Commissioner of Internal Revenue v. Glenshaw Glass Co.commissioner of Internal Revenue v. William Goldman Theatres, Inc, 211 F.2d 928 (3d Cir. 1954)

If the property or money paid represents a return of capital or a contribution to capital it is not subject to income taxation. Subsidies paid by a sovereign to aid in the construction and operation of a railroad line were held not to be income in Edwards v. Cuba R. Co., 1925, 268 U.S. 628, 45 S. Ct. 614, 69 L. Ed. 1124, and the money and property acquired were treated in effect as an accretion to capital. But compare Detroit Edison Co. v. Commissioner, 1943, 319 U.S. 98, 63 S. Ct. 902, 87 L. Ed. 1286, where the Supreme Court has indicated some halt in the doctrine of capital donation expressed in Edwards v. Cuba R. Co., supra. Cf. also Great Northern Ry. Co. v. Commissioner, 8 B.T.A. 225 (1927), affirmed 8 Cir., 1930, 40 F.2d 372. A single gift of money or property probably should not be treated as taxable income even if the specific exemption granted to gifts by statute were unavailable. Periodicity seems to be considered a factor. See Irwin v. Gavit, 1925, 268 U.S. 161, 168, 45 S. Ct. 475, 69 L. Ed. 897; Magill, Taxable Income, supra, note 8, at p. 428. The spontaneity of the gift may also serve to relieve the recipient of tax. See Bogardus v. Commissioner, 1937, 302 U.S. 34, 42, 58 S. Ct. 61, 82 L. Ed. 32; Washburn v. Commissioner, 1945, 5 T.C. 1333.⁹ 

The United States lays emphasis on the decision of the Court of Claims in Park & Tilford Distillers Corp. v. United States, Ct.Cls. 1952, 107 F. Supp. 941, 943-945. In this case the issue was whether a recovery under Section 16(b) of the Securities Exchange Act, 15 U.S. C.A. § 78p(b), constituted income to the recovering corporate taxpayer. The Court of Claims held that the recovery was taxable as income and specifically rejected the reasoning of this court in Central R. Co. v. Commissioner and the decision of the Board of Tax Appeals in Highland Farms. The Court of Claims stated: "The money came in from an outside source, it went into the plaintiff's treasury, it did not replace something which went out of plaintiff's ownership as a consideration for it." The Court went on to say that it was unwilling to surmise that the definition of "income" of Eisner v. Macomber was sufficient to read out of the taxing statute the phrase "income derived from any source whatever." In our opinion the theory of recovery under Section 16(b) of the Securities Exchange Act of 1934 is not a purely punitive one. The statute was designed to prohibit profit being made by an "insider" possessing peculiar knowledge of future profitable operations of his corporation. The making of a profit by the "insider" is the mainspring of the statute, a profit required by law to be passed on to the corporation probably because the corporation is the most convenient receptacle. An "outsider" purchasing stock in the open market, theoretically at least, would be compelled to pay a higher price because an insider was purchasing stock in the market against him. But, under the operation of the statute, all of the stockholders, save only the "insider" whose operations were prohibited by statute, would receive via the corporate entity the profit made by the prohibited transaction.¹⁰  We do not agree with the position of the Court of Claims that Park & Tilford's recovery was purely a "windfall".

In General American Investors Co., Inc. v. Commissioner, 1952, 19 T.C. 581, affirmed 2 Cir., 1954, 211 F.2d 522, the Tax Court followed the Park & Tilford decision of the Court of Claims but distinguished its decision from that in the instant Glenshaw Glass Company case and the decisions in Central R. Co. and Highland Farms employing the definition of taxable income of Eisner v. Macomber. Judge Murdock in his concurring opinion pointed to the provisions of Section 16(b) of the Securities Exchange Act of 1934, viz., that "any profit realized" under the circumstances presented by the General American Investors case "shall inure to and be recoverable by the issuer", i. e., the corporation. Judge Murdock took the position that the profits were income to General American Investors within the purview of Section 22(a) of the Internal Revenue Code "since they were `profits' either from `sales or dealings in property * * * growing out of the ownership of * * * or interest in such property' or `from any source whatsoever'."

