# Medd v. Commissioner

> United States Tax Court · October 22, 1968 · 27 T.C.M. 1224

URL: https://www.frixlaw.com/law-library/cases/4619715

## Case

- **Full name:** Richard L. Medd and Alberta E. Medd <sup id="fnr_fnote1"><a href="fn_fnote1" id="">1</a></sup> v. Commissioner.
- **Court:** United States Tax Court
- **Decided:** October 22, 1968
- **Citations:** 27 T.C.M. 1224; 1968 T.C. Memo. 244; 1968 Tax Ct. Memo LEXIS 55
- **Precedential status:** Unpublished
- **Opinion:** Opinion
- **Cited by:** 6 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4619715

## Opinion text

Richard L. Medd and Alberta E. Medd, et al. 1 v. Commissioner.
Medd v. Commissioner
Docket Nos. 4576-63-4580-63, 4582-63.
United States Tax Court
T.C. Memo 1968-244 ; 1968 Tax Ct. Memo LEXIS 55 ; 27 T.C.M. (CCH) 1224 ; T.C.M. (RIA) 68244 ;
October 22, 1968 , Filed
Francis B. Stine, 135 S. LaSalle St., Chicago, Ill., for the petitioners in docket Nos. 4576-63 through 4580-63. John F. Kelly and Duane P. Benson, for the petitioner in docket No. 4582-63. Donald J. Forman, for the respondent. 1226
WITHEY
Memorandum Findings of Fact and Opinion
WITHEY , Judge: The Commissioner has determined deficiencies in the income tax of the petitioners for the indicated years as follows: Petitioners Docket No. Year Deficiency
Richard and Alberta Medd 4576-63 1955 $ 5,086.48
Cecil and Mildred Medd 4577-63 1955 16,434.27
Robert and Nancy Medd 4578-63 1955 5,120.66
Ralph and Jean Medd 4579-63 1955 5,290.48
Ronald and Roma Medd 4580-63 1955 5,216.48
Lark Sales Company 4582-63 1955 109,791.04
1956 93,635.42
1957 69,875.71
1958 52,118.70
*57 As a result of concessions by the parties, the issues presented for determination are as follows:
In the cases of petitioners Medd, docket Nos. 4576-63 through 4580-63
(1) Whether the gain realized in 1955 by Ohio Dairy Queen, a partnership, sometimes hereinafter referred to as the Medd Partnership, from the sale of its Dairy Queen businesses and properties in Ohio and Eastern New York to Lark Sales Company constituted capital gain or ordinary income, and (2) whether a deduction of $39,503.83 taken by Medd Partnership in its partnership return of income for 1955 for legal expenses constituted an obligation of Lark Sales Company and therefore was not deductible as a business expense by the partnership.
In the case of Lark Sales Company, docket No. 4582-63
(1) Whether Lark's taxable income for 1955 should be increased by an amount of $150,000 as representing the purchase price of the Medd Partnership's Ohio and Eastern New York Dairy Queen businesses and properties which was written off by Lark on its books and used by it in its income tax return for 1955 to reduce its taxable income for that year, and (2) whether a deduction of $39,503.83 taken by Lark for 1955 for legal *58 fees constituted a capital expenditure incurred by it in its acquisition of the Medd Partnership's Dairy Queen businesses and properties in Ohio and Eastern New York.
Additional Issues in the case of Lark Sales Company, docket No. 4582-63
(3) Whether during 1956, 1957, and 1958, the petitioner was the owner of the property interest of "2( East" and thereby realized taxable income from Dairy Queen royalties in the amounts of $53,795.04, $62,079.19, and $44,938.09 during the respective years, (4) whether the petitioner purchased the property interests of the Medd Partnership in 1955 in Ohio and Eastern New York and thereby realized income from Dairy Queen royalties and other receipts from those areas in the amounts of $56,597.69, $45,787.99, and $46,342.76 during 1956, 1957, and 1958, respectively, (5) whether income accruals by petitioner for expense charges to Ar-Tik Systems, Incorporated, during 1955, 1956, 1957, and 1958 in the amounts of $93,053.35, $53,568.20, $27,140.73, and $12,279.19, respectively, and reported by petitioner as sales for such years, should be eliminated from the income reported by petitioner in its income tax returns for those years, (6) whether the petitioner *59 was entitled to deduct as ordinary and necessary business expenses for 1956, 1957, and 1958 the amounts of $59,913.50, $29,408.25, and $13,570.50, respectively, which were accrued by petitioner as payable to L.S. Murchie & Company as accounting fees, (7) whether petitioner is entitled to a reduction of its income for 1955 of $8,538.95, representing a portion of an amount of $17,077.91 (so-called Grafton expenditures), deducted by petitioner as part of its cost of goods sold, and which was disallowed by respondent, (8) whether petitioner is entitled to a deduction from its income for 1955 of $4,155.35, representing expenditures, hereinafter referred to as the Rockford expenditures, which the petitioner in its income tax return deducted as cost of goods sold and which respondent disallowed, and (9) whether petitioner sustained a net operating loss in 1958 of $186,906.43 which was available for being carried back and allowed as a net operating loss deduction in 1955, 1956, and 1957. 1227
Findings of Fact
In the cases of petitioners Medd and in the case of Lark Sales Company Issues 1 and 2
Some of the facts have been stipulated and are found accordingly.
Petitioners Cecil *60 R. Medd and Mildred I. Medd are husband and wife and the parents of four sons, namely, Richard L. Medd, Robert R. Medd, Ralph C. Meed, and Ronald A. Medd. Cecil R. and Mildred I. Medd filed their Federal joint income tax return for 1955 with the district director in Chicago, Illinois.
Petitioners Richard L. Medd and Alberta E. Medd are husband and wife. They filed their Federal joint income tax return for 1955 with the district director in Chicago, Illinois. Alberta is a petitioner in this case only by reason of her signing the joint income tax return.
Petitioners Robert and Nancy Medd are husband and wife. They filed their Federal joint income tax return for 1955 with the district director in Chicago, Illinois. Nancy is a petitioner in this case only by reason of her signing the joint income tax return.
Petitioners Ralph and Jean Medd are husband and wife. They filed their Federal joint income tax returns for 1955 with the district director in Chicago, Illinois. Jean is a petitioner in this case only by reason of her signing the joint income tax return.
Petitioners Ronald and Roma Medd are husband and wife. They filed their Federal joint income tax return for 1955 with the *61 district director in Chicago, Illinois. Roma is a petitioner in this case only by reason of her signing the joint income tax return.
At all times here material, Ohio Dairy Queen (sometimes known as Cecil R. or C.R. Medd and Sons) was a partnership, and sometimes hereinafter is referred to as the Medd Partnership. The members of the partnership were Cecil R. Medd, Mildred I. Medd, Richard L. Medd, Robert R. Medd, Ralph C. Medd, and Ronald A. Medd. The partnership through predecessors in interest was formed in 1946. It reported its income on the basis of a calendar year and filed its Federal partnership return of income for 1955 with the district director in Chicago, Illinois.
Tasty Bakery, Inc., an Illinois corporation, was organized on or about December 28, 1945. On or about January 20, 1950, the corporate name was changed to Lark Sales Company, which sometimes hereinafter is referred to as Lark.
At all times material herein, the principal office of a Dairy Queen business conducted by Lark was in the Moline National Bank Building, Moline, Illinois.
Lark filed its Federal income tax returns for 1955 on the calendar year basis with the district director in Chicago, Illinois.
*62 Leland S. Murchie, sometimes hereinafter referred to as L.S. Murchie or as Murchie, has been a certified public accountant since 1934. He is certified to practice in the State of Illinois. At all times here material, Murchie operated his accounting business in Illinois under the name of L.S. Murchie & Company. Prior to opening his own firm, he was associated with a nationally known firm of certified public accountants for 16 years. In 1938, Murchie was admitted to practice before the Tax Court of the United States and presently is authorized to practice before it. Murchie prepared the Federal income tax returns of the Medds for the years 1949 through 1954 and from time to time during those years advised them as to their business and financial affairs. He also collaborated in the preparation of a partnership agreement for the Medds who placed trust and confidence in him.
Murchie acquired all of the issued and outstanding common stock of Lark, consisting of 64 shares, which were issued to him on January 2, 1952. At all times here material, he was the sole owner of all of the issued and outstanding shares of common stock of Lark.
McCulloughs Dairy Queen, Inc., an Illinois corporation, *63 was organized on or about April 1, 1954. All of its issued and outstanding common stock, consisting of 100 shares, was issued to Murchie on April 2, 1954, who paid $1,000 therefor. McCulloughs Dairy Queen, Inc., was organized solely for the purpose of holding title to the trademark "Dairy Queen." It was never intended that it engage in other operations.
On or about May 18, 1937, Harry M. Oltz became the owner of United States patent No. 208097 1, sometimes hereinafter referred to as the Oltz patent, on a machine, sometimes hereinafter referred to as a freezer, designed to produce a soft frozen product from milk with sweetener, stabilizer, and flavor added, which product has become known as soft ice cream or ice milk. The Oltz patent expired May 18, 1954. 1228
On or about July 31, 1939, Oltz entered into an agreement, sometimes hereinafter referred to as the Western Agreement, with H.A. McCullough pursuant to which, among other things, the latter acquired the exclusive license to use, manufacture, and sell the above-mentioned freezer in the following States: Minnesota, Wisconsin, Illinois, Missouri, Iowa, Arkansas, Louisiana, Texas, Oklahoma, Kansas, Nebraska, North Dakota, *64 South Dakota, Montana, Wyoming, Colorado, New Mexico, Arizona, Utah, Idaho, Washington, Oregon, Nevada, and California. In 1939, McCullough originated the name "Dairy Queen" and thereafter used the name as a trade name in connection with the retail sale in the aforementioned States by him or by others licensed by him, or his sublicensees, of the soft frozen ice milk product made by freezers manufactured under the Oltz patent.
On or about June 11, 1940, Oltz assigned, transferred, and set over to Ar-Tik Systems, Incorporated, an Indiana corporation, hereinafter sometimes referred to as Ar-Tik, all his right, title, and interest in the Oltz patent.
On or about September 7, 1946, Ar-Tik entered into an agreement with McCullough by which Ar-Tik licensed McCullough to use, manufacture, and sell, and to permit others to use, manufacture, and sell, freezers manufactured under the Oltz patent, until the expiration of that patent, in certain States of the United States lying east of the Mississippi River, including the States of Ohio and New York.
On or about November 7, 1946, McCullough registered the name Dairy Queen under the Ohio General Code by filing in the office of the Secretary *65 of State of the State of Ohio, a proof of publication of the name Dairy Queen as a trade name.
On or about December 30, 1946, H.A. McCullough, together with J.F. McCullough (Sellers), entered into a patent license agreement by which they granted to Cecil, Mildred, Richard, and Robert Medd (Buyers), the exclusive right to use the Oltz patent in the State of Ohio for the life of the patent. In consideration for these rights and privileges, the buyers agreed, inter alia, to pay the sellers the sum of $40,000 of which $10,000 was payable upon execution of the agreement. The balance, $30,000, which was paid in full prior to 1954, was payable at the rate of 15 cents per gallon on all mix used or sold in the State of Ohio, with a minimum payment per season of $750 for each retail store in the State. In addition, the buyers agreed to pay to Ar-Tik monthly, the sum of 4 cents per gallon in the nature of a royalty on all mix thereafter used in the State of Ohio. These payments to Ar-Tik were to continue for the life of the contract and so long as the buyers had the rights granted to them in said contract. Under an agreement between Ar-Tik and the McCulloughs, Ar-Tik, upon receipt of the 4 *66 cents per gallon, was to pay one-half thereof to the McCulloughs.
About the same time as their execution of the aforesaid patent license agreement with the Medds, H.A. McCullough and J.F. McCullough, assigned all their right, title, and interest in the trademark and trade name Dairy Queen in the State of Ohio to Cecil and Richard Medd.
At the time of the foregoing assignment, the name Dairy Queen had achieved a significance in the minds of the general consuming public in Illinois, Iowa, and other States in the United States lying west of the Mississippi River, as being descriptive of a soft frozen ice milk product dispensed in retail stores and displaying and conducting business under the name Dairy Queen as well as a style and mode of a store operation.
Cecil, Mildred, Richard, and Robert Medd assigned all their rights, titles, and interest in property, including the trade name Dairy Queen, acquired from H.A. McCullough and J.F. McCullough, to the Medd Partnership.
From and after December 30, 1946, the Medd Partnership continuously used the name Dairy Queen as a trade name in connection with the sale to the public at retail of ice milk made in freezers manufactured under the *67 Oltz patent.
