## Facts

- The IRS determined income tax deficiencies against Nabisco for 1982 and 1983 after disallowing deductions related to payments for the Life Savers trademarks.
- Squibb sold the Life Savers business to Nabisco and, in a separate agreement, transferred the Life Savers trademarks.
- Nabisco agreed to pay $53,746,648 for the trademarks: a $25 million initial payment plus ten annual payments totaling $28,746,648.
- Annual payments were computed in part by reference to Nabisco’s sales of trademarked products.
- The agreement required Nabisco to use “best efforts” to maintain or increase sales of the trademarked products.
- The agreement included a “33 percent option” allowing Squibb, if sales of a product fell below 33% of its 1981 level, to require recalculation of payments for that year and remaining years as if sales remained at the 1981 level.
- Nabisco amortized the $25 million initial payment over 10 years and deducted each annual payment in full for 1982 and 1983.
- In the Tax Court case, the Commissioner conceded that about 25% of the annual payments were contingent on “productivity, use, or disposition” of the trademarks and deductible under I.R.C. § 1253(d)(1); the remaining dispute was whether additional amounts, including the initial payment, were deductible under § 1253(d)(2).

## Issues

1. Whether the trademark transfer was a § 1253 transfer in which the transferor retained a “significant power, right, or continuing interest” because contingent payments were a substantial element of the consideration.
2. Whether, given that retained interest, Nabisco could deduct the $25 million initial payment and the disputed portion of annual payments under I.R.C. § 1253(d)(2) rather than capitalize them.

## Decision

- The Tax Court held that Nabisco’s initial $25 million payment and its annual payments for the Life Savers trademarks were deductible under I.R.C. § 1253(d)(2).
- The court found that contingent payments tied to productivity/use were a substantial element of the agreement within § 1253(b)(2)(F).
- Because contingent payments were a substantial element, Squibb retained a significant power, right, or continuing interest under § 1253(a).
- The court therefore allowed deductions beyond the portion already conceded by the Commissioner, with computations to be resolved under Rule 155.

## Legal Principles

- Under I.R.C. § 1253(a), tax treatment of a transfer of a franchise, trademark, or trade name turns on whether the transferor retains a significant power, right, or continuing interest.
- A transferor’s right to receive contingent payments based on the productivity, use, or disposition of the trademark may constitute a significant continuing interest when that right is a substantial element of the transfer agreement. I.R.C. § 1253(b)(2)(F).
- When contingent payments are a substantial element and the transferor retains a qualifying interest, I.R.C. § 1253(d)(2) may permit deduction of amounts paid or incurred in connection with the acquisition, including certain noncontingent payments such as an initial lump-sum amount.

## Conclusion

The Tax Court treated the Life Savers trademark arrangement as a § 1253 transfer because Squibb’s right to contingent, sales-based payments was a substantial element of the consideration, giving Squibb a significant continuing interest; as a result, Nabisco could deduct both the initial payment and the disputed portions of the annual payments under § 1253(d)(2).


Nabisco Brands, Inc. & Consol. Subsidiaries v. Comm’r, T.C. Memo. 1995-127 (1995)