Respondents Brief — Commissioner v. Glenshaw Glass Co.

CHfice - Supremg Court, U. S. |

_ LIBRARY { FILED

SUPREME COURT. U.@ JAN 23 1955

HAROLD §. WILLEY, Clerk ]

- Sapreme Court of ‘the United States

October Term, 1954.

No. 199.

oa carmen ater OF INTERNAL REVENUE,

3 Petitioner,

v.

GLENSHAW GLASS COMPANY,

‘COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

0.

‘WILLIAM GOLDMAN THEATRES, INC.

"BRIEF FOR RESPONDENT, WILLIAM GOLDMAN

THEATEES, INC.

Samus, H. Levy,

Bernakp WoLFMaN,

12th Floor Packard Building,

Philadelphia 2, Pennsylvania,

Attorneys for Respondent,

Wiliam Goldman Theatres,

Inc.

INDEX TO BRIEF.

Page

ee Loe anc biwa cee kehepocnvens 1

de i eine da Cad Oe eae meme wi 3

SUMMARY OF ARGUMENT 2.0.6. ccsecccccescsccccs SE 3

SF oa 5 oa sho rk hee ub ee cea 3 OS KADON 4

The Penalty Received by the Taxpayer Under Section 4 of

the Clayton Act Is Not Taxable Under Section 22(a)

of the Internal Revenue Code of 1939 .............

4

1. Opportunities for Congressional Action ......... 5

2. The Legislative Nature of the Problem .......... 7

3. The Government’s Argument .................. 8

Dy. ee FE SU Nic cehepadsaescetbteteus 11

i ee Se FE SOU bos avo vee ev ekasanned> 16

RAINE oi ais creas Vee ee bead eau eek enessdewnes bade. 17

TABLE OF CASES CITED.

Page

Arcadia Refining Co. v. Commissioner, 118 F. 2d 1010 (C.A.

Py NED > ce rr ree oe pt ee ot er 15

Arrowsmith v. Comm’r., 344 U.S. 6, 12 (1952) (dissenting

opinion), reh. den. 344 U.S. 900 (1952) .............. 6

Bigelow v. RKO Radiv Pictures, 150 F. 2d 877 (C.A. 7th,

1945), rev’d on other grounds, 327 U.S. 251 (1946) .... 16

Central Railroad Co. of New Jersey v. Commissioner, 79 F. 2d

Se id, RET boa wih dé ved cawneechedeaueena ent 6,15

Clark Oil Company v. Phillips Petroleum Company, 148 F. 2d

580, 582 (C.A. 8th, 1945), cert. den. 326 U.S. 734 (1945) . 16

Commissioner v. Culbertson, 337 U.S. 733, 740 (1949) ...... 13

Commissioner v. Jacobson, 336 U.S. 28 (1949) ............ 12

Comm’r. v. Sunnen, 333 U.S. 591, 607-608 (1948) ......... 6

Dobson v. Comm’r, 320 U.S. 489 (1943), reh. den. 321 U.S.

Se ROTO ad <5 add c awe ey KAO bw ANS CASES 6b SER KS OO 6, 13

Doyle v Mitchell Bros. Co., 247 U.S. 179 (1918) .......... 9

Edwards v. Cuba R. R. Co., 268 U.S. 628 (1925) .......... 16

Eisner v. Macomber, 252 U.S. 189 (1920) ....... 5,9, 10, 12, 13, 17

General American Investors Company v. Commissioner, (Oct.

SO. BOOP ans oc aes 440 oo 08s ONS ooh kone 16

oe FS, Ue RE. BOE TAONE) bie beceilvesescccecs 5,8, 15

Helvering v. Bruun, 309 U.S. 461 (1940) .................. 12

Highland Farms Corp. v. Commissioner, 42 B.T.A. 1314

SED CR UARUAtH Fa GANS RARER AOR e Dob ed neh b cae ee kee 6

PE ee A, GE GF BE CPD heb cccys dines, cbuweenes 13

H. Liebes & Co. v. Commissioner, 90 F. 2d 932 (C. A. 9th,

SEE 665456 beURSAE SED MOAC Cheah ec aeb een bansy 14

Lyeth v. Hoey, 96 F. 2d 141 (1938), rev’d. on other grounds

Be See ee LEE. Rvaebacudanensds sxsbcbacsecdeeees 15

Mathey v. Commissioner, 177 F. 2d 259 (C.A. Ist, 1949),

aff'g. 10 T.C. 1099 (1948), cert. den. 339 U.S. 943 (1950) = 14

Merchants Loan and Trust Co v. Smietanka, 255 U.S. 509

SED 8 wtthabacnsdsten ns cbduvutebvetabastasdarerie 10

TABLE OF CASES CITED (Continued).

