set forth herein and in the Certificate of Interest. All rights of the registered holder of any Certificate of Interest shall cease and terminate forthwith upon the death of the registered holder and the units represented by any such Certificate of Interest shall not pass by Will or by the laws of intestacy; no heir or legal representative of any deceased registered holder shall have any right of any kind whatsoever, by reason of the death of the registered holder or by the terms of any testamentary document or by the provisions of any contract or trust or other agreement entered into prior to the death of any such registered holder by such registered holder, to any interest whatsoever in this Trust or in any of the units, Certificate of Interest or any of the property or assets of the Trust, provided, however, *370 that the Board of Trustees of the Trust may, in their sole discretion, reissue, for such consideration as the Board of Trustees may determine, the units represented by any such Certificate of Interest to such person or persons as they may determine, including any person then constituting a registered holder of a Certificate of Interest or any person not so constituting a registered holder of Certificate of Interest. In the event that a registered holder of a Certificate of Interest shall cease to have and own any portion or all of any rights he may have under any such Certificate of Interest by reason of foreclosure, insolvency or other similar creditor's proceedings, then, for all purposes hereof, any such Certificate of Interest shall be null and void and of no force, effect, or value, and the units represented by any such Certificate of Interest shall be deemed to have been acquired by purchase by this Trust and shall be cancelled and not outstanding and never reissued. No holder of any Certificate of Interest shall have any right or power whatsoever to direct or otherwise influence the Trustees in the exercise of their sole discretion. No registered holder of any Certificate *371 of Interest shall have any right or power to alienate ownership of any Certificate of Interest or of the units represented thereby in any manner, whether by assignment, mortgage, pledge, testamentary document or otherwise, without the prior written consent of the Board of Trustees of this Trust.

SEVENTH: It is hereby expressly declared that this instrument and the legal relationship constituted hereby constitutes a trust and that no partnership, association or corporation is hereby created. It is hereby further expressly declared that nothing herein contained shall constitute either the

(a) Trustees, individually or collectively, alone, or

(b) The Trustees and the agents and representatives of the Trustees when taken together, or

(c) The holders alone of Certificates of Interest, present or future, or

(d) The holders of Certificates of Interest, present or future, when taken together with the Trustees and/or with the representatives and agents of the Trustees,

an association or partners with any other person. It is further expressly declared that none of the Trustees, none of the agents and representatives of the Trustees and none of the holders of Certificates of Interest, present *372 or future, have or possess, in any such capacities, any beneficial interest in the property or assets from time to time constituting all or any portion of the Trust Estate and that none of such persons shall be personally liable hereunder, as partners or otherwise, and that rights and duties of each such persons or groups of persons are several in accordance with the provisions hereof and not joint. No person acting as Trustee hereby shall be liable for the act or omission of any other person whatsoever, whether employed by such Trustee or not, or whether employed by the Trustees as an agent or representative of the Trustees, or for anything other than his own personal breach of trust.

EIGHTH: The Trustees shall have, with respect to any and all property constituting the Trust Estate, whether real, personal or mixed, at any time held by them hereunder, full authority, in their absolute discretion, at any time and from time to time, to act in the management of this Trust as though the Trustees, acting as a body, were the beneficial owner of the Trust Estate including the authority (without limiting the generality of the foregoing):

A. To retain any such property temporarily or permanently; *373 to sell or exchange or abandon the same, at public or private sale, for cash or upon credit, with or without security, or upon any terms the Trustees deem proper; to grant options upon, to mortgage, or to lease the same for any period or periods whatsoever; and otherwise deal in and with such property as the Trustees from time to time deem fit.

B. To hold, invest, or reinvest in any securities or other real or personal property (whether domestic or foreign), or undivided interest therein, including shares or interest in investment companies or investment trusts, in any common trust funds, in voting trusts certificates, royalties and other mineral rights, or in real estate or mortgages thereon, or to bid in any property or choses in action at any foreclosure, without any duty to diversify and without regard to the proportion which any property, or property of a similar character, so held may bear to the entire amount of the Trust Estate and regardless of whether the same would in the absence of this provision constitute a legal investment for trustees or of whether the same is of a speculative nature rather than a conservative investment or of whether the same is productive or unproductive *374 and specifically, but without limiting the generality of the foregoing, to hold, invest, or reinvest all or any part of the entire Trust Estate in common or preferred stocks and even though some or all of such stocks might be considered speculative or might have no ready market.

