Freeman v. Comm'r of Internal Revenue
| Decision Date | 25 November 1959 |
| Docket Number | Docket No. 71275. |
| Citation | 33 T.C. 323 |
| Parties | RALPH FREEMAN AND GRACE FREEMAN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Richard B. Ryan, Esq., for the petitioners.
D. W. Wolf, Esq., for the respondent.
Petitioner, owner of an electrical fixture supply company, instituted suit under the Federal antitrust laws against certain distributors of electrical equipment and contractors charging loss of profits and injury to his business and property during the years 1946 through 1950, inclusive. The complaint prayed for treble damages under the so-called Clayton Act. In 1953, before trial, there was a compromise settlement under which petitioner received a lump sum of $32,000, for which he executed a release in full satisfaction of all actual or statutory damages, costs, attorney fees, and matters referred to or alleged in the complaint. Neither the release nor any other evidence in the record establishes the extent, if any, the amount in question represented a recovery of lost capital. Held, that petitioner has failed to meet the burden of proof of error in respondent's determination that, after attorney's fees of $8,000, the entire recovery ($24,000), received in 1953 was taxable under section 22(a) of the 1939 Code.
FINDINGS OF FACT.
Petitioners, Ralph and Grace Freeman, are husband and wife, residing at 1619 Edgecumbe Road, St. Paul, Minnesota.
For the taxable year December 31, 1953, petitioners filed a joint Federal income tax return with the district director of internal revenue for the district of Minnesota. Ralph Freeman, hereinafter called petitioner, is an individual doing business as the Freeman Electric Supply Company, which was known as the Freeman Electric Company during the late 1940's and early 1950's. Business operations of Freeman Electric Company consisted primarily of the purchase and sale of electric fixtures. Customers of said business included electrical contractors, ultimate consumers, commercial stores (including chain and department stores), and State jobs.
Ralph established said business during the fall of 1945. During and subsequent to the year 1946, his business address was 2864 Chicago Avenue, Minneapolis, Minnesota.
When petitioner started Freeman Electric Company during 1945, the business did not have any goodwill listed on its books. Assets of the business during 1946 consisted of a file cabinet, typewriter, desks, and a truck, having an aggregate value of approximately $3,000.
Sometime during 1947, petitioner became aware of the fact that there was an agreement among suppliers, contractors, and others to prevent his buying and selling electrical fixtures. The parties to this agreement were the St. Paul Contractors Association (or St. Paul Electrical Contractors Association), Minneapolis Electrical Contractors Association, and other parties, all hereinafter referred to as defendants.
The United States Government instituted a prosecution and civil antitrust action against these parties during the latter part of 1950, or during 1951. On March 27, 1953, the United States District Court for the District of Minnesota rendered its decision in said action, and held that defendants had violated the antitrust laws of the United States. The court determined that defendants had combined and conspired to monopolize the trade and commerce in electrical equipment for installation in the Twin Cities area.
Later in 1953, Ralph, doing business as Freeman Electric Company, instituted a civil action under the Sherman and Clayton Antitrust Acts to recover damages from the parties named as defendants in the above-noted proceedings. Said complaint states, in pertinent part, as follows:
1. This Complaint is filed and these proceedings are instituted under the Act of Congress of July 2, 1890, commonly known as the ‘Sherman Act’, 15 U.S.Code, Sec. 1, et seq., and the Act of Congress of October 15, 1941, commonly known as the ‘Clayton Act’, 15 U.S.Code, Sec. 12, et seq., which statutes are hereinafter jointly referred to as the ‘antitrust laws', to recover damages for injury to the property and business of the plaintiff caused by acts of the defendants in violation of said antitrust laws and for other relief.
