Norwich Pharmacal Co. v. Commissioner

NORWICH PHARMACAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Norwich Pharmacal Co. v. Commissioner Docket Nos. 64542, 67492. United States Board of Tax Appeals 30 B.T.A. 326; 1934 BTA LEXIS 1344; April 5, 1934, Promulgated *1344 A trade-mark is not such property as is susceptible to exhaustion by the passage of time, nor wear and tear by use in the business, and respondent's action in disallowing deductions for "depreciation" or trade-marks is approved. H. A. Mihills, C.P.A., for the petitioner. B. M. Coon, Esq., for the respondent. TRAMMELL *326 These are consolidated proceedings for the redetermination of deficiencies in income tax for the years 1929 and 1930 in the amounts of $5,457.34 and $5,508.68, respectively. The sole error assigned by petitioner is that "The respondent has failed to allow as a deduction from gross income depreciation of trade-marks based on their cost and useful life." FINDINGS OF FACT. The petitioner is a New York corporation, with its principal office at Norwich. It has been engaged since 1890, the date of its incorporation, in the manufacture and direct sale of pharmaceutical products, cosmetics, and toilet preparations. Its principal and best known product is Unguentine, used for burns and skin injuries. Petitioner is known in the drug industry as a direct service house. It maintains five branches and a corps of traveling salesmen*1345 and *327 takes care of its own distribution. Only a small part of its total sales is made to jobbers. Its line embraces some 150 products. At one time petitioner produced and listed in its catalogues about 4,000 items, including staple products, trade-marked products, and certain coined-name products which were not protected by registered trade-marks. But for the past several years petitioner has followed the policy of centering upon a limited group of trade-marked, nationally advertised products. Petitioner's board of directors had concluded that the future success of the company should be predicated upon the development of public demand for the trade-marked type of items. In pursuance of this policy, petitioner acquired the right to manufacture and sell a product known as "Amolin" through the purchase in 1928 of the entire capital stock of the Amolin Co. Amolin is a deodorant powder having the quality of neutralizing perspiration and body odors. Prior to 1928 it had been on the market for a number of years and had been distributed by retail stores throughout the country. Amolin was not a patented product. The exact formula was a secret, not known to petitioner, *1346 although the petitioner had analyzed the product in its laboratory and could have manufactured substantially the same preparation, but could not have sold it under the trade name by which it was favorably known on the market, for the reason that it was protected by registered trade-marks. On or about November 12, 1928, the petitioner purchased the entire outstanding capital stock of the Amolin Co. for a cash consideration of $675,000 and the assumption of an obligation to pay the sum of $500 per month to one Pray, inventor of the Amolin formula, during his lifetime. At the close of 1928 petitioner liquidated the business of the Amolin Co., taking over all of its assets for the nominal consideration of $1 and the assumption of all its liabilities. The charter of the Amolin Co. was surrendered on December 29, 1928. Usable items of equipment in the Amolin Co.'s New York plant were transferred to the petitioner's Norwich plant, together with any usable inventories remaining on hand at the close of the year 1928. The recorded value of assets on the books of the Amolin Co. at December 31, 1928, other than trade-marks, was $19,496.21. Those assets which were not usable by the petitioner*1347 were sold or otherwise disposed of. The actual, realized value of the net tangible assets of the Amolin Co., other than trade-marks, was less than the recorded book value. The opening entry on the books of the petitioner, recording the purchase of the capital stock of the Amolin Co. and the subsequent liquidation of the assets, set forth net tangible assets in the amount of $19,496.21, the same value recorded on the books of the Amolin Co., and after making an adjustment of $914.70 for an *328 operating loss sustained by the Amolin Co. from November 20 to December 31, 1928, the balance of the purchase price in the amount of $654,589.09 was recorded on the petitioner's books as the cost of trade-marks acquired from the Amolin Co. The two trade-marks, which were registered under No. 59178, dated January 1, 1907, and renewed January 1, 1927, and No. 126943, dated October 14, 1919, were duly assigned by the Amolin Co. to petitioner under date of December 22, 1928. Apparently "Amolin" is a coined word having no particular significance. This trade-marked word has been used continuously in the petitioner's business and that of its predecessors since about January 1, 1893. *1348 It originated with the Matteson Rubber Co,, from which company it was acquired by the Lodi Co. and transferred to the Amolin Co. The books of the Amolin Co. showed items amounting to $138,000 as the cost of acquisition of trade-marks. This amount included $50,000 paid to the Lodi Corporation on August 1, 1919, and other payments to Pray, inventor of the formula, up to December 31, 1928. The Amolin Co. purchased the assets of the Lodi Co. for $60,000 cash, of which $10,000 was to cover physical assets and $50,000 was allocated to the purchase or cost of the trade-marks. In computing the claimed annual depreciation deductions in respect of the Amolin trade-marks petitioner included in the depreciation base, in addition to the recorded book cost of $654,589.09, the liability assumed by the petitioner to pay Pray $500 per month during his lifetime, computed according to annuity tables. The additional cost so computed by the petitioner amounted to $23,086, making a total cost of the trade-marks on this basis in the amount of $677,675.09. The trade-marks were estimated by the petitioner to have a remaining useful life of 14 1/2 years, resulting in the annual exhaustion deduction*1349 of $46,736.21 claimed by the petitioner. Neither the petitioner nor its stockholders owned any of the capital stock of the Amolin Co. prior to November 12, 1928. OPINION. TRAMMELL: In its returns petitioner deducted from gross income on account of exhaustion of its trade-marks, and now contends