Court Opinion

ID: 4621465
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:44:43.657832+00
Date Added: 2024-06-11T07:56:00.503061
License: Public Domain

Thomas D. Armour and Estelle C. Armour, Petitioners, v. Commissioner of Internal Revenue, RespondentArmour v. Comm'rDocket No. 39890United States Tax Court22 T.C. 181; 1954 U.S. Tax Ct. LEXIS 217; 101 U.S.P.Q. (BNA) 257; April 30, 1954, Filed.  April 30, 1954, Filed *217 Decision will be entered under Rule 50.  Where petitioner contracted to authorize his name to be used as a trade-mark for a term of years in return for payments based on sales and thereafter in 1949 consented to the use and registration of his name as a trade-mark "from this date forth," held, (1) such consent is not a transfer of the perpetual right to use his name as a trade-mark; (2) the substance of the entire transaction is a license, not a sale; and (3) amounts received in 1949 and 1950 based on sales of products are ordinary income, not proceeds from the sale of a capital asset.  Robert A. Littleton, Esq., for the petitioners. *218 Newman A. Townsend, Jr., Esq., and Leigh A. Crockett, Esq., for the respondent.  Fisher, Judge.  FISHER*257 *181  This proceeding involves a redetermination of a deficiency in income tax *258  of the petitioners in the amount of $ 2,785.52 for the taxable year 1949 and $ 3,298.52 for the taxable year 1950.  The evidence consists of a stipulation of facts and exhibits received at the hearing.  The question is whether the amounts received by petitioners in 1949 and 1950 from two sporting goods companies are taxable as ordinary income or as capital gain when such amounts were determined by the volume of sales of particular items produced by those companies.  The remaining issues were not raised by petitioners in the pleadings.*182  FINDINGS OF FACT.The facts stipulated by the parties are found accordingly.The petitioners, Thomas D. Armour and Estelle C. Armour, are husband and wife.  They reside at Delray Beach, Florida, and for the taxable years 1949 and 1950 they filed joint income tax returns with the collector of internal revenue for the district of Florida.Thomas D. Armour, who will hereinafter be referred to as petitioner, is a prominent professional golfer who is better*219  known as Tommy Armour.  He won the United States Open Golf championship in 1927 and has won numerous other golf tournaments since that date.On January 4, 1933, petitioner executed an agreement with Worthington Ball Company, hereinafter referred to as Worthington, which granted that concern the "exclusive right, license and privilege" to use the name "Tommy Armour" as a trade-mark on golf balls for a period of 5 years in return for certain royalties on sales of such golf balls. The agreement further provided that Worthington could, at its option, renew the agreement for an additional 5-year period.  In 1937 Worthington duly exercised its option to renew.In 1934 and 1938 petitioner and Worthington executed further agreements under the terms of which Worthington employed petitioner at a recited consideration to play golf exclusively with golf balls which Worthington manufactured. The 1934 agreement covered a period of 1 year beginning January 1, 1935, and the 1938 agreement covered a period of 5 years beginning January 1, 1938.On April 1, 1946, petitioner and Worthington executed a new agreement relative to the use of the name "Tommy Armour" on golf balls, the material provisions*220  of which read as follows:MEMORANDUM OF AGREEMENT made and entered into this 1st day of April, 1946, by and between TOMMY ARMOUR, Party of the First Part, and THE WORTHINGTON BALL COMPANY, Party of the Second Part.That for and in consideration of the royalties hereinafter set forth, said Party of the First Part does hereby give and grant unto the said Party of the Second Part, for a period of five years commencing April 1, 1946, and ending March 31, 1951, the exclusive right, license, and privilege to use his name, either in facsimile signature or script, as a trademark on golf balls manufactured by or for, or sold by, Party of the Second Part, together with the full permission to use photographs or likenesses of said Party of the First Part in connection with the advertising or selling of golf balls so branded.And said Second Party hereby binds itself and agrees to pay the following royalties for golf balls bearing the name of said First Party so sold by it, to wit:Ten cents (10 cents) for each dozen "TOMMY ARMOUR" Golf Balls (all grades) until a total of ten thousand dozens (10,000 dozens) shall be sold in a calendar year, and thereafter, five cents (5 cents) per dozen as royalty*221  for all "TOMMY ARMOUR" Golf Balls sold in excess of ten thousand dozens (10,000 dozens).  