The following article written by Jerry Moskal was published in the Seattle Post-Intelligencer on March 16, 2000.

Special to the P-I.

WASHINGTON, D.C. - The maker of a self-inflating Therm-a-Rest camping mattress and its inventor have taken the air out of the Internal Revenue Service's $1.72 million tax demand.

The air mattress inventor, James Lea, and Cascade Designs Inc., his Seattle camping equipment manufacturing company, won their battle with the IRS over 1994 taxes and penalties in U.S. Tax Court.

Judge Carolyn Miller Parr ruled that the company can deduct the costs of buying Lea's air mattress patents and that Lea and his wife, Jane Lea, are entitled to pay less costly taxes on long-term capital gains rather than income.

The IRS sought more than $1.22 million in additional taxes and $245,000 in penalties from the company, and $212,783 in taxes and $42,556 in penalties from Lea.

"It was a long time coming, but it's nice to have the truth come out," said Lee Fromson, company vice president and chief financial officer. "Nobody at the IRS was listening until we took it to court, and the judge really listened to us."

In her 40-page opinion, issued late last month, Parr noted that the agreement between Cascade and Lea called for Lea to collect up to $10 million for his patents based on a payment of a 5 percent share of the annual gross sales.

Cascade's Chief Executive James Lea invented Therm-a-Rest mattress in 1971 with a friend, Neil Anderson, while laid off from his job as a Boeing engineering manager in Seattle. A year later, Lea founded Cascade Designs with help from John Burroughs, a Boeing computer systems engineer. Burroughs is now president of the company.

Patents were taken out on the mattress in 1975 and on the manufacturing process in 1977.

Lea and Burroughs went back to work for Boeing in 1972 and built Cascade Designs in the evening and on weekends.

In 1979, Lea entered into an agreement with Cascade to sell his entire right, title and interest to the patents. The total price was $300,000. Because the company didn't have the money, it was agreed that payment would be made out of the money received by Cascade Designs for sales of the air mattresses. Lea and Cascade agreed to pay 5 percent of sales.

In the 1980's, the company experience cash-flow problems and wound up owing Lea $259,128 in back payments.

In the meantime, Lea had secured a number of other patents on the manufacturing of the mattresses.

A new agreement was drawn up in 1982. The amount mentioned in the contract was $10 million, minus money already paid. Payments were still to be made in increments based on 5 percent of the gross selling price of the mattresses.

"Cascade was not required by the 1982 agreement to pay $10 million for the patents," Parr wrote in her decision. "Rather, the terms were that Cascade would pay 5 percent of the gross selling price of the productsÉ If Cascade had sold nothing, it would have paid Lea nothing. If it had sold more than $200 million of products, it would have paid Lea no more than $10 million."

The IRS argued that the payments to Lea are ordinary income, not long-term capital gains.

Peter Weidenbruch, a Georgetown University tax law professor, in Washington, D.C., said assets held for less than a year are usually treated and taxed as regular income. However, assets owned for more than one year are taxed at the much lower long-term capital gains tax rates, which begin at 20 percent.

P-I reporter Kathy Mulady contributed to this report from Jerry Moskal, a freelance writer in Washington, D.C.