Page

Commissioner v. Obear-Nester Glass Co., — F. 2d — (C.A.

7th, Nov. 15, 1954), Pet. for cert. pending, Oct. Term,

SS ii 4 oe x bin tie deshee PEA 15

Raytheon Production Corp. v. Commissioner, 144 F. 2d 110

(C.A. Ist; 1944), cert. denied 323 U.S. 779 (1944) ...... 14

Robertson v. United States, 343 U.S. 711 (1952) ........... 12

Rutkin v. United States, 343 U.S. 130 (1952) ............. 12

Southern Pacific Co. v. Loew, 247 U.S. 330 (1918) ......... 5, 10

Sterling v. Commissioner, 93 F. 2d 304 (1937), cert. den. 303

Sie ET Ses ac bo neko a can Cate ere esa Rea 15

Stratton’s Independence v. Howbert, 231 U.S. 399, 415 (1913) 9

United States v. Hess, 317 U.S. 537 (1943) ................ 16

United States v. Kirby Lumber Co., 284 U.S. 1 (1931) .... 9 12

United States v. Safety Car Heating & Lighting Co., 297 U.S.

Oe CEPUED. vaca cavecscusuréasscuetescreaeuscel nee 13, 16

STATUTES AND AUTHORITIES CITED.

Page

Bills and Debates in Congress Relating to Trusts, 1903, Sen.

EG. SEES, BU A, Er. SOME. ccc ccccscvcvccvers 16

Clayton Act, Section 4, 38 Stat. 731, 15 U.S.C. Sec. 15 ..1, 2, 3, 7, 17

Corporation Excise Tax Act of August 5, 1909, c. 6, sec.

ee OR ME aT ides ase nopebextsrensan canvas 9

The History of Bills and Resolutions, 51 Cong. Res. Index 160,

es Fees Se A Oe OOD, nine hs cccecwevseseveccn 16

H Rep. 1337, p. A. 18, 83d Cong., 2d Sess. ...........0600% li

H. Rep. No. 1337, p. 1, 83d Congress, 2d Sess. ............ 6

Internal Revenue Code of 1939, 26 U.S.C. (1952 ed.): ‘

We ED cae k car webeseeeek 3, 4, 5, 6, 7, 8, 9, 10, 11, 13, 15

EY Sb bob GUE haven eee reds Dieu sis weewreenes 8

EE Vn SPREE Nd Ree FOS NK eeeK Chet dud bebuccbeeess 7

68 A. Stat.:

DC ety econ giateherewd hehe anus cee behubeess 2, 6, 10, 11

SSCL UGK ep 6c ka deh ehh eseo eke eke bie Wee bts edus 8

le EE ec ta Kes Sack dn onde ab edad eV eens eee 7

Rev. Stat., sec. 4919, 1946 ed. 35 U.S.C. 1946 ed, Sec 67...... 14

Rev. Stat. Sec. 4921, 1946 ed. 35 U.S.C. 1946 ed., Sec. 70... 3914

Securities Exchange Act of 1934 Section 16(b), 15 U.S.C.

og RR eT errr ee reer Perey erreee 16, 17

Sen. Rep. 1622, p. 168, 83d Cong., 2d Sess. ............0005. 11

Tariff Act of Oct. 3, 1913, 38 Stat. 114, 166, c¢. 16 ............ 5

IN THE

Supreme Court of the United States.

Octoser TERM, 1954.

No. 199.

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

v.

GLENSHAW GLASS COMPANY.

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

v.

WILLIAM GOLDMAN THEATRES, INC.

BRiEF FOR RESPONDENT, WILLIAM GOLDMAN

THEATRES, INC.

STATUTORY PROVISIONS.

Cuayton Act:

‘Seo. 15. Surts sy Persons Insurep; AMOUNT OF

RECOVERY.

‘Any person who shall be injured in his business

or property by reason of anything forbidden in the anti-

trust laws may sue therefor in any district court of

the United States in the district in which the defend-

ant resides or is found or has an agent, without re-

Statutory Provisions

y

spect to the amount in controversy, and shall recover

threefold the damages by him sustained, and the cost

of suit, including a reasonable attorney’s fee. Oct. 15,

1914, c. 323, § 4, 38 Stat. 731.7") (15 U.S.C. 1951 Ed.,

§ 15.)

InTerNAL Revenve Cope or 1954:

‘*Sec. 61. Gross Income DEFINED.