Said Second Party guarantees a minimum royalty of One Thousand Dollars ($ 1,000.00) per year for the years 1946 (beginning April 1, 1946), 1947, *183  1948, 1949, 1950, and 1951 (to extend through March 31 1951), with the option, however, to the said Party of the Second Part to renew this agreement for an additional period of five years for the same royalties per year for such additional term as herein provided for.IT IS FURTHER MUTUALLY UNDERSTOOD AND AGREED, that at the option of the Second Party, this contract may be terminated at the end of any full year period by a notice in writing mailed to the Party of the First Part at least thirty days before the expiration of such full year, and upon the giving of such notice, all further rights of either party hereunto shall be terminated, and said Second Party shall thereafter entirely discontinue the use of the name of the said Party of the First Part as permitted hereunder, except that the Second Party shall have the right to dispose of stocks of made-up golf balls on hand at the time of termination or cancellation of this agreement as it *222  sees fit upon payment of the stipulated royalty per dozen for such balls so sold.* * * *The acceptance of this agreement shall also contemplate, on behalf of *259  the Party of the First Part, the endorsement of the product to be marketed under his name.On November 19, 1934, petitioner executed an agreement with Crawford, MacGregor, Canby Company of Dayton, Ohio, relative to use of the name "Tommy Armour" in connection with golf clubs manufactured and sold by that company.  This agreement was succeeded by other agreements dated October 1, 1939, and September 1, 1943.  The material portions of the latter contract read as follows:THIS AGREEMENT, entered into this First day of September, 1943, by and between THOMAS D. ARMOUR of River Forest, Illinois, hereinafter referred to as "Professional", and CRAWFORD, MACGREGOR, CANBY CO. a corporation with its principal place of business in Dayton, Ohio, its subsidiary, affiliated, and parent companies, and their successors and assigns, hereinafter referred to as the "Company", WITNESSETH:* * * *1. Professional does hereby give and grant to Company, its subsidiary, affiliated, and parent companies, the exclusive right and license during the terms*223  of this agreement, to manufacture, sell and/or advertise, and to license others to manufacture, sell and/or advertise golf clubs, bags and equipment identified by the name, facsimilar [sic] signature, initials, portrait or any nickname of professional, or any combination thereof.  At the request of the Company, Professional agrees to sign all proper and lawful documents necessary or desirable for obtaining federal or State trade-mark registrations for the right herein granted Company to use a mark identified with Professional.  Professional further agrees that at no time during the term of this Agreement or any renewal thereof will he grant any person, firm, corporation or association other than Company the right herein granted to Company; and that there are in existence no agreements of his in conflict with this Agreement, nor is there any existing situation which could develop into such a conflicting agreement.2. Professional agrees that during the term of this Agreement he will use in play and instruction exclusively the golf clubs manufactured and/or sold by Company, and that Company shall have the right to use for advertising purposes the fact that Professional uses and *224  plays exclusively "Trade-mark" golf clubs manufactured by Company.*184  3. Professional agrees that during the term of this Agreement that he will at all times put forth his best efforts to promote good will for the Company and its products, and will do his utmost to influence the use of, purchase and sale of all types of golf equipment manufactured and/or sold by Company.4. During the term of this Agreement, Professional will, when requested by an officer of the Company, spend a period not to exceed ten days annually at the factory of the Company to assist in designing and creating new golf clubs and other equipment, his expenses for transportation, room and meals for such period to be [borne] by Company.5. Company agrees to renew and continue its distribution of "Tommy Armour" monogrammed line or lines of golf equipment whenever permissible or expedient to do so, and agrees to pay Professional a royalty on the net sales of Armour monogrammed wood and iron golf clubs, bags and equipment of three percent (3%) on the Company's net sales.  (Sales between affiliated Companies or Company's licensees herein licensed not included).* * * *7. This Agreement shall automatically renew*225  on the same terms and conditions for two additional five year terms, unless the Company gives Professional notice in writing of its intention not to renew the same thirty (30) days prior to the expiration of any term.  