On July 31, 1952, the Medd Partnership registered the name, title, or designation Dairy Queen with the Secretary of State of the State of Ohio in accordance with the provisions of the General Code of that State.
Upon acquiring the exclusive right to use the aforesaid freezer patent and trade name Dairy Queen in the State of Ohio, the Medd Partnership entered into franchise agreements with district franchise operators, sometimes hereinafter referred to as Ohio district operators, under which the latter were granted the right to use freezers built under the Oltz patent during 1229 the life of the patent in specified counties of the State of Ohio. Contemporaneously therewith, the Medd Partnership granted and licensed to each Ohio district operator the right to use the trade name Dairy Queen in connection with the sale of such soft frozen ice milk during the period covered by the franchise agreement. Each Ohio district operator franchise agreement entered into with the Medd Partnership also provided that the district operator could by subcontract assign or transfer his interests under the contract to third persons. The Ohio district operator franchise agreements all *68 expired by their terms on May 18, 1954, the date of the expiration of the Oltz patent.
In turn, each Ohio district operator (some of whom operated retail stores directly) entered into written subfranchise agreements with retail store operators, hereinafter sometimes referred to as Ohio store operators, in his respective territory, authorizing the latter persons to use the freezers built under the Oltz patent and also to use the name Dairy Queen as a trade name in connection with the sale of the soft frozen ice milk produced and sold by the Ohio store operators in a specified area within the Ohio district operator's territory. The monthly mix payments required of the store operators varied from 34 cents or 35 cents a gallon to 45 cents a gallon in the main, and in one instance, 50 cents a gallon was required.
Except as the Medds licensed and franchised district operators and except as the latter, in turn, licensed and franchised retail store operators, the Medds continued from December 30, 1946, until September 1, 1955, to be the sole users of the trade name Dairy Queen in the State of Ohio in connection with the merchandising and sale of soft frozen ice milk.
Boyd Wagner, Incorporated, *69 sometimes hereinafter referred to as Wagner, at all times here material was an Ohio district operator. It became a district operator for the Medds on July 22, 1948. A typical Ohio store operator's subfranchise agreement made prior to May 18, 1954, is one entered into between Wagner and Harold E. Peters and Clarence E. Rensch, Ohio store operators, on January 26, 1950. Under this type of agreement, each Ohio store operator was licensed to use the patented freezer and the trade name Dairy Queen. Each Ohio store operator agreed that the Ohio district operator owned the exclusive right to the use of the trade name Dairy Queen in the area covered by the agreement; that the store operator desired to purchase the exclusive right of the trade name; and that the district operator agreed to sell and transfer to the store operator the exclusive right to use the name Dairy Queen, subject to certain specified conditions. The store operator further agreed as follows:
Both Parties agree that said trade name "Dairy Queen" has substantial value, that it is being used in many localities throughout the country, and that the restrictions, limitations, and conditions herein imposed are necessary, equitable, *70 and reasonable for the general benefit of the parties to this contract and all other parties enjoying any lawful interest in said trade name.
Upon breach by the licensee of the license agreement, each Ohio district operator could immediately terminate the contract whereupon all rights of the licensee in the trade name Dairy Queen would cease.
In 1949, the Medds were already, through their licensees, carrying on a large and successful business of vending soft frozen ice milk under the trade name Dairy Queen in Ohio. By this time, the Medds had entered into 15 district operator franchise agreements covering 22 counties in Ohio, in addition to 21 counties in Ohio covered by the contract with Wagner.
Each Ohio store operator paid to the Ohio district operator from whom he received his license and in whose territory he operated, a royalty of a certain amount of money per gallon of mix used to produce the ice milk, which royalty was prescribed in the license agreement between him and his Ohio district operator. Each Ohio district operator in turn paid to the Medd Partnership a royalty of a certain amount of money per gallon on mix used by Dairy Queen stores located in his district *71 and sublicensed by him, which royalty was prescribed in the contract between him and the partnership.
During the year 1947, C.R. Medd originated the trade phrase "The Cone with the Curl on Top" to describe the ice milk cone made with Dairy Queen ice milk and sold in Dairy Queen prototype stores. The Medd Partnership had an engraving made of an advertisement in which the phrase was employed in conjunction with the name Dairy Queen as descriptive of the ice milk product and the places or establishments at which it could be obtained. From the engraving the Medd Partnership 1230 prepared ad mats for distribution to and use by Ohio store operators. The Medd Partnership authorized their Ohio district operators and Ohio store operators to use the phrase in connection with the merchandising of ice milk and made the mats available to them. The Ohio district and store operators have since then continuously so used that phrase in the State of Ohio.
On or about August 17, 1949, the Medd Partnership assigned its right, title, and interest in the phrase "The Cone with the Curl on Top" to the Dairy Queen National Trade Association, Inc., reserving to itself the exclusive right to use the *72 phrase in the State of Ohio.
The Dairy Queen National Trade Association then registered the phrase with the United States copyright office on August 17, 1949, and has used that phrase on advertising throughout the United States. All retail Dairy Queens stores, as well as all Dairy Queen state and district operators throughout the United States and in Canada and Mexico, put the phrase to use as a trade phrase in conducting Dairy Queen business.
Prior to the time C.R. Medd conceived the trade phrase "The Cone with the Curl on Top" there had been developed and placed in use in all Dairy Queen stores a method of drawing the ice milk from the freezer so as to achieve a particular configuration of the ice milk in the cone, cup, dish, or other receptacle in which the product was dispensed. This cone curl configuration has ever since been employed in all Dairy Queen stores in other promotional and advertising materials.
District and store operators were trained and instructed in the appropriate method of drawing the ice milk product from the freezers and a uniform configuration was employed in all Dairy Queen stores. A distinctive feature of the configuration is a looped "doughnut hole" *73 curl on the top of the ice milk. The configuration with this closed loop curl has been at all times here material employed in all Dairy Queen stores in Ohio and elsewhere in roof and road signs, billboards, and placards as a label or identification of the Dairy Queen store and of the ice milk known to the public as Dairy Queen which was dispensed in those stores. The configuration and curl have become in the minds of the consuming public in Ohio and elsewhere in the United States, Canada, and Mexico a means of identifying the ice milk and the source or place the same may be obtained. Up until it was sold to Lark on September 1, 1955, the configuration and curl on the top thereof was a valuable property right of the Medds in Ohio as a means of identification and source of the Dairy Queen product.
Prior to the opening of the first Dairy Queen stores in Ohio, the Medds had prepared plans and specifications of a distinctive prototype building on which the name Dairy Queen was prominently displayed and to be used by all Dairy Queen retail stores in Ohio. The Medds supplied blueprint copies of these plans and specifications to each Ohio district operator to be delivered by him to each *74 Ohio store operator in his territory and to be used by them in the construction of the store buildings in which the Dairy Queen ice milk was to be sold. Each Ohio district operator delivered the plans and specifications to his store franchise operators and they used and followed them in the construction of their stores. Substantially all of the more than 200 Dairy Queen operated stores in Ohio have been built on the basis of these plans and specifications developed and distributed by the Medds and, as a result, the Ohio Dairy Queen stores are of a distinctive style, architecture, shape, design, and appearance. The name Dairy Queen and the distinctive curl configuration have been prominently displayed upon the outside of each store structure and the size and conformity of lettering is uniform as to each store structure.
After December 30, 1946, the Medds spent large sums of money advertising and promoting the name Dairy Queen and the distinctive cone configuration and since 1947, the phrase "The Cone with the Curl on Top" in Ohio. The Medds and their district operators as well, devoted substantial amounts of their time, energy, skill, and competence to the inspection and supervision *75 of all Dairy Queen retail stores operating in Ohio in order to insure the maintenance of uniformity and high standard of merchandising methods and uniform cleanliness and attractiveness of the stores themselves.
The Medds also made substantial expenditures of time and money: in the development, improvement, and inspection of freezers used in the making and sale of ice milk at retail for the purpose of maintaining and improving the quality of the ice milk product sold at Dairy Queen 1231 stores; in the development of methods of improving the quality, taste, and uniformity of the ice milk sold at Dairy Queen stores in Ohio; in the development of uniform designs and markings for containers in which the product is sold; in the training and education of franchise store operators and their employees in the proper operation of Dairy Queen stores; and in identifying the trade name Dairy Queen in the minds of the public in Ohio as describing and identifying an ice milk product of uniform and excellent quality, texture, taste, and appearance sold in the distinctive and uniform appearing and operated prototype retail stores using Dairy Queen and "The Cone with the Curl on Top" as trade *76 names and the distinctive cone configuration as a mark of identification of Dairy Queen stores and the ice milk product known as Dairy Queen dispensed in those stores.
Except as hereinafter found, all Ohio store operators paid royalties to their respective Ohio district operators and their respective Ohio district operators, in turn, paid the Medds royalties on ice milk produced and sold in Ohio.
On or about March 14, 1950, H.A. McCullough and J.F. McCullough, doing business as McCulloughs Dairy Queen, entered into a freezer and territory agreement by which they granted to the Medd Partnership, the exclusive right to purchase and use freezers manufactured under the Oltz patent in a certain described territory located in the eastern part of the State of New York for the life of the patent. In addition thereto, the Medd Partnership was given the exclusive right to use the trademark Dairy Queen in the development of that territory.
In consideration for such exclusive rights and privileges granted by McCulloughs Dairy Queen, the Medd Partnership agreed, inter alia, to pay McCulloughs Dairy Queen the sum of 10 cents per gallon on all mix used or sold within the above-mentioned territory. *77 In addition, the Medd Partnership agreed to pay to Ar-Tik the sum of 4 cents per gallon in the nature of a royalty on all mix thereafter used within the abovementioned territory. The Medd Partnership also agreed to collect not less than $1,000 and not more than $3,000 from each subcontractor for each retail store operated in that territory; and further agreed to pay to McCulloughs Dairy Queen one-third of such amounts as they were received.
Sometime in August 1951, the agreement referred to in the preceding two paragraphs was amended to provide that where the Medd Partnership entered into contracts with third persons for the sale of Dairy Queen rights in the areas covered thereby, such contracts contemplated that the third person subfranchise out, all or a substantial part of his rights thereunder, to other parties. Then and in such case, the following changes were to apply: (1) in lieu of a royalty of 10 cents per gallon of mix used, McCulloughs Dairy Queen was to receive one-half of all royalties received by the Medd Partnership under such contracts, provided however, that the minimum royalty to be thus received by McCulloughs Dairy Queen was to be 8 cents per gallon of mix used, *78 and (2) McCulloughs Dairy Queen was to receive one-half instead of one-third of the amount charged by the Medd Partnership to each subcontractor for each retail store operated in that territory.
On or about August 1, 1952, the agreement was further amended to provide that the territory encompassed in the original agreement was to be extended so as to include the counties of Queens, Albany, and Schenectady in the State of New York.
On May 18, 1954, the Oltz patent expired. Thereafter, certain store franchise operators in the State of Ohio announced that they would and, in fact, did under claim of their own right, use the trade name Dairy Queen, the trade phrase "The Cone with the Curl on Top," and the distinctive cone-curl configuration in connection with the sale by them of ice milk products in their franchise territories in the State of Ohio without paying to the Medd Partnership, or persons authorized by that partnership to use or license the use of such name, phrase, and distinctive configuration, the usual royalty paid by franchised operators of Dairy Queen stores and without recognizing their obligation to accept the supervision and direction of the partnership as to the manner *79 of operating their business and the maintenance of standards prescribed for the operation of Dairy Queen stores.
In 1954, there were approximately 200 retail Dairy Queen stores in Ohio. After May 18, 1954, when the freezer patent expired, about one-third of those stores ceased paying royalties.
On June 9, 1954, the Medd Partnership in Medd v. Boyd Wagner, Incorporated, et al., 139 F. Supp. 399 (1955) , filed a complaint in the United States District Court for the 1232 Northern District of Ohio, Western Division, at Toledo, Ohio (Civil No. 7214) against Wagner and certain named individuals who were Ohio store operators in one or more of the 21 counties in Ohio that had been sublicensed to Wagner by the partnership, to restrain the unauthorized use of the trade name Dairy Queen and of the trade phrase "The Cone with the Curl on Top."
In the civil action referred to in the preceding paragraph, the Medd Partnership sought to prevent the defendants, in the absence of consent of the partnership, from using the trade name Dairy Queen and the trade phrase in the vending of soft frozen ice milk and from representing to the public that they were part of the Dairy Queen *80 organization, in Ohio and elsewhere, vending Dairy Oueen ice milk. The primary basis of and the theory of the complaint were that the Medds were the exclusive owners in the State of Ohio of the trade name and trade phrase, that use of this name and phrase by the defendants was common-law unfair competition, and that defendants were using the property of the Medds without permission. The defendants' primary basis of and the theory of defense were that the trade name and trade phrase were so coupled with the freezer manufactured under the Oltz patent that the right to the exclusive use of the trade name and trade phrase expired with that patent.
