99 U.S.P.Q. (BNA) 30">*30 20 T.C. 944">*944 The respondent determined deficiencies in income tax against the petitioners for the calendar year 1946 as follows:

The principal question in issue is whether litigation expenses1953 U.S. Tax Ct. LEXIS 72">*73 incurred by the petitioners are deductible or whether these amounts constitute a capital expenditure. A further question with regard to a deduction for traveling expenses by Radcliffe M. Urquhart was raised by the pleadings but has been abandoned.

FINDINGS OF FACT.

The facts stipulated are found accordingly.

George Gordon Urquhart and his brothers, Radcliffe M. Urquhart and W. K. B. Urquhart, the petitioners herein, participated in a joint venture during the year 1946 carried on under the name of George Gordon Urquhart, et al. The joint venture was engaged in the invention, experimentation, development, and exploitation of patents and new processes and the licensing of these patents and processes. During 1946 the joint venture was a licensor of two patents on firefighting equipment and in that and previous years the petitioners had obtained substantial income from licensing such patents.

20 T.C. 944">*945 In January 1938, George Gordon Urquhart and Radcliffe M. Urquhart were issued a basic mechanical foam patent relating primarily to fire extinguishers. Prior to the issuance of a second patent, the Patent Office had held that there was not adequate disclosure of the invention covered 1953 U.S. Tax Ct. LEXIS 72">*74 by the claims and refused to issue the patent. In a proceeding instituted by these two petitioners in the United States District Court for the District of Columbia against the Commissioner of Patents, Radcliffe M. Urquhart and George Gordon Urquhart overcame the adverse holding of the Patent Office and were issued a patent on April 23, 1940, in response to the decree of the district court. Aside from these proceedings, the two patents have been involved in no other interference proceeding. Although title to these two patents was retained by Radcliffe M. Urquhart and George Gordon Urquhart, they invested the joint venture with power to make arrangements for the administration and licensing of these patents and to receive the royalties earned therefrom.

George Gordon Urquhart and Radcliffe M. Urquhart each held a 40 per cent interest in the earnings of the joint venture. W. K. B. Urquhart possessed a 20 per cent interest in the joint venture. From 1942 through 1946 the sole business conducted by the joint venture was the licensing of the two patents referred to. The royalties received by the joint venture from the licensing of these patents were as follows:

1953 U.S. Tax Ct. LEXIS 72">*75 Substantially all of these royalties were received from one licensee, National Foam System, Inc., which had entered into a license agreement with the two petitioners in April 1941.

99 U.S.P.Q. (BNA) 30">*31 In 1938, Radcliffe M. Urquhart and George Gordon Urquhart notified Pyrene Manufacturing Company that in their view that company was infringing one of the patents and threatened litigation with respect thereto. Pyrene Manufacturing Company denied any infringement and no correspondence with respect to the matter was exchanged until more than 5 years later. On April 28, 1943, Radcliffe M. Urquhart and George Gordon Urquhart brought an action against American La France Foamite Corporation, a customer of Pyrene Manufacturing Company, for alleged infringement of the two patents. On May 5, 1943, Pyrene Manufacturing Company brought action against Radcliffe M. Urquhart and George Gordon Urquhart seeking a declaratory judgment that the two patents were invalid and void and that the plaintiff's apparatus and methods did not infringe any valid claims of such patents. The Urquharts counterclaimed 20 T.C. 944">*946 asking an injunction against infringement, an accounting for profits and damages, and that damages be trebled1953 U.S. Tax Ct. LEXIS 72">*76 as provided by Revised Statues, sec. 4921, U. S. C. Title 35, sec. 70. No question was raised in this ligitation as to the petitioners' title to the patents. On April 3, 1945, the American La France Foamite Corporation action was dismissed.

The Pyrene Manufacturing Company suit was tried in June 1946, and the United States District Court for the Eastern District of Pennsylvania entered judgment in this suit in favor of Pyrene Manufacturing Company, ordering that the patents in question were invalid and void. The joint venture expended in 1946 $ 55,748.64 for legal fees and other expenses in connection with this litigation. This decision was appealed by the Urquharts on December 23, 1946, to the United States Court of Appeals for the Third Circuit. That court affirmed the judgment of the lower court on May 31, 1949. The petitioners, Radcliffe M. Urquhart and George Gordon Urquhart, then applied to the Supreme Court of the United States for a writ of certiorari which was denied on October 10, 1949.

