United States v. Safety Car Heating Lighting Co Rogers v. Same, Nos. 75 and 76

• Court: United States Supreme Court
• Writing for the Court: CARDOZO
• Citation: 297 U.S. 88,56 S.Ct. 353,80 L.Ed. 500
• Decision Date: 06 January 1936
• Docket Number: Nos. 75 and 76
• Parties: UNITED STATES v. SAFETY CAR HEATING & LIGHTING CO. * ROGERS, Collector of Internal Revenue, v. SAME

297 U.S. 88 56 S.Ct. 353 80 L.Ed. 500 UNITED STATES

v.

SAFETY CAR HEATING & LIGHTING CO.^* ROGERS, Collector of Internal Revenue, v. SAME.

Nos. 75 and 76. Argued Dec. 20, 1935. Decided Jan. 6, 1936.

[Syllabus from pages 88-90 intentionally omitted]

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Messrs. Homer S. Commings, Atty. Gen., and J. P. Jackson, of Washington, D.C., for petitioners.

Mr. Thomas G. Haight, of Jersey City, N.J., for respondent.

Mr. Justice CARDOZO delivered the opinion of the Court.

The respondent claims a refund of income taxes under the Revenue Act of 1926 (44 Stat. 9). The petitioner in one of the cases (No. 75) is the United States, a defendant in the court below. The petitioner in the other (No. 76) is the Collector of Internal Revenue for the Fifth District of New Jersey.

Since 1907, the taxpayer, respondent, has been the owner of the Creveling patent for an improvement in the electric lighting equipment of railway passenger cars. It brought suit in 1912 against the United States Light & Heating Company to restrain an infringement of the patent, and for an accounting of damages and profits. The suit was pending on February 25, 1913, the effective date of the Sixteenth Amendment, and on March 1, 1913, the effective date of the first statute enacted thereunder. Act of October 3, 1913, c. 16, 38 Stat. 114, 166, 168, 172, 174.^* The accused infringer contested its liability for in-

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fringement as well as its liability for damages and profits. Not till 1915 was the capital fact of an infringement determined. On February 15, 1915, there was entered in the District Court an interlocutory decree (Safety Car Heating & Lighting Co. v. U.S. Light & Heating Co., 222 F. 310) for an injunction, which was affirmed by the Circuit Court of Appeals (223 F. 1023) in July of the same year. An accounting followed before a master and continued for eight years. On that accounting the complainant waived any recovery for damages, and confined its claim to the profits received by the infringer. On May 26, 1923, the master filed his report in which he found that there was due to the complainant for profits received by the infringer between January 1, 1909, and April 30, 1914, the sum o $501,180.32. Of this award, a large part ($436,137.41) was for profits applicable to the period before March 1, 1913. The report was confirmed by the District Court on October 10, 1923 (2 F.(2d) 384), at which time the infringing defendant was in the hands of receivers. A final decree followed in October, 1924, the award being adjudged to constitute a superior lien upon the assets of the infringer then held by a successor. Cross-appeals were carried to the Court of Appeals for the Second Circuit, the complainant contending that the award was too small, the infringer and its successor contending that the award was too large and that error had been committed also in the declaration of the lien. While the appeals were undetermined, the complainant accepted a settlement in May, 1925, after thirteen years of litigation, whereby it received from the infringer the sum of $200,000 in satisfaction of the judgment. After deducting the expenses incurred in connection with the suit ($23,468.05), the net amount collected was $176,531.95, of which part ($153,621.72) is attributable to acts of infringement before March 1, 1913, and part to such acts thereafter.

In May, 1926, the taxpayer filed its income tax return for 1925, showing a net income for that year of $1,473,

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187.13, and a tax due thereon of $172,610.19, which has been paid. It did not include in the return any part of the proceeds of the patent litigation ($176,531.95), nor did it claim any deduction for loss resulting from the settlement. Thereupon the Commissioner made a deficiency determination of $22,162.07, plus interest, the additional tax due after adding the net proceeds of the settlement to the income of the year. Two claims for refund followed. The first, filed in March, 1929, was for $69,729.18. The taxpayer took the ground that as a result of the settlement it had sustained a loss of $536,378.28, which through error it had failed to deduct in making its return and in paying the tax thereunder. Its books were kept on the accrual basis. The second of the two claims, filed in July, 1930, was for an additional refund in the amount of $19,970.82. In this the taxpayer took the ground that in determining the gross income for 1925 the Commissioner had erred by including that part of the proceeds of the settlement attributable to acts of infringement before March, 1913. Both claims were rejected by the Commissioner. The taxpayer then sued, making the United States the defendant with reference to the first claim and the collector the defendant with reference to the second.