In case of expiration, Company may continue to sell and dispose of golf clubs, balls, bags and equipment bearing the name, facsimile signature, initials, portrait, or any nickname of Professional or any combination thereof which have been so branded or for which Company may have accepted orders up to time of expiration, with royalties payable thereon of three percent (3%) of the net sales price thereof.8. Should Professional die during the terms hereof or any renewal thereof, the Royalties, provided in Paragraph 5, shall be paid only to Professional's wife, Estelle Armour, and on the same terms and conditions outlined in Paragraph 5 for so long as the Company elects to continue the sale thereof and settlement of royalties due shall be made as outlined in Paragraph 5 Clause (A).* * * *The Crawford, MacGregor, Canby Company was succeeded by MacGregor Golf, Inc., which was succeeded by *260 Sports Products, Inc., prior to January 1, 1949.On May 31, 1949, Worthington wrote*226  petitioner Estelle C. Armour, in part, as follows:Dear Mrs. Armour:Last year there was a new registration of names law for articles passed and it is now necesary that we have written consent from Tommy to use his name on golf balls even though we have a contract direct with Tommy.We are enclosing herewith two copies that grant us exclusive right, license and privilege to use and register Tommy's name.  If you will have Tommy sign these two agreements and return same to us this will be greatly appreciated.  We are sending these agreements at the request of our patent attorney.Thereafter, on June 13, 1949, petitioner executed and delivered to Worthington the following unattested and unnotarized document:To Whom It May Concern:I, TOMMY ARMOUR, do hereby give The Worthington Ball Company of Elyria, Ohio, the exclusive right, license and privilege to use and register my name, "TOMMY ARMOUR", as a trade mark in the United States on golf balls from this date forth.*185  On July 19, 1949, petitioner executed and delivered to Sports Products, Inc., the following attested but unnotarized document:To Whom It May Concern:I, Tommy Armour, do hereby give Sports Products, Inc., *227  of Cincinnati, Ohio, the exclusive right, license and privilege to use and register my name, "TOMMY ARMOUR", as a trade mark in the United States and its Territories, and Foreign Countries on golf clubs, bags and equipment (Golf Balls excepted) from this date forth.On May 29, 1951, Worthington registered the name "Tommy Armour" with the United States Patent Office as a trade-mark for use on golf balls. There has been no registration of the name "Tommy Armour" by Sports Products, Inc.Petitioner received no consideration from either Worthington or Sports Products, Inc., other than the amounts calculated according to the terms of his contracts with those concerns dated April 1, 1946, and September 1, 1943, respectively.  No new or added consideration passed to petitioner in connection with the execution and delivery of the documents of June 13, 1949, and July 19, 1949.  During the taxable years 1949 and 1950 petitioner received the following amounts from Sports Products, Inc., and Worthington:19491950Sports Products, Inc$ 20,385.91$ 19,578.30Worthington1,417.523,068.90Total$ 21,803.43$ 22,647.20Of the amount of $ 20,385.91 paid to petitioner in *228  1949 by Sports Products, Inc., the amount of $ 15,289.43 was earned prior to July 19, 1949, and the amount of $ 5,096.48 was earned subsequent to that date.  The entire amount of $ 20,385.91 was actually paid to and received by petitioner on December 20, 1949.Of the amount of $ 1,417.52 paid to petitioner in 1949 by Worthington, the amount of $ 833.71 was earned prior to June 13, 1949, and the amount of $ 583.81 was earned subsequent to that date.  The full amount of $ 1,417.52 was actually paid to petitioner as follows:Apr. 5, 1949$ 286.70July 6, 1949681.43Oct. 3, 1949290.43Dec. 29, 1949158.96Total$ 1,417.52No agreement was entered into extending the termination dates of the contracts dated April 1, 1946, and September 1, 1943, beyond the renewal periods provided for in the respective contracts.*186  OPINION.Thomas D. Armour, who will hereinafter be referred to as petitioner, is a prominent professional golfer who is better known as Tommy Armour.  In 1946, he entered into an agreement with the Worthington Ball Company which gave that company "the exclusive right, license, and privilege to use his name, either in facsimile signature or script, *229  as a trade-mark on golf balls manufactured by or for, or sold by" the company together with permission to use photographs of the petitioner in connection with the advertising and sale of such balls. The company agreed to pay petitioner 10 cents per dozen for the first 10,000 dozens of such balls sold in a calendar year and 5 cents per dozen sold thereafter, with a minimum guaranteed "royalty" of $ 1,000 per year.  Petitioner was also to receive from the company "six dozen high grade golf balls per month, no charge, for the duration of this contract." The contract was for a period of 5 years with the option to the company of renewing the agreement on the same terms and conditions for an additional 5 years.  This contract continued a similar relationship which had existed between these parties since 1933.