In connection with the operation or carrying on of any business or other operations of all or any portion of the Trust Estate the Trustees shall have the authority to manufacture, construct, assemble, fabricate or otherwise produce, purchase or otherwise acquire, design, develop, improve, install, service, maintain, repair, experiment with, hold, own, use, sell, lease, pledge, or otherwise dispose of, import, export, and trade and deal in and with, any and all goods, wares, merchandise, materials, machines, apparatus, appliances, products and property of every kind, nature and description and in connection therewith to acquire by purchase, exchange, lease or otherwise and to own, hold, develop, improve, operate, sell, assign, lease, transfer, convey, exchange, mortgage, pledge or otherwise dispose of or encumber real and personal property of any class and description and any rights and interest therein without *375 limit as to amount and wherever situated, and, further, in connection therewith, to undertake, conduct, manage, assist, promote, engage, or participate in every kind of engineering, research, scientific, experimental, design or development work and to act as consultants, operating managers, agents, or representatives of corporations, firms, individuals and others and as such to promote, manage, supervise, operate, develop or extend the business interests or properties constituting the Trust Estate and the business interests or properties of others, including corporations, firms, and individuals, and to acquire by purchase or otherwise, erect, construct, make, improve and operate, or aid in or subscribe towards the erecting, constructing, making, improving and operating of mills, factories, storehouses, buildings, roads, plants, and works of all kinds and to enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government, or colony or dependency thereof, and to adopt, apply for, obtain, register, purchase, lease, take assignments and licenses in respect of, or otherwise acquire, *376 and to maintain, protect, hold, own, use, enjoy, control, exercise, develop, operate, introduce, turn to account, grant licenses or other rights in respect of, sell, assign, lease, mortgage, pledge or otherwise dispose of any and all inventions, devices, formulae, processes and all improvements and modifications thereof, any and all letters patent and/or applications therefor of the United States of America or any country and all rights connected therewith of appertaining thereto, any and all copyrights granted by the United States of America or by any other country and any and all trade marks, trade names, trade symbols, goodwill and other indications of origin or ownership granted by or recognized under the laws or decisions of the United States of America or of any state thereof or any other country, and, without in any respect limiting the generality of foregoing, to do any and all things herein set forth to the same extent as fully as natural persons might or could do, in any part of the world, and as principal, agent, contractor, or otherwise, and either along or in conjunction with any other individuals, firms, associations, corporations, syndicates or bodies politic, including *377 the borrowing of money without limit and upon any terms that the Trustees may determine, giving such security as the Trustees may determine and otherwise to do any and all things necessary and proper for the accomplishment of the purposes herein before set forth of this Trust or necessary or incidental to the protection and benefit of this Trust.

C. To employ such persons as the Trustees may determine to act as operational officers of the businesses and operations conducted with the property constituting all or any part of the Trust Estate and in connection therewith to employ agents, employees, accountants, brokers and investment counsel, individual or corporate, and to advise with counsel, who may be counsel for any Trustee individually, or with whom any Trustee may be associated, and to employ or deal with any firm or corporation with or in which any Trustee may be interested and to pay such salaries, fees, commissions, profits, benefits and allowances, directly or indirectly, in connection with any engagements as the Trustees may from time to time determine.

D. To make all such grants, donations and distributions, in such amounts and when, as and if determined by the Trustees *378 to be made, as are contemplated by the second preamble to this Declaration of Trust.

NINTH: The Trustees shall appoint a person, who need not be one of the Trustees, to act as the Secretary of the Trustees and to hold such office for such period of time and upon such terms and conditions as shall be determined by the Trustees at the time of such appointment and such Secretary shall maintain, or cause to be maintained, a permanent record of all proceedings of the Trustees. All proceedings and determinations of the Trustees shall, except as hereinafter provided, be made at meetings duly called, and provided that notice of each such meeting and the time, place and purposes thereof shall be given at least two (2) days in advance to each of the Trustees. Any Trustee may call a meeting of the Trustees upon the giving of such notice. Such notice may be waived by any Trustee by written instrument executed either before or after a meeting of the Trustees. The Trustees may also take any action, without holding any meeting, by executing a written instrument signed by at least the number of Trustees whose affirmative vote is required for the proposed action and such instrument may be in counterparts *379 respectively signed by the Trustees. The action of the majority of the whole number of Trustees expressed from time to time at a meeting or in writing with or without a meeting shall constitute the action of the Trustees and have the same effect as taken though by all. Any Trustee may, at any time, by an instrument in writing, appoint for a limited period of time not exceeding ninety (90) days, any other Trustee as his proxy and attorney, to perform specific duties or to exercise specific rights or to take specific action which the Trustee so appointing, would be entitled to perform, exercise or take as a Trustee. Each such proxy and power of attorney shall be revocable at any time by the Trustee executing the same, but no such revocation shall impair or affect any action taken pursuant thereto prior to such revocation.

Any Trustee, or any firm or corporation of which such Trustee may be a member, director, or officer, may contract with the Trust or become pecuniarily interested in any matter or transaction to which the Trust may be a party, or in which it may in any way be concerned, as fully as though such person were not a Trustee, provided, however, that the general character *380 and extent of such interest, if any, of any such Trustee shall be disclosed to the other Trustees upon any request therefor.

No Trustee shall be removable from office by the holders of Certificates of Interest for any reason at any time whatsoever. Any Trustee may be removed as such, but only for cause, upon the vote in favor of such removal of the majority of the remainder of the Trustees at the time in office at a meeting of the Trustees held not sooner than thirty (30) days following the actual delivery of notice of such proposed removal to the person so proposed to be removed as Trustee, which notice shall be accompanied by a detailed written list of particulars alleged to form the basis for the proposed removal.

Any Trustee may at any time resign his office as such or limit his powers, duties, rights and/or liabilities as such in whole or in any part at any time and from time to time for such period of limitation as such Trustee shall elect, such election to be evidenced by an instrument in writing including a minute of proceedings of the Board of Trustees reflecting such limitation.

In the event of the removal of a Trustee or the death or resignation of a Trustee or in the *381 case any vacancy shall be caused in the office of a Trustee for any other reason, a successor Trustee shall be selected and appointed by the remaining Trustees or Trustee, as the case may be, in office at the time. In the event that at any time there shall be only one person holding the office of Trustee, such Trustee shall designate in writing the person to be successor Trustee of the Trust in the event that such Trustee holding office shall cease to be a Trustee prior to his filling of vacancies in the offices of Trustees in the manner hereinabove provided prior to the time that such person shall cease to be a Trustee.

Each Successor to any Trustee shall forthwith upon appointment become vested with all rights, powers, immunities and duties of his predecessor as Trustee. Notice of the Selection and appointment of any new Trustee or of any successor to a Trustee shall be periodically reported in accordance with the provisions of this indenture.

No Trustee shall be required to give any bond or other security for the discharge of his duties as such Trustee.

