Park v. Gilligan, 2737

• Decision Date: 29 April 1921
• Docket Number: 2738.,2737
• Citation: 293 F. 129
• Parties: PARK v. GILLIGAN, Collector (two cases).
• Court: U.S. District Court — Southern District of Ohio

293 F. 129

PARK v. GILLIGAN, Collector (two cases).

Nos. 2737, 2738.

United States District Court, S.D. Ohio.

April 29, 1921

Matthews & Matthews, of Cincinnati, Ohio, for plaintiffs.

R. T Dickerson, Asst. U.S. Atty., of Cincinnati, Ohio, for the United States.

PECK District Judge.

These cases are submitted together upon an agreed statement of facts and evidence. The questions involved, identical in each case, are as to the taxability, as income, under the law of 1916 (39 Stat. 756), of two certain items. The first is that part which each plaintiff received as a stockholder from the proceeds of a settlement of the case of John D. Park & Sons Co. against various persons, by which the sum of $85,000 was realized upon a claim for damages by way of loss of profits resulting from an unlawful restraint of trade suffered in the years 1891 to 1904, which was in litigation long prior to March 1, 1913, and was settled by the payment of the aforesaid amount about November 1, 1916. At the time it was received John D. Park & Sons Co. had ceased to be a corporation, and had become a voluntary association organized under the laws of Ohio; but I take it that fact makes no material difference in any aspect of this case. The amount was received by the association, and apportioned among its shareholders, and credited to them upon its books. The item represented, therefore, the distribution of the proceeds of a chose in action arising ex delicto long prior to March 1 1913. It was compensation for an injury which John D. Park &amp Sons Co. had suffered by reason of a violation of the Anti-Trust Law (Comp. St. Sec. 8820 et seq.). It was not in itself a profit, but was indemnification for a wrong which had caused a loss of profits. On March 1, 1913, it was represented by an accrued chose in action. On November 1 1916, it was reduced to cash.

By the act of 1913 (38 Stat. 114) dividends were taxable if paid after March 1, 1913, whether from profits theretofore accrued or thereafter. Lynch v. Hornby, 247 U.S. 339, 38 Sup.St. 543, 62 L.Ed. 1149. But by the act of 1916 taxable dividends were limited to those made out of earnings or profits accrued since March 1, 1913. And, I take it, whatever claims the corporation had upon that date, whether arising from profit or otherwise, are to be considered as capital then accrued, for the purposes of this act, and that profit since accrued means after-acquired gain, which did not then exist, and that the mere fact that a then existing claim, even though representing a profit, was afterwards collected, would not make it a profit accrued after the prescribed date. The same limitation was carried in the amendment of October 3, 1917 (40 Stat. 300), and substantially the same in section 201 of the act of 1918 (Comp. St. Ann. Supp. 1919, Sec. 6336 1/8b), the date being there changed to February 28, 1913. Any distribution of property or money accumulated by a corporation prior to March 1, 1913, has not been taxable as income at any time since the enactment of the Act of September 8, 1916, and it was under that act that the taxes in question were imposed. Therefore the distribution of the sum realized from the compromise of the chose in action under discussion was not a dividend taxable as income unless that sum can be regarded as representing profit accrued after March 1, 1913.

The brief filed by the government rests its contention upon the proposition that, when a dividend is declared and paid by a corporation, such dividend is presumed to have been paid from profits, and not from capital, and that if the value of the capital of this corporation, after the distribution of said sum of $85,000, was equal to its value on March 1, 1913, the distribution of the $85,000 was a distribution of the profits, and the shares received by the plaintiffs were taxable income. But the evidence is that all, or practically all, of the profits that accrued to this corporation between March 1, 1913, and January 1, 1917, were paid out in other dividends, and it was impossible that this $85,000 could have been paid out of earnings on hand. The corporate surplus was practically...