Finally, the Government urges that if the court concludes this
is a case where a lump sum payment should be allocated between
deductible and nondeductible expenditures, the burden is on the
plaintiff to establish a reasonable method of allocation. Absent
evidence of a reasonable method, it contends that the court has
no power to make an allocation. Colonial Ice Cream Co. v.
Commissioner of Internal Revenue, 7 B.T.A. 154. In any event, the
Government asserts that the "primary purpose" for the survey
expenditures was litigation, not advertising.
As to plaintiff's contention that the survey expenditures were
incurred at least in part for advertising expenses, the
Government answers that they were all incurred for use in
litigation. Plaintiff has the burden of proving the deductible
amounts and segregating them from the nondeductible amounts.
Harden M. Loan Co. v. Commissioner of Internal Revenue,
137 F.2d 282 (10th Cir. 1943); Nowland v. Commissioner of Internal
Revenue, 244 F.2d 450 (4th Cir. 1957); Brinson v. Tomlinson,
264 F.2d 30 (5th Cir. 1959). The Government cites Mr. Cannon's
testimony, and the vouchers, that his charges were for
preparation of the surveys for use in the litigation, as were Mr.
Lampa's charges (he is in the business of trademark research).
Nor were the advertising uses of the surveys discussed until
after the determination to go ahead with the national survey. The
court reporter's depositions of the interviewers were billed to
plaintiff under the litigation heading and were evidence
While expenditures for advertising are generally ordinary and
necessary business expenses, the Government points out that where
the expenditures are for the acquisition or protection of a
capital asset to be used in advertising they must be capitalized.
French Broad Ice Cream Co. v. United States, 52 A.F.T.R. 1396
(involving a signboard); Simonson v. Commissioner, P-H Memo. T.C.
¶ 46,197. The Government contends that the survey (as well as the
trademark) are capital assets to be used in advertising which
definitely has a useful life of more than one year, and that the
evidence indicates an original estimate of three to five years
usefulness; that they have been used in all the years 1962
through 1966, and are still useful to plaintiff and will be so
for an indefinite time in the future. The plaintiff has made no
offer as to what the useful life might be but the evidence
establishes that in no event could it be less than five years.
Easter v. Commissioner of Internal Revenue, 338 F.2d 968 (4th
Cir. 1964). The Government concludes therefore that all of the
disallowed deductions for expenses in the Tremco litigation must
It is plaintiff's position, on the other hand, that the
expenditures it made were "primarily to recover lost profits and
protect income and were therefore ordinary and necessary
expenses" (under the unfair competition count of the Tremco
litigation) and "that the survey expenses were also deductible as
Plaintiff states that earlier surveys had been conducted at the
dealer level to provide information for the sales structure and
advertising campaign in a particular area. Later, the surveys
were conducted in established markets of plaintiff to tailor
sales and advertising campaigns to the specific needs of the
area. Plaintiff's expansion program advertised heavily to the
consumer market by means of radio and television and other forms
Plaintiff contends that Tremco engaged in increasingly flagrant
unfair practices subsequent to 1956 as to the phrase "Stops Rust"
which plaintiff had extensively advertised, so plaintiff's
counsel, Atty. Charles B. Cannon, on September 30, 1958, notified
them of alleged trademark infringement and unfair competition,
which Tremco denied. Suit was filed by plaintiff against Tremco
on April 28, 1960, in the Federal Court in Ohio.
Plaintiff had theretofore on May 14, 1959, applied in the
Patent Office for registration of the "Stops Rust" trademark
on the principal register, alleging use since 1951 and such
extensive advertising as to acquire a secondary meaning, of
plaintiff, Rust-Oleum, as the source of the product. Tremco on
December 11, 1959, opposed the issuance of the certificate of
registration but the opposition proceeding was suspended pending
the outcome of the Ohio suit.
In 1961, pilot surveys were made in Indianapolis and Pittsburgh
to establish a format for further surveys. A survey of nine
cities showed that 88% of the persons interviewed remembered
seeing "Stops Rust" on a label and identified it as a Rust-Oleum
product. As previously indicated, the Ohio suit was settled June
14, 1962, by written agreement in which no acknowledgment was
made by Tremco that the trademark was valid or that Tremco had
infringed or engaged in unfair competition. There was an
agreement to terminate the Patent Office opposition to
plaintiff's registration of "Stops Rust" and plaintiff permitted
Tremco to use the text of the trademark in a non-confusing
Plaintiff states that "No use was made of the survey in the
litigation, but a six-page colored insert depicting the results
of the survey in graphic form was drawn up for publication to
dealers and distributors. Beginning in September, 1962, extensive
use was made of the survey by advertising its results to dealers
and distributors in house organs, trade journals, and by direct
Plaintiff urges that a very substantial purpose for undertaking
the surveys was its useability both as an advertising instrument
and indicator to show the strength and weakness of its
advertising program. Sanitary Farms Dairy, Inc. v. Commissioner
of Internal Revenue, 25 T.C. 463 (1955).
Plaintiff maintains that the Tremco litigation was not one to
establish its trademark but was to prevent future loss of revenue
and to recover past losses for Tremco's unfair competition and
that litigation was the normal avenue to take and the expense was
an ordinary and necessary business expense, citing Int. Rev.Code
§ 162; Commissioner of Internal Revenue v. Heininger,
320 U.S. 467, 64 S.Ct. 249, 88 L.Ed. 171 (1943), (involving legal expenses
by dentist assailing a fraud order against him).
