Nabisco Brands v. Commissioner

Life Savers was a subsidiary of Squibb, Inc. that made and marketed several leading brands of hard candy and chewing gum. In 1981, Nabisco Brands, Inc. (Nabisco) (petitioner) bought the Life Savers business from Squibb. The transaction was structured so that the sale of Life Savers’ trademarks was separate from the sale of its stock. For the trademarks, Nabisco made an initial payment of $25 million plus annual payments for 10 years. The amounts of the annual payments were based in part on Nabisco’s sales of the trademarked products. The trademark agreement required Nabisco to use its best efforts to maintain or increase sales of the trademarked products. This was intended to prevent Nabisco from intentionally limiting sales to reduce the amount of the payments. The agreement also included an elective remedy that Squibb could trigger if sales of any of the trademarked products fell below 33 percent of their 1981 levels (33 percent option). If Squibb elected the 33 percent option, Nabisco would pay Squibb for that year and all the remaining years on the contract based on 1981 sales levels. Nabisco’s actual annual payments exceeded the amount that would have been due if Squibb had exercised the 33 percent option by an amount constituting approximately 25 percent of the total payments. On its tax returns, Nabisco amortized the initial payment over 10 years and deducted the annual payments. Nabisco’s total deductions were approximately $5.5 million for 1982 and $5.6 million for 1983, each deduction consisting of 10 percent of the $25 million initial payment plus the amount of the annual payment. The Internal Revenue Service (IRS) (defendant) disallowed both the amortization of the initial payment and the deduction of the annual payments, and Nabisco appealed.