‘(a) GeneraL Derinition.—Except as otherwise

provided in this subtitle, gross income means all] in-

come from whatever source derived, including (but

not limited to) the following items :

(1) Compensation for services, including

fees, commissions, and similar items;

(2) Gross income derived from business;

(3) Gains derived from dealings in property;

(4) Interest;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Alimony and separate maintenance pay-

ments;

(9) Annuities;

(10) Income from life insurance and endow-

ment contracts;

(11) Pensions;

(12} Income from discharge of indebtedness;

(13) Distributive share of partnership gross

income;

(14) Income in respect of a decedent; and

(15) Income from an interest in an estate or

trust.”’’

Question Presented—Summary of Argument 3

QUESTION PRESENTED.

Did respondent’s receipt of punitive damages pursuant

to Section 4 of the Clayton Act (15 U.S.C. § 15) constitute

income under Section 22(a) of the Internal Revenue Code

of 1939?

SUMMARY OF ARGUMENT.

A penalty, however eise it may be characterized, is

not income within the ordinary contemplation of the term

or within the accepted interpretations of Section 22(a). It

is not a gain derived from capital or labor, the familiar

touchstone of statutory income.

The Government, in asking that Section 22(a) be con-

strued to apply to any gain, is urging the Court to accom-

plish by a changed judicial interpretation what Congress

has never done. Congress has not chosen to tax penalties

specifically, nor to define income as every increase in re-

sources, despite a long history of opportunity to do so if it

wished, and despite the essentially legislative nature of the

problem. In particular, the revised phraseology of Section

22(a) in the new 1954 Code both eliminates the verbal basis

for the Government’s argument and underscores the ab-

sence of Congressional support for the Government’s in-

terpretation.

4 Argument

Argument.

THE PENALTY RECEIVED BY THE TAXPAYER UN.

DER SECTION 4 OF THE CLAYTON ACT IS NOT

TAXABLE UNDER SECTION 22(a) OF THE IN-

TERNAL REVENUE CODE OF 1939.

We fully agree that Congress has the power to tax the

receipt of a penalty.

The question is: Has Congress done so?

The answer depends on whether Section 22(a) of the

Internal Revenue Code of 1939 is properly construed to

include a payment of this character.

Congress has never expressly stated an intention to

tax penal‘‘es. It did not include the term ‘‘penalties’’

among the items specifically listed in the earhest counter-

part of Section 22(a), and it has never added the term to

the statute during the more than forty years that the in-

come tax laws have been in effect.

Congressional silence may not always have signifi-

cance. But here there has been inaction over a period of

many years; there have been occasion and opportunity for

Congress to act if it wished to do so; and the problem

involves essentially legislative considerations.

We think that in these circumstances the Congressional

silence is impressive evidence against the Government's

position which would impose the tax through a new judicial

construction of Section 22(a)—a construction that is based

on particular words which no longer even appear in the

1954 codification of the law, and that would extend the

meaning of Section 22{a) beyond all prior interpretations.

Argument 5

1. Opportunities for Congressional Action.

These penalties are not some new or novel development

which Congress could not have specifically foreseen. The

antitrust laws had been on the books for many years when

the first modern income tax law was adopted in 1913.’ They

were obviously known to Congress, both then and since.

In 1917 this Court put Congress and the executive

branch on specific notive that the income tax statute did not

reach every realized gain. Gould v. Gould, 245 U.S. 151

(1917). The Court held there that the receipt of alimony,

absent an express reference, was not included in the gen-

eralized language of Section II, B of the 1913 Act.2, A year

later the Court reminded Congress and the executive

branch that ‘‘ail receipts—everything that comes in—’”’ are

not ‘‘income within the proper definition of the term ‘gross

income’. . .”’’ Southern Pa ‘fic Co. v. Loew, 247 U.S. 330,

335 (1918).

Then, within the next two years, the Court construed

the genera] language of Section Ii, B of the 1913 Act as

the expression of an intention to tax whatever constituted

‘‘income’’ within the meaning of the Sixteenth Amend-

ment, and in Kisner v. Macomber, 252 U.S. 189, 206 (1920),

the Court restated its prior definition of what was meant by

income—the familiar ‘‘gain derived from capital, from

labor, or from both combined, provided it be understood to

inelude profit gained through a sale or conversion of capital

assets.’’ Distinguish or explain the statement as the Gov-

ernment may, it did become common parlance in tax prac-

tice and administration, and it was reiterated again and

agin in judicial decision.

