Theodore E. Moberg and Pauline Moberg v. Commissioner of Internal Revenue

Theodore and Vern Moberg were co-owners of a master franchise for the states of Washington and Oregon for the use of a patented freezing machine known as the “Dairy Queen” freezer. They have under varying types of contracts granted subfranchises for certain portions of their territory. The question here presented is whether the sums received by them under these subfran-chises are taxable as capital gain from sales of property or as ordinary income from licenses. The Tax Court has ruled that these subfranchises constituted licenses and that the sums received constituted ordinary income. Moberg v. Commissioner of Internal Revenue, 1961, 35 T.C. 773 .

Taxpayer Theodore Moberg and his wife have petitioned this court for review of the Tax Court decision. The case of taxpayer’s partner, Vern Moberg, has gone on review to the Court of Appeals for the Fifth Circuit, which has reversed the Tax Court. Moberg v. Commissioner of Internal Revenue, 1962, 305 F.2d 800 .

Two other circuits have had occasion to consider the nature of grants of Dairy Queen subfranchises. In all cases, as in the one before us, the payments in question consisted of lump sum payments plus continuing royalty payments…