1950 U.S. Tax Ct. LEXIS 182">*182
From its inception the petitioner employed the trade name "Food Fair" in its retail grocery business which was conducted in Arlington County, Virginia. Thereafter a competitor in an adjacent area began the use of the name in its business. The petitioner brought suit, alleging that it had established such trade name and the exclusive right to its use in the State of Virginia and sought to enjoin its use by the competitor. The suit was settled by agreement under which the competitor desisted from the objected use of the name.
85 U.S.P.Q. (BNA) 518">*518 14 T.C. 1089">*1089 The respondent determined deficiencies of $ 1,111.66 and $ 222.11 in the petitioner's income and excess profits tax, respectively, for the taxable year beginning November 15, 1945, and ended August 31, 1946. 1950 U.S. Tax Ct. LEXIS 182">*183 The only issue presented is the correctness of the respondent's action in disallowing a deduction of $ 5,000 taken by the petitioner for legal expense.
FINDINGS OF FACT.
Such of the facts as were stipulated are found accordingly.
The petitioner is a Virginia corporation, organized January 26, 1945, and during the taxable year beginning November 15, 1945, and ended August 31, 1946, had its principal place of business at 4241 North Pershing Drive in Arlington, Virginia, where it was engaged in the retail grocery business. The petitioner filed its income and excess profits tax returns for said year with the collector at Richmond, Virginia.
In March or April of 1946, a corporation known as Big Bear Food Stores of Virginia, Inc., also known as Big Bear Stores, Inc., and sometimes herein referred to as Big Bear, acquired a retail grocery store at 901 North Columbus Street in the City of Alexandria, Virginia, which store for some time prior thereto had been operated under the name and style of "Fairfax Super Market."
On April 8, 1946, Big Bear published a notice that it would apply for an off-premises sale license for beer and wines and signed said notice "Food Fair Stores, Inc." The petitioner, 1950 U.S. Tax Ct. LEXIS 182">*184 after consultation with its attorney, on April 10, 1946, protested to Big Bear about the use of the petitioner's name and on the same day filed with the Alcoholic 14 T.C. 1089">*1090 Beverage Control Board of Virginia a protest against said use of the petitioner's name. Following the latter protest, Big Bear withdrew its application for the liquor license and applied for and obtained one under the trade name of "Big Bear, Inc." Thereafter Big Bear operated the store at 901 North Columbus Street under the style of "Big Bear, Inc.," trading as "Fairfax Super Market." However, Big Bear continued to use the trade name "Food Fair" by freely and prominently displaying in its store items labeled and packaged with that trade name and by displaying in the store and on the store large posters and noticeable packages containing in bold letters the words "Food Fair" and "Distributed by Food Fair, Inc. of Pennsylvania."
On May 24, 1946, the petitioner advised Big Bear that it had discovered Big Bear's use of petitioner's trade name, "Food Fair" and protested its use. After that Big Bear discontinued the use of the trade name, "Big Bear, Inc." and "Fairfax Super Market" and operated its store under the1950 U.S. Tax Ct. LEXIS 182">*185 trade name of "Food Lane." However, Big Bear continued to display prominently the words "Food Fair" in advertising its merchandise in newspapers and to display in its store large posters bearing the words "Food Fair." It repeatedly distributed posters and handbills in which the words "Food Fair" were prominently displayed and continuously and repeatedly displayed in prominent positions in its store packaged goods bearing the name "Food Fair." Big Bear operated a store in Richmond, Virginia, under the name "Food Fair."
The foregoing action of Big Bear in connection with its Alexandria store caused confusion in the minds of many of the petitioner's customers as to whether Big Bear's store did or did not belong to petitioner. As a result of 85 U.S.P.Q. (BNA) 518">*519 Big Bear's advertising the petitioner on various occasions had to reduce its prices of certain articles advertised by Big Bear under the name "Food Fair" in order to retain customers. The petitioner would have had no complaint if Big Bear had not, in any manner, used the name "Food Fair" or "Food Lane."