The initial number of Trustees shall be four (4) but such number may be increased, or decreased, from time to time for such *382 practical reasons beneficial to the Trust as the Trustees then in office may determine and the Trustees then in office shall fill all vacancies in the offices of Trustee caused by their action increasing the number of Trustees.

The Trustees shall have and shall exercise collectively the exclusive management and control of the trust, the Trust Estate and operations constituting all or any portion of the Trust Estate. By unanimous action, the Trustees may amend from time to time the trust document.

TENTH: This Trust shall continue for a period of twenty (20) years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their sole discretion, because of threatened depreciation in value, or other good and sufficient reason, liquidate the assets, distribute and close the trust at any earlier date determined by them. Upon such determination and dissolution of the Trust and the winding up of its affairs, the Trust Estate shall be distributed exclusively to one or more either charitable, religious, scientific, literary or educational organizations (as selected by the Trustees) which would then qualify under the provisions of Section 501(c)(3) of the Internal Revenue Code *383 and its regulations as they now exist or as they may hereafter be amended. In the event this instrument has been recorded with the County Auditor's office, they shall file with said Auditor a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, their administration and distribution has been made in good faith, otherwise a court of competent jurisdiction may be invoked to review and correct any tort or error.

ELEVENTH: At any time prior to the expiration of this Trust, by its terms or pursuant to any subsequent agreement, the Trustees may if they so desire and believe that said Trust should not be closed, renew this agreement for an additional period or periods each not to exceed twenty (20) years from date of renewal. A resolution of said renewal shall be entered upon the minutes (and also recorded with the County Auditor's office in the event this Trust has been recorded) at least one hundred twenty (120) days prior to the expiration hereof.

IN WITNESS WHEREOF, the Subscribers, Grantors and Assignors and the Trustees have signed, sealed and executed this Agreement all as of the day and year *384 first above written.

SUBSCRIBERS, GRANTORS & ASSIGNORS

TRUSTEES

IN WITNESS WHEREOF, the Grantor and Creator hereof and the Acceptors hereof, for themselves, their heirs and assigns, have hereunto set their hands and seals in token of the conveyance, delivery and acceptance of property, assets, or other things of value, and the obligations and duties as herein assumed as Trustees of said Trust and assent to all stipulations herein as imposed and expressed.

COUNTY OF YAKIMA STATE OF WASHINGTON

ss.

I, Gerold W. Curtis, a Notary Public, an officer authorized by law to administer oaths, do hereby certify that FLOYD G. PAXTON, Creator, and LORNE HOUSE, JERRE PAXTON, JAMES B. SHRADER, and DIANE IRWIN, as Trustees of the F. G. PAXTON FAMILY ORGANIZATION, a Trust, personally appeared before me this day and acknowledged that they signed, sealed and delivered the above and foregoing Trust Indenture for the uses and purposes therein set forth, and that the Trustees by their signatures evidenced the acceptance of the duties, obligations and faithful performance of said Trust Indenture.

On July 8, 1975, the United States Court of Appeals for the Ninth Circuit affirmed the decision of this Court *385 in Paxton v. Commissioner, 520 F.2d 923 (9th Cir. 1975) .

On July 10, 1968, Floyd G. Paxton and Grace Paxton as "Subscribers, Grantors and Assigns" and Jerre H. Paxton and Lorne House as "Trustees" executed the following declaration of trust creating IDT:

INTERNATIONAL DEVELOPMENT TRUST DECLARATION OF TRUST OF Floyd G. Paxton and Grace Paxton

TO BE ADMINISTERED BY NATURAL PERSONS HOLDING TITLE IN JOINT TENANCY WITH RIGHT OF SURVIVORSHIP AS TRUSTEES

THIS INDENTURE OF TRUST, made the 10th day of July, 1968, by and between the one or more persons subscribing this agreement under the heading at the end hereof entitled "Subscribers, Grantors, and Assignors" (such person or persons being hereinafter called "Subscribers"), parties of the first part, and Lorne House and Jerre H. Paxton (hereinafter called the "Trustees"), parties of the second part.

WITNESSETH

WHEREAS, the Subscribers are deeply involved in the complex economic, social and cultural affairs of the world of today and are aware of the many uncertainties that exist in this changing world and of their responsibilities to friends, relatives, employees, charitable institutions, governmental service organizations and the people of *386 their municipalities, states and nation and have determined that this Trust is an instrument designed to best meet said responsibilities for the benefit of all such beneficiaries.

WHEREAS, the Subscribers intend that the functions of this Trust shall therefore be to manage as effectively as possible all properties with which the Trustees may from time to time be vested so as to maximize the economic potential thereof for the good of all beneficiaries, to make grants and donations to educational, scientific and religious institutions for and in the name of the Trust, and, if the Trustees in their sole discretion so determine, to make distributions from the net revenues of such operations to the account of and in the name of the Holders of Certificates of Interest.

WHEREAS, the Trustees have consented to act as such hereunder on the terms and conditions hereinabove and hereinafter set forth:

NOW, THEREFORE, in consideration of the premises and of the objects and purposes hereinabove and hereinafter set forth and of the sum of One Dollar ($1.00) in hand paid and other considerations of value, the receipt whereof is hereby acknowledged, the Subscribers and the Trustees, each acting severally *387 and not jointly, have and do hereby agree as follows:

FIRST: The Subscribers do hereby irrevocably sell, assign, grant, convey, transfer and set over to the Trustees, to be held in joint tenancy with right of survivorship, the property described in Schedule "A" hereto annexed and made a part hereof, the receipt of which is hereby acknowledged by the Trustees, all of which property, together with any and all other property from time to time held by the Trustees under this indenture is hereinafter referred to as the "Trust Estate", upon trust for the uses and purposes hereinabove and hereinafter set forth, said Trustees to hold legal title in joint tenancy with right of survivorship, and not as tenants in common, to those certain properties constituting from time to time the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith may deal in properties, operations underway or contemplated, equities, formulae, entities, parents and copyrights.