Thus Congress early had before it pronouncements by

this Court marking both limitations and content for Sec-

tion 22(a). In view of those limitations the Court of Ap-

1. Tariff Act of Oct. 3, 1913, 38 Stat. 114, 166, c. 16.

2. Section I], B was the counterpart of Section 22(a) of the

Internal Revenue Code of 1939, 26 U.S.C. Sec. 22(a).

6 Argument

peals for the Third Cireuit in 1935 held that a penalty came

neither within the constitutional nor the statutory concept

of income. Central Railroad Co. of New Jersey v. Com-

missioner, 79 F. 2d 697 (C.A. Srd, 1985). Five years later

the Board of Tax Appesis held expressly that punitive

damages did not come within the meaning of Section 22(a).

Higkland Farms Corp. v. Commissioner, 42 B.T.A. 1314

(1940).

Over the twenty-year period since the Central Railroad

decision we have witnessed a great volume of litigation

involving the enforcement of the anti-trust laws. They

have also been the subject of much political debate. During

the same period of time there have been almost annual

revisions of the income tax laws, but no move was made to

provide for the taxation of penalties. The Bureau of In-

ternal Revenue had noted its non-acquiescenee in the High-

land Farms ease, but it did not appeal and the Treasury

Department proposed no legislative action despite the

weight which this Court had held must attend the decisions

of the Board of Tax Appeals.®

Finally, less than six months ago Congress adopted the

Internal Revenue Code of 1954,* the most comprehensive

revision of the Internal Revenue laws at least sinee 1913.°

This occurred after the unanimous decision of the court

below sitting en banc in the instant case, and before the

grant of certiorari. Although Section 61(a) (the successor

to Section 22(a)) lists fifteen specific items within the defini-

tion of ‘‘gross income,’’ Congress has yet to include penal-

ties.

3. See, e.g., Dobson v. Comm’r, 320 U.S. 489 (1943), reh. den.

321 U.S. 231 (1944); Comm’r. v. Sunnen, 333 U.S. 591, 607-608

CS

(1948). See also Arrowsmith v. Comm’r., 344 U.S. 6, 12 (1952)

(dissenting opinion), reh. den. 344 U.S. 900 (1952).

4. H.R. 8300, c. 736, P.L. 591, 68 A. Stat., Approved Aupst

16, 1954.

5. See H. Rep. No. 1337, p. 1, 83d Congress, 2d Sess.

Argument

2. The Legisiative Nature of the Problem.

As we have stated, the significance of the fact that

Congress has never specificaily included penalties among

the Seetion 22(a) items is emphasized by the distinetly

legislative character of the problem. Whether, how, or to

what extent penalties should be taxed involves questions

which, we submit, can be effectively explore:l and answered

only through the legislative process.

For example, what would the effect be on the adminis-

tration of the anti-trust laws? The treble damage pro-

visions obviously evolved from considerations affecting the

enforcement of these statutes, Congress has required a

monopolist or conspirator who has injured another party

to make that party whole, and then, as a penalty, he must

also give that party an amount of capital equal to twice the

actual damages.® Will that policy be served, defeated or

impaired if, through the imposition of a tax, a portion of

the payment must be turned over to the Government? If

there is a tax, should it be at the ordinary rates or at capi-

tal gain rates?’ If the payment should be taxed as or-

dinary income, should it be treated as having been received

over a number of years—the vears of the conspiracy for

example—in order to alleviate the effect of a receipt in a

single year? *

Considerations such as these affect both the puble and

the individual taxpayer. They cannot be resolved effee-

6. See Clav'on Act, Section 4. 38 Stat. 731, 15 U.S.C. See. 15.

It provides that the injured ees “shall recover threefold the dam-

ages by him sustainea,

7. If it is taxable to the ‘recipient and is not deductible by the

payor, as the Government has claimed, the Government would collect

z sum equal to 76% of any penalty under the 38% tax rate in effect

in 1948. Under the current rates of 52% the Government would

recover 104%.

8. Cf. Section 107 of the 1939 Code which provides that lump

sum compensation fur services, artistic compositions, copyrights, ete.

produced over a y«riod of 36 months or more, is to be taxed as #f

received during the period in which the work was done. See, to the

sanie effect, Internal Revenue Code of 1954, Section 1301, et seq.

8 Argument

tively through litigation because of the limitations inherent

in the jucicial process. Sound Government and fair Gov-

ernment require that they be analyzed and resolved through

norma! legislative procedures before a tax is imposed,

especially where the receipt in question itself results from

a legislative mandate.

