Aluminum Products Co. v. Commissioner , 24 B.T.A. 420 ( 1931 )

ALUMINUM PRODUCTS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Aluminum Products Co. v. Commissioner

Docket No. 16150.

United States Board of Tax Appeals

24 B.T.A. 420; 1931 BTA LEXIS 1648;

October 22, 1931, Promulgated

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An amount expended by the petitioner in settlement of a controversy between it and a competitor as to which of them had the prior use of a trade-mark and as a result of which the petitioner acquired certain merchandise and other assets of the competitor, together with the competitor's promise immediately to discontinue the use of the trade-mark, held to be an expenditure of capital nature and as such not an allowable deduction from gross income.

Henry W. Wales, Esq., for the petitioner.

John E. Marshall, Esq., for the respondent.

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TRAMMELL

This proceeding is for the redetermination of a deficiency in income and profits taxes of $31,400.07 for 1920. The only matter in controversy is the deductibility of an amount of $12,212.40 representing expenditures made in 1921 in connection with the settlement of a controversy as to who had the prior right to the use of a trade-mark which was being used by the petitioner and a competitor.

FINDINGS OF FACT.

The petitioner is an Illinois corporation with its principal office at LaGrange.

In June, 1917, the petitioner filed an application in the United States Patent Office for registration of the trade-mark "Lifetime," for aluminum kitchen cooking utensils, stating that it had continuously used in its business since April, 1915, the trade-mark proposed for registration. On June 25, 1918, the trade-mark was duly registered in the Patent Office and the petitioner was issued a certificate of registration, which, by its terms, was to remain in force for 20 years unless sooner terminated by law and which may be renewed for a like period from time to time upon application.

William H. Doty of Boston, Mass., was engaged in selling aluminum ware through a canvassing organization, going directly to the consumer. Doty had a considerable business. He bought his aluminum ware from the Aluminum Goods Manufacturing Company, a manufacturer of aluminum ware, with its principal office at Manitowoc, Wis. On the wares purchased by Doty from that company, the company stamped the name "Lifetime." The name "Lifetime" had not been registered in the Patent Office by Doty or anyone else except the petitioner.

The petitioner distributed its product through stores. A conflict developed between the petitioner and Doty in the distribution of merchandise through the two competitive lines having similar trademarks. In the spring of 1920 a controversy arose between them as to their respective rights to the use of the name "Lifetime," and continued into the fall of that year. Doty claimed that he had prior right to the use of the name "Lifetime" and through his attorney threatened to institute legal proceedings against the petitioner. Attorneys for the petitioner were impressed by Doty's claim and in a conference between the stockholders of the petitioner and its attorneys it was decided to settle the controversy without litigation.

In 1920 Walter Luttringhaus was the manager of the Chicago sales office of the Aluminum Goods Manufacturing Company, from which Doty purchased aluminum ware. He knew of the controversy existing between Doty and the petitioner and was acquainted with Doty and W. A. Hastings, who was the secretary and general manager of the petitioner. Luttringhaus had suggested to Doty and Hastings that they attempt to settle the controversy by agreement, if possible, and to that end arranged for a conference between them to be held in his office during the latter part of November, 1920. Doty, Hastings and Luttringhaus were present at the conference. The directors of the petitioner had instructed Hastings to negotiate a settlement of the controversy, with the limitation that such settlement should not involve the payment by the petitioner of an amount in excess of $15,000.

At the conference terms of settlement of the controversy were discussed and an agreement was reached between the parties as to the terms of such settlement. The terms of the settlement were: That in consideration of Doty's discontinuing the use of the word "Lifetime" in his literature and advertising matter and on his cooking utensils the petitioner would pay him $5,000; that the petitioner would reimburse him for the expense he would incur in replacing literature and advertising matter destroyed; and that the petitioner would take over at cost whatever aluminum merchandise he had on hand, in transit and under order from the Aluminum Goods Manufacturing Company bearing the trade-mark "Lifetime." No written agreement was entered into at that time, but a short memorandum covering the points involved was dictated by Luttringhaus to his stenographer. No cash payment was made at the time. The total amount of money that would pass to Doty under the terms of the settlement was not agreed upon at that time, since that was dependent upon the quantity of merchandise, literature and advertising matter involved. It was necessary that an inventory of these items be taken in order to determine the quantity of them.