On June 25, 1954, defendant Wagner filed its answer and on June 28 the court issued an Order of Injunction Pendente Lite, whereby the defendants were ordered and directed to pay into the registry of the court during the pendency of the action, the royalties required under the terms of the contracts. On July 30, the Medd Partnership filed an amendment and supplement to the complaint in which it joined additional Ohio store operators who were operating under subfranchise agreements from Wagner as party defendants, and the injunction was extended *81 to apply to these additional defendants.
On September 9, 1954, the five original individual defendants each filed separate answers and thereafter, through their counsel, stated to the court that they had no right to the continued use of the trade name and trade phrase without permission from the plaintiff, Medd Partnership, or the designated rightful owner, and that they would continue to operate and pay their stipulated royalties into the registry of the court and would abide by the eventual decision of the court. On October 4, 1954, the individual defendants named in the amended supplemental complaint who were operators of sixteen retail stores, filed their answers in which they set up nine separate defenses to the complaint. On December 2, 1954, Wagner filed its offer to confess judgment in which it recited that its subfranchise agreement, as well as all subagreements entered into by it with the individual store operators who were defendants, were assigned to the Medd Partnership. On the same date, the offer was accepted by the partnership which acquired any and all right, title, and interest of Wagner in the subject matter of the litigation.
The Wagner case was tried in December *82 1954.
On June 10, 1955, the United States District Court filed its opinion and found for the Medd Partnership. Contemporaneously therewith, the court retained jurisdiction over any accounting claimed by the Medd Partnership for damages suffered by reason of the acts complained of.
The District Court's final decree was entered on August 5, 1955. To the extent pertinent hereto, the court's findings and conclusions were as follows:
1. The expiration of United States patent No. 208097 1 relating to the freezer did not affect plaintiffs' title to and right of exclusive use of the trade name Dairy Queen, the trade phrase "The Cone with the Curl on Top," or the distinctive cone-curl configuration, or their rights to license the exclusive use thereof in Ohio.
2. The district operator franchise agreement between the partnership and Wagner expired on May 18, 1954, the date on which the patent expired.
3. Each of the store operator franchise agreements between Wagner and the store operators expired on May 18, 1954. As of that date, any and all rights granted the respective store operators by such franchise agreements ceased and thereupon became and were again vested exclusively in plaintiffs.
*83 4. The franchise agreements entered into subsequent to May 18, 1954, between Wagner and store operators were of no force and effect. 1233
5. Plaintiffs were the owners of and had the exclusive right to use the trade name Dairy Queen, the trade phrase "The Cone with the Curl on Top," and the distinctive cone-curl configuration in the State of Ohio in connection with the promotion, sale, and merchandising of ice milk.
6. Plaintiffs had shown that they were entitled to a permanent injunction enjoining the defendants from the use, in connection with the merchandising, promotion, and sale of ice milk, of the name Dairy Queen, the phrase "The Cone with the Curl on Top," and the distinctive cone-curl configuration, in the State of Ohio, without express permission of plaintiffs.
7. Plaintiffs had shown that they were entitled to an accounting from the defendants of all the gains and profits made by them by reason of the acts of defendants complained of by plaintiffs, and to recover of defendants all damages suffered by plaintiffs from the acts of defendants, and the costs of the action.
8. Each of the defendants (other than Wagner), was ordered to pay to plaintiffs the sum *84 of 37 1/2 cents for each gallon of mix by him used or sold while he was (1) operating his store under the name Dairy Queen, or (2) using in his operation the phrase "The Cone with the Curl on Top," or (3) selling ice milk in the form of a distinctive Dairy Queen configuration with a looped "doughnut hole" curl on top of the portion of the ice milk sold, except for mix on which royalties or license fees at the rate of 37 1/2 cents per gallon of mix, or at some other return agreed upon by and between the particular defendants and Wagner or plaintiffs, had already been paid by that defendant to plaintiffs or to Wagner.
9. The clerk of the court was ordered to pay to plaintiffs the moneys which had been deposited with him pendente lite pursuant to the orders of the court.
Shortly after the Medd Partnership filed its complaint in the Wagner suit, the partnership instituted in the Federal courts of Ohio two similar suits, Medd, et al. v. Abner Smith, et al. (No. 7240), and Medd, et al. v. Kenneth Conoway, et al. (No. 3417). The Abner Smith suit was filed in the same court as the Wagner suit and involved two district operators (Abner Smith who operated four stores and John Mulberin *85 who operated one store), as well as the operators of seven retail stores, several of whose district operators were not joined. The Conoway action was solely against 26 store operators representing a total of 17 stores. While a temporary injunction similar to that obtained in the Wagner case was entered in the Smith action, none was ever entered in the Conoway case.
Notice of appeal of the court's decision in the Wagner case was due on October 9, 1955. Since notice of appeal was never filed, the right of appeal expired on that date.
By an undated instrument entitled "Assignment of Trade-Mark and Trade-Name," Cecil and Richard Medd, on behalf of all the members of the Medd Partnership, purportedly sold and assigned to McCulloughs Dairy Queen, Inc., all their right, title, and interest in and to the trademark and tradename Dairy Queen as used on and in association with the sale of the frozen ice milk product, together with the goodwill of the business in connection with which the trademark and trade name was used. While the signatures of Cecil and Richard Medd appearing on this instrument are theirs, such signatures were never acknowledged.
Neither McCulloughs Dairy Queen, Inc. *86 , nor Lark or Murchie paid any cash or property to the Medds in connection with the purported "assignment" referred to in the preceding paragraph.
Contemporaneously with the execution of the above assignment, Cecil and Richard Medd, on behalf of all the members of the Medd Partnership, signed an undated second instrument entitled "Territory Agreement" under the terms of which Lark, as an alleged licensee of McCulloughs Dairy Queen, Inc., purported to assign and transfer to the Medds the exclusive right to use the trademark and trade name Dairy Queen in the State of Ohio, and the Medds agreed to pay to Lark the sum of 4 cents per gallon of mix used in the preparation of the soft frozen ice milk product sold under that name. This undated instrument was signed for Lark by H. A. McCullough, Agent, and contained his acknowledgment, and also contained his individual acknowledgment dated September 20, 1954. There is no acknowledgment of either Cecil or Richard Medd contained in this instrument. Neither Lark nor Murchie received any cash or other property from the Medds in connection with this instrument. Nothing of value exchanged hands between the parties and the Medds have made no payments *87 to Lark pursuant to its terms. 1234
The two undated instruments referred to above were prepared by Murchie. They were not intended to have any force or effect but were intended to be held in "escrow" by Murchie and used by him solely in an effort to effect settlement of the Ohio litigation.
On October 30, 1954, the Medd Partnership entered into an executory agreement with McCulloughs Dairy Queen, Inc., and Lark. The agreement provided, in pertinent part, that the Medds owned the exclusive right to use the name Dairy Queen in the State of Ohio in connection with the sale of ice milk products; that the Medds had licensed by written contracts various district operators in Ohio to use the name Dairy Queen in designated areas in that State, subject however to the supervision and control of the Medds; and that the Medds had been engaged in the business of merchandising the ice milk products in Ohio under the trade name Dairy Queen by means of licensing, franchising, supervising, and furnishing of services to franchise operators. The parties thereto also agreed that the Medd Partnership immediately upon the entry of a final decree in the case of Medd, et al. v. Boyd Wagner, Incorporated, *88 et al., or at such prior time as the Medds might elect, would sell and transfer to McCulloughs Dairy Queen, Inc., their entire Dairy Queen business in the State of Ohio, including all of their rights under their license and franchise agreements with third persons, their obligation and right to supervise, inspect, and supply various other services to franchised operators and their entire right, title, and ownership in and to the name Dairy Queen in the State of Ohio. In consideration for these rights, Lark agreed, inter alia, to pay to the Medds the sum of 3 cents per gallon for all mix used in the State of Ohio in the production of the Dairy Queen product, from and after the date of transfer. This agreement was signed by Cecil Medd on behalf of the Medd Partnership. McCulloughs Dairy Queen, Inc., and Lark were signed for by "L. S. Murchie, Attorney in Fact."
Contemporaneously with the execution of the agreement referred to in the preceding paragraph, and in further consideration of the rights to be transferred under that agreement. Lark executed a second agreement which provided, in effect, that from the royalties or license or franchise fees collected by Lark for the use of the *89 name Dairy Queen in the State of Ohio from and after the date of the transfer, it would set aside the sum of 1 cent per gallon of mix used in Ohio, such moneys to be used by Lark for the furnishing of services to or for the benefit of Dairy Queen store operators in Ohio.
The executory agreements of October 30, 1954, referred to in the preceding two paragraphs were never consummated.
On October 4, 1955, and to be effective from and after September 1, 1955, the Medds, individually and as copartners, doing business as Dairy Queen Stores of Ohio, and doing business as Dairy Queen Stores of Eastern New York (as Sellers), and Lark Sales Company (as Buyer), entered into an agreement entitled "Contract of Sale," which sometimes hereinafter is referred to as the September 1, 1955, Contract of Sale. The agreement provided as follows:
WITNESSETH:
WHEREAS, Sellers [Medd Partnership] have agreed to sell, convey and transfer to Buyer [Lark] their entire Dairy Queen business in the State of Ohio and State of New York,
NOW, THEREFORE, Sellers for and in consideration of the sum of One Dollar ($1.00) and other valuable consideration in hand paid, the receipt and sufficiency whereof is *90 hereby acknowledged, do hereby sell, assign, transfer and deliver unto Buyer all rights, title, and interest in and to their businesses known as Dairy Queen Stores of Ohio and Dairy Queen Stores of Eastern New York, which include the entire Dairy Queen businesses of the Sellers in the State of Ohio and in the State of New York, including the trade name "Dairy Queen Stores of Ohio" and the trade name "Dairy Queen Stores of Ohio" and Eastern New York", together with the good-will in connection therewith, and including, not by way of limitation, all their rights under licenses and franchise agreements to and with third parties, and with the Buyer or its assignors, and all their right, title, interest and ownership in and to the trade mark and trade name "Dairy Queen", and the trade phrase, "The Cone with the Curl on Top," and the distinctive cone-curl configuration identified with the Dairy Queen product and store operation in the State of Ohio and the State of New York, as used on, and in association with, the sale of a frozen dairy product by the Sellers, and their licensees, together with the goodwill of said businesses in connection with 1235 which the said trade mark and trade *91 name "Dairy Queen" and the said trade phrase, "The Cone with the Curl on Top," and the distinctive cone-curl configuration are used, together with all assets of every kind and nature of said businesses, exclusive, however, of all automobiles, trucks, equipment, office furniture and fixtures, and cash not required by this Contract to be paid to Buyer.
Sellers may retain the books and records of said businesses for the years 1953, 1954 and 1955, and furnish copies thereof to Buyer. Said original books and records shall be turned over to Buyer after the final determination of Seller's Federal Income Tax for the years 1953, 1954 and 1955. Buyer shall keep and preserve all the books and records of the businesses turned over to Buyer under this Contract and shall, upon the request of Sellers, make said books and records available to Sellers or persons dedignated by them, for inspection or copying.
Sellers thereby transfer to Buyer, in addition to the aforesaid businesses, goodwill, and interests in trade, trade phrase and distinctive configuration, and other assets, the following rights:
(a) all rights in and to funds deposited in the United States District Courts in Toledo, Ohio, *92 in connection with the case of Medd, et al., v. Boyd Wagner, et al., now pending therein, which are in the amount of $7,461.28, of which $3,730.64 is the property of Buyer, and in addition, all right in and to all moneys paid voluntarily or otherwise, by the defendants in said action, in accordance with said action;
(b) all rights in and to royalties and license fees and damages for unfair competition which may be received or receivable, in connection with actions by Sellers now pending undetermined in the United States District Courts in Toledo, Ohio (Medd, et al. v. Smith, et al.), and Cincinnati, Ohio (Medd, et al. v. Conoway, et al.), including the amount which will or would upon receipt of said amount by Sellers, be the property of Buyer;
(c) all rights in and to moneys owed Sellers by Boyd Wagner, Inc., by reason of its receipts from store operators on and before June 30, 1955, which are in the amount of $3,210.00, of which $1,605.00 is the property of Buyer;
(d) all rights in and to moneys owed Sellers by Ron Baker, by reason of his operations for the year 1954, in the amount of $6,214.70, of which $3,754.40 is the property of Buyer;
(e) all rights in and to moneys owed *93 Sellers by reason of the operations of Joseph Florentine and Glenn Vore, and by reason of the operations of said other store operators in eastern New York during the winter of 1954-1955, which other store operators have not paid royalties or franchise fees with respect to such winter operations.