The facts of the Park and Tilford and the General American Investors decisions are distinguishable both from those at bar and from Central R. Co. v. Commissioner, supra.

The United States contends that the "source of gain" should not be controlling in view of the final phrase of Section 22(a) dealing with gains or profits or income "derived from any source whatever"; that the phrase last quoted expresses congressional intent that the source of income or gain is immaterial — a complete negation of the concept of source in relation to taxable income. The government in substance asserts that any money or property coming into the hands of any person is taxable as income unless specifically exempted. But we have found no case in which the court did not look to source as at least coloring or bearing upon the incidence of taxation.

Punitive damages seem to be sui generis. By definition they are not compensatory. They certainly possess no periodicity. They are not derived from capital, from labor or from both combined and assuredly they are not profit gained through the sale or conversion of capital assets. It is clear that they do not fall within the definition of Eisner v. Macomber and if we could be certain that the definition of that case was controlling we would have no difficulty with the issue at bar. It is easy to say what punitive damages are not but difficult to say what they really are. They smack of donations made to the individual by the State, by operation of law. A person does a prohibited act to another injuring him. The injured individual is subsequently enriched by a gift taken from the pocket of the injuring party by virtue of law. There is no quid pro quo. An analogy seems to us to lie in those cases where contributions are made by the sovereign in the general public interest to an individual. Cf. Edwards v. Cuba R. Co., supra. Where the injuries were gross, the doctrine of punitive damages comes into play. The taxpayers have recovered because the sovereign has seen fit to punish gross behavior for the good of the public. There are naked exactions by the sovereign which go to the injured corporations rather than to the fisc. There is vague likeness to a fine exacted by the sovereign but which goes to the taxpayer.

The Supreme Court has never expressly departed from the definition of income of Eisner v. Macomber. In fact it has reiterated it fairly recently. See Merchants Loan & Trust Co. v. Smietanka, 1921, 255 U.S. 509, 519, 41 S. Ct. 386, 65 L. Ed. 751 and Commissioner of Internal Revenue v. Culbertson, 1949, 337 U.S. 733, 740, 69 S. Ct. 1210, 93 L. Ed. 1659. And see Helvering v. Griffiths, 1943, 318 U.S. 371, 63 S. Ct. 636, 87 L. Ed. 843 in which the Supreme Court expressly declined to overrule Eisner v. Macomber on the facts there presented. The Culbertson decision cites not only Treasury Regulation 101, Article 22(a)-1 but also 1 Mertens, Law of Federal Income Taxation, 159 et seq. See the authorities set out in note 9 cited to § 5.02 of Mertens. We concede that no definition is too helpful, United States v. Kirby Lumber Co., supra, and that the decisions relating to income tax law contain charts rather than definitions, as Mr. Mertens has aptly stated. But it should be borne in mind that in Eisner v. Macomber, albeit where severability was the primary issue, the Supreme Court said, 252 U.S. at pages 206-207, 40 S. Ct. at page 193, that "only a clear definition of the term `income,' as used in common speech * * *." was required. We do believe that a "windfall" — and the payments at bar were "windfalls" — would not be regarded as "income" within the terms of common speech. Certainly the payments to the taxpayers cannot fairly be regarded as products of capital or labor. We believe that the ordinary man regards income as something which comes to him from what he has done, not from something which is done to him. This is perhaps an over-simplification but we are of the opinion that the ordinary man using terms of common speech would not regard punitive damages as "income."

We must further concede that the decision of this court in Central R. Co. v. Commissioner cannot be deemed to be overwhelmingly persuasive for the sources of the moneys in that case can be distinguished from the sources of the moneys sought to be taxed in the instant cases but the decision has been followed frequently and has been applied to the issue of taxation of punitive damages. See Highland Farms, supra. There is as yet no decision which has adopted the contentions made by the Government here. The position of the United States would indeed, if adopted, bring symmetry into this aspect of the law of income taxation. See "The Taxability of Punitive Damages," 101 U. of P. L. Rev. 1052 (1953). Cf. Keasbey & Mattison Co. v. Rothensies, 3 Cir., 1943, 133 F.2d 894, 897. But we think if such a result is to be achieved after nearly two decades it should be effected by the Supreme Court and not by this tribunal.

The decisions of the Tax Court will be affirmed.