20. As a direct and proximate result of the aforesaid acts, practices, agreements, combinations, conspiracies and boycott of the defendants, the plaintiff was prevented from selling electrical lighting fixtures to many consumers for said acts; plaintiff and consumers to whom plaintiff had sold electrical lighting fixtures were unable to have electrical lighting fixtures sold by plaintiff installed; plaintiff was prevented from selling electrical lighting fixtures which plaintiff had purchased and held for sale; plaintiff was unable to purchase or secure certain electrical lighting fixtures desired by consumers and therefore was unable to sell to such consumers; plaintiff was denied the right to continue purchasing the electrical lighting fixtures of certain electrical manufacturers; (plaintiff's cost of doing business was substantially increased above what it would have been but for said acts; the normal expansion and growth of plaintiff's business and sales was greatly curtailed and limited; plaintiff suffered a substantial loss of business and profits which plaintiff had a reasonable expectation of receiving but for said acts; and plaintiff's said business and property were substantially damaged and diminished in value.
21. The damage and injury to the property and business of the plaintiff and the loss of profits to the plaintiff caused by the aforesaid agreements, combinations, conspiracies, acts and practices of the defendants, as aforesaid, amount in the aggregate to approximately one hundred and thirty-five thousand dollars ($135,000.00).
25. The violations of the antitrust laws by the defendants referred to and specified above and the acts and practices forbidden by the antitrust laws committed by the defendants and referred to and specified above, have injured the plaintiff in his business and property as related and specified above in the amount of one hundred and thirty-five thousand dollars ($135,000.00). Three times said amount is four hundred and five thousand dollars ($405,000.00).
WHEREFORE, plaintiff demands judgment against the defendants and each of them for four hundred and five thousand dollars ($405,000.00) plus reasonable attorneys' fees and costs herein. (Emphasis supplied.)
The alleged restraint of trade forming the basis for this civil action occurred during the years 1946 to 1950, inclusive.
On September 4, 1953, the parties to said civil action entered into an agreement providing for a disposition of this civil action without trial.
Said agreement reads, in part, as follows:
2. The parties have concomitantly herewith executed a stipulation of dismissal providing for the dismissal upon the merits, with prejudice and without costs, of the above entitled action.
(a) after a so-called ‘Consent Decree’ has been entered in the case of United States of America v. Minneapolis Electrical Contractors Association, et al., Civil No. 3715, in the United States District Court for the District of Minnesota, Fourth Division, in substantially the form previously discussed and agreed upon between the defendants therein and the Department of Justice and dated on or about August 18, 1953; and,
(b) upon the payment to plaintiff and his counsel of the sum of $32,000.00 by certified check on or about October 12, 1953.
Upon the payment of said consideration to plaintiff and his counsel, plaintiff and his counsel will execute and deliver releases in the usual form of all claims arising out of any of the transactions or matters referred to or alleged in the complaint herein as to all of the undersigned defendants and such others as undersigned counsel for the defendants may designate. (Emphasis added.)
Petitioner executed the release referred to in said agreement, the terms of the release reading, in part, as follows:
It is acknowledged that the payment of the above mentioned sum is not and shall not be construed as or taken to imply any admission by any of the parties to whom this release is given of any liability to me or of the truth of any allegation in the complaint in the above entitled matter. It is further acknowledged that the payment of the foregoing sum shall not be construed as the payment of a penalty, but as a compromise payment in full satisfaction of all actual or statutory damages, costs, and attorney's fees suffered and incurred by me, or claimed to be suffered and incurred by me, on account of the transactions, matters, or events referred to or alleged in the said complaint and in and about the prosecution of said action. (Emphasis supplied.)
On October 14, 1953, the United States District Court for the District of Minnesota entered its order dismissing this civil action, upon the merits, with prejudice and without costs, pursuant to the stipulation of dismissal entered into by the parties to that action.
Petitioner received $32,000 in settlement of the above-noted action. Eight thousand dollars of said amount was paid for attorney's fees, leaving a balance of $24,000 received by petitioner.
Petitioners reported the $24,000 received from the settlement of the lawsuit in a schedule attached to their 1953 income tax return, as follows:
+-----------------------------------------------------------------------------+
¦Received in settlement of lawsuit for treble damages under Sherman ¦$24,000¦
¦Act ¦ ¦
+---------------------------------------------------------------------+-------¦
¦Amount taxable in accordance with court decisions, 1/3 ¦8,000 ¦
+---------------------------------------------------------------------+-------¦
¦Nontaxable ¦16,000 ¦...To continue reading
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