William Goldman Theatres, Inc. v. Comm'r of Internal Revenue
| Decision Date | 09 January 1953 |
| Docket Number | Docket No. 29450. |
| Citation | 19 T.C. 637 |
| Parties | WILLIAM GOLDMAN THEATRES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Samuel H. Levy, Esq., and Bernard Wolfman, Esq., for the petitioner.
Jules I. Whitman, Esq., for the respondent.
INCOME— PUNITIVE DAMAGES.— Petitioner, as an injured party, received a damage judgement in an antitrust suit. Held, one-third of the award was compensatory damages for loss of profits and taxable as income. Held, further, that two-thirds of the award was punitive damages and not taxable.
The respondent determined deficiencies in petitioner's income tax for the years 1947 and 1948 in the amount of $1,847.19 and $92,874.70, respectively. The deficiency determined for the year 1947 is not in issue.
Two of the three allegations of error for the year 1948 were resolved by stipulation of the parties. The sole remaining issue before us is whether a two-thirds portion of the aggregate award received by petitioner in an antitrust suit was taxable income.
The facts are stipulated and are so found.
The petitioner is a Delaware corporation authorized to do business in the Commonwealth of Pennsylvania and has it principal place of business at Philadelphia, Pennsylvania. Petitioner's income tax return for 1948 was filed with the collector of internal revenue for the district of Pennsylvania.
Petitioner's business during the year 1948 consisted of the operation of motion picture houses and the exhibition of motion pictures produced and distributed by other persons and corporations. On December 8, 1942, petitioner instituted a civil action in the District Court of the United States for the eastern District of Pennsylvania against certain motion picture distributors; petitioner alleged that the named defendants violated the Federal antitrust laws. The action was brought under section 4 of the Act of Congress of October 15, 1914, entitled ‘An Act to supplement existing laws against unlawful restraints and monopolies and for other purposes,‘ as amended and supplemented (15 U.S.C.A. 15), commonly known as the Clayton Act, and sections 1 and 2 of the Act of Congress of July 2, 1890, entitled ‘An Act to protect trade and commerce against unlawful restraints and monopolies‘ (15 U.S.C.A. 1), said Act being commonly known as the Sherman Anti-Trust Act, and the Act of Congress of June 19, 1936 (15 U.S.C.A. 13), commonly known as the Robinson-Patman Act. Petitioner's complaint was in part as follows:
28. As a result of the discrimination against plaintiff which defendants accomplished through said monopoly, plaintiff has been unable to operate the Erlanger Theatre and has thereby suffered great loss and damage, to wit, the sum of $450,000.00.
WHEREFORE, plaintiff prays:
(e) That the defendants be decreed to pay to the plaintiff triple all such damages as may have been sustained by the plaintiff as above, to wit, the sum of $1,350,000.00.
After the case was presented to the district court a judgement was entered in favor of the defendants. William Goldman Theatres, Inc. v. Loew's, Inc., 54 F.Supp. 1011.
On appeal the United States Court of Appeals for the Third Circuit reversed the judgment of the district court; the Court of Appeals held that a conspiracy existed as charged. William Goldman Theatres, inc. v. Loew's, Inc., 150 F. 2d 738. Pursuant to an agreement of the parties and pending the court's decision on the question of liability under the Sherman Act, William Goldman Theatres, Inc., offered no evidence relating to the issue of damages at the first stage of the trial. After the Court of Appeals held the evidence sufficient to sustain the charge of conspiracy in restraint of trade, the district court heard evidence directed solely to the question of damages.
On September 10, 1946, the district court made its findings with respect to damages. The damages were based solely on the petitioner's loss of profits at the Erlanger Theatre. The court's finding is as follows:
I, therefore, find as a fact that the plaintiff, but for the wrongful acts of the defendants, would have earned profits at the Erlanger Theatre amounting to $125,000 during the damage period.
William Goldman, Theatres, Inc. v. Loew's Inc., 69 F.Supp. 103.
On December 18, 1946, the district court entered a final decree based on the findings as set forth in the opinion of September 10, 1946. Paragraph four of the opinion provides:
The amount of the plaintiff's damages is $125,000 and the defendant shall pay to the plaintiff threefold that amount, or $375,000. Interest to date is not allowed.
On January 6, 1948, the Court of Appeals for the Third Circuit affirmed the judgment of the district court in a per curiam opinion. William Goldman Theatres, Inc. v. Loew's, Inc., 164 F. 2d 1021. Certiorari was denied by the United States Supreme Court, 334 U.S. 811.
On May 28, 1948, the defendants paid the petitioner the sum of $375,000. Of this amount petitioner, on its income tax return for the year 1948, included in gross income the amount of $125,000. The balance of the $375,000 was not included in petitioner's gross income for the year 1948.
Of the aggregate award of $375,000, petitioner received $250,000 as punitive damages and $125,000 for the loss of profits.
Petitioner has reported as taxable income $125,000 of a total of $375,000 judgment received upon the successful prosecution of an antitrust suit. The award was made under what is commonly known as section 4 of the Clayton Act (15 U.S.C.A. 15).1
Respondent maintains that the excess ($250,000) by which the award exceeds the actual damages ($125,000) constitutes taxable income under section 22 (a) of the Internal Revenue Code and the Sixteenth Amendment. Respondent also contends that the entire award in this case was for loss of profits and therefore the entire amount is taxable. Petitioner, in opposition, relies on the contention that the sum of $250,000 constitutes a penalty which is not income and therefore is not taxable.
Two questions must be answered before we ascertain the correctness of respondent's contention. First, we must determine for what purpose the $250,000 was awarded. Was it received in lieu of profits or capital gain, or was it received as a punitive award under the Clayton Act? Next, if the money were received as a punitive award, is it taxable income?
The district court did not specifically denominate this $250,000 as a particular type of damage; that court, however, did find as a fact that petitioner's damages from loss of profits amounted to $125,000 and under the statute (Clayton Act) it was entitled to threefold the damages sustained. This decision of the district court does not resolve the issue before us; therefore we must look elsewhere.
The words of the Clayton Act, ‘and shall recover threefold the damages by him sustained,‘ do not in themselves answer our question; we have, therefore, gone into the legislative history of the Sherman Act (section 7, 26 Stat. 210), and the Clayton Act. We have found that even though Congress did not set forth in the statute the words ‘punitive‘ or ‘exemplary‘ in describing part of the threefold damages, there can be no doubt that Congress intended part of the threefold damages to be compensatory and part to be punitive.2
The courts have also interpreted the award in antitrust suits to be composed of both punitive and compensatory damages. The court in Clark Oil Co. v. Phillips Petroleum Co., 148 F. 2d 580, 582, said:
* * * The Sherman Act and the Clayton act afford a cause of action for those suffering damages. In their provisions for damages they embody both punitive and compensatory damages but no recovery can be had unless a case for compensatory damages is made. In the event of compensatory damages, then automatically the punitive damages follow. * * *
Again, it was said in Johnson v. Schlitz Brewing Co., 33 F.Supp. 176, 182, affd. 123 F. 2d 1016, that section 7 of the Sherman Act ‘was intended to be punitive in nature and deterrent in effect.‘ Further, in Bigelow v. RKO Radio Pictures, Inc., 150 F. 2d 877, 833, reversed on other grounds, 327 U.S. 251, it was said:
* * * The amount of this verdict (under 15 U.S.C.A. 15) was required by statute to be trebled by the judgment. In this respect neither the jury nor either court had any discretion. The verdict should represent actual damages sustained, and two-thirds of the judgment is a penalty which Congress has seen fit to impose...
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