SECOND: The name of this Trust and other things of value constituting *388 the Trust Estate, including all rights in reversion, remainder, expectancies or inheritances, wherever situated and other things of value too numerous to mention, shall be held, administered and disposed of in accordance with and pursuant to the provisions of this indenture.

THIRD: The principal place of business of this Trust shall be in the City of Yakima, County of Yakima, State of Washington, and is to be governed in all respects by the laws of the State of Washington.

FOURTH: The Trustees, for themselves and their successors in trust, do hereby accept the conveyance and assignment in trust and acknowledge delivery of all of the property sold, assigned, granted, conveyed, transferred and set over to the Trustees described in Schedule "A" hereto annexed and the continuing operations of such property and accept all of the terms of the Trust set forth herein and the Trustees do hereby agree to conserve and improve the Trust, to continue the operations of the property constituting the Trust Estate as if such property had not been parted with by the Subscribers in consideration for the Certificates of Interest as contemplated in FIFTH hereof, to protect and preserve the assets constituting *389 the Trust Estate, to invest and reinvest the funds of said Trust Estate in the exercise of their best judgment and discretion, to make distribution of portions of the proceeds and income under the Trust Estate as in their discretion and according to the minutes to be maintained by the Trustees should be made, to make complete periodic reports as to the operations of the Trust and Business transactions of the Trust and, upon final liquidation of the Trust to distribute the assets constituting the then Trust Estate in accordance with the provisions hereof, and in all other respects to administer the Trust, and the Trust Estate, in good faith strictly in conformity hereto.

FIFTH: In consideration for the sale, assignment, grant, conveyance, transfer and setting over to the Trustees of the property described in Schedule "A" hereto annexed, the Trustees do simultaneously with the acceptance of and delivery of this indenture authorize, issue and deliver to the Subscribers units reflected by Certificates of Interest to evidence the equitable interest contributing to the Trust Estate, said units reflected by Certificates of Interest being 100 in number and said Certificates of Interest being *390 substantially in form hereto attached as Annex I. Said Certificates of Interest shall be nonassessable, nontaxable and non-negotiable and shall not pass by delivery unless registered with the Secretary of the Board of Trustees and such registration noted upon any such Certificate of Interest so registered. The Secretary of the Board of Trustees shall keep at the office of the Trust books and other facilities for the registration and transfer of Certificates of Interest and upon presentation for such purpose the Secretary of the Board of Trustees shall register or cause to be registered therein and permit to be transferred thereon, under such reasonable regulations as the Secretary of the Board of Trustees may prescribe, any Certificates of Interest issued under this indenture.

SIXTH: Ownership of Certificates of Interest in the Trust shall not entitle the holder thereof, whether or not registered, to any legal title in or to the Trust Estate nor to any undivided interest therein, nor any voice in the management of the Trust, nor to permit or entitle any heir or legal representative of a holder of any Certificate of Interest following his death to demand any partition or division *391 of the property of the Trust or to any special accounting. Death, insolvency or bankruptcy of any holder of a Certificate or Certificates of Interest or the transfer of any Certificate or Certificates of Interest by sale, devise or descent shall not operate as a dissolution of the Trust or in any manner affect the Trust, the operation or mode of business of the Trust or the Trust Estate. The Trustees may, in their sole discretion, at any time and from time to time, make any distribution of income from the operation of the Trust Estate and make any distribution of all or any portion of the assets comprising the Trust Estate for any reason to any of the holders of Certificates of Interest in the Trust and, except to the extent that the Trustees have given notice of their intention to make any distribution of income or of assets comprising any portion of the Trust Estate, the holders of Certificates of Interest shall have no right, title, or interest in or to any portion of the Trust Estate or of any income generated by the Trust Estate for any purpose whatsoever.

SEVENTH: It is hereby expressly declared that this instrument and the legal relationship constituted hereby constitutes *392 a trust and that no partnership, association or corporation is hereby created. It is hereby further expressly declared that nothing herein contained shall constitute either the

(a) Trustees alone, or

(b) The Trustees and the agents and representatives of the Trustees when taken together, or

(c) The holders alone of Certificates of Interest present or future, or

(d) The holders of Certificates of Interest, present or future, when taken together with the Trustees and/or with the representatives and agents of the Trustees, an association or partners with any other person. It is further expressly declared that none of the Trustees, none of the agents and representatives of the Trustees and none of the holders of Certificates of Interest, present or future, have or possess any beneficial interest in the property or assets from time to time constituting all or any portion of the Trust Estate and that none of such persons shall be personally liable hereunder, as partners or otherwise, and that the rights and duties of each such persons or groups of persons are several in accordance with the provisions hereof and not joint. No person acting as Trustee hereby shall be liable for the act *393 or omission of any other person whatsoever, whether employed by such Trustee or not, or whether employed by the Trustees as an agent or representative of the Trustees, or for anything other than his own personal breach of trust.

EIGHTH: The Trustees shall have, with respect to any and all property constituting the Trust Estate, whether real, personal or mixed at any time held by them hereunder, full authority, in their absolute discretion, at any time and from time to time, to act in the management of this Trust as though the Trustees, acting as a body, were beneficial owners of the Trust Estate, including the authority (without limiting the generality of the foregoing):

A. To retain any such property temporarily or permanently; or to sell or exchange or abandon the same, at public or private sale, for cash or upon credit, with or without security, or upon any terms the Trustees deem proper; to grant options upon, to mortgage, or to lease the same for any period or periods whatsoever; and to operate sa going concerns or businesses any and all such property and in connection therewith to manager in such manner as any natural person could any such business or operations and to buy, *394 manufacture, sell and perform services in connection therewith and otherwise deal in and with such property as the Trustees from time to time deem fit, but only when necessary to affect its disposal.