On December 29, 1949, George Gordon Urquhart assigned all his interest in the two patents to Radcliffe M. Urquhart. On July 22, 1949, National Foam System, Inc., brought suit against1953 U.S. Tax Ct. LEXIS 72">*77 the two petitioners seeking a declaratory judgment asking to be relieved of all liability under the license agreement as of the date of the judgment in the Pyrene Manufacturing Company suit. The petitioners counterclaimed for royalties on all sales of mechanical foam equipment by National Foam System, Inc. On January 18, 1952, the United States District Court for the Eastern District of Pennsylvania entered its decision in favor of National Foam System, Inc. An appeal from this decision was taken by Radcliffe M. Urquhart to the United States Court of Appeals for the Third Circuit, which on March 13, 1953, affirmed the judgment of the lower court.

On November 29, 1949, Radcliffe M. Urquhart and George Gordon Urquhart brought suit in the United States Court of Claims against the United States asserting the validity of and claiming compensation for the unlicensed use of the two patents. On January 13, 1953, the United States Court of Claims entered its decision in the suit in favor of the United States.

A partnership return of income was filed by the joint venture for the calendar year 1946 with the collector of internal revenue for the first district of Pennsylvania. In this return, 1953 U.S. Tax Ct. LEXIS 72">*78 the joint venture claimed deductions for legal fees and litigation expenses in the amount of $ 55,748.64. All the petitioners in filing their individual income tax returns for 1946 showed income from the joint venture in amounts which were determined after the deduction for expenses on the part of 20 T.C. 944">*947 the joint venture. The respondent disallowed the deductions of all petitioners claimed on account of these litigation expenses treating them as capital expenditures for the perfection or protection of patent property rights.

OPINION.

The sole issue to be decided is the propriety of deductions taken by the petitioners as expenses in the suit brought by the Pyrene Manufacturing Company. The issue with respect to the traveling expense deduction taken by Radcliffe M. Urquhart has apparently been abandoned as no evidence with respect to this issue has been introduced and no argument made thereon.

Two of the three petitioners were issued mechanical foam patents relating to fire extinguishment equipment. The petitioners carried on the joint venture to develop and license these inventions. Title to the two patents was retained by Radcliffe M. Urquhart and George Gordon Urquhart, although1953 U.S. Tax Ct. LEXIS 72">*79 they invested the joint venture with power to administer and license the patents. In 1938, petitioners notified Pyrene Manufacturing Company that in their view that company was infringing the patent. No further action was taken until 1943 when the petitioners instituted an infringement suit against a customer of Pyrene Manufacturing Company. Shortly thereafter Pyrene Manufacturing Company brought the suit which occasioned the 99 U.S.P.Q. (BNA) 30">*32 expenses in question and the petitioners entered their counterclaim therein. It is the cost of this litigation which the petitioners seek to deduct.

It is well settled that expenditures made for the purpose of defending title are capital in nature and are not deductible as ordinary and necessary business expenses. Moynier v. Welch, 97 F.2d 471; James C. Coughlin, 3 T.C. 420. This is true even though one purpose of the expenditure is to protect the right to income from the property in question. Central Material & Supply Co., 44 B. T. A. 282, affirmed on this point sub nom. Farmer, Trustee v. Commissioner, 126 F.2d 542. The1953 U.S. Tax Ct. LEXIS 72">*80 parties do not disagree as to this proposition but conflict with respect to the classification of the expenses in question. The petitioners incurred these expenses in the suit brought by Pyrene Manufacturing Company seeking a declaration that the patents issued to the petitioners were void and invalid and that its apparatus did not infringe any valid claims. No question of title was thus raised by the suit, rather the validity and infringement of the patents with respect to Pyrene Manufacturing Company were put in issue. The petitioners' counterclaim sought an injunction against infringement and an accounting of profits and treble damages.

The petitioners contend that the nature of the suit was to claim and defend the right to income. The respondent contends that the petitioners 20 T.C. 944">*948 were defending the validity of their patents. The petitioners reply that the validity of the patents could not have put in issue in private litigation such as this, and cite Bulldog Electrical Products Co. v. Cole Electrical Products Co., 148 F.2d 792.

