Durkee v. Commissioner

*773 By this case petitioner seeks a redetermination of a deficiency in income tax, determined for the calendar year 1941, in the amount of $ 3,858.15.

The issue presented is whether respondent erred in including the net amount of $ 19,439.95 received by petitioner during the year 1941 in settlement of a lawsuit as part of his taxable income, in accordance with the provisions of section 22 (a) of the Internal Revenue Code. From evidence, both documentary and oral, we make the following findings of fact.

FINDINGS OF FACT.

The petitioner, R. J. Durkee, is an individual residing in East Cleveland, Ohio, and was engaged in the electrical contracting business in 1941, and prior thereto, in the city of Cleveland, Ohio. He filed with the eighteenth collection district of Ohio an individual income tax return for 1941, reporting a net loss from business in the amount of $ 290.53 and no tax liability. A schedule attached to the return contained the following statements:

*226 *774 Taxpayer is supplying this information with his income tax return so that Treasury Department may have due notice thereof. Taxpayer denies that the proceeds of this action are taxable as such.

The suit mentioned in the tax return of the petitioner was filed in October 1939 by petitioner with the Court of Common Pleas, Cuyahoga County, Ohio, No. 491756, naming as defendants 30 individuals, firms, and corporations engaged in the electrical contracting business in the city of Cleveland, Ohio, and vicinity. The petition was captioned "Petition for Money." A general denial was filed as an answer by each of the defendants named in the original petition.

An amended petition was filed in the above entitled lawsuit in January 1940, and a general denial was filed on June 5, 1940, and thereafter by each of the defendants. The amended petition contained other and further allegations not set forth in the original petition.

It was alleged, in substance, in pertinent part, in the amended petition (1) that the petitioner had been an electrical contractor in the County of Cuyahoga, State of Ohio, for a number of years; (2) that the defendants were also electrical contractors and were*227 engaged in similar business in Cuyahoga County, during the period from and including the years 1928 to 1939; (3) that the defendants comprised the greater portion of all the electrical contractors so engaged within the county and together performed and installed, during said period, approximately 90 percent of the aggregate of all the electrical construction performed and installed in said county, exclusive of heavy industrial work; (4) that the defendants entered into and maintained an agreement with each other for the purpose and with the intent of forming a combination in restraint of trade; (5) that by the agreement the defendants conspired to fix and did fix the prices of the electrical contractual business; (6) that the defendants agreed to maintain, and did maintain, a quota system, under which the various contracts for electrical construction work throughout the county were allotted to and distributed among the defendants at fixed prices; (7) that the defendants, in furtherance of a conspiracy in restraint of trade formed an association and controlled the bidding upon electrical construction work and secured the active assistance of persons having active control over organized*228 labor; that in furtherance of their conspiracy the defendants threatened to prevent him from obtaining jobs or remaining in business, prevented him from bidding on 37 contracts (which are listed by name) and caused rejection of other bids upon nine jobs (listed by name); that the defendants advised, induced, and coerced architects and builders against him; and that for a long time he was prevented by the defendants from obtaining many jobs; that prior to such conspiracy the petitioner, under a system of free competition, obtained many contracts, derived a fair *775 profit therefrom, and created a vast amount of good will, which would have increased in value had it not been for the defendants' acts; that prior to the conspiracy he was able to earn from his business an income of $ 8,000 to $ 10,000 per year, with reasonable anticipation of increasing said income as the value of his business and the good will increased, to approximately $ 15,000 to $ 20,000 per year, and it would have so increased had free competition continued. The amended petition finally and further alleged:

18. By reason of the foregoing acts and conduct of the defendants, the good will of plaintiff's business*229 has been destroyed and he has been deprived of an income therefrom for a period of approximately ten years last past of the approximate value of one hundred fifty thousand dollars.

19. Wherefore, plaintiff prays for judgment against the defendants, and each of them, in a sum fixed pursuant to Section 6397 of the General Code of Ohio at two-fold the amount of plaintiff's damages, to-wit: in the sum of three hundred thousand dollars, and for his costs of suit.

Section 6397 of the General Code of Ohio provides recovery of "two-fold the damages sustained" under the Ohio Anti-Trust law.

The above mentioned suit in the common pleas court was settled in May 1941 for $ 25,000, and at that time plaintiff (petitioner herein) executed a release to the several defendants. The release clause was as follows:

Now, Therefore, the said Durkee [Roy J. Durkee], for a valuable consideration this day received by him to his full satisfaction of said defendants does hereby for himself, his executors, administrators and assigns, release and discharge from all debts, claims, demands, damages, actions and causes of action whatsoever, and in particular from such as have been asserted in said Case No. 491756*230 * * * [then follows the names of the defendants].

Said Durkee agrees forthwith to cause said Case No. 491756 to be dismissed at his costs, no record.

Said Durkee further agrees that this instrument will be not only his release personally but also his release as a partner of Durkee Electric Company, a partnership now dissolved, and of Durkee Electric R. J. Inc., a corporation.

In Witness Whereof, said Roy J. Durkee has hereunto set his hand at Cleveland, Ohio, this 22nd day of May 1941.

