Usually wine lovers argue about what's in a bottle, not what's on its label. Not so in upstate New York. There a bunch of people who run the Taylor Wine Company but aren't Taylors are in the midst of a legal feud with a Taylor who runs a vineyard outside Hammondsport named Bully Hill.

Walter S. Taylor, or Walter S. . . ., as he signs his name these days, claims he is having a court-inflicted identity crisis. He also is battling the federal government in an attempt to have what's on the label reflect exactly what's in the bottle.

Later this spring, a U.S. District judge issued a "modified preliminary injunction" that enjoined Bully Hill from using the word "Taylor" on its labels and from making certain claims about the origins and family heritage of the vineyard (including a prohibition against using portraits of Taylor family members). It allowed use of the Walter S. Taylor signature only on the back label at a size not "larger, more prominent nor more conspicuous than the smalles mandatory label information . . ." on a bottle.

"It's a magic marker time at Bully Hill," a Bully Hill lawyer told a New York State newspaper. Walter S. Taylor, who has proved a genius at gaining publicity, invited the public to come to the winery to help cross out words and mask the eyes of various Taylors portrayed on his labels. Taylor himself posed in a mask, Lone Ranger style.

Meanwhile Bully Hill is taking the decision to the Second District's Court of Appeals. A hearing of the appeal is scheduled for October. This is the second time this course has been followed. The first "preliminary" injunction, temporarily banning the Bully Hill labels that offended the Taylor Wine Company, was sent back to the District Court by the Court of Appeals. This second, or modified, injunction is still only "preliminary" injunction. In prospect is more legal battling before the ban could become "permanent, "including the possibly of a trial. The case began in May, 1977 when Bully Hill launched a new "Walter S. Taylor" line of wines. The owner's signature was on the front of the bottle, larger than the name Bully Hill and each label also contained a portrait of a member of the Taylor family. The Taylor Wine Company, which is now oned by Coca-Cola, sued for trademark infringement. Their claim was the public could confuse Bully Hill wines for the widely distributed and extensively advertised Taylor Wine Company products.

A number of factors in the background loom large or small, depending on your point of views. The Taylor Wine Company is the nation's sixth largest with a multi-million case yearly production, compared with 20,000 for tiny Bully Hill. The Taylor Wine Company did once belong to Walter S.'s family and Walter himself was fired from the company in 1970 after publication of his harsh criticism of New York State winemaking practices.

At that time, Walter was considered his family's black sheep and became quite unpopular in tiny Hammondsport. Now Coca-Cola is on the scene. Famous for their trade-mark battles the giant Atlanta corporation is perceived - wrongly, sources at Taylor have said - as an outsider attacking the romance of wine and winemaking with a soft drink mentality. A Taylor spokesman has said the action against Bully Hill was not initiated by Atlanta.

Nonetheless, Coca-Cola is being painted as the mean-spirited outsider and Walter Taylor has become something of a hometown hero. He is pictured by his supporters as an artistic free spirit who has been outspoken in distinguishing his wines from those of the Taylor Wine Company on grounds of production techniques and quality. He also champions the cause of making New York State grapes (legally a sizable percentage of these grapes may ome from elsewhere), a stand that has pleased grape growers in the region.

The controversy has gained Bully Hill publicity it could never have afforded to purchase and the vineyard's lawyers, while admitting they are negotiating to settle the suit, old out the threat of going to trial. The Taylor Wine Company's lawyers, having had things mostly their way legally so far, contend, "This is a matter for the courts to resolve."

Not one to fight his battles one at a time, Walter S. Taylor is also feuding with the Bureau of lcoho, Tabacco and Firearms. Wines is one of the few products that is exempt from ingredient labeling. Taylor supports consumer activits who have been trying to change the law and was angered recently when BATF rejected one of his labels. It said the wine was made 100 percent from the Seyval Blanc grape, listed two growers from whose vineyards the grapes came and added the phrase, "made without the addition of water or use of the ion exchange."

Water and sugar may be added legally to New York State wines. Therefore, BATF ruled telling the public his wines were made without adding water was "disparaging" of other wines.

In effect, the government not only won't make wineries say they add water to their wines. It won't allow Bully Hill to say it does not.

"These wines are my own. My achievements are my own. My aspirations are my own," writes "Walter S. . . . Winemaker. Grapegrower and Artist" on the label. However out of step he may be with the industry, one of his achievements is sensing what ought to be, no matter what the laws says has to be.