it is entitled to deduct each year, an aliquot part of the total cost of the trade-marks. Respondent disallowed the deductions claimed, and asserts that trade-marks are not subject to exhaustion. The statute (section 23(k), Revenue Act of 1928) provides that in computing net income there shall be allowed as deductions, among other things, "A reasonable allowance for the exhaustion, wear and *329 tear of property used in the trade or business, including a reasonable allowance for obsolescence." It is not questioned here that trade-marks constitute property, nor that the petitioner used its trade-marks in its business. It is elemental to say that, under the quoted statute, deductions are allowable only in respect of property used in the trade or business which is being exhausted by the passage of time or worn out and consumed by use. Obviously, of course, trade-marks, like*1350 other intangibles, are not subject to physical wear and tear. The issue, then, which is purely one of law, is resolved into the question, whether trade-marks may be the subject of exhaustion allowances. Rights in trade-marks are of common law origin, ; certiorari denied, . The right to a trade-mark exists at common law, , and has long been protected thereby, ; affd., . A trade-mark does not derive its existence from any statute, state or Federal, but exists independent of statutes, and is protected even in the absence thereof. Trade-marks are not created by the trade-mark statutes. Such statutes merely fortify the common law right to a trade-mark by conferring the statutory title on the owner. Authorities cited, supra, and . The value of a registered trade-mark does not cease upon expiration of the registration period. Registration under the Federal law protects only in interstate*1351 commerce, and the rights of the owner of such a trade-mark will be protected by the courts even after expiration of the registration. Hence, prior to the complete abandonment of a trade-mark the period of its useful life can not be forecast or determined. There is no determinable period over which cost may be spread. Certainly it is not the period of registration, for the trade-mark is still valuable and enjoys protection of the law after expiration of that period. On this ground alone it would be necessary to disallow petitioner's claims. However, another and equally difficult obstacle to petitioner's contention is the fact that the value of a trade-mark, registered or otherwise, is not exhausted by use nor the passage of time. So long as it is used in connection with a going business, it may safely be said that, barring obsolescence which results in disuse or abandonment, the value normally increases. And it may be noted on this point that no claim is made hre on account of abandonment or obsolescence. *330 The principle stated is well illustrated by the facts of the instant case. The Amolin Co. acquired*1352 the trade-marks in question from the Lodi Co. and its books disclosed a total cost of the trade-marks in the amount of $138,000. Thereafter, the Amolin Co. sold the trade-marks to the petitioner for more than $677,000, notwithstanding the intervening use and lapse of time. There are no facts disclosed by the record before us to justify the conclusion that the value of the petitioner's trade-marks is being lessened either by use or the passage of time. The inherent quality of trade-marks is such that they are not subject to exhaustion. A trade-mark is essentially an inseparable part of, or the outward symbol of, good will. In , it was pointed out that: A trade-mark is not only a symbol of an existing good will, although it commonly is thought of only as that. Primarily it is a distinguishable token devised or picked out with the intent to appropriate it to a particular class of goods and with the hope that it will come to symbolize good will. So far as concerns exhaustion, or the allowance of deductions therefor, trade-marks must be considered in the same classification as good will; in fact, *1353 good will embraces trade-marks. In , following its prior decision in , the Supreme Court held that the taxpayer was not entitled to deduct for exhaustion or obsolescence of good will, and specifically treated good will "as embracing trade-marks, trade brands and trade names." In the Renziehausen case the Circuit Court of Appeals in its opinion (; affd., supra ) said: Trade-marks, trade brands and trade names are closely related to good will and no attempt has been made to segregate or differentiate them. The Circuit Court of Appeals for the Eighth Circuit * * * in the case of * * * held that a deduction for obsolescence of the good will of a brewing company was not allowable * * * because the allowance for obsolescence is limited to such property as is susceptible to exhaustion, wear and tear by use in the business, and good will is not such property. Good will is not susceptible of being disposed of independently, that is, separate and*1354 apart from the business to which it attaches. . "Good will is the favor which the management of a business wins from the public." It has no existence separate and apart from an established business, and it can not be the subject of a loss except on the termination of the business and the sale of the assets. . *331 The petitioner is not here claiming a loss of the value of good will represented by its trade-marks on account of obsolescence or abandonment of the trade-marks upon the termination of the business to which they appertain. In , we said on this subject: The intangible property which the petitioner asserts is subject to obsolescence consists of good will, trade names, and trade-marks. Such assets have value, but that value is so interwoven with the operation of the business, so much an inseparable part of the going concern to which they appertain, that the ascertainment of such value is difficult and their sale, except as component parts of*1355 a going business concern, is all but impossible. They are not subject to physical wear and tear incident to their use in the business operations of their owner, nor ordinarily is the period of their useful life limited either by contract or statute. No one would argue that such intangibles are subject to annual losses due either to wear and tear or exhaustion even if their cost or capital value could be ascertained. Respondent's action in disallowing deductions for exhaustion of trade-marks is approved. Judgment will be entered for the respondent.