*261  In 1943, petitioner entered into an agreement with the Crawford, MacGregor, Canby Company (hereinafter referred to by the name of its most recent successor, Sports Products, Inc.) for a period of 5 years with automatic renewal for two additional 5-year periods unless the company gave notice of its intention not to renew 30 days prior to the expiration of any period.  The second 5-year*230  term of the contract began in 1948.  Petitioner agreed by this contract:(1) That he "does hereby give and grant to Company * * * the exclusive right and license during the terms of this agreement, to manufacture, sell and/or advertise, and to license others to manufacture, sell and/or advertise golf clubs, bags and equipment identified by the name, facsimilar [sic] signature, initials, portrait or any nickname of Professional, or any combination thereof.";(2) That he would "sign all proper and lawful documents necessary or desirable for obtaining federal or State trade-mark registrations for the right herein granted Company to use a mark identified with Professional.";(3) That he would use in play and instruction exclusively the golf clubs made and/or sold by the company and that the company could so advertise;(4) That he would "put forth his best efforts to promote good will for the Company and its products," and "do his utmost to influence the use of, purchase and sale of all types of golf equipment manufactured and/or sold by Company."; and*187  (5) That he would spend up to 10 days a year at the company's factory "to assist in designing and creating new golf clubs*231  and other equipment."The company agreed to pay petitioner "a royalty on the net sales of Armour monogrammed wood and iron golf clubs, bags and equipment of three per cent (3%) on the Company's net sales," to continue its distribution of such items "whenever permissible or expedient to do so," and to furnish petitioner with two sets of "Tommy Armour trade-mark clubs" per year for his personal use.  This contract continued a similar relationship which had existed between these parties since 1934.On May 31, 1949, the Worthington Ball Company wrote to petitioner's wife to the effect that because of a new trade-mark law it was necessary for the company to have petitioner's written consent to use his name on golf balls despite their contract.  The letter enclosed two copies of "agreements" for petitioner to sign and return at the request of the company's patent attorney.  On June 13, 1949, petitioner complied with the request.  The terms of the "agreements" are set forth in our Findings of Fact.On July 19, 1949, petitioner executed and delivered to Sports Products, Inc., a statement substantially the same in all material respects as the "agreements" delivered to Worthington Ball Company. *232  Prior to the passage of the Lanham Act on July 5, 1946 (15 U. S. C. sec. 1051, etc.; 60 Stat. 427), an individual's name could be registered only if presented in some particular or distinctive manner or in association with the portrait of the individual (sec. 5 (b), Trade-Mark Act of Feb. 20, 1905, 33 Stat. 725).  The provisions of the Trade-Mark Act of Feb. 20, 1905, were declaratory of the then existing law to the effect that exclusiveness could not be acquired in a personal name because of the restriction imposed upon others bearing the same name (Amdur, Trade-Mark Law and Practice, Lanham Act ed., 1948, pp. 201-203, and cases cited therein).  Section 2 of the Lanham Act (15 U. S. C. sec. 1052, 60 Stat. 428), however, provides in effect that no trade-mark shall be refused registration on the principal register on account of its nature, even if it consists of or comprises a name identifying a particular living individual, provided such individual gives his written consent.The provision of the 1946 act had the effect, therefore, of permitting the registration of the name "Tommy Armour" as a trade-mark, with*233  his written consent, upon compliance with the other requirements of the law.On May 29, 1951, Worthington Ball Company registered the name "Tommy Armour" with the United States Patent Office as a trade-mark for use on golf balls. There is nothing in the record to indicate *188  that Sports Products, Inc., applied for registration of its trade-mark on the basis of the similar statements which petitioner executed on July 19, 1949.We mention preliminarily that the contract with Sports Products, Inc., required a limited amount of personal services from petitioner upon request.  It is obvious that any amount attributed to such personal services would be ordinary income but, since we have determined that all the amounts received by petitioner involved in this case are to be deemed ordinary income, it is unnecessary to make an apportionment.We will first consider the treatment of the earnings under both contracts prior to the respective dates of execution of the consents to registration. The sum of $ 15,289.43 represents an amount received by petitioner under the contract with Sports Products, Inc., attributable to sales made by the company prior to July 19, 1949, the date on which*262 *234  petitioner consented to the registration of his name as a trade-mark by Sports Products, Inc.  