The history of the taxation of alimony payments pro-

vides an illustration. As we have pointed out, in 1917 this

Court held that alimony was not ‘‘income’’ within the mean-

ing of the then counterpart of Section 22(a). In 1942, how-

ever, Congress re-examined the situation. The result was

the addition of new provisions to the Code providing that

alimony would be taxed, but only in certain prescribed

situations, subject to specified limitations.” Except to the

limited extent that Congress has specifieaily taxed alimony,

the Gould decision is operative. The situation is directly

analogous to the case at bar because alimony, like a penalty,

is not derived from capital or labor, and therefore is not

‘‘income’’ within the ordinary comprehension of the term.

The Treasury Department, if it thought penalties

should be taxed (for reasons of symmetry or otherwise),

has had every oppertunity to present the issue to the legis-

lative branch for its consideration. Not only has Congress

failed to consider the matter on its own initiative, but also,

to the best of our knowledge, the Treasury Department has

never asked it to do so. It has chosen instead to ask the

courts to accomplish that result by a new, broadened in-

terpretation of the general language of Section 22(a).

3. The Government's Argument.

The Government botivims its case on the proposition

that Section 22(a) should be construed to include ‘‘all gains

received by the taxpayer (not including return of capital)’’

(Pet. Br., p. 15). Tt aseribes this meaning to the words

‘‘gains, or profits and income derived from any source

9 Internal Revenue Code of 1939, Sec. 22(k); cf. Internal

Revenue Code of 1954, Sec. 71

Argument 9

whatever’ contained at the end of the section. It argues

that by use of the word ‘‘gains,’’ Section 22(a) reaches

not merely ‘‘income’’ within the normal meaning of that

term, but also any type of increase in net worth which is not

included within the meaning of the term ‘‘income.’’

Section 22(a) is a strange mixture of specification and

generality. It deals specifically with ‘‘zains, profits and

income’’ derived (1) from personal service; (2) from busi-

nesses of all sorts; and (3) from the investment of capital.

This enumeration is then followed by the tail-end reference

‘‘gains or profits and income derived from any source

whatever.”’

The meaning of Section 22(a) is not to be found in

verbal or grammatical! uiceties. Rather, the seetion has

been accepted as an attempt to deseribe in the statute the

general understanding of what is ‘‘income.*’ Separate

content has not been given to the three words, ‘*gains,”’

‘*profits,’’ and ‘‘income.’’ Necessarily the concluding

phrase is no more than a generalized reference to the con-

tent supplied the term ‘‘income’’ by the enumeration of

items which precede it.

All of this finds expression in the so-called Macomber

definition of ‘‘income.’’ Well before that decision the Court

had defined income as ‘‘the gain derived from eapital, labor

or from both combined.’’" That definition carries through

to the modern income tax laws an understanding of income,

as the term was used in income tax statutes prior to 1913, in

10. In the court below the Government's argument would have

brought au receipts within Section 22(a). Because it was pointed

out that this definition would encompass even a return of capital, the

Government now has qualified its position to include all receipts

exceft those constituting a return of capital

11. The Court employed this definition in its interpretation of

“income,” as that term was used in the Corporation Excise Tax Act

of August 5, 1909, ¢. 6, see. 38, 36 Stat 11, 112.) Stratton’s Inde-

pendence v. Howhert, 231 U.S. 399, 415 (1913). Later, interpreting

the same act, the Court reiterated that definition of moome. Dove

v. Mitchell Bros. Co., 247 U.S. 179 (1918).

10 Argument

the Amendment itself, and in the acts adopted after the

Amendment.” Eisner v. Macomber simply noted the in-

clusion in the definition of ‘* profit gained through a sale or

conversi«.: of capital assets.’’ As the Court said in Mer-

chants Loan and Trust Co. v. Smietanka, 255 U.S. 599, 519

(1921), ‘*. . . this Court . . . has approved, in the defini-

tions quoted, what it believed to be the commonly under-

stood meaning of the terms which must have beca in the

minds of the people when they adopted the Sixteenth

Amendment to the Constitution : . . [and] we continue

entirely satisfied with that definition . . .’’ It is clear, as

the court below held, that penalties do not come within it.

The phraseology of Section 22(a) itself indicates why

the words ‘‘gains’’ and ‘‘profits’’ were used together w th

the word ‘‘income.’? One normally speaks of ‘‘income’’

from personal service or from property. On the other

hand, if property is sold it is customary to speak of the

‘*protit’’ or the ‘‘gain’’ on the transaction, rather than the

‘‘income’’ from it. The words were apparently intended

for facility of expression, but in fact they are entirely

repetitious.

