Glenshaw Glass Co. v. Comm'r of Internal Revenue, Docket No. 30821.

CourtUnited States Tax Court
Writing for the CourtARUNDELL
PartiesGLENSHAW GLASS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Decision Date13 August 1952
Docket NumberDocket No. 30821.

18 T.C. 860

GLENSHAW GLASS COMPANY, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 30821.

Tax Court of the United States.

Promulgated August 13, 1952.


1. Where a lump sum of money is received in settlement of various claims, an allocation of specific amounts to each of the several claims is necessary and proper.

2. Sums received in settlement of punitive damages do not constitute taxable income.

3. Sums received in settlement of claims for anticipated profits are taxable as ordinary income.

[18 T.C. 860]

Sidney B. Gambill, Esq., for the petitioner.

Albert J. O'Connor, Esq., for the respondent.

The respondent has determined deficiencies of $31.82 and $126,361.06 in the petitioner's income tax liability for the taxable years ending September 30, 1947, and September 30, 1948, respectively.

The petitioner contests the deficiency determined for the taxable year 1948 which results from the inclusion as ordinary income of the proceeds received in a compromise settlement of various claims.

All stipulated facts are found as stipulated.

FINDINGS OF FACT.

The petitioner is a Pennsylvania corporation organized in 1900 as a successor to a limited association formed in 1895. Its principal office and place of business is in Glenshaw, Pennsylvania. From the date of its incorporation to the present time, the petitioner has been continuously engaged in the manufacture of glass bottles and glass containers. For the taxable year 1948 the petitioner's income tax return was filed with the collector of internal revenue for the twenty-third district of Pennsylvania.

For some years prior to 1923, the petitioner was licensed by Howard Automatic Glass Feeder Company to use royalty-free Howard feeder machines in its manufacturing operations. Except with respect to the manufacture of milk bottles, the Howard license agreements were without restrictions as to the type of glass containers that could be manufactured by the petitioner.

Early in 1923, Hartford-Empire Company (hereinafter referred to as Hartford) representing that it had acquired control of the Howard patents, induced the petitioner to cancel its royalty-free license agreements and to enter into new license agreements with Hartford covering the use of both Howard and Hartford feeder machines. The Hartford license agreements imposed upon the petitioner the obligation to pay royalties computed upon ware production, and also prohibited the petitioner from using the feeders to manufacture a wide variety of

[18 T.C. 861]

glassware and containers, including fruit jars, prescription and proprietary medicine ware, milk bottles, and certain other items. Each Hartford license agreement contained a provision permitting its termination by petitioner upon the payment of a prescribed lump sum minimum royalty. From 1923 until 1931, petitioner used and operated only glass feeding machines under the Hartford license agreements, and pursuant to such agreements petitioner paid royalties to Hartford from 1923 through the fiscal year ended September 30, 1931.

The royalty payments and the restrictions upon its manufacturing operations led the petitioner to endeavor to free itself from the Hartford license agreements. In 1931, the license agreements covering the Howard feeders expired, and the petitioner took the position that those feeders, having been originally purchased by the petitioner, remained its property and could be retained and freely used upon the expiration of the license agreements. Accordingly, the petitioner embarked upon the manufacture of fruit jars through the use of those feeders in July 1931, and a 5-year exclusive distribution contract for the sale of its entire fruit jar output was executed with a distributor in September of that year. In December 1932 the royalty-free, unrestricted use of the Howard feeders by the petitioner was terminated as the result of litigation instituted by Hartford for that purpose.

In 1931 and in the forepart of 1932, the petitioner, the McKee Glass Co., George R. Haub, and others formed a corporation, the Shawkee Manufacturing Company, for the purpose of building and selling a new glass feeder. During that period, Haub developed and built in petitioner's plant a new feeder known as the Shawkee feeder. Petitioner received a nonexclusive license to use the Shawkee feeder free from the payment of any royalties. By October 19, 1934, the date of the permanent injunction hereinafter referred to, petitioner had seven royalty-free Shawkee feeders in operation in its plant and was manufacturing 65 per cent of its total production on these machines. It had by then replaced five Howard (Hartford licensed) feeders. The Shawkee feeder proved to be an efficient, workable feeder, equal to those covered by the Hartford licenses.