The petitioner kept its books on the accrual basis. In December, 1920, during the closing of its books for the year, it credited Doty with the amount of $15,000 and charged miscellaneous administration expense with the same amount.

Thereafter the petitioner, by Hastings, its secretary, and Doty executed an instrument providing as followd:

THIS AGREEMENT made and entered into this eighth day of January, 1921, by and between the Aluminum Products Company of La Grange, Illinois, and William H. Doty, of Boston, Mass., doing business as the Lifetime Aluminum Co.

IN CONSIDERATION of the fulfillment of the premises made below by the Aluminum Products Co., William H. Doty agrees to immediately discontinue the use of the word "LIFETIME" on aluminum cooking utensils. In consideration of the above promise made by William H. Doty, the Aluminum Products Co. agrees to pay on Monday, January tenth 1921, the sum of Five Thousand Dollars ($5,000.00) in cash, and further agrees to pay William H. Doty the actual cost of replacing all printed matter, electrotypes, half tones, dies, and all other material bearing the word "LIFETIME". The Aluminum Products Co. agrees to pay William H. Doty the cost of the above, emmediately upon receipt of the above printed matter, electrotypes, etc. In the event that the prices at which William H. Doty bills the above printed matter, electrotypes, half tones, etc., to the Aluminum Products Co., are not satisfactory to the Aluminum Products Co., then the Aluminum Products Co. and William H. Doty hereby agree to allow Mr. W. Luttringhaus of Chicago, Illinois, to place a price on same, which the Aluminum Products Co. agrees to pay and William H. Doty agrees to accept.

The ALUMINUM PRODUCTS CO. agrees to purchase from William H. Doty the entire stock of aluminum cooking utensils bearing the trade-mark "LIFETIME" that William H. Doty now has on hand in Boston, and that which is in transit, said price to be based on the actual selling prices as quoted today to William H. Doty by the Aluminum Goods Mfg. Co. of Manitowoc, Wisconsin. Said shipment of goods to be made immediately f.o.b. Boston, Mass., and payment for same to be made within ten days after receipt of shipment by the Aluminum Products Co.

The ALUMINUM PRODUCTS CO. further agrees to accept and pay the Aluminum Goods Mfg. Co. of Manitowoc, Wis., at today's billing prices to William H. Doty, all aluminum cooking utensils manufactured and in process of manufacture imprinted with the word "LIFETIME". Said goods to be shipped f.o.b. Manitowoc, Wis.

Payments aggregating $12,212.40 were made by the petitioner to Doty as follows: January 10, 1921, cash $5,000; February 18, 1921, cash, $3,200; May 16, 1921, cash $1,000 and trade acceptances in the amount of $3,012.40. The various amounts were paid on receipt by the petitioner of invoices from Doty covering merchandise, stationery and supplies. The difference between the amount of $15,000 credited by the petitioner to Doty in 1920 and the $12,212.40 actually paid in 1921 was taken into income and returned by the petitioner as a part of its income for 1921.

The aluminum ware taken over from Doty was disposed of in various ways, through trade channels, a jobber or second-hand dealer or disassembled and the aluminum melted and recast. The dies, while being kept by the petitioner, were not used by it in its business. The advertising matter that was taken over was destroyed. The petitioner did not take over any part of Doty's organization nor any part of his sales forces.

In determining the deficiency here involved the respondent refused to allow as a deduction for 1920, the taxable year before, us, the amount of $15,000 credited to Doty on the petitioner's books in December, 1920, but held that the entire amount was an allowable deduction for 1921.

OPINION.

TRAMMELL: The petitioner contends that it is entitled to a deduction in 1920 as a business expense incurred in that year the amount of $12,212.40 paid by it to Doty in 1921 in connection with the settlement of the controversy between them. The respondent contends that the amount constituted a capital expenditure and, even if an expense, was not accruable until 1921. We will first consider the question as to whether the amount constituted a business expense or a capital expenditure.