B. To hold, invest, or reinvest in any securities or other real or personal property (whether domestic or foreign), or undivided interests therein, including shares or interests in investment companies or investment trusts, in any common trust funds, in voting trusts certificates, royalties and other mineral rights, or in real estate or mortgages thereon, or to bid in any property or choses in action at any foreclosure, without any duty to diversify and without regard to the proportion which any property, or property of a similar character, so held may bear to the entire amount of the Trust Estate and regardless of whether the same would in the absence of this provision constitute a legal investment for trustees or of whether the same is of a speculative nature rather than a conservative investment or of whether the same is productive or unproductive and specifically, but without limiting the generality of the foregoing, to hold, invest, or reinvest all or any part of the entire Trust *395 Estate in common or preferred stocks and even though some or all of such stocks might be considered speculative or might have no ready market.

In connection with the operation of all or any portion of the Trust Estate the Trustees shall have the authority to manufacture, construct, assemble, fabricate or otherwise produce, purchase or otherwise acquire, design, develop, improve, install, service, maintain, repair, experiment with, hold, own, use, sell, lease, pledge, or otherwise dispose of, import, export, and trade and deal in and with, any and all goods, wares, merchandise, materials, machines, aparatus, appliances, products and property of every kind, nature, and description and in connection therewith to acquire by purchase, exchange, lease or otherwise and to own, hold, develop, improve, operate, sell, assign, lease, transfer, convey, exchange, mortgage, pledge, or otherwise dispose of or encumber real and personal property of any class and description and any rights and interest therein without limit as to amount and wherever situated, and, further, in connection therewith, to undertake, conduct, manage, assist, promote, engage or participate in every kind of engineering, research, *396 scientific, experimental, design or development work and to act as consultants, operating managers, agents, or representatives of corporations, firms, individuals and others and as such to promote, manage, supervise, operate, develop or extend the business interests or properties constituting the Trust Estate and the business interests or properties of others, including corporations, firms and individuals, and to acquire by purchase or otherwise, erect, construct, make, improve and operate, or aid in or subscribe towards the erecting, constructing, making, improving and operating of mills factories, storehouses, buildings, roads, plants, and works of all kinds and to enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government, or colony or dependency thereof, and to adopt, apply for, obtain, register, purchase, lease, take assignments and licenses in respect of, or otherwise acquire, and to maintain, protect, hold, own, use, enjoy, control, exercise, develop, operate, introduce, turn to account, grant licenses or other rights in respect of, sell, assign, lease, mortgage, *397 pledge or otherwise dispose of any and all inventions, devices, formulae, processes and all improvements and modifications thereof, any and all letters patent and/or applications therefor of the United States of America or any country and all rights connected therewith or appertaining thereto, any and all copyrights granted by the United States of America or by any other country and any and all trade marks, trade names, trade symbols, goodwill and other indications of origin or ownership granted by or recognized under the laws or decisions of the United States of America or any other country, and, without in any respect limiting the generality of the foregoing, to do any and all things herein set forth to the same extent as fully as natural persons might or could do, in any part of the world, and as principal, agent, contractor, or otherwise, and either alone or in conjunction with any other individuals, firms, associations, corporations, syndicates or bodies politic, including the borrowing of money without limit and upon any terms that the Trustees may determine, giving such security as the Trustees may determine and otherwise to do any and all things necessary and proper for the *398 accomplishment of the purposes herein before set forth of this Trust or necessary or incidental to the protection and benefit of this Trust.

C. To employ such persons as the Trustees may determine to act as operational officers of the operations conducted with the property constituting all or any part of the Trust Estate and in connection therewith to employ agents, employees, accountants, brokers and investment counsel, individual or corporate, and to advise with counsel, who may be counsel for any Trustee, individually or with whom any Trustee may be associated and to employ or deal with any firm or corporation with or in which any Trustee may be interested and to pay such salaries, fees, commissions, profits, benefits and allowances, directly or indirectly, in connection with any engagement as the Trustees may from time to time determine.

D. To make all such grants, donations and distributions, in such amounts and when, as and if determined by the Trustees to be made, as are contemplated by the second preamble to this Declaration of Trust.

NINTH: The Trustees shall appoint a person, who need not be one of the Trustees, to act as the Secretary of the Trustees to hold such office *399 for such period of time and upon such terms and conditions as shall be determined by the Trustees at the time of such appointment and such Secretary shall maintain, or cause to be maintained, a permanent record of all proceedings of the Trustees. All proceedings and determinations of the Trustees shall, except as hereinafter provided, be made at meetings duly called and provided that notice of each such meeting and the time, place and purpose thereof shall be given at least two (2) days in advance to each of the Trustees. Any Trustee may call a meeting of the Trustees upon the giving of such notice. Such notice may be waived by any Trustee by written instrument executed either before or after a meeting of the Trustees. The Trustees may also take any action, without holding any meeting, by executing a written instrument signed by at least the number of Trustees whose affirmative vote is required for the proposed action and such instrument may be in counterparts respectively signed by the Trustees.The action of the majority of the whole number of the Trustees expressed from time to time at a meeting or in writing, with or without a meeting shall constitute the action of the Trustees *400 and have the same effect as though taken by all. Any Trustee may, at any time, by an instrument of writing, appoint for a limited period of time not exceeding ninety (90) days, any other Trustee as his proxy and attorney, to perform specific duties or to exercise specific rights or to take specificaction which the Trustee so appointing, would be entitled to perform, exercise or take as a Trustee. Each such proxy and power of attorney shall be revocable at any time by the Trustee executing the same, but no such revocation shall impair or affect any action taken pursuant thereto prior to such revocation.