In addition, Sellers will transfer and deliver to Buyer 120 Capital Shares of National Dairy Queen Development Company.
Sellers will deliver to Buyer, on the execution of this Contract, the sum of $42,126.52 attributable to operations in Ohio, which sum is now held by Sellers but is the property of Buyer, and Sellers will deliver to Buyer Four Cents (4() per gallon on any mix used or sold in Ohio during the month of August, 1955, which has not been accounted for in said $42,126.52.
Sellers will deliver to Buyer the sum of $11,624.00, which is the property of Buyer as its share of royalties and franchise payments collected from operators in eastern New York for operations prior to September 1st, 1955, and which amount Sellers warrant is the amount due Buyer under a complete accounting, to the extent they were received, of all sums due Buyer to said date from said area.
Sellers acknowledge *94 that the sums referred to in the next preceding paragraphs, and all sums derived from collections of the above described Four Cents (4() payment, are the property of Buyer, and that Sellers neither have nor ever have had any right, title or interest in said sums.
IT IS HEREBY UNDERSTOOD AND AGREED by the parties hereto that except for the items described above, Sellers are retaining as their own property, all cash on hand, and are entitled to retain or receive, as the case may be, amounts due Sellers from other persons arising from operations by said other persons during the months of July and August, 1955. That said months due Sellers do not include the amounts which are the property of Buyer as received.
That the sums listed herein as the property of Buyer constitute a full and complete accounting, to the extent received, all sums due Buyer as Assignee of McCullough's Dairy Queen and Ar-Tik Systems, Incorporated.
It is further warranted by Sellers, with reference to the assets described herein, which are to be transferred to Buyer by Sellers, that there are no liens thereon, or actions or causes of action pending against the said partnerships or members thereof, except for *95 the claims involved in the actions pending in the United States District Courts in Toledo and Cincinnati referred to herein as against any of the 1236 said assets; and that Sellers have full right to deliver unto Buyer said assets at the present time or at the time they are received, except as may be determined by the Courts in the actions described above. It is further warranted by the Sellers that none of said assets have been pledged and/or anticipated, nor have the aforesaid partnerships, nor any of the members thereof, pledged any of the assets of said partnerships.
In furtherance of Sellers' desire to discontinue their business activities in Ohio and Eastern New York, the Sellers, individually and collectively, agree that they will not, for a period of two (2) years from the date hereof, engage, directly or indirectly, in the business of selling a frozen dairy product in the State of Ohio or in the State of New York under the present trade name or any other name.
That the Buyer shall have and hold the aforesaid unto itself, its successors and assigns, to its own proper use and benefit forever.
That in further consideration of the aforesaid Contract of Sale, Buyer hereby *96 agrees that the aforesaid partnership, Dairy Queen Stores of Ohio, is obligated to pay the legal fees, costs and disbursements of the firm of Johnston, Thompson, Raymond and Mayer, of Chicago, Illinois, and the firm of Fuller, Harrington, Seney and Henry, of Toledo, Ohio, for services rendered in connection with the prosecution of certain litigation in the State of Ohio in the Federal District Courts thereof, not to exceed [$]39,503.83, on the effective date of this Contract of Sale, and the Buyer represents that said sum shall be paid from the assets acquired under this Contract, and guarantees that said sum shall be paid.
Sellers, having accounted to Buyer in full for the payments required of Sellers, to the extent received by Sellers, under an Agreement relating to Ohio between Sellers' predecessors and Buyer's assignors, and an Agreement relating to Eastern New York between Sellers and Buyer's assignors, which Agreements are herein assigned and transferred to Buyer, it is hereby understood and agreed that Sellers are hereby relieved of further obligations for payments otherwise required under, or by reason of, said agreements, except as otherwise specifically provided herein; *97 and, in connection therewith, Buyer shall save Sellers harmless from any and all claims against Sellers by Ar-Tik Systems, Incorporated, arising out of, or by reason of, the aforesaid Agreements.
That this Contract of Sale is to be effective from and after the first day of September, A.D. 1955.
That the Sellers will execute and deliver to the Buyer any and all further documents which the Buyer may require for the consummation of this Contract.
That the Sellers shall in no way do any act or thing which will hinder or impede the Buyer from negotiating with district and retail operators in the State of Ohio and the State of New York; and that Sellers will use their best efforts to persuade district and retail operators in said territories to negotiate with and to enter into contract with Lark Sales Company, or persons licensed by Lark Sales Company, on the request of Buyer and its agreeing to pay Sellers the reasonable value of services rendered and expenses to be incurred in connection therewith.
The formulation and execution of the foregoing contract was the culmination of an arm's length transaction which had been entered into by the parties thereto following various controversies, *98 conferences, and negotiations between them or their representatives, all of whom were conversant with the subject matter and terms of the contract and its objective to place in Lark the ownership of the properties and rights transferred by Medd Partnership.
Contemporaneously with the execution of the September 1, 1955, Contract of Sale and in the further consideration of that contract, the Medds, individually, and as copartners, doing business as Davenport Dairy Queen Stores of Scott County, Iowa, executed a second instrument entitled "Agreement" in which they agreed that so long as they should continue to use the trademark and/or trade name Dairy Queen in connection with their business in Scott County, Iowa, they would pay, without interruption, to Lark Sales Company, the sum of 4 cents per gallon on all mix used in the sale of the frozen dairy product in such business in such county.
In pursuance of the September 1, 1955, Contract of Sale, Lark, on October 4, 1955, made payment by check of a lump sum amount of $150,000 to the Medd Partnership. The voucher attached to the check contained the following explanation: "9-1-55 Contract of sale of Businesses Ohio & E.N.Y. $150,000.00." *99 Likewise in pursuance of the foregoing Contract of Sale, Lark, on October 4, 1955, made payment by check of $35,410.17 to Johnston, Thompson, Raymond and Mayer, attorneys of Chicago, Illinois, for their unpaid legal fees and expenses through August 31, 1955, incurred by Medd Partnership in its litigation 1237 involved in the Wagner, Smith, and Conoway cases. The voucher attached to the check contained the following explanation: "9-1-55 Contract of Sale - Medds-Lark re businesses in Ohio & E.N.Y. Legal services and expenses (Statement dated 9-30-55) $35,410.17." Also on October 4, 1955, and in pursuance of the above-mentioned Contract of Sale, Lark made payment by check of $4,093.66 to Fuller, Harrington, Seney & Henry, attorneys of Toledo, Ohio, for their unpaid legal services and expenses incurred by Medd Partnership in its litigation involved in the Wagner, Smith, and Conoway cases. The voucher attached to the check contained the following explanation: "9-1-55 Contract of Sale - Medds-Lark re Businesses in Ohio & E.N.Y. Services and expenses per statement dated 9-20-55 $4,093.66." Each of the checks to which the above-mentioned respective vouchers were attached was signed by *100 Murchie on behalf of Lark. Despite the fact that the unpaid amounts owing to the above-mentioned law firms were the obligations of the Medd Partnership, at the instance of Murchie, the sole stockholder of Lark, checks of the latter were issued in payment of those obligations.
During the negotiations leading up to and including the execution of the September 1, 1955, Contract of Sale, the Medds were represented by Albert Jenner and Philip Tone of the Chicago law firm of Johnston, Thompson and Mayer.
The Medds assigned to Lark certain unrealized receivables which were listed and set forth in the September 1, 1955, Contract of Sale. Tone prepared a memorandum dated October 26, 1955, in which he made a valuation of the fair market value of the specific receivables as follows:
MEMORANDUM RE VALUE OF RECEIVABLES LISTED ON PAGES 2 AND 3 OF CONTRACT OF SALE BETWEEN C. R. MEDD & SONS AND LARK SALES COMPANY, EFFECTIVE SEPTEMBER 1, 1955
(a) Rights in funds deposited in the United States District Court in Toledo in Medd v. Boyd Wagner, Inc. Notice of appeal in this case was due on or before October 9, 1955. Thus, when the contract was entered into there was still the possibility that *101 the defendants would appeal. If they had appealed and had been successful, they, rather than the sellers, plaintiffs in that case, would have been entitled to the funds deposited with the Court. In view of these considerations, the Clerk of the United States District Court refused to release the funds to sellers until the appeal time had run. On the other hand, we are now able to determine that the case was not appealed and the clerk paid out the money to plaintiffs, who turned it over to the buyers under the contract. It is the opinion of the trial counsel that, in the light of the possibility of an appeal and the attendant uncertainties, the receivable in the amount $3of,730.64 turned over to the buyer had a fair value at the time of sale of approximately 80% of its face amount.
(b) Rights to royalties and license fees and damages for unfair competition receivable in connection with the cases of Medd v. Smith and Medd v. Conoway. The amounts and collectibility of those receivables are uncertain. The Conoway case is an action for unfair competition and for damages for the unauthorized use of the name and phrase against some thirty odd store operators throughout the Southern District *102 of Ohio. The district operators of these store operators have continued to pay sellers royalties and have thus impliedly acknowledged their right, although two of these district operators have not yet signed new contracts with plaintiffs and may in the future dispute plaintiff's right. The issues in this case on the merits are the same as the issues in Medd v. Boyd Wagner, Inc., which was decided in favor of plaintiffs by Judge Kloeb in Toledo. However, defendants in the Conoway case moved to join their district operators as parties defendant, claiming that the district operators were indispensable parties. The effect of this motion, if allowed, would be to bring in parties who would destroy diversity of citizenship, which is the basis for the federal court's jurisdiction. This motion has been argued and briefed and was, at the effective date of the contract, and still is under consideration by Judge Druffel. If Judge Druffel allows the defendant's motion, it will be necessary to proceed against each of the thirty odd defendants in the local state court of his residence. While it may be possible to consolidate some of these suits, the result will be numerous suits, each involving a *103 relatively small amount of money.
Turning to the Smith case, this is an action by the plaintiffs against two district operators who are denying sellers' (plaintiffs') right, their store operators and certain other store operators. While the issues between plaintiffs and the various store operators are the same as those in Medd v. Boyd Wagner, Inc., the issues between plaintiffs and the district operators is whether plaintiffs sold the latter all their rights in the name and phrase. If they did, plaintiffs will be unable to recover anything from the district operator. Moreover, the district operator will be entitled to collect all the amounts payable by their store operators. Plaintiffs' claims against the additional 1238 store operators in this case, the operators of two stores, will probably prevail regardless of the outcome of the dispute between the plaintiffs and the two district operators.
An additional uncertainty in these cases is raised by the probability that many of the store operator defendants have ceased using the name and phrase during the pendency of these suits. Plaintiffs have conceded in these suits that when the store operator ceases to use the name and phrase *104 he is no longer under any obligation to pay royalties or damages for unfair competition. Most of the store operator defendants will undoubtedly contend, even if and when judgment is entered against them, that they ceased using the name and phrase at some time in the past. Similar claims have already been made by most of the defendants in the Boyd Wagner case. This factor obviously further reduces the amounts of the claims and also affects their collectibility.
In view of the foregoing factors, it is the opinion of trial counsel that the fair value of these claims is approximately $2,640.
(c) Rights to moneys owed sellers by Boyd Wagner, Inc., in the amount of $1,605. This item is comparable to item (a) above. However, because it is an obligation of a private corporation rather than money resting in the registry of the court, the obvious risks and uncertainties reduce its value by an additional five per cent. Accordingly, it is the opinion of trial counsel that this item has a fair value of 75% of its face value.
(d) Rights to moneys owed sellers by Ron Baker, of which $2,460.30 was the property of sellers. This claim represents Baker's royalty obligation for the year 1954. The *105 debtor experienced tax difficulties, was the subject of a deficiency assessment and was unable to pay these royalties. The debtor advised the sellers that he was unable to pay these obligations but that he would pay them as soon as he could. The obligation is over one year old. This claim has a fair value of 50% of its face value.
(e) Rights to moneys owed sellers by reason of the operations of Joseph Florentine and Glen Vore and by reason of the operations of certain other store operators in Eastern New York during the winter of 1954-1955. The sellers have received no gallonage reports from Florentine and can only estimate the amount of the claim against him, which is probably about $600. He has refused to pay and is probably in no position to pay. The claim against Vore is also probably about $600, although no mix reports have been received from him. He has also refused to pay. The claim for operations during the winter of 1954-1955 arose because certain store operators continued to sell Dairy Queen during that winter without reporting these sales or paying royalties thereon. The sellers' claim arising from these operations would probably not exceed $100 or $150. All these claims *106 are considered to be substantially worthless. However, since they are listed as receivables transferred in the contract of sale, we have assigned them an aggregate value of $100.