Plaintiff especially stresses the legal principle that where an
expenditure has a dual purpose its treatment for tax purposes
depends on its primary purpose — if to defend of perfect title,
it is capitalized under § 263, but if for some other business
purpose, it is deducted in the year in which incurred although
perfection of title is incident. Plaintiff cites in support of
its contention the decision of this Circuit's Court of Appeals in
Rassenfoss v. Commissioner of Internal Revenue, 158 F.2d 764 (7th
Cir. 1946), wherein it was held that legal fees paid by a partner
were ordinary and necessary business expenses in the years in
which paid, although the suit involved an employee's claim to a
partner's interest. The suit was settled, granting the employee a
1.75% interest. The court stated, at 767:
"* * * [T]he Commissioner contends that such
expenditures `were more than mere ordinary business
expenses' and that they are not deductible because
made in protecting and defending petitioner's title
to the partnership business and property. The Tax
Court sustained this view. * * * [W]e reach a
contrary conclusion. In the first place, the factual
basis for such a contention is more fanciful than
real. Laying aside the legal question as to whether
petitioner had any title to the partnership assets,
it is perfectly plain * * * that the main and primary
purpose of the suit which petitioner defended was for
an accounting and any question of title was merely
incidental thereto. This is borne out by the
compromise which was finally effected, by which
Campbell was awarded almost infinitesimal and only a
limited interest in the partnership."
Other "primary purpose" cases plaintiff relies on are:
Industrial Aggregate Company v. United States, 284 F.2d 639
(8th Cir. 1960); Usry v. Price, 325 F.2d 657 (5th Cir. 1963);
Kennecott Copper Corporation v. United States, 347 F.2d 275, 171
Ct.Cl. 580 (1965); Urquhart v. Commissioner of Internal Revenue,
215 F.2d 17 (3rd Cir. 1954). Plaintiff insists that the primary
purpose of the Tremco litigation was the protection of income
rather than the defense or perfection of title to an asset, and
furthermore, since plaintiff was unsuccessful in that litigation
so far as perfection of title was concerned, the expenditures
were deductible since they were ordinary and necessary and
resulted in neither a loss nor a gain of a capital nature.
It is plaintiff's contention that the actual use of the
surveys, and counsel's fees for services in connection therewith
for advertising purposes, entitles plaintiff to a deduction of
the cost as an ordinary and necessary expense — despite the fact
that the benefits might in some measure extend beyond the year in
which the expenses were incurred, or that they were initially
incurred for use in litigation pertaining to the trademark.
Plaintiff negates the importance of the trademark litigation in
Ohio in that it was settled prior to trial, without the results
of the survey ever being utilized in any way in the suit, or in
the Patent Office.
Both sides, as noted, lay emphasis on the well-established
proposition that the primary purpose for which expenditures are
incurred determines their tax treatment. As might be expected,
they differ diametrically as to what was the principal or primary
purpose of the survey expenditures. The taxpayer insists that the
surveys were primarily for use in connection with the unfair
competition count of the lawsuit and in its advertising program.
The government equally vigorously asserts that the surveys were
principally conducted to buttress the trademark infringement
count and to counter the Tremco opposition to the registration of
the mark by Rust-Oleum.
Omniscience, of course, is a power which every judge should
possess but unfortunately few trial judges do and this court is
part of the great majority. Divining the primary purpose of the
surveys here is beyond our competence. Nor do we perceive that
all human conduct must necessarily have one primary or principal
motivation. In fact, the more "principal" purposes a venture has,
the more desirable it may be.
The evidence seems to us to demonstrate that the surveys here
had two equally significant contemplated uses, Count One and
Count Two of the Ohio suit. As it developed, that suit was
settled as was the opposition in the Patent Office without their
introduction into evidence but they clearly contributed to the
negotiated disposition of those matters. Subsequently they were
exploited by plaintiff for advertising purposes but this can
hardly be given retroactive significance as the primary purpose
for which they were secured. Similarily, the other legal expenses
incurred by plaintiff in connection with the Ohio suit appear to
us to be logically divisible equally between the two counts.
It is undisputed that the purpose of the first count was to
secure a judicial determination that plaintiff had property
rights in the mark "STOPS RUST" while the second was to secure
money damages for alleged unfair competition, passing off, etc.
Expenses of the former would not be deductible while those
attributable to the latter clearly would.
It follows, we believe, that the proper determination of the
instant controversy is to divide the expenses of the Ohio suit,
including those incident to the surveys, equally between those
properly deductible and those not so deductible.
We recognize that the apportionment of the expenditures between
capital expenses and ordinary and necessary business expenses in
this cause may not be exact or precise. But precision is not an
indispensable prerequisite. As was said in Buder v. United
States, 221 F. Supp. 425 at 439 (E.D.Mo. 1963):
"* * * [K]eeping in mind that a determination here
can nowhere approach exactitude * * * it is the
best estimate from the evidence in hand that * * *
two-thirds of the expenses which taxpayers claim are
deductible as business expenses * * and one-third of
the expenses must be attributable to the personal
non-deductible items category * * *."
The parties are directed to submit a judgment order consistent
with the conclusion herein.