Prior to the close of the taxable year involved herein the petitioner consulted its attorney about Big Bear's use of the name "Food Fair" and "Food1950 U.S. Tax Ct. LEXIS 182">*186 Lane" in the conduct of its business and was advised that the only thing that could be done would be to file a suit against Big Bear and attempt to enjoin it from a continuance of such use.
A fee of $ 5,000 was agreed upon with the attorney to handle the suit against Big Bear and during August, 1946, an entry showing the petitioner's liability therefor was made upon its books.
On August 30, 1946, the petitioner filed in the Circuit Court of the City of Alexandria, Virginia, a bill of complaint in chancery naming Union Premier Stores, Inc., Food Fair, Inc., of Maryland, and BigBear, Inc., as defendants. In this bill the petitioner sought to enjoin 14 T.C. 1089">*1091 the use by the named defendants of its trade name. For lack of properly designated parties defendant, the suit was dismissed on March 10, 1947, at the cost of the petitioner.
On December 24, 1946, the petitioner filed in the Circuit Court of the City of Alexandria, Virginia, a bill of complaint in chancery against Big Bear. An answer to this bill was filed by Big Bear on February 26, 1947.
On March 10, 1948, the court, by consent of the parties, entered an order dismissing the suit without prejudice.
In its complaint filed 1950 U.S. Tax Ct. LEXIS 182">*187 on December 24, 1946, the petitioner alleged among other things that:
On or about January 26, 1945, complainant entered the retail grocery business in Arlington County, and since that date has transacted business under the trade name of "Food Fair". For a long time prior to said date, the trade name "Food Fair" had been used in the District of Columbia by the Square Deal Markets, Inc., and the use of the trade name "Food Fair" by complainant has been with the consent and permission of said Square Deal Markets, Inc. Complainant has expended large sums of money in advertising and otherwise for the purpose of establishing good will among persons residing in Arlington County, Virginia, and of relating the words "Food Fair" to the retail grocery stores owned and operated by complainant, and has established such trade name and the exclusive right to the use thereof in the State of Virginia.
The petitioner further alleged the various uses of its trade name by Big Bear as heretofore set out, stated that the "defendant has been and is guilty of unfair competition and unlawful use of complainant's trade name and good will theretofore established by it at great expense" and that the acts of1950 U.S. Tax Ct. LEXIS 182">*188 the defendant "if continued, will cause irreparable injury to complainant by destroying its property right in the trade name 'Food Fair'."
In its request for relief the petitioner asked:
That the said defendant, its servants, agents, or employees, and all persons in active concert or participation with it be enjoined and restrained from:
(a) Doing or causing to be done any act which would indicate that the store operated by defendant at 901 Columbus Street, Alexandria, Virginia, is owned or operated by, or in any way connected with, complainant, Food Fair Stores of Virginia, Inc.
(b) Using or causing to be used in any newspaper advertisement, handbill, poster, sign or radio announcement or any letter, or otherwise, the words "Food Fair" in connection with said store or any goods sold in said store.
(c) Requiring defendant to remove from said store at 901 Columbus Street, Alexandria, Virginia, any private brands of packaged or canned foods bearing the trade name "Food Fair" or merchandising any products in any manner so as to offer the same to the public under such trade name or in any other manner to confuse the purchasing public generally as to the ownership and operation of said1950 U.S. Tax Ct. LEXIS 182">*189 stores.
(d) Using the trade name "Food Lane" in connection with the defendant's retail grocery business in the State of Virginia.
14 T.C. 1089">*1092 In its answer Big Bear for the most part denied the allegations in the petitioner's complaint. Among others it denied that the words "Food Fair" as a trade name belonged exclusively in the State of Virginia to petitioner. Big Bear also stated that it was informed that the trade name "Food Fair" had been registered and used as a trade-mark by the corporation some of whose goods were sold by Big Bear, that the meaning of that trade-mark had been known in the Alexandria City and Arlington County territory long before the petitioner began business, that the stock of such company, "Food Fair, Inc.," was sold on the New York Stock Exchange, that 85 U.S.P.Q. (BNA) 518">*520 such company did a very large business, and that some of the goods manufactured by it were sold in Big Bear's store exactly on the same basis as the goods from other supply houses were sold.