P.W.T
The following is a statement of the face value and the fair market value on September 1, 1955, of the foregoing unrealized receivables involved in the September 1, 1955, Contract of Sale transferred by Medd Partnership to Lark: Face value
Fair market value
(a) Boyd Wagner law suit $ 3,730.64
$2,984.51
(b) Smith and Conoway law suits 26,400.00
2,640.00
(c) Boyd Wagner operations 1,605.00
1,293.75
(d) Ron Baker operations 2,460.30
1,230.15
(e) Florentine and Vore operations 1,200.00
100.00
Total $35,395.94
$8,248.41
The total amounts of the gallonage of Dairy Queen Mix delivered to operators in Ohio and New York under licenses from Medd Partnership were as follows for the indicated years: Year Ohio New York
1950 527,956
1951 772,484
1952 910,702 37,752 1/2
1953 1,062,668 72,563
1954 801,530 109,923
The following is a statement of the gross income of Medd Partnership for the indicated years from its Dairy Queen operations in *107 Ohio, income items collected for others, its operating expenses, and its net income: 1239 1952 1953
Gross income
Royalty $123,733.42 $146,777.63
Franchise 10,722.40 2,622.35
Interest
Other $134,455.82 238.00
Less: income items collected for
others
McCullough Dairy Queen
Ar-Tik Systems, Inc 36,881.50 43,776.32
Dairy Queen National Trade Association 5,616.62 15,787.07
Ohio Association 3,325.00 45,823.12 2,790.00
Balance 88,632.70
Less: operating expenses
Legal and accounting 1,427.10 1,102.15
Other than legal and ac- counting 5,905.52 7,332.62 13,565.13
Net income $ 81,300.08
1954
Gross income
Royalty $99,879.01
Franchise 706.50
Interest 100.00
Other $149,637.98 269.29 $100,954.80
Less: income items collected for
others
McCullough Dairy Queen
Ar-Tik Systems, Inc 28,440.92
Dairy Queen National Trade Association 15,224.15
Ohio Association 62,353.39 1,600.00 45,265.07
Balance 87,284.59 55,689.73
Less: operating expenses
Legal and accounting 11,046.10
Other than legal and ac- counting 14,667.78 9,901.76 20,947.86
Net income $ 72,616.81 $ 34,741.87
*108 The following is a statement of the gross income of Medd Partnership for the indicated years from its Dairy Queen operations in Eastern New York, income items collected for others, its operating expenses, and its net income: 1952 1953
Gross income
Royalty $7,550.50 $14,602.70
Franchise 8,875.25 11,801.35
Interest
Other $16,425.75
Less: income items collected for
others
McCullough Dairy Queen 7,353.23 11,804.74
Ar-Tik Systems, Inc 1,493.30 2,922.66
Dairy Queen National Trade Association 364.53
Ohio Association 8,846.53
Balance 7,579.22
Less: operating expenses
Legal and accounting
Other than legal and account- ing 660.43 660.43 637.90
Net income $ 6,918.79
1954
Gross income
Royalty $21,912.20
Franchise 12,581.30
Interest
Other $26,404.05 $34,493.50
Less: income items collected for
others
McCullough Dairy Queen 15,049.19
Ar-Tik Systems, Inc 4,380.52
Dairy Queen National Trade Association 547.59
Ohio Association 15,091.93 19,977.30
Balance 11,312.12 14,516.20
Less: operating expenses
Legal and accounting
Other than legal and account- ing 637.90 937.98 937.98
Net income $10,674.22 $13,578.22
*109 From May 18, 1954, to October 4, 1955, the Medd Partnership withheld payment of moneys collected on the Ar-Tik 4-cents level not only in Ohio but also in New York and Scott County, Iowa, which involved a retention during that period of $48,062.60. Of this sum, $42,813.40 related to Ohio. During the same period, the Medd Partnership withheld payments of the McCullough share of overrides and franchise payments collected in New York in the amount of $10,296.76. The foregoing amounts represented all of the moneys received by the Medd Partnership as to such interests in these areas for the operating periods from May 18, 1954, through September 1, 1955, except that payments to the Ar-Tik and McCullough interests for New York operations were made by the Medds in 1954 through the October 1954 operations' periods.
At the time of the execution by the parties on October 4, 1955, of the September 1, 1955, Contract of Sale, the Medd Partnership paid to Lark the sum of $58,359.36, of which $48,062.60 represented 4-cents level delinquencies subsequent to May 18, 1954, and prior to September 1, 1955, in the following areas: in Ohio, $42,813.40; in Scott County, Iowa, $2,055.12; and in New York, *110 $3,194.08. The balance of the $58,359.36, or $10,296.76, represented sums due on the McCullough level overrides and franchise 1240 payments in New York. The funds in the Lark bank account were insufficient to meet the above-mentioned payments by Lark of $150,000 to Medd Partnership and the $39,503.83 paid to the partnership's attorneys without the deposit of the $58,359.36 received by Lark from the partnership.
In addition to the sums it received on October 4, 1955, Lark, during the balance of 1955 and in 1956, collected accounts due on the 4-cents and McCullough levels arising from Dairy Queen operations in Ohio and New York prior to October 4, 1955, in the following amounts: 1955 Ohio New York
4( level $12,574.26 $ 398.20
McCullough level 1,294.15
1956
4( level 2,270.72 93.70
McCullough level 964.28
Total $14,844.98 $2,750.33
Exclusive of the Wagner gallonage, during 1955 the Medd Partnership collected gross gallonage payments in Ohio of $81,294.59 on 639,272 1/2 gallons at the following gross rates: Gallons Rate Amount
209,040 8( $16,763.17
430,232 1/2 15( 64,531.42
639,272 1/2 $81,294.59
During the *111 winter of 1955-1956, Lark renegotiated substantially all of the Ohio district operator contracts and approximately 110 of the underlying store contracts. In the new contracts, the royalty requirement of the district operators was pegged at 11 cents. In turn (except in isolated instances where subcontracts were involved), the store operator royalty was reduced to a uniform 29 cents per gallon. In addition, Lark committed itself to 3 cents for advertising out of the 11 cents in connection with these agreements.
No 1956 gallonage payments were received or collected in Ohio by Lark in excess of a gross rate of 11 cents per gallon, even though several of the operators refused to sign new contracts. These payments were based on 559,807 gallons in 1956 compared to 1,062,668 in 1953, the last year prior to the Ohio litigation. The total decline of 502,861 gallons includes an amount of 278,632 gallons occasioned by the failure of two major district operators (Pelton and Dickinson) to make any payments in 1956.
The gallonages of Dairy Queen mix delivered to operators in the Medd New York area during the years 1952 through 1956 were as follows: 1952 37,752 1/2
1953 73,000
1954 110,000
1955 89,807
1956 20,996
*112 In 1956 the only collections in the New York area were with respect to 7,417 gallons of mix as to which a total of $508.66 was received on the Medd level on account of 1955 operations.
Neither the $40,000 franchise payment by the Medd Partnership in Ohio nor the various other sums spent by it in the development, maintenance, and promotion of the Dairy Queen business in that state were capitalized.
Respondent determined that during the years 1955 and 1956, Lark received the following amounts, which constituted nontaxable receipts on receivables acquired from the Medd Partnership: 1955 $6,729.91
1956 1,518.50
$8,248.41
From the ownership by Medd Partnership of its businesses and properties which it sold to Lark under the September 1, 1955, Contract of Sale, and from the operation of such businesses and properties during the period September 1, 1955, to October 4, 1955, there accrued to the partnership during the foregoing period, receivables in the amount of $6,472.69, which the partnership by the Contract of Sale transferred to Lark on October 4, 1955. Between October 4, 1955, and the end of 1955, Lark received payment of the receivables.
In its partnership *113 return of income for 1955, Medd Partnership reported as ordinary income $8,248.41, representing the fair market value on September 1, 1955, of the unrealized receivables which were involved in the September 1, 1955, Contract of Sale and sold by the partnership to Lark. The partnership's action was taken on the theory that the $8,248.41 was received in exchange for unrealized receivables and that the remainder, $189,503.83, composed of Lark's lump sum payment of $150,000 to the partnership and Lark's payments totaling $39,503.83 of the obligations owing by the partnership to its attorneys for their unpaid legal services and expenses, was received in payment of the partnership's business interests and properties in Ohio and 1241 Eastern New York, including the Dairy Queen trade name and trademark, the trade phrase, franchise agreements, the goodwill established in connection therewith and attributable thereto, and certain shares in National Dairy Queen Development Co. Accordingly, Medd Partnership, in its 1955 partnership return of income, treated the transaction effected under the September 1, 1955, Contract of Sale as a sale or exchange of capital assets held for more than 6 months *114 and reported a long-term capital gain thereon of $180,655.42, computed as follows: Gross $189,503.83
sales
price
Cost or 8,848.41
other
basis
Long-term $180,655.42
capital
gain
In determining the deficiencies of petitioners Medd involved herein for 1955, the respondent determined that the gain realized by Medd Partnership on the transaction was ordinary income and not long-term capital gain; that the sale price was $150,000; that the basis of the property rights transferred was $8,848.41, composed of unrealized receivables, $8,248.41, and shares in National Dairy Queen Development Co., $600; that the gain realized was $141,151.59, and that of the latter amount, $140,431.59 constituted ordinary income and was taxable as such. Medd Partnership in its partnership return of income for 1955 took a deduction of $44,033.50 for professional expenses of which $39,503.83 represented the amount of the partnership's unpaid obligations owing by the partnership to its attorneys for legal services and expenses as mentioned above and which were paid by Lark pursuant to the September 1, 1955, Contract of Sale. The respondent determined that the $39,503.83 was not paid by *115 or on behalf of Medd Partnership and accordingly disallowed the deduction of $44,033.50 to the extent of $39,503.83.
With respect to the $150,000 paid by it to Medd Partnership pursuant to the September 1, 1955, Contract of Sale, Lark, in accordance with a series of circuitous entries in its books, took in its income tax return for 1955 in reduction of its gross income for that year, the entire amount of the $150,000, comprised of the following: An offset against income for 1955 from 2( $24,498.53
East derived from Ohio and Eastern New York,
net of dues
An offset against income for 1955 derived $19,105.19 $ 43,603.72
from Ohio and Eastern New York other than 2(
East
As cost of goods sold 106,396.28
Total $150,000.00
In determining the deficiency against Lark for 1955, the respondent determined that the above-mentioned payment of $150,000 made by Lark to Medd Partnership constituted a nondeductible capital expenditure. He also determined that the amount of $150,000 was to be reduced by an amount of $6,729.91 paid by Lark for receivables of Medd Partnership which were collected by Lark in 1955 and he accordingly increased Lark's taxable income for *116 1955 by the remainder, $143,270.09.
Respecting the unpaid legal fees and expenses of the attorneys for Medd Partnership, totaling $39,503.83, which were paid by Lark pursuant to the September 1, 1955, Contract of Sale, the respondent determined that they constituted a nondeductible capital expenditure to Lark and accordingly increased Lark's taxable income for 1955 for such amount.
Ultimate Findings
Prior to September 1, 1955, Medd Partnership was the owner of and had the exclusive right to use the trademark and trade name Dairy Queen, the trade phrase "The Cone with the Curl on Top," and the distinctive cone-curl configuration in Ohio and Eastern New York, in connection with the promotion, sale, and merchandising of the frozen ice milk product. Those were property rights of the partnership and had substantial value.
The franchise agreements under which Medd Partnership granted to district operators the right to use the trademark and trade name Dairy Queen and trade phrase "The Cone with the Curl on Top" within certain geographical areas in Ohio and Eastern New York, in connection with the merchandising, promotion, and sale of the frozen ice milk product, had substantial value *117 as property rights.
The September 1, 1955, Contract of Sale, under which Medd Partnership sold and assigned to Lark all of its right, title, and interest in Ohio and Eastern New York, including the trademark and trade name Dairy Queen, the trade phase "The Cone with the Curl on Top," the distinctive conecurl configuration, and the licenses and franchise agreements with third parties, together with the goodwill attributable thereto, for use in connection with the 1242 merchandising, promotion and sale of ice milk, transferred to Lark a going business in those areas and an established trade phrase which had substantial value as property rights.
The amount paid by Lark for those valuable property rights in Ohio and Eastern New York constituted an unamortizable capital expenditure by Lark, except for the amount attributable to the fair market value of the unrealized receivables acquired by Lark from the Medds under the September 1, 1955, Contract of Sale.