The above amount (together with an additional amount received by virtue of the same contract for the year 1949, attributable to sales made after July 19, 1949) was paid to petitioner after July 19, 1949.  A similar situation applies to the Worthington contract, the amount of $ 833.71 being attributable to sales made prior to June 13, 1949 (the date of the consent to registration by Worthington), but paid subsequent to that date with other 1949 earnings.Respondent contends that under no circumstances could these amounts be deemed to have been received by petitioner as the result of a sale, on the theory that the contracts, at least up to the dates of the consents to registration, represented licensing agreements and did not amount to sales.  Petitioner's brief does not devote itself to this problem and it might be assumed that petitioner concedes respondent's contention in this respect if it were not for the fact that petitioner's counsel took the contrary position in his opening statement.  Error in this respect is also asserted in the petition filed with this Court.  We, therefore, deem*235  it necessary to express our opinion on this issue.The Worthington contract provides for the use of the name "Tommy Armour" on golf balls for a period of 5 years, and gives Worthington the right to renew the agreement for an additional 5-year period with the same royalties. It also gives Worthington the right to terminate the contract at the end of any full year by appropriate notice.The contract with Sports Products, Inc., contains like provisions except that the agreement provides for two 5-year renewals in the absence of termination by Sports Products, Inc.Since it is clear that the duration of each contract is limited, the contracts cannot be deemed to have constituted sales, because each of *189  the sports companies acquired limited rights, less than the whole interest which might have been transferred to each.  Sabatini v. Commissioner, 98 F.2d 753">98 F. 2d 753, 755; Witmark & Sons v. Pastime Amusement Co., 298 F. 470">298 F. 470, affirmed per curiam 2 F.2d 1020">2 F. 2d 1020. See also analysis of the distinction between sale and license by Judge Harron in Seattle Brewing & Malting Co., 6 T. C. 856, 866.*236 The applicable underlying principles are stated in Goldsmith v. Commissioner, 143 F. 2d 466, where Judge Chase said, in part, (p. 467):When by those terms the assignee acquires less than the sum of all the rights which together make up the copyright which as a whole is property and may be conveyed as such, it does not matter whether he is called an assignee in the instrument or whether that is called an assignment or something else.  If he gets only the rights of a licensee, the so-called assignment amounts only to a license. M. Witmark & Sons v. Pastime Amusement Co., D. C., 298 F. 470">298 F. 470, affirmed 4 Cir., 2 F.2d 1020">2 F. 2d 1020. And when that is so the amount which the assignee pays for what he gets is for tax purposes to be treated as ordinary income to the recipient because it is in fact royalty income. * * *On the basis of the foregoing, we hold that the payments received by petitioner under both the Worthington and Sports Products, Inc., contracts, attributable to the periods prior to the respective dates of his consents to registration of the trade-mark, constituted ordinary income derived from*237  licensing agreements and cannot be accorded capital gain treatment.We turn to the amounts received by the petitioner attributable to the contracts for periods subsequent to the dates of the execution of the respective consents to trade-mark registration. Under the Sports Products, Inc., contract, the amounts so attributable were $ 5,096.48 for 1949 and the entire amount paid for 1950.  Under the Worthington contract, the 1949 amount attributable to the period after the execution of the consent was $ 583.81.  The same issue applies to all of the amounts attributable to the Worthington contract for 1950.The emphasis of petitioner's contention is to the effect that the filing of the consents to registration, each of which includes the words "from this date forth," altered the original arrangement under each contract to the end that Sports Products, Inc., and Worthington thereby received "perpetual" rights to the use of the name "Tommy Armour" upon the items covered by the respective contracts.  It is petitioner's contention that even if the contracts were mere licenses prior to the execution of the consents, such execution changed the contracts into sales of the right to use the name, *238  and that the proceeds of such sales must receive capital gain treatment. It is our view that the execution of the consents had no such effect upon the contracts for the reasons set forth below.