General American Inv. Co. v. Commissioner of Int. Rev.

• Decision Date: 09 March 1954
• Docket Number: No. 29,Docket 22718.,29
• Citation: 211 F.2d 522
• Parties: GENERAL AMERICAN INVESTORS CO., Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

211 F.2d 522 (1954)

GENERAL AMERICAN INVESTORS CO., Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 29, Docket 22718.

United States Court of Appeals Second Circuit.

Argued February 9, 1954.

Decided March 9, 1954.

Norris Darrell, John F. Dooling, Jr., and Robert A. McDowell, New York City, Sullivan & Cromwell, New York City, of counsel, for petitioner.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack and Morton K. Rothschild, Sp. Asst. to Atty. Gen., for respondent.

Before CHASE, Chief Judge, and AUGUSTUS N. HAND and MEDINA, Circuit Judges.

MEDINA, Circuit Judge.

The appeal in this case involves a deficiency in income tax for the calendar year 1948 in the amount of $57,922.55. In compliance with Section 30 (f) of the Investment Company Act of 1940, 15 U.S.C.A. § 80a-29, and Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b), a director, and a stockholder owning more than 10% of the outstanding warrants for the purchase of petitioner's stock, who had realized profits in the respective sums of $81,092.33 and $129,362.95, paid these sums into the treasury of petitioner, as they were so-called "short-swing profits" realized by an "insider" within the meaning of said Section 16(b), as construed and applied in Smolowe v. Delendo Corp., 2 Cir., 1943, 136 F.2d 231, 148 A.L.R. 300, certiorari denied 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446.

Under similar circumstances moneys thus received by a corporation were held by the Court of Claims to be "gains or profits and income derived from any source whatever", within the meaning of Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. Park & Tilford Distillers Corp. v. United States, D.C., 107 F.Supp. 941, certiorari denied 345 U.S. 917, 73 S.Ct. 728, 97 L.Ed. 1350.

Petitioner relies principally upon the following definition of income contained in the opinion of the Supreme Court in the stock dividend case of Eisner v. Macomber, 1920, 252 U.S. 189, 207, 40 S.Ct. 189, 193, 64 L.Ed. 521:

"`Income may be defined as the gain derived from capital, from labor, or from both combined,\' provided it be understood to include profit gained through a sale or conversion of capital assets * * *."

If this definition is to be regarded as all inclusive, and to be applied literally, it does not reach the payments to petitioner with which we are now concerned. And the range of discussion in the briefs and oral arguments before us has covered many situations said to be analogous, including tort recoveries of punitive or exemplary damages in defamation cases, two-thirds of the triple damage awards in private antitrust suits, so-called "penalties" imposed upon faithless fiduciaries and others.¹

Is there some common principle or touchstone by the application of which one may infallibly determine what is and what is not in a given case "gains or profits and income derived from any source whatever"? We think not. The old definition of Eisner v. Macomber was perhaps contrived in the hope that a final and definitive solution had been found. But by reason of the very nature of the subject matter this was not to be. The decision in Eisner v. Macomber still stands, but the definition has met the common fate of generalities, and it has long since given way to an empirical case by case approach, which has the virtue of elasticity and makes possible a more sensible solution of new problems as they arise.²

Policy considerations may in the end play a decisive or persuasive role in the punitive damage, antitrust and faithless fiduciary cases. For, despite the fact that the moneys received in those instances are at the free disposal of those to whom they are paid, and the rationale of such tribunals as have held them not to be "income" is based principally upon the Eisner v. Macomber definition, it may be thought by some that the public interest will be better served if such receipts are held not to be subject to the income tax. It is on some such basis that a taxpayer, who included "short-swing" profits in his gross income, has been denied deductions for payments of these same profits over to the corporations of which he was a director, officer or stockholder, as required by Section 16(b) of the Securities Exchange Act of 1934.³ However imponderable or remote or difficult of ascertainment such policy questions may be we express no opinion thereon. Perhaps they have no relevance to the problem, and the Court of Claims was right when it expressed the view that Central R. Co. of New Jersey v. Commissioner and Highland Farms Corp. (see footnote 1, supra) were wrongly decided. Park & Tilford Distillers Corp. v. United States, supra, 107 F.Supp. at page 945. In any event, no considerations of policy would seem to affect this case one way or the other, since the beneficent purpose of Section 16(b) will be served equally well whether or not these payments are held to be "income" to petitioner.

It is at least clear that the answer is not to be found in mere terminology. Thus it will not help to characterize these payments as a "windfall" to the corporation or as in the nature of a "penalty" imposed upon the director and the stockholder.

In United States v. Kirby Lumber Co., 1931, 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131, a corporation retired some of its own bonds after purchasing them at a price less than the face value, which it had received for...