The new Internal Revenue Code of 1954 shows that the

Government’s argument reaches far beyond the Congres-

sional understanding of the scope of Section 22(a). As we

have noted, Section 22(a) has been replaced by Section

61(a). The report of the House Ways and Means Com-

mittee states as follows

‘This section corresponds to seetion 22 (a) of the

1939 Code. While the language in existing section

22 (a2) has been simplified, the all-inciasive nature of

statutory gross income has not been affected thereby.

Section 61 (a) is as broad in scope as section 22 (a).

Ae EE

*?. In Southern Pacific Ce. v. Loew, 247 U.S. 330, 335 (1918),

the Court said: “Certainly the term ‘imecome fogs no broader rneaning

in the 1913 Act than in that of 1909." See aiso Merchant's Loan and

Trust Co. v. Smietanka, 255 US. 509, §18-519 (1921).

13. See supra, p. 2 where Section 61(a) has been set out im

extense.

Argument 11

**Section 61 (a) provides that gross income in-

cludes ‘all income from whatever source derived.’ This

definition is based upon the 16th Amendment and the

word ‘income’ ‘s used in its constitutional sense.’’ ™

The report of ti: Senate Finance Committee is the same,

with the further statement:

‘Tt is not intended to change the content of income

that obtains under Section 22 (a).’’™

Section 61(a) has not defined income to mean all real-

ized gain. It could have done so just that simply if this is

what Congress understood Section 22(a) to mean. On the

contrary, it eliminated those words in Section 22(a) upon

which the Government has based its case, and vet intended

no change in substance, First, instead of the awkward refer-

ence to ‘‘gains or profits and income,’ it provides that

‘*vross income shall mean all income from whatever source

derived (including but not limited to) the following items

.’’—thus using only the word ‘‘income’’ as a general

term. Second, the specific items listed include ‘‘gains de-

rived from dealings in property’? (Subsection (3)), and

at no other place is the word ‘‘gains’’ used.

Thus, the entire verbal basis for the Government's

position in this case is no longer to be found in the present

counterpart of Section 22(a). Since the reports of both

the House Ways and Means Committee and the Senate

Finance Committee state that no change in the content of

Section 22(a) was intended, the inference is clear that

Congress regarded the words ‘‘gains’’ and ‘profits’? in

Section 22(a) as adding nothing to its overall meaning.

4. The Judicia] Decisions.

We disagree with the Government's contention that

this Court has held gains subject to tax which do not come

on ee a ne ne _ A ES SS

14. H. Rep. 1337, p. \ TS, 83d Cong., 2d Sess

15. Sen. Rep. 1622. p. 168, 83d Cong., 2d Sess.

12 Argument

within the Eisner v. Macomber definition. We think that

every case cited deals with a situation where a taxpayer

had increased his wealth either through his own activity

(labor) or through the use or disposition of property

(capital).

In the Kirby Lumber Company case the taxpayer had

borrowed money, evidencing the debt by its bonds. Later

it bought in the bonds at a discount. The Court held merely

that as a result of these dealings in bonds the taxpayer had

made a profit which was iticome. United States v. Kirby

Lumber Co., 284 U.S. 1 (1931). Commissioner v. Jacobson,

336 U.S. 28 (1949) was decided on the same basis—wholly

consistent w'ih the Macomber definition which requires the

use of capital (here the borrowed :.oney and bonds) or.

labor as the suurce of taxable gain.

In the Bruun case, the owner of leased real estate on

which the lessee had erected improvements was held to

have realized gain equivalent to the value of the improve-

ments, upon termination of the lease resulting from the

lessee’s default. Here clearly was a gain derived from use

of the taxpayer’s property. In fact, the only issue in the

ease was whether there could be a realization prior to

severance or disposition of the improvements, not whether

there was income. Helvering v. Bruun, 309 U.S. 461 (1940).

In the Rutkin case the taxpayer was taxed on money

obtained through extortion. The money had come to the

taxpayer as a result of his efforts and business dealings,

although they were illegal, and the only question was

whether illegality affected taxability. Rutkin v. United

States, 343 U.S. 130 (1952).

In the Robertson case the taxpayer had composec. the

winning symphony in a prize contest; the only question was

whether the prize was a quid pro quo for services rendered

or a gift. The court found that it was the former, and

therefore taxable. Robertson v. United States, 345 U.S.

711 (1952).

Argument 13

In /rwin v. Gavit, 268 U.S. 161 (1925), the question was

whether the income from bequeathed property was exempt

from tax under the statutory exemption for bequests. There

was no question but that the income from the property as

such was within Section 22(a).