Any Trustee, or any firm or corporation of which such Trustee may be a member, director, or officer, may contract with the Trust or become pecuniarily interested in any matter or transaction to which the Trust may be a party, or in which it may in any way be concerned, as fully as though such person were not a Trustee, provided, however, that the general character and extent of such interest, if any, of any such Trustee shall be disclosed to the other Trustees upon any request therefore.

No Trustee shall be removable from office by the holders of Certificates of Interest for any reason *401 at any time whatsoever. Any Trustee may be removed from office by any court of competent jurisdiction after the exhaustion by the person so proposed to be removed of all his legal and equitable rights and remedies, including the right of appeal. Any Trustee may also be removed as such, but only for cause, upon the vote in favor of such removal of the majority of the remainder of the Trustees at the time in office at a meeting of the Trustees held not sooner than thirty (30) days following the actual delivery of notice of such proposed removal to the person so proposed to be removed as Trustee, which notice shall be accompanied by a detailed written list of particulars alleged to form the basis for the proposed removal.

In the event of the removal of a Trustee or the death or resignation of a Trustee or in the case any vacancy shall be caused in the office of a Trustee for any other reason, a successor Trustee shall be selected and appointed by the remaining Trustees or Trustee as the case may be, in office at the time. In the event that at any time there shall be only one person holding the office of Trustee, such Trustee shall designate in writing the person to be successor Trustee *402 of the Trust in the event that such Trustee holding office shall cease to be a Trustee prior to his filling of vacancies in the office of Trustees in the manner hereinabove provided prior to the time that such person shall cease to be a Trustee.

Each successor to any Trustee shall forthwith upon appointment become vested with all rights, powers, immunities, and duties of his predecessor as Trustee. Notice of the selection and appointment of any new Trustee or of any successor to a Trustee shall be periodically reported in accordance with the provision of this indenture.

No Trustee shall be required to give any bond or other security for the discharge of his duties as such Trustee.

The initial number of Trustees shall be two (2) but such number may be increased, or decreased, from time to time for such practical reasons beneficial to the Trust as the Trustees then in office may determine and the Trustees then in office shall fill all vacancies in the offices of Trustee caused by their action increasing the number of Trustees.

The Trustees shall have and shall exercise collectively the exclusive management and control of the trust, the Trust Estate and operations constituting all *403 or any portion of the Trust Estate. By unanimous action, the Trustees may amend from time to time the trust document.

TENTH: This Trust shall continue for a perod of twenty (20) years from date, unless the Trustees shall unanimously determine upon an earlier date. The Trustees may at their discretion, because of threatened depreciation in value, or other good and sufficient reasons, liquidate the assets, distribute and close the Trust at any earlier date determined by them. Upon the dissolution of the Trust and the winding up of its affairs, the Trust Estate shall be distributed exclusively to one or more either charitable, religious, scientific, literary or educational organizations (as selected by the Trustees) which would then qualify under the provisions of Section 501 (c) (3) of the Internal Revenue Code and its Regulations as they now exist or as they may hereafter be amended. In the event this instrument has been recorded with the Recorder of Deeds, they shall file with said Recorder a notice that the Trust shall cease and determine; and, thereupon, the Trustees shall automatically be further discharged hereunder, PROVIDED, their administration and distribution has been *404 made in good faith, otherwise a court of competent jurisdiction may be invoked to review and correct any tort or error.

ELEVENTH: At the expiration of this Trust, or any subsequent agreement, then the Trustees, if they so desire and believe that said Trust should not be closed, may renew this agreement for a like or shorter period. A resolution of said renewal shall be entered upon the minutes (and also recorded with the County Auditor's office in the event this Trust has been recorded) at least one hundred twenty (120) days prior to the expiration hereof

IN WITNESS WHEREOF, the Subscribers, Grantors and Assignors, and the Trustees have signed, sealed and executed this Agreement all as of the day and year first above written.

SUBSCRIBERS, GRANTORS & ASSIGNS

TRUSTEES

On July 12, 1968, Floyd Paxton assigned to IDT U.S. Patent Nos. 3,270,872 and 3,270,873 . The assignment was recorded in the U.S. Patent Office on April 10, 1969, after which date IDT was shown as the assignee and owner of the patents. In addition to the transfer of U.S. Patent Nos. 3,270,872 and 3,270,873 , Floyd and Grace Paxton, on July 12, 1968, transferred to IDT the following assets:

Australia Applications Nos. *405 49,899/64 and 49,898/64

Austria Patents Nos. 252,797 and 252,112

Belgium Patents Nos. 655,008 and 654,627

Canada Patents Nos. 747,099 and 746,207

Denmark Applications Nos. 4,802/64 and 4,860/64

England Patents Nos. 1,040,535 and 1,038,510

Finland Applications Nos. 2,043/64 and 2,100/64

France Patents Nos. 1,413,291 and 1,419,835

Germany Applications Nos. P35, 377VII/81C and P35, 378X/3992

Great Britain Letters Patent Nos. 1,040,535 and 1,038,510

Holland Applications Nos. 6,411,620 and 6,411,621

Italy Patents Nos. 22,452 and 22,453

Japan Patents Nos. 482, 673 and 481,941

Luxembourg Patents Nos. 47,281 and 47,191

New Zealand Applications Nos. 139,529 and 139,530

Norway Patent No. 110,506 and Application No. 154,919

Phillippines Applications Nos. 6,063 and 6,064

Portugal Patents Nos. 43,059 and 43,060

South Africa Patents Nos. 64/4,597 and 64/4,598

Spain Patents Nos. 304,808 and 305,208

Sweden Patents Nos. 217,360 and 217,361

Switzerland Patents Nos. 412,694 and 421,803

In exchange for such assets, IDT issued to Floyd and Grace Paxton each a certificate reflecting 50 units of beneficial ownership of IDT.