Signed and delivered in the

presence of:

(Roy J. Durkee)

The case was dismissed on May 26, 1941, by journal entry. The petitioner had no conversation with any of the attorneys representing the other parties to the suit relative to the finances or amount that was received, and could recall no correspondence with the check in payment of the settlement, nor could he recall being told that any part of the money was paid in settlement of any particular claim he was making. He received all of the money paid.

*776 OPINION.

The Commissioner having determined that the $ 19,439.95 received by the petitioner in settlement of the suit above described constituted taxable income to him, in accordance*231 with the provisions of section 22 (a), Internal Revenue Code, it is incumbent upon the petitioner to show error in such determination. After carefully analyzing all of the facts and the law applicable thereto, we are of the opinion that such showing has not been made.

Epitomized, the situation is that the petitioner recovered the money in settlement of an action brought by him; that he alleged in detail that he had been prevented from bidding upon certain electrical construction jobs; that his bid had been rejected on certain other jobs; and that he had been prevented from obtaining many jobs, all through the conspiracy and acts of the defendants; that prior to such conspiracy he had been deriving a fair profit from his business and had a great good will, which would have increased in value but for the defendants; that prior to that time he had been earning from $ 8,000 to $ 10,000 a year, which would have increased to $ 15,000 or $ 20,000 a year had it not been for the defendants; that they had deprived him of the right of free competition and the right to engage in business, and thereby the good will of his business had been destroyed and he was deprived of an income for ten years*232 past of the approximate value of $ 150,000; that therefore he sued, under section 6397 of the General Code of Ohio for twofold the amount of his damages, that is $ 300,000.

If the amount received in settlement of such an action had been shown to be received for the good will of petitioner's business, it would, above its basis, be a capital recovery, and he would not be taxable. But clearly, it is impossible for us so to state, under the facts of record here. The petition, in effect, alleges both loss of profits and damage to good will and business, but there is no way of allocating between the two elements. Moreover, the record contains no showing of the basis of the good will, even if the entire recovery had been shown to be for that element of the action. Again, the settlement was a release and discharge "from all debts, claims, demands, damages, actions and causes of actions whatsoever, and in particular from such as have been asserted in said Case No. 491756" -- the case above described. Moreover, the settlement on its face shows that it was for not only the petitioner, but a corporation and a partnership -- though the partnership is recited to have been already dissolved. *233 The situation is similar to that involved in Raytheon Production Corporation, 1 T. C. 952; affd., 144 Fed. (2d) 110; certiorari denied, 323 U.S. 779, where we were unable to allocate any portion of the money received upon a settlement to capital recovery because of a settlement including matters other than such capital recovery, *777 for good will, and because the settlement was also for other parties than the petitioner there. Though the petitioner here received all of the money, in the absence of any showing as to his relation with the corporation included in the release, we can not say that any claims that it might have had against the defendants, possibly not for capital recovery, were not included in the settlement. The petitioner may have been the sole owner of such corporation, giving rise to question in that regard, and without explanation we can not presume otherwise. Raytheon Production Corporation, supra;Martin Brothers Box Co. v. Commissioner, 142 Fed. (2d) 457.

With other cases which we find not applicable, the petitioner*234 relies upon Highland Farms, 42 B. T. A. 1314, suggesting that, "If it should be claimed that any part of the settlement money received by the petitioner could have been considered as allocated to the penalty imposed by the statute because of the violation of the Anti-Trust Law, such penalty or punitive damages are never considered as income, and are never taxable." However, we are again unable to allocate between any recovery for capital replacement, for good will, for, though there appears to be some conflict of opinion as to whether a suit for multiple damages, such as the one here considered, is or is not punitive in its nature, there is strong authority that where the statute allows recovery of only a multiple of actual damages proven, any such recovery is punitive only above the amount of actual damages; also strong authority that the recovery in such a case is remedial. This, of course, leaves us, in any event, unable to say how much, if any, of the moneys received upon settlement in this matter was received under the punitive element of the case, and therefore, under the Highland Farms case, was not income. In that case there was definite*235 division between the punitive and the remedial elements involved in the case which went to judgment, whereas here there is none. 15 American Jurisprudence 742, on this question, says:

Nature and Conditions Precedent to Recovery. -- Where the statute provides for double or treble damages, the excess over the actual damages sustained is generally regarded as punitive in character or as a penalty, the purpose being to subject the wrongdoer to an extraordinary liability by way of punishment. Since such statutes are penal laws, they must be strictly construed and will not be construed to include other damages not covered by the terms of the statute.

Sullivan v. Associated Billposters & Distributors, 6 Fed. (2d) 1000 (C. C. A., 2d Cir.), involved an action under section 7 of the Sherman Anti-Trust Act, providing that any person injured in his business or property by reason of anything forbidden or declared unlawful by the act "shall recover threefold" "the damages by him sustained." The court said:

* * * A statute may be penal in one part and remedial in another. If a statute which is penal in part gives a remedy for an injury to the person *778 *236 injured, to the extent that it gives such a remedy it is a remedial statute, irrespective of whether it limits the recovery to the amount of actual loss sustained or as cumulative damages as compensation for the injury. * * * [Citing many authorities.]

See also Imperial Film Exch. v. General Film Co., 244 Fed. 985; United Copper Securities Co. v. Amalgamated Copper Co., 232 Fed. 574.

The petitioner has, in our opinion, failed to show error in the determination by the Commissioner with respect to the amount received in settlement as above described.

Decision will be entered for the respondent.