Court Opinion

ID: 8880094
Source: CourtListenerOpinion
Date Created: 2022-11-26 20:18:01.695799+00
Date Added: 2024-06-11T17:06:35.980301
License: Public Domain

THOMPSON, District Judge
(dissenting in part):
I respectfully dissent from that portion of the Opinion which approves the allocation of two-thirds of the money received in settlement of the anti-trust action to punitive damages. This I deem to be an arbitrary, mechanical adoption of a formula leading to an improper assignment of two-thirds of the recovery as punitive damages, taxable as ordinary income. Commissioner of Internal Revenue v. Glenshaw Glass Co., 1955, 348 U.S. 426, 75 S.Ct. 473. The Glenshaw case decided the point that a recovery of punitive damages is taxable as ordinary income. The case involved no problem of allocation.
The taxpayers’ evidence in the antitrust action had been presented during several weeks of trial. At the time of settlement, the action was pending before the Court for decision on motions to dismiss, a prime point of defendants being the bar of statute of limitations. Plaintiffs’ proof of damages would have sustained a judgment for actual damages based in part on injury to capital investment and in part on loss of prospective profits far in excess of the net settlement of $47,686.55. The proof of loss of prospective profits was more tenuous and doubtful than the proof of injury to capital investment, but on the record, I cannot disagree with the Tax Court’s allocation of the settlement (that portion of it not designated as punitive damages) fifty per cent to recovery of capital and fifty per cent to the recovery of anticipated profits.
*1011My quarrel is pointed exclusively at the designation of any of the settlement as punitive damages under these circumstances. The record shows that the taxpayers were not satisfied with the settlement, deeming it grossly inadequate to make them whole for the loss suffered, and they accepted the settlement only because of the advice of their attorney which we are entitled to infer was the consequence of the serious statute of limitations problem which had been argued to the Court.
Where, as here, there is substantial evidence in the record showing that the actual damages suffered were substantially more than the amount of the settlement prior to judgment, this, in my opinion, is sufficient to characterize as arbitrary and unreasonable the allocation to punitive damages of any of the settlement sum paid in an anti-trust action.
The majority of this Court deems it “regrettable”1 that the new Internal Revenue Service procedures articulated in Technical Release TIR-919, July 31, 1967, Rev. Proc. 67-33, I.R.B. 1967-35, were not adopted before decision of this case in the Tax Court. I consider the new procedures to be recognition of the essential unfairness and arbitrariness of the Tax Court method of allocation.
In any event, the real issue before the Tax Court was what was the best evidence of the underlying nature of the taxpayers’ anti-trust action claim which was settled. Spangler v. C.I.R., 1963, 9th Cir., 323 F.2d 913. The complaint may be the best evidence “in the absence of other evidence.” See: Rev. Rule 58-418, fn. 4, majority opinion. Over the years, I have come to discount prayers of a complaint as evidence of much of anything other than the highest financial aspirations of the pleader. In this case, there was much better and more probative evidence before the Tax Court. This evidence has been summarized in the first portion of this opinion. It is uncontradicted and persuades me that the finding of the Tax Court that two-thirds of the anti-trust settlement was paid as punitive damages was clearly erroneous.

. Equally “regrettable”, I presume, is the fact that the decision in Commissioner of Internal Revenue v. Glenshaw Glass Co., 348 U.S. 426, 75 S.Ct. 473, was not rendered until March 28, 1955; that the anti-trust case here involved was settled before March 25, 1955; that before the Glenshaw opinion, tax decisions generally held punitive damages not to be taxable as ordinary income (see Commissioner of Internal Revenue v. Glenshaw Glass Co., 3rd Cir. 1954, 211 F.2d 928); and that under then existing law, there was no taxation reason for the taxpayer to require a specification in the settlement papers that none of the money was paid as punitive damages.