*190  It should be noted that the Worthington contract in its original form provided that Worthington, for the period of the contract, should have the exclusive right, license, and privilege to use the name*263  "Tommy Armour" as a trade-mark on golf balls. There is no provision in the contract requiring petitioner to execute any further papers which might be necessary for the purpose of registering the name.  In transmitting the forms of consent to petitioner through his wife, the transmittal letter stated, among other things, "If you will have Tommy sign these two agreements and return same to us, this will be greatly appreciated." There was no suggestion of any legal obligation on the part of petitioner to sign the consent.  The consent has no provision for a consideration, and uses the word "give" in relation to yielding the right to registration.The Sports Products, Inc., contract contains the following provision:At the request of the Company, Professional agrees to sign all proper*239  and lawful documents necessary or desirable for obtaining Federal or State trade-mark registrations for the right herein granted Company to use a mark identified with Professional.  * * * [Italics supplied.]There is no transmittal letter in the record concerning the consent in relation to Sports Products, Inc., but the consent likewise uses the word "give" and recites no consideration.We will assume for the purpose of discussion, however, that on the basis of the considerations provided for in the contracts, both Worthington and Sports Products, Inc., could have required Armour to execute his consent to trade-mark registration, although there is no provision to such effect in the Worthington contract.If we take the view (which we do not) that the effect of the words "from this date forth" in the consents had the effect of transferring petitioner's entire interest in the use of his name in perpetuity (or for the life of the trade-marks), the effect of such construction would be to amend and extend the period of duration of the contracts without consideration.  No doubt petitioner could have brought about this effect if he desired to do so, but the transfer would merely result*240  in a voluntary amendment of the agreements, and would not have amounted to a sale, upon valuable consideration, of petitioner's remaining interest in the use of the name for the items referred to in the contracts.We think it clear, however, that the words "from this date forth" are not to be construed to the effect that petitioner's interest in the use of his name was transferred "forever thereafter" (or for the entire life of the trade-marks).  The words in question must be read in relation to, and in the context of, the time limitations set forth in the basic agreements.  There is nothing to indicate that the consents were *191  intended to extend in any way the duration of the agreements, or to effect so radical a change as to convert the basic contracts from agreements of limited duration to contracts granting a perpetual right.  We construe the words in question to mean merely that the consents shall apply from the dates of their respective execution to the time of termination of the contracts to which they respectively related.In addition to what we deem to be the obvious meaning of the words "from this date forth" in the context in which they were used, we again refer*241  to the circumstances surrounding the execution of the consents.  The language of the contract with Sports Products, Inc., requires petitioner to sign all proper documents for obtaining trade-mark registrations "for the right herein granted company." No intention to alter that "right" is expressed in the consent executed for the benefit of that company.  Although the Worthington contract has no provision for execution of supplemental documents, the letter requesting the consent makes specific mention of the contract without expressing any intention to alter its terms and conditions by the execution of the consent.  We think that an intention to make a material alteration in the contract may not be inferred with respect to either of the consents without very clear language to that effect.  We have already expressed the view that no consideration passed for an extension of the duration of the contracts, but we add, in addition to our determination of the question of law applicable thereto, that from the standpoint of intention the lack of any new or additional consideration would weigh strongly against the construction urged by petitioner.Since the execution of the consents did not *242  extend the duration of the contracts, it is our view that the authorities already cited and the underlying principles which we have applied in our treatment of the amounts attributable to the periods prior to the consents, are equally applicable to the periods subsequent thereto.  We hold, therefore, that the amounts received by petitioner under the contracts in question, for the periods both prior and subsequent to the consents, constituted ordinary income from licensing agreements and are not to be given capital gain treatment.Decision will be entered under Rule 50.