Opinion
Petitioners Medd Issues 1 and 2
With respect to the transaction effected pursuant to the September 1, 1955, Contract of Sale, the respondent has determined (1) that the gain realized therefrom by Medd Partnership *118 in 1955 was ordinary income and not long-term capital gain, that the sale price was $150,000, that the basis of the property rights transferred was $8,848.41, that the gain realized from the sale was $141,151.59, and that of the latter amount, $140,431.59 constituted ordinary income and was taxable as such; and (2) that the $39,503.83 representing the amount of Medd Partnership's unpaid obligations owing by it to its attorneys for legal services and expenses which were paid by Lark were not paid by or on behalf of the partnership and accordingly were not deductible by the partnership.
Petitioners Medd take the position (1) that the transaction effected pursuant to the Contract of Sale constituted a sale of long-term capital assets, that such assets were of substantial value, that the consideration paid by Lark for such assets was $189,503.83, representing the $150,000 paid by Lark directly to the Medd Partnership and the $39,503.83 paid by Lark to the partnership's attorneys, and that the value of the accrued receivables involved was fairly estimated; (2) that the obligation for the payment by Medd Partnership to its attorneys for legal services and expenses Partnership to its attorneys *119 for legal services and expenses was solely that of the partnership and was properly deducted as a professional expense; and (3) that we should conclude that the partnership correctly reported in its partnership return of income for 1955 a long-term capital gain of $180,655.42 from its sale to Lark of its long-term capital assets and properly deducted from ordinary income, its attorneys' fees and expenses which were paid by Lark.
At this point we observe that respondent states on brief that on the basis of his consideration of the record presented, he now takes the position herein that the transaction effected pursuant to the September 1, 1955, Contract of Sale constituted a sale by Medd Partnership of capital assets for $150,000, that the gain from the sale was $141,151.59, and that such gain was taxable as long-term capital gain. In taking the foregoing position, the respondent recognizes that he here takes a position that is opposite to the position taken by Lark herein with respect to the transaction, which the respondent considers to be contrary to the substantive facts of record. The respondent further recognizes that the position he now takes is diametrically opposite to the *120 statements contained in the separate notices of deficiency issued to petitioners Medd and points out that the prior position was taken for the purpose of protecting the Government revenue.
The above-stated present position of respondent respecting the transaction in question constituting a sale of capital assets and the portion, $141,151.59, of the sales price thereof which was taxable as long-term capital gain, removes those questions from controversy between the respondent and the petitioners Medd. However, there remains in controversy the question as to whether the amount of $39,503.83, representing the amount of Medd Partnership's unpaid obligations owing by it to its attorneys for their services and expenses which were paid by Lark pursuant to the September 1, 1955, Contract of Sale, constituted a portion of the sales price as was reported by Medd Partnership in its partnership return of income for 1955. As to this question, the respondent states on brief that he remains neutral as between the Medd Partnership's inclusion of the $39,503.83 as part of the sales price and its deduction of that amount as professional expenses, on the one hand, and the deduction taken by Lark of *121 the $39,503.83 as business expenses on the other hand.
The September 1, 1955, Contract of Sale contains the following provisions with respect to Lark's payment of the $39,503.89 here in controversy:
That in further consideration of the aforesaid Contract of Sale, Buyer [Lark] 1243 hereby agrees that the aforesaid partnership, Dairy Queen Stores of Ohio [Medd Partnership] is obligated to pay the legal fees, costs and disbursements of the firm of Johnston, Thompson, Raymond and Mayer, of Chicago, Illinois, and the firm of Fuller, Harrington, Seney and Henry, of Toledo, Ohio, for services rendered in connection with the prosecution of certain litigation in the State of Ohio in the Federal District Courts thereof, not to exceed [$]39,503.83, on the effective date of this Contract of Sale, and the Buyer represents that said sum shall be paid from the assets acquired under this Contract, and guarantees that said sum shall be paid.
The record discloses that the above-mentioned provision of the Contract of Sale was inserted in the contract at the instance of Murchie, the sole stockholder of Lark, and was acquiesced in by Medd Partnership. From a consideration of the above-quoted *122 provision of the Contract of Sale in connection with the record relating thereto, we think it is apparent that a purpose of the provision, as indicated on its face, was to provide that payment of $39,503.83 was a "further consideration" of the contract and in addition to other considerations mentioned in the contract. Another purpose was to fix the amount of Medd Partnership's indebtedness that was to be paid and to set forth Lark's guarantee that payment of $39,503.83 would be made.
As shown by our findings, supra, Lark, on October 4, 1955, issued its checks to the respective firms of Medd Partnership's attorneys in payment of the amounts due and owing each of the firms. The voucher attached to Lark's check issued to Medd Partnership in payment of the $150,000 to the partnership was keyed to the September 1, 1955, Contract of Sale to Lark of the businesses and properties of the partnership in Ohio and Eastern New York. Likewise the vouchers attached to the checks issued by Lark to the respective law firms in payment for their services and expenses rendered to Medd Partnership were keyed to the September 1, 1955, Contract of Sale. Further, the checks issued by Lark to Medd Partnership *123 and to the partnership's attorneys were signed by Murchie in behalf of Lark. Such being the situation and since Murchie was the sole stockholder of Lark, a participant in the formation of the September 1, 1955, Contract of Sale, and was an experienced businessman as well as a certified public accountant, it would appear that Lark, acting through Murchie, at the time of the payments to the law firms, regarded and treated such payments as for a like purpose as the payment of $150,000 to Medd Partnership, namely, in payment for the businesses and for the properties acquired from the partnership under the contract. In view of the manner in which Lark, at the time of payments, regarded and treated its payments to the law firms totaling the $39,503.83 in controversy, and since Medd Partnership has accorded the $39,503.83 a like regard and treatment in its partnership return of income for 1955 by the inclusion of that amount in the sales price of the businesses and properties, and since our consideration of the record relating thereto does not convince us that other and different treatment was the intention of the parties at the time of the payments, we think it fair and reasonable to conclude *124 that the partnership in its return of income correctly included the $39,503.83 as part of the sales price of its properties. Accordingly, we hold for petitioners Medd on this issue.
The words "sale" or "exchange" as used in the Internal Revenue Code must be given their ordinary meanings. Helvering v. Flaccus Leather Co, 313 U.S. 247 (1941) ; Gaius G. Gannon [Dec. 18,304], 16 T.C. 1134 (1935) . "A sale, in the ordinary sense of the word, is a transfer of property for a fixed price in money or its equivalent." Iowa v. McFarland, 110 U.S. 471 , 478 (1884) ; Betty Rogers, 37 B.T.A. 897 (1938) , affd. 103 F. 2d 790 (C.A. 9, 1939), certiorari denied 308 U.S. 580 (1939) . Here Medd Partnership transferred its businesses and properties involved herein to Lark for a total price of $189,503.83 of which $150,000 was paid directly by Lark to the partnership, and $39,503.83, pursuant to the agreement of the partnership and Lark, was paid by Lark for the benefit of the partnership by payment of the partnership's obligations to its attorneys. Consequently, we conclude that the transaction between the partnership and Lark *125 constituted a sale of the businesses and properties involved.
Respecting the respondent's disallowance of the deduction of $39,503.83 for professional expenses taken by Medd Partnership in its partnership return of income for 1955 with respect to the services and expenses of the two law firms rendered in connection with the partnership's suits in the Wagner, Smith, and Conoway litigation, petitioners Medd in their petitions assigned the following error: "The Commissioner erred in determining that certain legal fees were not paid on behalf of the partnership and were, therefore, not deductible on the partnership 1244 return of income for 1955." In their allegations of fact in their petitions, the petitioners Medd alleged that the sales price of the assets of Medd Partnership was $189,503.83, that Lark made payment of that price by paying $150,000 directly to Medd Partnership and by paying the remainder, $39,503.83, to the partnership's attorneys for their services and expenses, and that accordingly the latter amount constituted an allowable deduction to the partnership as a business expense. Both the assignment of error and the allegation of facts were denied by respondent in *126 his answer.
As a result of our holdings, supra, as to the sales price of the partnership's businesses and properties and Lark's payments of the sales price, the remaining question for decision is the deductibility as a business expense by the partnership of the $39,503.83 paid to its attorneys. As we understand the position of petitioners Medd on brief, they contend that since the $39,503.83 was part of the sales price of the partnership assets, it therefore follows that such amount was deductible as a business expense from the partnership's ordinary income for 1955.
The purpose of the capital gains provisions of the Code is to relieve taxpayers from the excessive tax burdens on gains resulting from a conversion of capital investments and to remove the deterrent effect of those burdens on such conversions. The capital gains provisions, therefore, provide an exception to the normal tax requirements of the Code. Consequently, such provisions are to be narrowly applied and exclusions therefrom broadly interpreted so as to exclude from their operation situations not coming clearly therein in order to protect the revenue from artful devices. Commissioner v. P.G. Lake, Inc., 356 U.S. 260 (1958) ; *127 Corn Products Co. v. Commissioner, 350 U.S. 46 (1955) .
It is now well established that deductions are a matter of legislative grace and that one who seeks a deduction must be able to point to a statute which provides for the allowance of the deduction and show that he comes within the terms of that statute. New Colonial Co. v. Helvering, 292 U.S. 435 (1934) , affirming 24 B.T.A. 886 (1931) ; Deputy v. du Pont, 308 U.S. 488 (1940) ; Interstate Transit Lines v. Commissioner, 319 U.S. 590 (1943) ; McDonald v. Commissioner, 323 U.S. 57 (1944) , affirming 1 T.C. 738 (1943) ; Hart v. Commissioner, 338 F. 2d 410 (C.A. 2, 1964), affirming 41 T.C. 131 (1963) .
Petitioners Medd do not point us to any statute which they contend provides, in the situation presented, for the allowance of the $39,503.83 as a deduction for a business expense by Medd Partnership.
In general, the deductibility of legal expense depends upon the purpose for which the expense was incurred. Lykes v. United States, 343 U.S. 118 (1952) . The $39,503.83 in issue was a debt incurred by Medd Partnership *128 for legal fees and expenses of two law firms which the partnership employed in its litigation involved in the Wagner, Smith, and Conoway cases. Turning to the purpose of the litigation involved in the foregoing cases, our findings show that in the action instituted by Medd Partnership in the Wagner case, the partnership sought to prevent the use by the defendants, in the absence of consent of the partnership, of the trade name Dairy Queen and the trade phrase "The Cone with the Curl on Top" in the vending of soft frozen ice milk, and from representing to the public that they were part of the Dairy Queen organization in Ohio and elsewhere vending Dairy Queen ice milk. The primary basis of and the theory of the complaint were that the Medds were the owners of the exclusive right of the use in the State of Ohio of the trade name and trade phrase and that the use of this name and phrase by the defendants was common-law unfair competition and that the defendants were using the property of the Medds without permission therefor. The defendants' primary basis of and the theory of defense were that the trade name and trade phrase were so coupled with the freezers manufactured under the Oltz *129 patent that the right to the exclusive use of the trade name and trade phrase expired with the patent. In view of the foregoing stuation, coupled with other of our Findings as to the matter, we think it apparent that the primary purpose of the action brought by Medd Partnership was to obtain a judicial determination as to its ownership of and property rights in the trade name and trade phrase in the State of Ohio, and that such action was basically and primarily an action by the partnership to defend or perfect its title or property rights in the trade name and the trade phrase. 1245
Shortly after Medd Partnership instituted its action in the Wagner case, it instituted actions in the Smith and Conoway cases which also involved defense of or perfection of the partnership's title or property rights in the trade name and the trade phrase.
In Food Fair of Virginia, Inc., 14 T.C. 1089 (1950) , it was held that a suit instituted by the taxpayer against a competitor for the primary purpose of obtaining a judicial determination as to ownership of and property rights in a trade name which the taxpayer alleged it had established and had the exclusive right to use in the *130 State of Virginia was basically and primarily a suit to defend or perfect the taxpayer's title or property right in the trade name and that in substance a fee paid by the taxpayer to an attorney who represented it in a suit was a cost of defending or perfecting title to property and as such was not allowable as a deduction for a business expense. The Court further held that the fact that the suit was disposed of by agreement of the parties did not alter the Court's holding. In reaching its holding, the Court relied on the following cases: Morgan Jones Estate, 43 B.T.A. 691 (1941) , affd., 127 F. 2d 231 (C.A. 5, 1942); Central Material & Supply Co., 44 B.T.A 282 (1941) , affd. on this point, 126 F. 2d 542 (C.A. 10, 1942); and Louisiana Land & Exploration Co., 7 T.C. 507 (1946) , affd. 161 F. 2d 842 (C.A. 5, 1947). In the cases there relied on by the Court, not only was it held that expenditures incurred in defending or perfecting title to property were not deductible as business expenses, but it also was held that such expenditures were capital in nature.