On August 7, 1968, Floyd and Grace Paxton executed instruments transferring the *406 following number of units of interest in IDT to the following persons: Transferee No. of Units

Jerre Paxton 10

Ted Paxton 8

Cheryl Paxton 8

Ande Paxton 8

Diane Irwin 8

Floyd G. Paxton, Jr. 8

The trustees of IDT for the periods here involved were: July 1, 1968 to

September 10, 1968 Jerre Paxton, Lorne House

September 10, 1968 to

end of period here

involved Jerre Paxton, Lorne House,

James Shrader, Dale Leach 1

Peter Lind 2

Neither Floyd G. Paxton nor Grace Paxton was ever a trustee of IDT.

On July 11, 1968, Lorne House and Jerre Paxton, the original trustees of IDT, unanimously took the following action as trustees:

Jerre Paxton was appointed as First Trustee and Trust Manager to handle individually all the affairs and business of the trust estate, to make distributions of portions and proceeds and income of the trust in his sole discretion, the right to appoint his successor as First Trustee, and to preside at meetings of the Board of Trustees. No official action by the trust may be taken without his consent.

On January *407 23, 1973, Floyd G. Paxton and Grace Paxton as grantors and Jerre Paxton, Lorne House, Peter Lind, Dale Leach and James B. Shrader as trustees executed a "Restatement Declaration of Trust" of IDT which is reproduced below:

DECLARATION OF TRUST OF THIS CONSTITUTIONAL TRUST

TO BE ADMINISTERED BY NATURAL PERSONS, HOLDING TITLE IN JOINT TENANCY, ACTING UNDER THEIR CONSTITUTIONAL RIGHTS AS CITIZENS OF THE UNITED STATES OF AMERICA

THIS DECLARATION OF TRUST AUTHORIZES ITS TRUSTEES TO OPERATE UNDER THE NAME OF

INTERNATIONAL DEVELOPMENT TRUST

THIS AGREEMENT, CONVEYANCE and ACCEPTANCE, made and entered into at the time and on the date appearing in the acknowledgement hereto attached, by and between FLOYD G. PAXTON and GRACE PAXTON, GRANTORS and CREATORS hereof, JERRE PAXTON, LORNE HOUSE, PETER LIND, DALE LEACH, and JAMES B. SHRADER, ACCEPTORS hereof in joint tenancy who shall compose the Board of Trustees and Executive Officers for conducting business.

THIS INDENTURE OF TRUST, made the 18th day of January, 1973, by and between the one or more persons subscribing this agreement under the heading at the end hereof entitled "Subscribers, Grantors, and Assignors" (such persons being hereinafter *408 called the "Subscribers"), parties of the first part, and Jerre Paxton, Lorne House, Peter Lind, Dale Leach and James B. Shrader (such persons hereinafter called the "Trustees"), parties of the second part,

WITNESSETH

WHEREAS, the Subscribers are deeply involved in the complex economic, social and cultural affairs of the world of today and are aware of the many uncertainties that exist in this changing world and of their responsibilities to friends, relatives, employees, charitable institutions, governmental service organizations and the people of their municipalities, states and nation and have determined that this Trust is an instrument designed to best meet said responsibilities for the benefit of all such beneficiaries.

WHEREAS, the Subscribers intend that the functions of this Trust shall therefore be to manage and operate as effectively as possible all properties with which the Trustees may from time to time be vested so as to maximize the economic potential thereof for the good of all beneficiaries, to make grants and donations to educational, scientitic and religious institutions for and in the name of the Trust, and, if the Trustees in their sole discretion so determine, *409 to make distributions from the net revenues of such operations to the account of and in the name of the Holders of Certificates of Interest.

WHEREAS, the Trustees have consented to act as such hereunder on the terms and conditions hereinabove and hereinafter set forth:

NOW, THEREFORE, in consideration of the premises and of the objects and purposes hereinabove and hereinafter set forth and of the sum of One Dollar ($1.00) in hand paid and other considerations of value, the receipt whereof is hereby acknowledged, the Subscribers and Trustees, each acting severally and not jointly, have and do hereby agree as follows:

FIRST: The Subscribers do hereby irrevocably sell, assign, grant, convey, transfer and set over to the Trustees, to be held in joint tenancy with right of survivorship, the property described in Schedule "A" hereto annexed and made a part hereof, the receipt of which is hereby acknowledged by the Trustees, all of which property, together with any and all other property from time to time held by the Trustees under this indenture is hereinafter referred to as the "Trust Estate", upon trust for the uses and purposes hereinabove and hereinafter set forth, said Trustees to *410 hold legal title in joint tenancy with right of survivorship, and not as tenants in common, to those certain properties constituting from time to time the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith said Trustees shall collectively act by virtue of the covenants herein contained as a Board of Trustees under the name herein designated in respect to the Trust Estate and in connection therewith may deal in properties, operations underway or contemplated, equities, formulae, entities, patents, and copyrights.

SECOND: The name of this Trust and other things of value constituting the Trust Estate, including all rights in reversion, remainder, expectancies or inheritances, wherever situated and other things of value too numerous to mention, shall be held, administered and disposed of in accordance with and pursuant to the provisions of this indenture.

THIRD: The principal place of business of this Trust shall be in the City of Yakima, County of Yakima, State of Washington, and is to be governed in *411 all respects by the laws of the State of Washington.

