Cullins v. Commissioner

Chalmers Cullins and Emily Cullins, et al., 1 Petitioners, v. Commissioner of Internal Revenue, Respondent Cullins v. Commissioner Docket Nos. 52420, 52421, 52422 United States Tax Court 24 T.C. 322; 1955 U.S. Tax Ct. LEXIS 179; June 6, 1955, Filed *179 Decisions will be entered for the respondent. Gross Income -- Sec. 22 (a), 1939 Code -- Nature of Payment Received in Settlement of Antitrust Suit. -- Petitioners joined with others in suit against distributors and exhibitors of motion picture films for alleged violations of antitrust laws. Before trial there was a compromise settlement under which the defendants agreed to pay petitioners $ 36,363.67, part of which was received in 1947, and part in 1948. Held: (1) That petitioners have failed to prove that all or any part of the recovery constituted a return of capital and did not represent a recovery of profit or of lost profits. (2) That a reasonable construction of the complaint of petitioners is that their claim was in the nature of a claim for compensatory and punitive damages, and that as such the entire recovery is taxable under section 22 (a). The question relating to recovery of punitive damages is controlled by Commissioner v. Glenshaw Glass Co., 348 U.S. 426. Marx J. Borod, Esq., and Irvin Bogatin, Esq., for the petitioners. Lester R. Uretz, Esq., for the respondent. Harron, Judge. HARRON *323 The Commissioner determined deficiencies in income tax for 1947 and 1948, as follows: Deficiencies Docket No. Taxpayer [1948] 52420 C. Cullins $ 2,285.09 $ 3,369.36 52422 N. Evans 2,483.05 3,317.46 52421 E. Cullins 1,513.76 In the taxable years, the petitioners received distributions of certain sums out of a lump-sum payment which was made by defendants to a suit brought by several plaintiffs including the petitioners. None of the petitioners *181 included in taxable income any part of the distributions. The Commissioner determined that the distributions received in 1947 and 1948 were taxable in full under section 22 (a) of the 1939 Code. The only issue to be decided is whether the distributions in question are taxable. Other adjustments made by the Commissioner are not contested. The petitioners filed their returns with the collector of internal revenue for the district of Tennessee. FINDINGS OF FACT. Chalmers Cullins filed an individual return for 1947. For 1948, he and his wife, Emily, filed a joint return. Nate Evans filed an individual return for 1947. He and his wife, Ray, filed a joint return for 1948. Edward Cullins and his wife, Lucile, filed a joint return for 1948. Since the issue presented relates only to Chalmers Cullins, Edward Cullins, and Nate Evans, they are referred to hereinafter as the petitioners. All of the petitioners are residents of Memphis, Tennessee. The stipulated facts are found in accordance with the stipulation. In 1946, and both before and after that year, C. Cullins, E. Cullins, and N. Evans were the only members of a partnership which operated the Idlewild Theatre in Memphis. The partnership*182 had been engaged in the business of owning and operating a neighborhood motion picture theatre in Memphis since September 1940. Each of the petitioners *324 had and still has a one-third interest in the partnership. The partnership's books were kept and its returns were filed on the basis of a fiscal year ended on September 30. Prior to the formation of the Idlewild Theatre partnership in 1940, C. Cullins and Evans, as partners, had leased and operated a first-run motion picture theatre, the Orpheum Theatre, which was located in downtown Memphis. They leased the Orpheum Theatre in September 1937, on a year-to-year basis, for a rental of $ 1,500 a month. They operated the Orpheum Theatre until February 1940, when they surrendered possession because they were in default under the lease. Thereafter the partnership was dissolved. On August 22, 1946, the petitioners as the operators of the Idlewild Theatre, and as the former operators of the Orpheum Theatre, and 8 others as the operators of 5 other theatres in Memphis and the Memphis area, filed a "Complaint for an Injunction and Damages" in the United States District Court for the Western District of Tennessee against 16 distributors*183 and exhibitors of motion picture films including, inter alia, Paramount, United Artists, RKO, and Twentieth-Century Fox. The complaint was filed under certain sections of the Clayton Act., i. e., sections 4 and 16 of the Act of Congress of October 15, 1914 (ch. 323, 38 Stat. 731, 737), as amended, entitled "An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes." It was alleged in the complaint that the defendants had violated certain provisions of the Sherman Act, namely, sections 1 and 2 of the Act of Congress of July 2, 1890 (ch. 647, 26 Stat. 209), as amended, entitled "An Act to protect trade and commerce against unlawful restraints and monopolies." The plaintiffs sought injunctive relief and damages for alleged violations of the Federal antitrust laws. The complaint is incorporated herein by this reference. With respect to the operation of the Orpheum Theatre by C. Cullins and Evans, it was alleged in the complaint, among other things, that at some time prior to 1937, the defendant exhibitors and distributors had combined and conspired among themselves to eliminate competition in the first run showing of motion pictures in*184 Memphis by illegal means, and to drive the Orpheum Theatre out of business by preventing it from obtaining films from any of the distributor defendants. It was alleged that as a result of the combination and conspiracy Cullins and Evans, as lessees of the Orpheum Theatre from September 1937 until February 1940, were unable to obtain any films for exhibition at the