In our opinion the holdings in the Food Fair of Virginia, *131 Inc., case, supra, and the cases there relied on are applicable here. Accordingly, we conclude and hold that the attorneys' fees and expenses of $39,503.83 here in controversy were not deductible by Medd Partnership as a business expense but were capital expenditures and as such were to be applied as an offset against the sales price of the property sold by the partnership to Lark in computing the amount of the partnership's long-term capital gain on the sale. The respondent's disallowance of the deduction of the $39,503.83 as a business expense is sustained.
Opinion
Lark Sales Company Issues 1 and 2
In pursuance of the September 1, 1955, Contract of Sale, Lark on October 4, 1955, made payment by check of a lump sum amount of $150,000 to Medd Partnership. The check was signed on behalf of Lark by Murchie, Lark's sole stockholder, and the voucher attached to the check contains the following explanation: "9-1-55 Contract of sale of Businesses Ohio & E.N.Y. $150,000.00." Although the contract involved the sale to Lark by Medd Partnership of its businesses and properties stated in the contract and as set out in our findings, Lark, in accordance with a series of roundabout entries *132 made in its books, took in its income tax return for 1955 as a reduction of its gross income for that year, the entire amount of the $150,000 comprised of the following: An offset against income for 1955 from 2( $24,498.53
East derived from Ohio and Eastern New York,
net of dues
An offset against income for 1955 derived 19,105.19 $ 43,603.72
from Ohio and Eastern New York other than 2(
East
Cost of goods sold 106,396.28
150,000.00
In determining the deficiency against Lark for 1955, the respondent determined that the payment of $150,000 made by Lark to Medd Partnership constituted a nondeductible capital expenditure; that the amount of $150,000 was to be reduced by $6,729.91, representing a receivable acquired by Lark from Medd Partnership which was collected by Lark in 1955; and that accordingly Lark's taxable income for 1955 was to be increased by the remainder, $143,270.09.
The September 1, 1955, Contract of Sale is a comprehensive instrument which shows that in making the sale to Lark, Medd Partnership sold its going businesses in Ohio and Eastern New York, including various items of property then employed in the conduct of those businesses. *133 Lark's position, as we understand it, is that by the Contract of Sale the parties thereto were attempting to resolve all of their controversies and differences by an instrument which in its nature was a "sweeping assignment." From our consideration of the contract against the background of the portion of the record relating thereto in connection 1246 with the contentions of the parties herein, we have found as a fact that the formulation and execution of the contract was the culmination of an arm's length transaction which was entered into by the parties thereto following various controversies, conferences, and negotiations between them or their representatives who were conversant with the subject matter and terms of the contract and its objective to place in Lark the ownership of the businesses and properties transferred by Medd Partnership.
Lark, having thus acquired ownership of such businesses and properties involved in the Contract of Sale, urges that it is not unusual for a legal draftsman to employ inartful or inappropriate phrases in characterizing a relatively simple transaction, and states as its primary position herein, that its transaction with Medd Partnership did *134 not involve the acquisition by Lark of any capital asset, but if any was acquired, the value thereof was so nominal as to be merely incidental.
With respect to the lump-sum amount of $150,000 it paid to Medd Partnership, Lark takes the position that $14,631.10 thereof was allocable to receivables acquired by it from Medd Partnership under the Contract of Sale. As to the $135,368.90, the remainder of the $150,000, Lark contends that the amount constituted a proper deduction from its gross income for 1955 for the reason that payments totaling the latter amount were made in whole or in part for one or all of the following purposes: (1) to obtain the relinquishment of a contractual interest which threatened the existing Dairy Queen interests of those parties for whom Lark acted; (2) to effect the elimination of a burdensome or onerous contract to pay Medd Partnership 34 cents per gallon in the future; and (3) for the collection of several delinquent gallonage accounts as well as to insure collection of such accounts in the future.
Lark takes the position on brief that under the September 1, 1955, Contract of Sale it acquired from Medd Partnership two groups of receivables: (1) the *135 five items of receivables listed and set forth in the Contract of Sale discussed in Philip Tone's memorandum dated October 26, 1955, as shown in our Findings, and as to which we have found a fair market value of $8,248.41 on September 1, 1955; and (2) numerous items of receivables, which Lark contends were in the total amount of $6,472.69 and accrued to Medd Partnership between September 1, 1955, the effective date of the Contract of Sale, and October 4, 1955, the date of the execution of the contract, were collected by Lark between October 4, 1955, and the end of 1955, and were income to Medd Partnership for the foregoing period. The above-mentioned receivables in the amounts of $8,248.41 and $6,472.69 are relied on by Lark in support of its position that $14,631.10 of the $150,000 paid by it to Medd Partnership was allocable to receivables and the remainder of $135,368.90 constitutes a proper deduction from its (Lark's) gross income for 1955.
Respecting the above-mentioned amount of $8,248.41, we have found that the respondent determined that during 1955 and 1956 Lark received the following amounts which constitute nontaxable receipts from receivables acquired from Medd Partnership: *136 1955 $6,729.91
1956 1,518.50
Total 8,248.41
From the foregoing, it is apparent that Lark here seeks to enlarge by $1,518.50 the amount of its nontaxable receipts of $6,729.91 for 1955, as determined by respondent. Since Lark has not shown error in respondent's determination of the latter amount for 1955, the respondent's action is sustained.
With respect to receivables in the amount of $6,472.69, we have found as facts that from the ownership of Medd Partnership of its businesses and properties which it sold to Lark and from the operation of such businesses and properties during the period September 1, 1955, to October 4, 1955, there accrued to the partnership during the foregoing period, receivables in the amount of $6,472.69 which the partnership transferred to Lark on October 4, 1955, and that between October 4, 1955, and the end of 1955, Lark received payment of the receivables.
The rule with respect to the accrual of income was stated by the Supreme Court in Spring City Co. v. Commissioner, 292 U.S. 182 (1934) , as follows:
Keeping accounts and making returns on the accrual basis, as distinguished from the cash basis, import that it is *137 the right to receive and not the actual receipt that determines the inclusion of the amount in gross income. When the right to receive an amount becomes fixed, the right accrues. * * *
In view of the rule as to the accrual of income enunciated above and the 1247 applications made of that rule in Hulburt v. Commissioner, 227 F. 2d 399 (C.A. 7, 1955), affirming a Memorandum Opinion of this Court, filed October 30, 1953, and in 2 Lexington Avenue Corp., 26 T.C. 816 (1956) , we are of the opinion that on the record presented our above-stated Findings are correct and proper. Consequently, we hold that since the receivables in question accrued to Medd Partnership in 1955, they were income to it for that year and not to Lark. Further, we hold that upon the transfer of the receivables to Lark and Lark's receipt of payment thereof in 1955, the amount of such payment, $6,472.69, constituted nontaxable receipts in the hands of Lark and is to be treated as such in computing the portion of the lump-sum payment of $150,000 made by Lark to Medd Partnership that was allocable to the receivables.
After giving effect herein to the above holdings, the portion of the lump-sum *138 payment of $150,000 that remains is $136,797.40 and not $135,368.90 as contended by Lark. Under the tenor of Lark's position, the question posed is whether such remainder, $136,797.40, constituted a proper deduction from Lark's gross income for 1955 for the reason that payments totaling that amount were made in whole or in part for one or all of the above three stated purposes of Lark.
The first of such stated purposes was to obtain the relinquishment of a contractual interest (the interest of Medd Partnership in the Dairy Queen businesses in Ohio and the eastern part of New York State) which threatened the existing Dairy Queen interests of those parties for whom Lark acted (which are stated in Lark's brief as the national interests). 2
From our consideration of the record bearing on the foregoing *139 stated purpose, we are unable to find that the continued ownership and operation by Medd Partnership of the businesses and properties which it sold to Lark would have been detrimental or injurious to the national interests or otherwise would have constituted a threat to such interests. Nor does the record show that there was any program, practice, or desire on the part of the national interests which contemplated the elimination from the Dairy Queen business of Medd Partnership or any other state operator. The record shows that the sale by Medd Partnership of its businesses and properties to Lark emanated solely from the desire of the partnership to get out of the Dairy Queen business in Ohio and the eastern part of New York State. Being unable to find a factual basis to support Lark's position as to the instant purpose, we hold that no portion of $136,797.40 here involved was attributable to such purpose.
The second of the stated purposes was to effect the elimination of a burdensome or onerous contract to pay Medd Partnership 3 cents per gallon in the future. That stated purpose relates to the executory agreement entered into on October 30, 1954, by Medd Partnership with McCulloughs *140 Dairy Queen, Inc., and Lark for the sale by the partnership of its entire Dairy Queen business in the State of Ohio to McCulloughs Dairy Queen, Inc., in consideration for which Lark was to pay the partnership 3 cents per gallon for all mix used in the State of Ohio in the manufacture of the Dairy Queen product from and after the date of transfer by Medd Partnership of its business in the State of Ohio. Because of differences which arose between the Medd Partnership, on the one hand, and Lark on the other, and the fact that the September 1, 1955, Contract of Sale involved not only the business of the partnership in Ohio, but also its business in the eastern part of New York State, the October 30, 1954, agreement was never consummated by the parties. Since the October 30, 1954, agreement was never consummated by the parties, and since the September 1, 1955, Contract of Sale did not contain any provision requiring Lark to make any payment to Meed Partnership of 3 cents per gallon for mix used in the State of Ohio, we are unable to find that there was any contract pursuant to which Lark was required to make payment of the 3 cents per gallon of mix. Such being the situation, we are unable *141 to find that the $136,797.40 here involved, or any part thereof, was to effect the elimination of a burdensome or onerous contract. Consequently, Lark is not sustained as to the above-considered purpose and no portion of the $136,797.40 here involved is attributable thereto.
The remaining stated purpose was for the collection of some delinquent gallonage 1248 accounts as well as to insure collection of such accounts in the future. As was pointed out above, Lark, in accordance with entries in its books, took in its income tax return for 1955 in reduction of its gross income for that year, the entire amount of the $150,000 paid to Medd Partnership comprised of the following: (1) $24,498.53, representing an offset against income for 1955 from 2( East derived from Ohio and Eastern New York, net of dues, (2) $19,105.19, representing an offset against income for 1955 derived from Ohio and Eastern New York other than 2( East, and (3) $106,396.28, representing the cost of goods sold. In view of Lark's treatment in its books and in its income tax return for 1955 of the $150,000 it paid to Medd Partnership, it is not apparent how it can be found that the $136,797.40, here involved, or *142 any part thereof was expended for the purpose of collecting some delinquent gallonage accounts and insuring collection of such accounts in the future as Lark here contends. Since Lark does not here attempt to reconcile its treatment of the $150,000 in its books and income tax return for 1955 with its contention here as to the $136,797.40, which comprises by far the greater portion thereof, and since we are unable to make such reconciliation, we conclude that Lark has not sustained its burden as to the instant purpose and that no part of the $136,797.40 is attributable thereto.
Lark, in taking the position that its transaction with Medd Partnership did not involve the acquisition by Lark of any capital asset, but if any was acquired, the value thereof was of such a nominal amount as to be merely incidental, obviously ignores the fact that basically the September 1, 1955, Contract of Sale was for the sale to Lark by Medd Partnership of the latter's entire going Dairy Queen business in Ohio and its entire going Dairy Queen business in Eastern New York. Such sale included the trade name Dairy Queen Stores of Ohio and the trade name Dairy Queen Stores of Eastern New York, together with *143 the good will in connection therewith. The sale further included all the partnership's rights under licenses and franchise agreements to and with third parties and with Lark or Lark's assignors, and all of the partnership's right, title, interest, and ownership in and to the trademark and trade name Dairy Queen, and the trade phrase "The Cone with the Curl on Top" and the distinctive cone-curl configuration identified with the Dairy Queen product and store operation in the State of Ohio and in the State of New York as used on and in association with the sale of a frozen dairy product by the partnership and its licensees, together with the goodwill of said businesses in connection with which the trademark and the trade name Dairy Queen, the trade phrase "The Cone with the Curl on Top," and the distinctive cone-curl configuration were used, together with all assets of every kind and nature of the partnership's businesses, exclusive, however, of all automobiles, trucks, equipment, office furniture and fixtures, and cash not required by the September 1, 1955, Contract of Sale to be paid to Lark. Since there is no showing or contention herein that any of the foregoing enumerated properties *144 acquired by Lark had any fixed or determinable life in the hands of either Medd Partnership or Lark, and since Lark continued the use of the properties in its business following their acquisition by it, we are unable to find, as Lark contends, that it did not acquire any capital assets in its transaction with Medd Partnership. See Rose Marie Reid, 26 T.C. 622 (1956) and cases there cited.