FOURTH: The Trustees, for themselves and their successors in trust, do hereby accept the conveyance and assignment in trust and acknowledge delivery of all of the property sold, assigned, granted, conveyed, transferred and set over to the Trustees described in Schedule "A" hereto annexed and the continuing operations of such property and accept all of the terms of the Trust set forth herein and the Trustees do hereby agree to conserve and improve the Trust, to continue the operations of the property constituting the Trust Estate as if such property had not been parted with by the Subscribers in consideration for Certificates of Interest as contemplated by FIFTH hereof, to protect and preserve assets constituting the Trust Estate, to invest and reinvest the funds of said Trust Estate in the exercise of their best judgment and discretion, to make distribution of portions of the proceeds and income under the Trust Estate as in their discretion and according to the minutes to be maintained by the Trustees should be made, to make complete periodic reports as to the operations of the Trust and business transactions of the Trust, and, *412 upon final liquidation of the Trust to distribute the assets constituting the then Trust Estate in accordance with the provisions hereof, and in all other respect to administer the Trust, and the Trust Estate, in good faith strictly in conformity hereto.

FIFTH: In consideration for the sale, assignment, grant, conveyance, transfer and setting over to the Trustees of the property described in Schedule "A" hereto annexed, the Trustees do simultaneously with the exception of the delivery of this indenture authorize, issue and deliver to the Subscribers units reflected by Certificates of Interest to evidence the equitable interest contributing to the Trust Estate, said units reflected by Certificates of Interest being 100 in number and said Certificates of Interest shall be nonassessable, nontaxable and shall only be negotiable with the express prior consent of the Trustees under such regulations, if any, as shall be prescribed by the Board of Trustees. When and if authorized by the Board of Trustees but not otherwise, said Certificates of Interest shall pass by delivery. No Certificate of Interest which is registered with the Secretary of the Board of Trustees may in any other manner *413 be transferred and any attempt to transfer any Certificate of Interest without the prior consent of the Trustees shall be null and void and of no force and effect. The Secretary of the Board of Trustees shall keep at the office of the Trust such books and other facilities for the registration and transfer of Certificates of Interest as shall be necessary for the purposes hereof, specifically including provision therein for the recordation of any consents to transfer at any time or from time to time given. Upon presentation for transfer of a Certificate of Interest, the Secretary of the Board of Trustees shall present to the Board of Trustees the request for such transfer and the Board of Trustees shall, at a meeting appropriately called, determine whether or not to permit any such transfer to be made; Board of Trustees shall have the power to determine at any such meeting whether to decline the transfer of any such Certificate of Interest, to authorize the transfer of any such Certificate of Interest, or to elect to purchase for this Trust from the then holder of the Certificate of Interest at such price as the Board of Trustees in their sole and arbitrary discretion shall determine, *414 regardless of market values, book values or other criteria for fair value, the units represented by such Certificate of Interest and to cancel such Certificate of Interest, without any right in the holder of such Certificate of Interest, so presenting the same for transfer to receive for the units of such Certificate of Interest any amount in excess of the repurchase price declared applicable thereto by the Board of Trustees. The units represented by such Certificates of Interest acquired by the Board of Trustees pursuant to the foregoing shall be cancelled and not outstanding and shall at no time and under no circumstances ever be reissued to any person.

SIXTH: No person whomsoever shall have any right or interest in any Certificate of Interest except the person named therein as the registered holder thereof. The registered holder of any Certificate of Interest shall have only the rights relating thereto which are specifically set forth herein and in the Certificate of Interest. All rights of the registered holder of any Certificate of Interest shall cease and terminate forthwith upon the death of the registered holder and the units represented by any such Certificate of Interest *415 shall not pass by Will or by the laws of intestacy; no heir or legal representative of any deceased registered holder shall have any right of any kind whatsoever, by reason of the death of the registered holder or by the terms of any testamentary document or by the provisions of any contract or trust or other agreement entered into prior to the death of any such registered holder by such registered holder, to any interest whatsoever in this Trust or in any of the units, Certificate of Interest or any of the property or assets of the Trust, provided, however, that the Board of Trustees of the Trust may, in their sole discretion, reissue, for such consideration as the Board of Trustees may determine, the units represented by any such Certificate of Interest to such person or persons as they may determine, including any person then constituting a registered holder of a Certificate of Interest or any person not so constituting a registered holder of Certificate of Interest. In the event that a registered holder of a Certificate of Interest shall cease to have and own any portion or all of any rights he may have under any such Certificate of Interest by reason of foreclosure, insolvency *416 or other similar creditor's proceedings, then, for all purposes hereof, any such Certificate of Interest shall be null and void and of no force, effect, or value, and the units represented by any such Certificate of Interest shall be deemed to have been acquired by purchase by this Trust and shall be cancelled and not outstanding and never reissued. No holder of any Certificate of Interest shall have any right or power whatsoever to direct or otherwise influence the Trustees in the exercise of their sole discretion. No registered holder of any Certificate of Interest shall have any right or power to alienate ownership of any Certificate of Interest or of the units represented thereby in any manner, whether by assignment, mortgage, pledge, testamentary document or otherwise, without the prior written consent of the Board of Trustees of this Trust.

SEVENTH: It is hereby expressly declared that this instrument and the legal relationship constituted hereby constitutes a trust and that no partnership, association or corporation is hereby created. It is hereby further expressly declared that nothing herein contained shall constitute either the

(a) Trustees, individually or collectively, *417 alone, or

(b) The Trustees and the agents and representatives of the Trustees when taken together, or

(c) The holders alone of Certificates of Interest, present or future, or

(d) The holders of Certificates of Interest, present or future, when taken together with the Trustees

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