## Facts

- DuPont filed a federal income tax refund suit raising three claims; the government conceded one claim, leaving two contested issues.
- DuPont sold compressed gases in 1950 that were delivered in heavy steel cylinders intended to be returned.
- Customers paid a stated “deposit” per cylinder; contract documents stated the cylinders remained DuPont’s property and were “loaned” to customers, with deposits required to assure return.
- The deposit amount exceeded DuPont’s average adjusted basis in the cylinders; returned cylinders triggered a refund, while unreturned cylinders caused forfeiture of the deposit.
- DuPont developed an industrial process it believed was not patentable and treated as a trade secret.
- DuPont agreed to disclose the process to Associated Ethyl Corporation, Ltd. for a $225,000 lump sum, granted worldwide use, and required confidentiality for five years.
- The agreement did not restrict DuPont from disclosing or licensing the process to others.

## Issues

1. Whether forfeited cylinder deposits, to the extent exceeding the cylinders’ adjusted basis, constitute capital gain from a sale or exchange of a capital asset or ordinary income.
2. Whether a lump-sum payment for a nonexclusive disclosure and use right to a trade-secret process, with limited confidentiality and retained rights to further license, is proceeds from a sale of a capital asset (capital gain) or ordinary income from a license-like arrangement.

## Decision

- The court held that forfeited cylinder deposits exceeding the cylinders’ adjusted basis were ordinary income, not capital gain.
- The court held the $225,000 payment for disclosure and use of the trade-secret process was ordinary income, not capital gain, because the transaction was not a sale or exchange.
- DuPont was denied capital-gain treatment on both contested issues; recovery was limited to the conceded claim.

## Legal Principles

- A forfeited customer “deposit” intended as security for return of property, where the seller retains ownership and the amount is not a bargained-for purchase price, is ordinary income when the refund obligation is extinguished.
- Capital-gain treatment generally requires a “sale or exchange”; mere retention of amounts arising from routine business arrangements does not convert the event into a capital transaction.
- A transfer of trade-secret know-how is not a “sale or exchange” for capital-gain purposes when the transfer is nonexclusive and the owner retains substantial rights, including continued use and the ability to license or disclose to others.
- Lump-sum payments received under nonexclusive know-how arrangements are treated as ordinary income attributable to licensing/exploitation rather than disposition of the underlying intangible.

## Conclusion

The Court of Claims treated both the forfeiture of cylinder deposits and the lump-sum payment for a nonexclusive trade-secret disclosure as ordinary income, emphasizing that DuPont retained ownership of the cylinders and substantial rights in the secret process, so neither transaction qualified as a sale or exchange producing capital gain.


E.I. DuPont de Nemours & Co. v. United States, 153 Ct. Cl. 274, 288 F.2d 904 (Ct. Cl. 1961)