In United States v. Safety Car Heating & Lighting Co.,

297 U.S. 88 (1936), lost profits had been recovered in settle-

ment of a patent infringement suit. The recovery was

taxed because it had the same character as the funds which

it replaced—just as there has been no question in the in-

stant case as to the taxrability of the tarpayer’s recovery of

damages for its lost profits.

Dobson v. Commissioner, 320 U.S. 489 (1943), reh. den.

321 U.S. 231 (1944) involved a reaffirmation of the tax

benefit rule. The recoveries which were taxed had their

foundation in a capital transaction, and it makes no differ-

ence whether the capital is regarded as the securities which

the taxpayer had sold or the income tax payments saved

as a result of the loss deductions—capital in either event.

Section 22(a), as the Court has often stated, is broad

in its scope and is intended to tax income comprehensively.

However, the Court has never said, nor held, that Section

22(a) ineludes as income an item of gain which is not

derived from capital or from labor.’*

The Government ha- suggested that since the penalty

was obtained as a result of litigation, it coule be said to be

derived from labor or capital. This argument fails to take

into account the faet that the payment of the penalty de-

rives entirely from an Act of Congress designed to punish

wrongdoers. Litigation is but the means by which it can

he colleeted.

Whenever a recovery in litigation is involved, the ques-

tion always to be asked in determining taxability is, ‘‘In

———. er

16. On the contrary, the Macomber definition was reiterated hy

this Court oniv a few vears ago in Cononissioner v. Culbertson, 337

U_S. 733, 740 (1949).

14 Argument

lieu of what were the damages awarded?’’"? If the donee

of a promissory note, enforceable only because it is under

seal, is required to bring suit against the maker, payment

of the judgment is nevertheless a gift. If a legatee under

a will must prosecute his claim against the executor of the

decedent’s estate for recovery of his bequest, the award of

the Probate Court is nevertheless a bequest.

If the anti-trust defendants had admitted their wrong,

computed and volunteered to texpayer its actual damages,

and then trebled that sum in order to arrive at the statutory

penalty, the latter would not be a receipt derived from

capital or labor, but solely from a congressional mandate.

The mere fact that the tapayer had to bring suit to recover

the penal award cannot translate the source into capital or

labor.

In Mathey v. Commissioner, 177 F. 2d 259 (C.A. Ist,

1949), aff’g. 10 T.C. 1099 (1948), cert. den. 339 U.S. 943

(1950), the inquiry of the courts was directed to the ques-

tion whether the award was compensatory or penal. On a

finding, based on the taxpayer’s own admissions in the

patent infringer‘ent suit, that the award was compensatory

in its entirety and not penal, the entire award was taxed.

Implicit in the decision of both the Tax Court and the First

Circuit was the view that a penalty is not a gain from capi-

tal or labor, and therefore not income in the accepted

sense.’*

Again in Ff. Liebes & Co. v. Commissioner, 9 F. 2d 932

(C.A. 9th, 1937), a recovery of lost profits was taxed. It

17. Raytheon Production Corp. v Commissioner, 144 F. 2d 110

(CA. Ist, 1944), cert. denied 323 Us. 779 (1944).

18. The patent infringement statutes (Rev. Stat., Sec. 4919, 1946

ed. 35 U.S.C. 1946 ed., Sec. 07: Rev. Stat. Sec. 4921, 1446 ed. 35

U.S.C. 1946 ed., Sec. 70) are not penal. They merely authorize a

court, in order more accurately to determine the actual damages sus-

iained, to increase the provable loss “according to the circumstances of

the case, not exceeding three times the amount of such a verdict...”

See the opinion of the Court of Appeals in the Mathey case at p. 204

and the opinion ot the Tax Court at p 1104

Argument 15

was clear from the Court’s opinion that it was not inelud-

ing a penalty within its concept of income.”

The decision of the Court of Appeals for the Third

Circuit in Central Railroad Co. v. New Jersey may be sub-

ject to criticism with respect to the factual conclusion that

the taxpayer had recovered a penalty. It is only on this

ground that the earlier decisions of the Seeond Circuit in

Sterling v. Commissioner, 93 F. 2d 304 (1937), cert. den.

303 U.S. 663 (1938), and Lyeth v. Hoey, 96 F. 2d 141 (1938),

rev’d. on other grounds 305 U.S. 188 (1938) eriticized the

Central Railroad decision. Similarly Arcadia Refining Co.

v. Commissioner, 118 F, 2d 1010 (C.A. Sth, 1941) differs

from the Central Railroad decision only because of a con-

trary factual interpretation. But nothing in the court’s

opinion leads to the conclusion that a true penalty is to be

treated as income.

