Before GOODRICH, McLAUGHLIN and FORMAN, Circuit Judges.
The Dill Company, a Pennsylvania corporation is the owner of a trade-mark, Espotabs, under which it manufactured and sold a pharmaceutical laxative product. For some time prior to April 18, 1949, Eastco Laboratories, Inc.,*fn1 a Delaware corporation, negotiated with it for a license to use the trade-mark and manufacture the product. On that date they entered into an agreement under which The Dill Company licensed Eastco Laboratories, Inc. to use the trade-mark and manufacture and sell the product made under it for a period of five years commencing May 1, 1949 for a royalty equal to ten percent*fn2 of the net sales as defined therein. The agreement further provided that:
"6. If this license shall be in force April 30, 1954, Licensee shall have the right and option either:
"(a) To purchase as of the close of business on said day at a purchase price of $350,000, all of Licensor's right, title, and interest in and to said trade-mark, Espotabs including the label and dress of said distinctive package used in connection therewith, and to the product heretofore manufactured and sold by it under said trade-mark Espotabs and to all rights appurtenant thereto including whatever rights it may have in the trade-mark Espotabs and to the formulae and all other information which it may have relating to the manufacture and sale of the product sold under the trade-mark Espotabs and that part of the good will of Licensor's business connected with the use of, and symbolized by, said trade-mark Espotabs; election to exercise which right and option to purchase shall be made by Licensee giving to Licensor a written notice of its election to exercise such right and option and paying the said purchase price to Licensor on or before said April 30, 1954; or
"(b) To extend the term of this license until April 30, 1959, upon the same terms and conditions so far as applicable, by Licensee giving to Licensor written notice of its election to exercise such right and option by paying to the Licensor $50,000 on or before said April 30, 1954 in addition to any royalties which may be then payable.
"If the terms of this license shall be extended pursuant to the foregoing provisions, then Licensee shall have the right and option to purchase as of the close of business of any calendar month thereafter during such extended term at a price of $300,000 all of Licensor's right, title, and interest in and to said trademark and in and to all of the other property and rights appertaining thereto and described in paragraph (a) of this section; election to exercise which right and option to purchase shall be made by Licensee giving to Licensor a written notice of its election to exercise such right and option and paying the said purchase price of $300,000 to Licensor on or before the effective date specified in such notice of election."
On April 27, 1954, the licensee exercised its right to extend the term for a further period of five years ending April 30, 1959 and paid the licensor $50,000 in accordance with the agreement.*fn3
The licensor entered the receipt of the payment in its journal on April 29, 1954, as follows:
Cash - General Account $50,000.00 Profit and Loss $50,000.00
Amount received from Espotabs
Corporation to extend term of
license agreement until April 30, 1959."
The Dill Company reported the receipt of the payment of $50,000 in its 1954 income tax return as a long term capital gain realized from the sale of the trademark, which had a zero basis.
The Commissioner of Internal Revenue determined that the $50,000 payment constituted ordinary income taxable in 1954 and that there was a deficiency in tax.
A petition was filed in the Tax Court of the United States for a redetermination of the deficiency.
The Tax Court decided that there was an overpayment in income tax for the year 1954 because the character of the $50,000 payment could not be determined until either the option to purchase was exercised or lapsed and it was ...