For the payment of the $12,212.40 the petitioner acquired (1) the promise of Doty to discontinue the use of the word "Lifetime" on aluminum cooking utensils, (2) all literature and advertising material that Doty had containing the word "Lifetime," as well as certain electrotypes and dies, (3) Doty's entire stock on hand, as well as in transit, of aluminum cooking utensils bearing the trade-mark "Lifetime," and (4) all the aluminum cooking utensils imprinted with the word "Lifetime" manufactured or in the process of manufacture by the Aluminum Goods Manufacturing Company under orders from Doty.

Doty was selling, through a canvassing organization, aluminum ware bearing the trade-mark of "Lifetime." The petitioner had registered in the United States Patent Office the trade-mark "Lifetime" and was selling, through retail dealers, aluminum ware manufactured by it and bearing the trade-mark "Lifetime." As the retail dealers did not have any canvassing organization expenses, they were able to sell the petitioner's products cheaper than they were being sold by Doty through his organization. This brought the interests of the petitioner and Doty in direct conflict. Doty claimed prior use of the trade-mark "Lifetime," insisting that he had been using it prior to the time the petitioner began its use. He also threatened to institute legal proceedings against the petitioner. Doty's contention as to prior use was not without basis and the petitioner's attorneys were so impressed with the claim that it was decided in a conference between them and the petitioner's stockholders to dispose of the matter by settlement, as was done.

By obtaining the promise of Doty to discontinue the use of the word "Lifetime" on aluminum cooking utensils the petitioner acquired the right to the unmolested use, so far as Doty was concerned, of the trade-mark "Lifetime" on the aluminum ware manufactured by it. Doty, by abandoning the use of this trade-mark, would no longer be in a position to claim any rights under it, and as for the sale of goods bearing the trade-mark the field was left entirely to the petitioner. Doty was permanently eliminated from the field so far as the use of the trade-mark "Lifetime" was involved. These constituted rights of a substantial value, the benefits from which would be available to the petitioner not only throughout the remaining 20-year period for which the trade-mark was registered, but to any renewal thereof. The acquisition of these rights by the petitioner constituted the perfection of its right to the free use of the trade-mark without interference of any kind from Doty.

With respect to the aluminum ware that Doty had on hand and that in transit, the language used by the parties in the agreement indicates that the petitioner was purchasing such merchandise from Doty. Payment for this merchandise and that manufactured or under manufacture by the Aluminum Goods Manufacturing Company on orders from Doty was to be made on the basis of that company's selling or billing prices to Doty. With respect to the aluminum ware manufactured or in the process of manufacture by the Aluminum Goods Manufacturing Company on orders from Doty, the petitioner appears to have stepped into Doty's shoes so to speak, and so far as the record shows, with the acquiescence of the Aluminum Goods Manufacturing Company. The record does not show when the aluminum ware acquired in connection with the settlement with Doty was actually received by the petitioner or when disposed of by it. There is nothing in the record to indicate that any of it was received or disposed of by the petitioner during the year 1920.

We are of the opinion that, with the possible exception of the literature and advertising matter containing the word "Lifetime" and the electrotypes and dies, the petitioner acquired valuable rights as well as merchandise in return for the expenditure of the $12,212.40. No attempt was made by the petitioner to show what part of the amount involved represented payment for the advertising matter and the electrotypes and dies. In fact, no attempt was made by the petitioner to allocate the $12,212.40 to the various items of property acquired.

Inasmuch as the $12,212.40 was expended by the petitioner in the acquisition of assets, the unmolested use of its trade-mark, the perfection of its rights therein and the elimination of competition, the amount constituted an expenditure of a capital nature and as such was not an allowable deduction for 1920. Cf. ; ; .

Since the amount in controversy constituted an expenditure of a capital nature, we are not concerned as to when it might have been accrued if it were an expense deduction.

Judgment will be entered for the respondent.