of what the amount was paid for so that an accurate apportionment can be made." At trial, Raytheon gave evidence to support its valuation of the patents; it also assessed the value of its lost business good will (at $3,000,000) by introducing evidence of its profitability. Issues First: Are damages for the destruction of business good will taxable income—or a return of capital, of which any recovery of basis is non-taxable? Second: If the recovery is non-taxable, did the Tax Court err in holding that there was insufficient evidence to enable it to determine what part of the lump sum payment was properly allocable to the settlement? Holding and Decision Tax law treats recoveries as "income" when they represent compensation for loss of profits. Thus, the test for taxability is: What loss were the damages designed to compensate for? -- "In lieu of what were the damages awarded?" Tax law treats business good will not as future profits (which are fully taxable when recovered as damages), but as present capital—even though evidence of future profitability must be introduced to evaluate it. Thus, damages for its destruction are designed to compensate for the destruction of a capital asset—they are a "return" of this capital. However, tax law does not exempt compensatory damages just because they are a return of capital—exemption applies only to the portion that recovers the cost basis of that capital; any excess damages serve to realize prior appreciation, and should be taxed as income. In this case, the record is devoid of evidence as to the amount of that basis. This Court agrees with the Tax Court that "in the absence of evidence of the basis ... the amount of any nontaxable capital recovery cannot be ascertained." Since Raytheon could not establish the cost basis of its good will, its basis will be treated as zero. The Court concludes that the $350,000 of the $410,000 attributable to the suit is thus taxable income. (Thus, the second question as to allocation between this and the ordinary income from patent licenses is not present.) Notes In this case, the Court treated the basis as zero because Raytheon was unable to establish it. Generally, the basis of goodwill is zero because it consists of costs that are themselves immediately deductible—expenses for advertising, PR, etc. However, goodwill can acquire a basis, e.g. as a portion of the cost of purchasing another business.