The opinion of the court was delivered by: Will, District Judge.
Plaintiff sues for income tax refunds of deficiency assessments
heretofore paid, attributable to disallowed deductions for
"professional fees" of $8,296.82*fn1 for its fiscal year 1961
and $59,008.49*fn2 for its fiscal year 1962. The
expenditures were payments to plaintiff's attorney, Charles B.
Cannon, in connection with litigation instituted on April 28,
1960, in Ohio against the Tremco Manufacturing Company, and the
costs of public surveys made during the course of that
litigation, which was settled,*fn3 the surveys later being used
in connection with plaintiff's advertising.
Subsequent to the settlement of the suit, a stipulation was
filed in the Patent Office stating that: "Whereas, Civil Action
No. 36,093 in the United States District Court for the Northern
District of Ohio between Applicant and Opposer has been
terminated by agreement of the parties; it is hereby stipulated
that the above identified opposition be and is hereby withdrawn."
On June 20, 1962, a notice from the "Members, Trademark Trial and
Appeal Board" was filed: In view of the stipulation filed June
18, 1962, the opposition is dismissed.
A stipulation and supplemental stipulation of facts have been
entered into by the parties which reveal these undisputed facts:
Plaintiff, an Illinois corporation, which manufactures and sells
rust preventive surface coatings, reported income of $553,797.23
for the fiscal year 1961 on which it paid corporate income tax of
$282,474.56. A $7,489.40 deficiency was assessed and paid, with
$923.35 interest, the Government disallowing a $14,402.70
deduction for professional fees out of a claimed amount of
$45,139.88. Plaintiff maintains it is entitled to a deduction of
$8,296.82 of the $14,402.70 disallowed with a resulting refund of
$4,314.34 and $531.96 interest.
As to 1962, plaintiff reported income of $665,183.73 on which
it paid a tax of $340,395.54, and the Government assessed a
deficiency of $32,619.34, which plaintiff paid with interest of
$2,064.40. For that year, the Government disallowed a deduction
of $68,085.57 advertising and professional fees, and plaintiff
believes it is entitled to a deduction of $59,008.49 for which a
refund of $30,684 and $1,942.32 interest are sought.
The Amended Complaint in the Tremco litigation in the Northern
District of Ohio alleged two separate causes of action: the
first for infringement of plaintiff's trademark "Stops Rust," the
second, for unfair competition (re-alleging all the assertions as
to the first cause of action) and then alleging unfair
competition and aggravation of the trademark infringement, by
dressing of products in a color scheme and paint motif closely
resembling that of plaintiff and by employing sales displays
resembling those long employed by plaintiff, thereby deceiving
and tending to deceive purchasers and the consumer public into
believing that, contrary to fact, defendant's products had their
source in plaintiff, constituting unfair competition both at
common law and under the Trademark Act. In addition to damages,
an injunction against unfair competition was also sought.
The court concludes that if "[t]axation * * * is eminently
practical, and a practical mind * * * [considers] results" (Tyler
v. United States, 281 U.S. 497, 503, 50 S.Ct. 356, 359, 74 L.Ed.
991 (1930)), this case is a prime instance where justice can best
be done by giving
weight to the actualities of the situation. Since the
expenditures were in substantial part utilized for purposes
generally considered ordinary and necessary business expenses,
i.e., litigation and advertising costs, it is necessary to
ascertain, so far as possible, the extent to which they related
to the protection of a capital asset, the trademark on the one
hand, and the extent to which they related to the unfair
competition litigation and advertising, on the other hand.
The following considerations and evidence are relevant:
(1) The Tremco litigation was settled prior to trial, with
the result that the survey evidence was not used in an actual
trial. Further costs of litigation were saved by plaintiff, but
past costs of litigation concerned both the trademark
protection and the unfair competition litigation.
(2) While the settlement of the litigation assured the dropping
of the Patent Office opposition to plaintiff's trademark by
Tremco, thus ensuring plaintiff the sole use of the mark, it also
stopped the alleged unfair competition by Tremco apart from any
trademark rights, and prescribed a permissive but restricted
dress for Tremco's products in the future.
(3) The surveys were extensively used in subsequent
advertising. Some 588,000 copies of the summary of the results of
the Lampa-Meier survey were made and sent to over 12,000
distributors and salesmen. Plaintiff had in previous years spent
large sums in advertising. It had made over a hundred surveys. It
had used these surveys to guide its advertising programs.
(4) Plaintiff's business was greatly enhanced as a result of
(5) Attorney Cannon testified that the Ohio suit was primarily
to enjoin Tremco's unfair competition and recover damages and not
for infringement of the trademark.
(6) Attorney Cannon further testified that the surveys,
although initially prepared for the suit, were not used in the
Tremco litigation, although they had been "submitted to counsel."
The Ohio court suggested settlement talks. The court had not
been shown the surveys nor was there discussion about them ...