In the suit against the United States the District Court found that the taxpayer's claim for damages on account of so much of the infringement as had occurred before March 1, 1913, had a 'market value' on that date of $436,137.41, the profits of the infringer up to that time as reported by the master. From this the court concluded that in the year 1925 there had been a deductible loss of the difference between $436,137.41 and the sum of $174,040.62, a like proportion of the $200,000 actually recovered. The tax upon this difference ($262,096.79) was $34,072.58. The taxpayer received an award of judgment for that amount with interest. 5 F.Supp. 276. In the suit against the collector, the District Court held that

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such portion of the net settlement as was allocable to acts of infringement before March 1, 1913 ($153,621.72), had accrued to the taxpayer i advance of that date, and was therefore to be treated as capital, not taxable as income for the year when the settlement was made. The taxpayer received an award of judgment for the tax on that amount (i.e., for $24,732.90) with interest.

The Circuit Court of Appeals for the Third Circuit affirmed the judgments in both suits. 76 F.(2d) 133. To fix more precisely the taxable quality of contested and contingent choses in action belonging to a taxpayer before March 1, 1913, writs of certiorari issued from this court. 296 U.S. 555, 56 S.Ct. 91, 80 L.Ed. 391.

First. Congress intended, with exceptions not now important, to lay a tax upon the proceeds of claims or choses in action for the recovery of profits, unless the right to such recovery existed unconditionally on March 1, 1913, the effective date of the first statute under the Sixteenth Amendment.

The tax imposed on the respondent was laid under the Revenue Act of 1926 (c. 27, 44 Stat. 9), which includes in gross income (section 213(a), 44 Stat. 23) gains on profits 'from any source whatever.' We have said of that act that it reveals in its provisions an intention on the part of Congress to reach 'pretty much every sort of income subject to the federal power.' Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 89, 55 S.Ct. 50, 52, 79 L.Ed. 211. There is no denial that profits owing to a patentee by the infringer of a patent are income within the meaning of the statute, unless withdrawn from that category by the date of the infringement. Cf.T.R. 45, Art. 52; T.R. 62, Art. 51; T.R. 65, Art. 50; T.R. 69, Art. 50; Commissioner v. S. A. Woods Machine Co. (C.C.A.) 57 F.(2d) 635.

Until July, 1915, the existence of any liability was contested and uncertain. The amount remained contested and uncertain until May, 1925, when there was a

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settlement of the liability reported by the master. Then for the first time the profits flowing from the infringement became taxable as income. North American Oil Consolidated v. Burnet, 286 U.S. 417, 423, 52 S.Ct. 613, 76 L.Ed. 1197; Lucas v. American Code Co., 280 U.S. 445, 451, 452, 50 S.Ct. 202, 74 L.Ed. 538, 67 A.L.R. 1010; Lucas v. North Texas Lumber Co., 281 U.S. 11, 50 S.Ct. 184, 74 L.Ed. 668; Burnet v. Huff, 288 U.S. 156, 53 S.Ct. 330, 77 L.Ed. 670. The respondent admits this to be true to the extent that the acts of infringement were later than February, 1913. The argument seems to be, however, that accrual has a different meaning when applied to income generated by acts committed earlier. But plainly the respondent's exemption, if it exists, will have to rest upon some other basis. A claim for profits so contingent and indefinite as to lack the quality of accrued income in March, 1913, cannot have had the quality of such income before that time, its existence and extent being then equally uncertain. Only an arbitrary dichotomy could bring us to the conclusion that part of the recovery was income to the taxpayer as of the date of payment or collection and part as of the date of the underlying wrong. The respondent, to prevail, must be able to make out that though the profits were income in their entirety as of May, 1925, there was an intention of the Congress that part of this income, the part attributable to acts before March, 1913, should be excluded from the reckoning.

We find no disclosure of that intention in the provisions of the statute, and none in the history of other acts before it. The first statute following the Sixteenth Amendment laid a tax, as we have seen, on the entire net income 'accrued' within each calendar year; the impost being coupled with a proviso that for the year 1913 what was to be taxed should be the entire net income 'accrued' within that portion of the year from March 1 to the end. Definiteness of meaning was given to that and later acts by Treasury Regulations. Article 90 of Regulations 62,

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adopted in 1922, provides: 'Any claim existing unconditionally on March 1, 1913, whether presently payable or not, and held by...