The suit was dismissed pursuant to an agreement by the petitioner and Big Bear in which Big Bear agreed to discontinue the things complained of with respect to the use of the name "Food Fair" in its advertising, including1950 U.S. Tax Ct. LEXIS 182">*190 window posters and handbills. Big Bear did not agree to discontinue the use of the name "Food Lane." While Big Bear has continued to trade under the name "Food Lane," it has discontinued its objectionable advertising and use of the name "Food Fair" in the business of the Alexandria store. Although Big Bear has continued to sell merchandise bearing the manufacturer's or processor's trade-mark or label "Food Fair," it has not advertised such merchandise.
In its returns, prepared on the accrual basis, for the taxable year here involved the petitioner deducted the attorney's fee as a business expense. In determining the deficiency the respondent disallowed the deduction.
OPINION.
The parties are agreed that expenditures made for defending or perfecting title to property are capital expenditures and are not allowable deductions in computing taxable net income. However, they are in disagreement as to the purpose for which the expenditure in controversy was incurred. The petitioner contends that it was incurred primarily for the purpose of protecting and maintaining its income by bringing about a discontinuance by Big Bear of certain advertising practices which had resulted in loss 1950 U.S. Tax Ct. LEXIS 182">*191 of income to the petitioner and that that was the sole result accomplished. Petitioner insists that the expenditure was not in anywise incurred for the purpose of defending or perfecting title to any of its property. The respondent's position is that the expenditure was incurred for the purpose of defending or perfecting petitioner's right and title to the trade name "Food Fair."
14 T.C. 1089">*1093 It is clear that the petitioner's suit against Big Bear resulted from the latter's use of the trade name "Food Fair," which the petitioner had been using in its business since its inception. In its complaint the petitioner alleged, among other things, that it had established that trade name and the exclusive right to its use in the State of Virginia. While not claiming ownership of such trade name in, or for, itself, Big Bear denied in its answer that the name belonged exclusively in the State of Virginia to the petitioner. Manifestly, any adjudication of the suit would require a determination as to whether the petitioner had established such trade name and was entitled to its use in the State of Virginia, as petitioner claimed. Such a determination would be a prerequisite to a determination1950 U.S. Tax Ct. LEXIS 182">*192 as to the action, if any, that should be taken on the petitioner's prayers for relief, including the prayer for relief from the advertising practices of Big Bear which had resulted in the loss of income to the petitioner. Obviously, if the petitioner had no title to or right in the controverted name, it had nothing on which to base a complaint about Big Bear's use of it. Without permitting these questions to be determined judicially, the petitioner and Big Bear effected a compromise settlement. The record is silent as to whether the agreement under which the compromise was effected was reduced to writing. However, such evidence as there is as to the terms of the agreement shows that Big Bear agreed to, and did, desist from any further use of the name "Food Fair" in the conduct of the business of its Alexandria store, including the advertising with respect thereto. The evidence also indicates that Big Bear has desisted from any acts which would indicate that its Alexandria store was owned or operated by petitioner or in anyway connected with it. Under the settlement Big Bear was permitted to continue trading under the name of "Food Lane," a name which, so far as shown, the petitioner1950 U.S. Tax Ct. LEXIS 182">*193 had never owned or used. Big Bear was also permitted to continue selling merchandise bearing the manufacturer's or processor's trade-mark or label "Food Fair," but not to advertise such merchandise.
From the foregoing, we think it is obvious that basically and primarily the suit was one to defend or perfect the petitioner's title to, or property right in, the trade name "Food Fair." That the suit was disposed of by a settlement agreement between the parties in no way detracts from the fact that the primary purpose of the litigation was to obtain a judicial determination as to ownership and that the attorney's fee was incurred in defense of the ownership of and property rights in the name. Since in substance the attorney's fee was a cost of defending or perfecting title to property, it was not an allowable deduction. ; affd., ; ; affd. on this point, 14 T.C. 1089">*1094 ; ; affd., .1950 U.S. Tax Ct. LEXIS 182">*194
The petitioner cites and relies on , 85 U.S.P.Q. (BNA) 518">*521 and . The primary question involved in the