On May 31, 1933, Hartford filed suit against the petitioner, Shawkee, and others, in the United States District Court for the Western District of Pennsylvania, entitled Hartford-Empire Co. v. Shawkee Manufacturing Co., et al., Docket No. 2791. On the basis of an earlier decision, in Hartford-Empire Co. v. Hazel-Atlas Glass Co., 59 F.2d 399, the complaint charged that the Shawkee feeder infringed the patent owned by Hartford. Relying on the Hazel-Atlas decision, the District Court, on June 27, 1933, entered a preliminary injunction which restrained the defendants from selling Shawkee feeders, but did not apply to the continued use of Shawkee feeders by the petitioner.

[18 T.C. 862]

Relying upon its earlier decision in the Hazel-Atlas case, the Circuit Court of Appeals for the Third Circuit affirmed the order for the preliminary injunction, with an opinion reported at 68 F.2d 726. Pursuant to the mandate of the Circuit Court, the United States District Court for the Western District of Pennsylvania entered an order for a permanent injunction on October 19, 1934. The permanent injunction enjoined the use of Shawkee feeders by petitioner for the manufacture of any and all glassware, and ordered an accounting. Upon the entry of the permanent injunction, the royalty-free Shawkee feeders were dismantled by petitioner. In order to do business and comply with the injunction, it was necessary for the petitioner to reinstall, and it did reinstall, the Hartford licensed feeders and to pay royalties. Were it not for the permanent injunction, the petitioner would have continued to install royalty-free Shawkee feeders to replace the Hartford licensed feeders.

The accounting directed by the permanent injunction was finally concluded by a settlement between the parties in 1939, whereby petitioner paid Hartford the sum of $11,167.85. A final decree in Docket No. 2791 was thereupon entered in 1939.

In 1939, the United States instituted a civil action in the United States District Court for the Northern District of Ohio, in which Hartford was ultimately held to have violated the Federal antitrust laws. United States v. Hartford-Empire Co., 46 F.Supp. 541. The judgment of the District Court finding and holding that Hartford had violated the antitrust laws was affirmed by the United States Supreme Court. Hartford-Empire Co. v. United States, 323 U.S. 386; 324 U.S. 570.

After December 1940, petitioner decided to discontinue all further payments of feeder royalties to Hartford. This decision resulted from information disclosed in the antitrust proceedings prosecuted against Hartford by the United States. Hartford thereupon filed an action for royalties against petitioner in 1941 in the United States District Court for the Western District of Pennsylvania, entitled Hartford-Empire Co. v. Glenshaw Glass Co., Civil Action No. 1650. Following the disclosures made in the Government's antitrust case, the petitioner filed an answer and counterclaim asking for a return of certain royalties and treble damages for destruction of certain lines of its business in violation of the antitrust laws. Hartford's motion to strike the petitioner's counterclaim on the ground that it stated no cause of action was denied in 1942. No further proceedings were had in Civil Action No. 1650 prior to the settlement hereinafter referred to.

Also, following the disclosures in the Government's antitrust case, petitioner instituted proceedings to reopen and set aside the permanent

[18 T.C. 863]

injunction entered against it in 1934 in Docket No. 2791. Petitioner charged that the judgment which Hartford had obtained against Hazel-Atlas Glass Company had been secured through fraud, and that the Hazel-Atlas judgment was fraudulently employed to secure the permanent injunction against petitioner in 1934. Simultaneously, Hazel-Atlas Glass Company filed its petition making the same charges of fraud in the procurement of the judgment against it. The proceedings were consolidated for hearing, and the applications to vacate the judgments were denied by the Circuit Court of Appeals for the Third Circuit, by a divided court. On appeal, the Supreme Court of the United States in 1944 ordered both the judgment against Hazel-Atlas and the judgment against the petitioner set aside upon the ground of fraud. The Supreme Court ordered that the fraudulently obtained injunction entered against the petitioner in 1934 by annulled and set aside, that Hartford's complaint be dismissed, and that the petitioner be permitted to bring appropriate proceedings for restitution and damages.