theatre except films of an inferior quality, with the result that they were forced to default upon their lease, and the theatre was thereafter acquired by certain of the defendant exhibitors, and was operated by them as a profitable business. It was *325 alleged that Cullins and Evans could have operated the Orpheum Theatre as a profitable business but for the combination and conspiracy among the defendants. With respect to the operation of the Idlewild Theatre by the petitioners as partners (and the operation of other neighborhood theatres in Memphis by the various plaintiffs), it was alleged in the complaint, among other things, that beginning at some time prior to 1930, the defendant exhibitors had combined and conspired among themselves and with the defendant distributors to monopolize by illegal means the exhibition*185 of motion pictures in practically all neighborhoods in Memphis in which the defendant exhibitors operated theatres. It was alleged that defendant distributors refused to license feature motion pictures for exhibition in neighborhood theatres in Memphis except upon terms and under conditions which gave an unfair competitive advantage to the defendant exhibitors over plaintiffs. It was alleged that as a result of the practices complained of "plaintiffs have been prevented from obtaining the volume of patronage which under free competitive conditions and but for said acts of defendants they would otherwise receive, to their loss and damage"; also that "as long as the distributor defendants * * * continue to afford to the exhibitor defendants the preferences and privileges hereinbefore described, the early neighborhood run monopoly enjoyed by the exhibitor defendants in the neighborhoods in Memphis in which they operate will continue and the plaintiffs and other exhibitors in like situations will continue to be held in inferior positions." The prayer of the complaint, in pertinent part, was as follows: Wherefore, Plaintiffs Pray: * * * * (6) That pursuant to the provisions of Section*186 4 of the Clayton Act, 38 Stat. 731, plaintiffs have judgment against defendants in the sum of $ 2,910,600.00, together with the costs of suit and a reasonable attorney's fee, said judgment to be apportioned among the plaintiffs as follows: -- Idlewild Theatre $ 312,000.00 Airway Theatre 210,600.00 Luciann Theatre 280,800.00 Hollywood Theatre 280,800.00 Bristol Theatre 374,400.00 Mrs. Lebora Cianciola, as Sole Executrix of the Estate of M. Cianciola 491,400.00 Rosemary Theatre 210,600.00 Chalmers Cullins and Nate Evans, Individually 750,000.00 Total $ 2,910,600.00 The answer of the defendants to the complaint was in the form of a general denial of the allegations contained therein. The suit was settled by agreement of the parties prior to trial. On January 14, 1948, parties to the suit filed a stipulation of settlement *326 in the District Court. The stipulation of settlement is incorporated herein by this reference. It recites formal matters, only, and states that the defendants agreed to pay the plaintiffs' attorneys $ 1 upon their signing of the stipulation of dismissal of the complaint. In the settlement, the defendants "insisted" that they had *187 not violated the Clayton Act or the Sherman Act. Pursuant to the stipulation of settlement, the suit was dismissed with prejudice, and the plaintiffs executed and delivered to the defendants general releases of any and all claims of plaintiffs against defendants. The releases executed by the petitioners are incorporated herein by this reference. Although the stipulation of settlement recited only that the defendants agreed to pay to the plaintiffs' attorney $ 1, the defendants, in fact, agreed to pay the total amount of $ 200,000 2 to all of the plaintiffs, including the petitioners. The plaintiffs paid their costs and the fees of their attorneys out of the $ 200,000 which the defendants paid, so that the plaintiffs received some net amount which remained. *188 Out of the net proceeds left from the agreed amount of $ 200,000, the petitioners received payments in 1947 and 1948 in the aggregate amount of $ 36,363.67, none of which was reported for tax. Of this sum, the petitioners received $ 10,227.28 in 1947, and $ 26,136.39 in 1948. The parties have stipulated that C. Cullins and Evans, as the former partners in the Orpheum partnership, received $ 18,181.85; that C. Cullins, E. Cullins, and Evans, as the partners in the Idlewild partnership received $ 18,181.82; that the former partners of the Orpheum partnership received about $ 9,090.90 in 1947, and about $ 9,090.92 in 1948; and that the three partners in the Idlewild partnership received $ 18,181.82 in 1948. The following schedule sets forth, according to the stipulation, these receipts according to the year in which the payments were received and according to the partnership business to which the sums received were attributed (the breakdown of $ 36,363.67 has not been made so as to accurately take care of a few cents): C. Cullins Evans E. Cullins [1947] Receipts -- Orpheum $ 4,545.45 $ 4,545.45 [1948] Receipts -- Orpheum 4,545.46 4,545.46 [1948] Receipts -- Idlewild 6,060.67 6,060.67 $ 6,060.67 *189 *327 The respondent has included in the taxable income of C. Cullins and Evans, individually, for 1947 and 1948 the amounts attributed to the former Orpheum partnership. The respondent, also, has included in the income of the Idlewild partnership for its fiscal year ended September 30, 1948, the amount attributed to that partnership, and, accordingly, has increased the amounts of each partner's share of the distributive income of that partnership for 1948. The reason given by the respondent for his determinations is: "It is held that the amount received represented the recovery of lost