Except for the Seventh Circuit’s decision in the Obear-

Nester case (Commissioner v. Obear-Nester Glass Co., —

F. 2d—(C.A. 7th, Nov. 15, 1954), Pet. for cert. pending,

Oct. Term, 1954, No. 478, no court has permitted the Com-

missioner to tax a gain not derived from capital er labor.

The courts which have considered the question have di-

rected their inquiry to whether a receipt is a penaiuy. When

this court was squarely presented with a gain vs hich was

not derived from capital or labor, it held that the gain was

not within the scope of Seetion 22(a) (Gowd v. Gould,

supra).

The Court below recognized that punitive damages or

penalties are sui generis, not easily characterized (R. 36)

They have no ready synonym. But whether the receipt o.

the penalty is analogized te a gift from the sovereign or a

1% The Court incheated that a recovery, to be taxable, must

be from capital or labor. It distinguishe | the Central Railroad de-

ctsion by noting (pp. 936-937) that in that case “a fecovers which

Was neither profits ner for an meury to capital was held not tanabl

Such is not the case here.

16 Argument

forced transfer of property or a subsidy,” it is clear that a

penalty is not derived from anything that the taxpayer or

its capital has produced or would have produced if it had

not been prevented by the anti-trust defendants. On the

contrary, it is a payment exacted by law to penalize a law-

breaker for his infraction.”

5. The ‘‘Insider Profits’’ Case.

In the ‘‘insider profits’’ case which is also before the

Court the taxpayer has attempted to bring the profits which

it has recovered within the concept of a penalty. General

American Investors Company v. Commissioner. (Oct. Term,

1954, No. 114). If indeed the award under Section 16(b) is

viewed primarily as a penalty imposed upon the insider, and

if. therefore, the Court concludes that the recovery is not

the result of a devotion of capital or labor, then the insider

profits are not taxable.

On the other hand, the recovery of insider profits may

well be analogized to the recovery of the lost profits which

the instant taxpayer received and reported, or which the

taxpayer in the Safety Car Heating & Lighting Co. case had

recovered. If the court finds that Section 16(b) does not

provide for punitive damages but rather is intended to

restore what the Congress has presumed to be the cor-

poration’s profits, then of course the recovery shouid be

taxed.

20. See, e.g., Edwards v. Cuba R. R. Ca., 268 U.S. 628 (1925).

21. The treble damage aspect of the Clayton Act recovery has

been recognized consistently as punitive and deterrent in nature and

purpose. See Mr. Justice Black in /aited States v. Hess, 317 US.

537, 550 (1943) and Mr. Justice Frankfurter’s cone arring opinion

in the same case (p. 556). See also Bigelow v. RKO Radio Pictures,

180 F. 24 877 (CLA. 7th, 1945), rev'd on other grounds, 327 US,

251 (1946): Clark Ou Company v. Phillips Petroleum Company, 148

F. 2d 580, 582 (CA. Sth, 1945), cert. den. 326 US. 734 (1945);

Bilis and Debates in Congress Relating to Trusts, 1903, Sen. Doc

#147, 871), Cong., 24 Sess.: The History of Bills and Resolutions,

51 Cong. Res Index 160, HER. 156057, 63d Cong., 2d Sess.

Conclusion 17

The language of Section 16(b) of the Securities Ex-

change Act of 1934 (15 U.S.C. 1952 ed. § 78p(b)) expresses

a legislative policy which regards an insider who has access

to information belonging to the corporation as having

traded on that information, and therefore, any profits which

he realizes are recoverable by the corporation. The section

provides that in order to prevent ‘‘the unfair use of infor

mation which may have been obtained . . . [by an in-

sider] . . . by reason of his relationship to the issuer, any

profit realized . . . shall inure to and be recoverable by

the issuer . ** The profits are presumed to have been

derived from the corporation’s information and so from

its capital. Thus within the Macomber definition of income

the profits would be taxable to the corporation.

Section 4 of the Clayton Act bears no comparison to

Section 16(b) of the Securities Exchange Act of 1934. The

latter is intended to enable the corporation to recover what

may be derived from its capital and no more. The Clayton

Act, however, gives the injured party his lost profits on

which he must pay his tax, and, in addition, a penalty

imposed on the monopolist as a punishment or deterrent.

CONCLUSION.

For the foregoing reasons, it is respectfully submitted

that the judgment of the Court of Appeals for the Third

Circuit should be affirmed.

Respectfully submitted,

Samven H. Levy,

Bernarp WoLrMan,

12th Floor Packard Pvilding,

Philadelphia 2, Pennsylvania,

Attorneys for Respondent,

William Goldman The-

atres, Ine.

January, 1955.