Pursuant to the decision of the United States Supreme Court, the petitioner filed a counterclaim in the United States District Court for the Western District of Pennsylvania, in the original Hartford injunction proceedings, Docket No. 2791, seeking compensatory damages in the amount of $1,500,000, and exemplary damages in a like amount, based upon the findings of fraud made by the Supreme Court. The District Court denied all of the petitioner's claims for damages except the claim for $11,167.85 paid by petitioner to Hartford in 1939, in settlement of the accounting order above referred to.

The District...

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17 practice notes
  • Commissioner of Internal Revenue v. Glenshaw Glass Company, No. 199
    • United States
    • United States Supreme Court
    • March 28, 1955
    ...of 1939.1 In a single opinion, 211 F.2d 928, the Court of Appeals affirmed the Tax Court's separate rulings in favor of the taxpayers. 18 T.C. 860; 19 T.C. 637. Because of the frequent recurrence of the question and differing interpretations by the lower courts of this Court's decisions bea......
  • Commissioner of Internal Rev. v. Glenshaw Glass Co., No. 11073
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • April 9, 1954
    ...on for gain or profit, or gains or profits and income derived from any source whatever. * * *" 4 The Tax Court opinions are reported at 18 T.C. 860 (Glenshaw) and 19 T.C. 637 (Goldman). See also Obear Nester Glass Co., 20 T.C. 1102, and Telefilm, Inc., 21 T.C. ___, similar 5 The Commissione......
  • Roemer v. Comm'r of Internal Revenue , Docket No. 949-80.
    • United States
    • United States Tax Court
    • August 30, 1982
    ...this Court adhered to the view that punitive damages did not constitute gross income for tax purposes. Glenshaw Glass Co. v. Commissioner, 18 T.C. 860 (1952), affd. 211 F.2d 928 (3d Cir. 1954). In 1955, the Supreme Court granted certiorari and reversed the position of this Court and the Thi......
  • Commissioner of Int. Rev. v. Obear-Nester Glass Co., No. 11140.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • November 15, 1954
    ...no reason other than the Central Railroad case. This holding was followed in Glenshaw Glass Co. v. Commissioner of Internal Revenue, 18 T.C. 860, 868, and William Goldman Theatres, Inc., v. Commissioner of Internal Revenue, 19 T.C. 637. These two cases were considered together and affirmed ......
  • Request a trial to view additional results
17 cases
  • Commissioner of Internal Revenue v. Glenshaw Glass Company, No. 199
    • United States
    • United States Supreme Court
    • March 28, 1955
    ...of 1939.1 In a single opinion, 211 F.2d 928, the Court of Appeals affirmed the Tax Court's separate rulings in favor of the taxpayers. 18 T.C. 860; 19 T.C. 637. Because of the frequent recurrence of the question and differing interpretations by the lower courts of this Court's decisions bea......
  • Commissioner of Internal Rev. v. Glenshaw Glass Co., No. 11073
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • April 9, 1954
    ...on for gain or profit, or gains or profits and income derived from any source whatever. * * *" 4 The Tax Court opinions are reported at 18 T.C. 860 (Glenshaw) and 19 T.C. 637 (Goldman). See also Obear Nester Glass Co., 20 T.C. 1102, and Telefilm, Inc., 21 T.C. ___, similar 5 The Commissione......
  • Roemer v. Comm'r of Internal Revenue , Docket No. 949-80.
    • United States
    • United States Tax Court
    • August 30, 1982
    ...this Court adhered to the view that punitive damages did not constitute gross income for tax purposes. Glenshaw Glass Co. v. Commissioner, 18 T.C. 860 (1952), affd. 211 F.2d 928 (3d Cir. 1954). In 1955, the Supreme Court granted certiorari and reversed the position of this Court and the Thi......
  • Commissioner of Int. Rev. v. Obear-Nester Glass Co., No. 11140.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • November 15, 1954
    ...no reason other than the Central Railroad case. This holding was followed in Glenshaw Glass Co. v. Commissioner of Internal Revenue, 18 T.C. 860, 868, and William Goldman Theatres, Inc., v. Commissioner of Internal Revenue, 19 T.C. 637. These two cases were considered together and affirmed ......
  • Request a trial to view additional results

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