profits." OPINION. The issue presented is the taxability of the sum of money which petitioners received in the compromise settlement of the claims they asserted against several distributors and exhibitors of motion picture films. The Commissioner has determined that the entire sum in question represented recovery of lost profits and that, therefore, it is taxable as ordinary income under section 22 (a) of the 1939 Code. The taxable nature of the sum recovered in settlement of petitioners' claims is dependent upon the nature of the claims. It is well established that "since profits from business*190 are taxable, a sum received in settlement of litigation based upon a loss of profits is likewise taxable; but where the settlement represents damages for lost capital rather than for lost profits the money received is a return of capital and is not taxable." Durkee v. Commissioner, 162 F. 2d 184, 196, and cases cited therein; and Raytheon Production Corporation v. Commissioner, 144 F. 2d 110, certiorari denied 323 U.S. 779. The petitioners make two contentions. They assert that their recovery represented damages for tortious injury to reputation or reduction to an inferior position in their business and, therefore, constituted a return of capital. In the alternative, they contend that the recovery represented punitive damages to the extent of two-thirds; that not more than one-third represented recovery of lost profits; and that the amount received as punitive damages is not taxable. Petitioners have relied on Glenshaw Glass Co., 18 T. C. 860, 868, affd. 211 F. 2d 928, and Telefilm, Inc., 21 T. C. 688, 694.*191 It is noted at the outset that both of the authorities which are cited have been reversed recently. See, Commissioner v. Glenshaw Glass Co. and William Goldman Theatres, Inc., 348 U.S. 426; and Commissioner v. Telefilm, Inc., F. 2d (May 3, 1955). The petitioners cannot succeed under either contention. *328 Petitioners have failed to establish their cost or basis of any capital asset, such as goodwill, which was allegedly lost. Proof of the cost of any capital asset which might be involved is necessary because recovery of an amount in excess of cost constitutes income. It is a question of fact whether the recovery is limited to a recovery of capital. Raytheon Production Corporation v. Commissioner, supra.Petitioners, upon whom the burden of proof rested, offered no evidence on the value of one business which allegedly was destroyed, or on the value of a portion of the goodwill of another business which allegedly was lost. Furthermore, the complaint filed in the District Court did not advert to injury to goodwill or capital. Also, the evidence indicates that the defendants agreed to the*192 compromise settlement to avoid further expenses of litigation. See Armstrong Knitting Mills, 19 B. T. A. 318, 321. The suit in which petitioners joined was settled under a compromise agreement. That agreement is not before us and there is no other evidence upon which any allocation of the amount which petitioners recovered can be made. There is no evidence to establish the purpose or purposes for which the money was paid to petitioners. The petitioners made claims for recovery of $ 312,000 and $ 750,000. They received $ 36,363.67 in settlement. Neither the complaint, nor the settlement agreement, nor the releases, nor the evidence as a whole provides a basis for making an allocation of the recovery and finding that all or part of the sum recovered represented a return of capital. The respondent has determined that the entire sum recovered represented recovery of lost profits. That determination is prima facie correct, and petitioners have failed to establish that it was an erroneous determination. Furthermore, a reasonable construction of the complaints in the suit which was instituted is that the petitioners, in making a claim under section *193 4 of the Clayton Act, sued to recover compensatory and punitive damages. They do not deny that such construction can be made of the nature of their complaint; in fact, such construction is implicit in their alternative contention. If part of the recovery was for punitive damages, such part is taxable as ordinary income. Commissioner v. Glenshaw Glass Co. and William Goldman Theatres, Inc., supra; and Commissioner v. Telefilm, Inc., supra. It is well settled that recovery of lost profits other than treble damages is taxable as ordinary income. Swastika Oil & Gas Co. v. Commissioner, 123 F. 2d 382, certiorari denied 317 U.S. 639. It follows that the entire recovery of $ 36,363.67 is taxable under section 22 (a). The respondent's determinations are sustained. Decisions will be entered for the respondent. Footnotes 1. The following proceedings have been consolidated: Docket No. 52420, Chalmers Cullins and Emily Cullins; Docket No. 52421, Edward O. Cullins and Lucile Brett Cullins; Docket No. 52422, Nate Evans and Ray Evans.↩ 2. The record in this proceeding does not contain any evidence with respect to the agreement of the defendants to pay $ 200,000. It appears that there was some written agreement, but such agreement is not before us. The record does not show the basis upon which some part of $ 200,000 was to go to the petitioners. The releases which were executed by the petitioners do not specify any amount as the portion of $ 200,000 which petitioners were to receive. The record does not show how or upon what basis $ 200,000 was to be divided among all of the plaintiffs. Whether or not all of the plaintiffs agreed among themselves as to the portions each was to receive out of $ 200,000 is not shown by the record. The record does not show the total amounts of costs, attorneys' fees, and the net amount which the plaintiffs received out of $ 200,000.↩