Without entering into a discussion of the merits of the petitioners' contention with respect to patent law, 1953 U.S. Tax Ct. LEXIS 72">*81 we are of the opinion that the taxpayers were engaged in defending a property interest, the exclusive right to make, use, and vend these inventions granted by the patents and were only incidentally engaged in seeking to collect income.

Pyrene Manufacturing Company, one of whose customers had been sued by the petitioners, brought its suit attacking the validity of the patents issued to two of the petitioners. A decision upon this issue would determine the validity of the patents at least with respect to the Pyrene Manufacturing Company. Without going into the question of the effect of this determination upon others, it is clear that a decision on this issue would determine whether the petitioners had the exclusive right, at least until that time to make, use, or vend the invention. This is necessarily true, since, if the Pyrene Manufacturing Company succeeded in the litigation, as it did, the petitioners lost their exclusive right to make and license the article invented. If the Pyrene Manufacturing Company failed in its attack on the validity of the patents, the petitioners would retain their exclusive right. As far as appears, no other challenge either to the validity1953 U.S. Tax Ct. LEXIS 72">*82 or ownership of the patents existed. This exclusive right is a property interest, valuable over a period of years, and it is this right which is fundamentally in issue in the litigation. As in Food Fair of Virginia, Inc., 14 T.C. 1089, wherein the expenses were incurred in defending the taxpayers' exclusive right to the use of a name, these expenses must be held capital in nature and not deductible as ordinary and necessary business expenses. ¹

It is true that the petitioners sought an accounting and treble damages as well as an injunction against infringement but the determination of the issues raised by the counterclaim was dependent upon the result reached as to the validity1953 U.S. Tax Ct. LEXIS 72">*83 of the patents. The petitioners' right to damages and accounting could have accrued only on proof of validity of the patents as to the Pyrene Manufacturing Company. In the present instance, the question of an accounting and damages was merely incidental and the deduction must be disallowed. Addison v. Commissioner, 177 F.2d 521, affirming a memorandum opinion of this Court entered August 31, 1948; Safety Tube Corporation, 20 T.C. 944">*949 8 T.C. 757, affd. 168 F.2d 787; Midco Oil Corporation, 20 T.C. 587. The decision in William A. Falls, 7 T.C. 66, is inapplicable here to suggest an allocation between a nondeductible capital expenditure and an amount spent to retain income. The petitioners here had not received income which the opposing party sought to recover as was true in the cited case.

The petitioners' alternative contention that the litigation costs are allowable deductions as losses under section 23 (e) of the Internal Revenue Code² must also 99 U.S.P.Q. (BNA) 30">*33 be denied. The amounts in question were expended in 1946 in an unsuccessful1953 U.S. Tax Ct. LEXIS 72">*84 attempt to defend the petitioners' exclusive right to make, use, and vend the patented article. The expenditures do not constitute losses apart from their character as added capital costs incurred in defending this exclusive right. To be entitled to a loss deduction in 1946, the petitioner must point to some closed transaction such as a sale or other disposition or to an abandonment of the property rights of which the litigation expenses formed a portion of the cost. No sale, exchange, or other disposition of the petitioners' rights occurred in 1946. Although the court in the Pyrene Manufacturing Company litigation declared the patents invalid, the petitioners sought reversal of this decision in order to retain their property rights which reversal was denied in May 1949. Further review by the Supreme Court was denied in the same year. It cannot be said that an abandonment of the petitioners' property rights occurred in 1946. Nor would it be persuasive that the petitioners personally considered the patent rights lost in 1946 in view of their later actions. Virginia Stage Lines, Inc., 16 T.C. 557. The facts reveal that the petitioners sought to1953 U.S. Tax Ct. LEXIS 72">*85 obtain royalties upon the patent rights from National Foam System, Inc., in 1949 and litigation directed towards that end did not terminate until 1952. An affirmance of the judgment of the lower court in that proceeding was handed down in 1953. The petitioners instituted proceedings in 1949 asserting the validity of the patents in a suit against the United States. An adverse decision on this issue was reached in 1953. In 1949, George Gordon Urquhart assigned all his interests in the patents to his brother Radcliffe. It is evident that an abandonment did not occur during the taxable year and a loss deduction therefor may not be granted. See Hart-Bartlett-Sturtevant Grain Co., 12 T.C. 760, affd. 182 F.2d 153.

1953 U.S. Tax Ct. LEXIS 72">*86 Decisions will be entered for the respondent.