In taking the position that if it acquired any capital asset in its transaction with Medd Partnership, the value thereof was of such a nominal amount as to be merely incidental, Lark fails to accord recognition to the fact that the September 1, 1955, Contract of Sale was an arm's length transaction entered into between it and Medd Partnership and that they were conversant with the subject matter and terms of the contract and its objective to place in Lark the ownership of the businesses and properties transferred by the partnership to Lark. Since it does not appear that either Lark or Medd Partnership was under compulsion to enter into the contract, it would appear that the consideration paid by Lark thereunder approximated the fair market value of the businesses, properties, and rights *145 acquired by Lark from the partnership. From our consideration of the record as a whole bearing on the question of value, we are unable to find that such fair market value was substantially different from the consideration paid by Lark. Consequently, we are unable to sustain Lark's contention that the value of any capital asset acquired by it in its transaction with the partnership was of such a nominal value as to be merely incidental. In connection with the 1249 foregoing, we observe that in accordance with entries in its books, Lark in its income tax return for 1955 applied $19,105.19 of the $150,000 it paid Medd Partnership as an offset against its income for 1955 derived from Ohio and Eastern New York other than 2( East, thereby showing that its net income for the period October 4, 1955, to the end of 1955, derived from the businesses and properties acquired from the partnership was $19,105.19. Such an amount of income for the approximate 3-months' period would be the equivalent of a rate of approximately 14 percent on the $136,797.40 ($150,000 less receivables of $13,202.60) for an entire year. Such rate of return scarcely would support a conclusion that the businesses and *146 properties here involved had only a nominal value.
Lark contends that the amount of $39,503.83 it paid to the attorneys for Medd Partnership for the fees and expenses of the attorneys for services rendered by them to the partnership in the partnership's litigation involved in the Wagner, Smith, and Conoway cases was properly deductible as a business expense from its (Lark's) gross income for 1955. In support of its contention, Lark urges that in September 1954 it entered into a firm commitment for the payment of all of the legal fees and expenses owing or to become owing by Medd Partnership in connection with the litigation involved in the above-mentioned cases, that its liability arising from such commitment was undertaken by it on behalf of the national interests and was in the nature of store services similar to those forms of assistance rendered to other holders of franchises throughout the country. Lark further urges that the September 1, 1955, Contract of Sale establishes that its payment of the legal fees and expenses required of it in that contract effected a reimbursement to Medd Partnership in satisfaction of Lark's commitment made in September 1954 and that such commitment *147 was separate and distinct from and not part of the consideration that Lark may have paid to the partnership for assets.
The respondent has taken a neutral position as to this issue.
From our consideration of the conflicting record bearing on the point, we are unable to find that at any time prior to the execution on October 4, 1955, of the September 1, 1955, Contract of Sale, Lark made any firm commitment for the payment of all or any portion of Medd Partnership's legal fees and expenses involved in the partnership's litigation in the Wagner, Smith, and Conoway cases. In this connection, we observe that the Contract of Sale did not contain any reference to a prior commitment of Lark for the payment of any of the partnership's legal fees and expenses involved in the litigation. The Contract of Sale merely contains a recital of a stated amount of such legal fees and expenses and a further recital of Lark's guarantee of the payment thereof. Payment was made of the amount by Lark on October 4, 1955, to the parties to whom such amount was owing. As a consequence, we are without a basis for concluding that Lark's payment of fees effected a reimbursement to Medd Partnership in satisfaction *148 of Lark's prior commitment to the partnership or to the national interests, or that such payment was separate and distinct from and not part of any consideration that Lark may have paid to the partnership for assets.
In our Opinion in the cases of petitioners Medd, supra , we have held that the $39,503.83 here in issue constitutes part of the sales price of Medd Partnership's businesses and properties which it sold to Lark. For the reasons stated in that Opinion, we think our holding there is applicable here and accordingly hold adversely to Lark here.
In our Opinion in the cases of petitioners Medd, supra , we held that since the legal fees and expenses in the amount of $39,503.83, which are also involved here, were for the services of the attorneys in defending or protecting the title of the properties of Medd Partnership, they were capital expenditures and were not deductible by the partnership as a business expense. In our view, our holding there is applicable to Lark's contention here that the $39,503.83 was deductible by it as a business expense. The fact that the $39,503.83 of legal fees and expenses were incurred by Medd Partnership but paid by Lark *149 does not alter the fact that they were incurred for the purpose of defending or perfecting title to property which Lark was purchasing, were a part of the consideration for such property, and as such were capital expenditures and not ordinary and necessary deductible business expenses.
In view of the foregoing, we sustain the respondent's determination that the $39,503.83 constituted a nondeductible capital expenditure to Lark.
Our Findings of Fact and Opinion as to other issues in the case of Lark Sales Company follow. 1250 Issue 3. Whether during 1956, 1957, and 1958 Lark, the petitioner, was the owner of the property interest of "2( East" and thereby realized taxable income from Dairy Queen royalties in the amounts of $53,795.04, $62,079.19, and $44,938.09 during the respective years
Findings of Fact
Some of the facts have been stipulated and are found accordingly. In the interest of clarity, we reiterate certain background facts heretofore found.
On or about May 18, 1937, Harry M. Oltz became the owner of United States patent No. 208097 1, sometimes referred to as the Oltz patent. That patent was on a machine, sometimes hereinafter referred to as a freezer, which *150 was designed to produce a soft frozen product from milk with sweetener, stabilizer, and flavor added. That product has become known as soft ice cream or ice milk. The Oltz patent expired May 18, 1954.
On or about July 31, 1939, Oltz entered into an agreement, hereinafter referred to as the Western Agreement, with H. A. McCullough, pursuant to which, among other things, the latter acquired the exclusive license to use, manufacture, and sell the freezers in the following States: Minnesota, Wisconsin, Illinois, Missouri, Iowa, Arkansas, Louisiana, Texas, Oklahoma, Kansas, Nebraska, North Dakota, South Dakota, Montana, Wyoming, Colorado, New Mexico, Arizona, Utah, Idaho, Washington, Oregon, Nevada, and California. The parties to the Western Agreement contemplated that McCullough would initiate a business in which the freezers manufactured by him would be placed into operation either in his ice cream stores or in stores operated by other retailers on a lease basis.
The Western Agreement provided, in part material herein, that McCullough was to furnish the mix to make the product and to pay Oltz a certain royalty until the expiration of the Oltz patent. At that time, the manufacturing *151 rights of McCullough were to end but he was to be allowed to retain his freezers and operate them indefinitely within the allotted territory, provided he continued to pay to Oltz the usual royalty. If for any reason the agreement was terminated at any time, it was agreed that McCullough could keep his freezers and operate them any place within his territory provided he continued to pay to Oltz the regular or usual royalty. Moreover, it was agreed that the heirs of McCullough and Oltz were to be bound to all of the conditions of the agreement and to inherit its rewards.
On or about June 11, 1940, Oltz assigned, transferred, and set over to Ar-Tik Systems, Inc., an Indiana Corporation, sometimes hereinafter referred to as Ar-Tik, all his right, title, and interest in the Oltz patent together with all his rights under the Western Agreement. At all times here material, a majority of the capital stock of Ar-Tik was owned by Oltz and members of his family.
Events thrust themselves upon McCullough and forced a direction to the business so instituted, wholly uncontemplated by him at the outset, yet the original payment plan altered by this force of events, unique as it was, became the *152 pattern for the entire soft ice cream industry and is now commonplace.
McCullough conceived the name Dairy Queen in 1939 or 1940 to designate the business he instituted and conducted. He used that trade name in the merchandising and sale of the ice milk product. He designed a new type of retail merchandising outlet consisting of an attractive small store with windows on three sides and with his stainless steel ice cream freezers visible from the street. McCullough, himself, over a period of several years, put some 20 stores in operation. The response of the public was gratifying. As a result thereof, he realized the importance of the trade name Dairy Queen and had it registered in almost every State in the Union.
Shortly after McCullough opened his first store, the popular demand to be permitted to conduct this type of business operation under the trade name Dairy Queen was great. In order to fulfill his duty under the Western Agreement, McCullough decided to commence the granting of franchises throughout the territory covered by the Western Agreement. He, of course, in granting any such franchises was confronted with the royalty payments due Ar-Tik under the Western Agreement.
*153 McCullough went into the cities, towns, and villages and promoted and developed a program of licensing and franchising third persons. When he entered into a franchise agreement, he went wherever freezers were installed and taught the people to operate this new equipment. He 1251 was well informed about the freezer, having seen it through its early experimental stage, and was instrumental in having it built.
The efforts of McCullough in the licensing and franchising of third persons met with success. Indeed, the business "snowballed" under his guidance.
By agreement entered into on or about September 7, 1946, between Ar-Tik and McCullough, the Western Agreement was amended to provide for a royalty payment of 4 cents per gallon on all mix used in the freezers operated within the territory covered by the Western Agreement. The royalty payments to Ar-Tik were to survive the patent expiration so long as McCullough operated the freezers within his allotted territory.
On September 7, 1946, Ar-Tik entered into another agreement, sometimes hereinafter called Eastern Agreement, with McCullough by which Ar-Tik exclusively licensed McCullough to use, manufacture, and sell and to permit *154 others to use, manufacture, and sell freezers built under the Oltz patent until the expiration of that patent (May 18, 1954), in all of that part of the continental United States lying east of the Mississippi River, except the States of Florida, Illinois, Wisconsin, and Louisiana, and the County of Greenville in the State of South Carolina, the County of Mecklenburg in the State of North Carolina, and the County of Hinds in the State of Mississippi. The agreement also provided that should there be any improvements made on the Oltz patent, the life of the agreement should be extended during the life of the improvement or improvements.
In consideration of Ar-Tik granting the rights and licenses to McCullough under the Eastern Agreement, McCullough agreed to pay to Ar-Tik the sum of $10,000 upon execution of the agreement and 60 percent of all sums received by him from his granting of territorial rights to third persons until the sum of $102,000 had been paid to Ar-Tik.
It was further agreed under the provisions of the Eastern Agreement that all sublicenses granted by McCullough would contain a provision obligating the sublicensee to pay to Ar-Tik a royalty in the sum of 2 cents per *155 gallon on all mix used in the freezers, such royalty to continue during the life of the freezers regardless of the expiration of the patent.
Also under the Eastern Agreement, copies of all sublicenses granted by McCullough were required to be promptly furnished to Ar-Tik. All freezers manufactured were required to bear a serial number and Ar-Tik was to be kept informed at all times of the location of all freezers manufactured by McCullough or his sublicensees.
On September 17, 1947, the above-mentioned Eastern Agreement of September 7, 1946, was amended whereby (1) McCullough returned to Ar-Tik all of his exclusive rights and licenses for the use, manufacture, sale, and distribution of freezers built under the Oltz patent in the States of Mississippi, Alabama, Georgia, South Carolina, and North Carolina, (2) Ar-Tik agreed to credit McCullough's territorial account in the East with the amount of $30,000, and (3) McCullough granted to Ar-Tik all the exclusive rights to the use of the registered trade name Dairy Queen in the foregoing five states and the State of Florida.
Sometime after September 7, 1946, and prior to February 20, 1953, McCullough assigned the original Eastern Agreement *156 to McCullough's Dairy Queen, a copartnership.
On February 20, 1953, the Eastern Agreement was supplemented and amended retroactively to its inception. As so supplemented and amended, it provided as follows:
THIS SUPPLEMENTAL AGREEMENT made and executed as of the 7th day of September, A.D. 1946 by and between AR-TIK SYSTEMS, INC. hereinafter referred to as First Party and H. F. McCullough acting for McCULLOUGH'S DAIRY QUEEN, a co-partnership to which said original agreement has been previously assigned by H. A. McCullough, hereinafter referred to as Second Party,
WITNESSETH:
WHEREAS, by agreement bearing said date First Party granted exclusive rights to Second Party and license for the use, manufacture, sale and distribution of all machines built under Patent No. 208097 1 in certain territory lying East of the Mississippi River, and
WHEREAS paragraph 4 of said agreement does not express the agreement actually made nor the intention of the parties, and since the date of execution of said agreement the parties have by all their actions and dealings with each other, treated said agreement as if supplemented and amended as hereinafter set forth and now desire to supplement and *157

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4619715. Public record. Not legal advice.