*57 Decision will be entered under Rule 50.
Lump sum received in settlement of claims for damages arising under the antitrust laws held, on facts, allocable one-third as taxable ordinary income and two-thirds as nontaxable amounts received in lieu of punitive damages. Glenshaw Glass Co., 18 T.C. 860">18 T. C. 860, followed.
*1103 Respondent determined a deficiency of $ 396,476.84 in petitioner's income taxes for the fiscal year ended June 30, 1948. The sole issue is whether the net amount of $ 1,043,360.11 received by petitioner during the period in controversy in a compromise settlement of claims for damages arising under the antitrust*58 laws is includible, in whole or in part, in petitioner's taxable income under section 22 (a) of the Internal Revenue Code.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
Petitioner is a corporation organized in 1891 under the laws of the State of Missouri. Its principal office and place of business is located in East St. Louis, Illinois. A Federal income tax return was filed on its behalf for the period in controversy with the collector for the eighth district of Illinois. Petitioner kept its books and prepared its return on an accrual basis.
Since its incorporation petitioner has engaged continuously in the manufacture of glass bottles other than milk bottles. The production of such glassware in quantity requires elaborate automatic machinery, such as feeders, forming machines, stackers, and lehrs.
The Hartford-Empire Company, hereinafter called Hartford, is primarily engaged in holding and developing patents relating to machinery used in the manufacture of glassware. It licenses such machinery and methods on a royalty basis to various manufacturers. Hartford manufactures neither glass-making machinery nor glassware. Prior to 1949 neither*59 petitioner nor various other glassware manufacturers took licenses from Hartford.
Prior to 1926 petitioner used plunger feeders of its own design in its manufacturing operations. In 1926 Hartford filed suit against petitioner in the United States District Court for the Eastern District of Missouri, hereinafter called the trial court. The complaint charged that petitioner's plunger feeders infringed certain patents owned by Hartford. About 4 months after the filing of the complaint and before the case went to trial, petitioner voluntarily abandoned the use of its plunger feeders, and installed Stuckey air feeders. In 1928 the trial court found that petitioner's feeders did infringe some of Hartford's claims and entered judgment ordering an accounting. Judgment was affirmed on appeal, and a motion addressed to the Court of Appeals to direct the trial court to reopen the trial for the purpose of receiving newly discovered evidence was denied. The *1104 accounting following remand was never completed, and the case was finally dismissed with prejudice in 1947.
In 1929 Hartford filed a second suit against petitioner in the trial court, alleging that petitioner's Stuckey air feeders*60 infringed certain patents owned by Hartford. These patents were not involved in the prior litigation. The trial court held these patents invalid. On appeal by Hartford, the trial court's decision was affirmed. In 1935, following this affirmance, Hartford filed a petition with the trial court addressed to the first suit against petitioner, which was then on remand for an accounting, entitled "For Supplemental Injunction or for Leave to File Supplemental Bill of Complaint." In this petition, Hartford alleged that petitioner's Stuckey air feeders infringed the Hartford patents involved in the prior litigation. The trial court entered an order denying the petition as not timely. This order was affirmed on appeal.
On April 8, 1938, Hartford filed a third suit against petitioner in the trial court, alleging that petitioner's Stuckey air feeders infringed the Hartford patents involved in the first litigation. Petitioner's answer contended that the patents relied on by Hartford were void, and alleged as a counterclaim that Hartford had obtained a monopoly of the production of unpatented glassware and glass-making machinery through illegal practices. The counterclaim prayed that petitioner:
*61 be awarded its damages increased to the maximum amount permitted by law for plaintiff's illegal acts, its attorneys fees, and its costs on the counterclaim; * * *
Prior to 1942 petitioner used "Lynch B" and "Lynch L-A" forming machines in its manufacturing operations. These machines were manufactured by Lynch Corporation, of Anderson, Indiana, the largest manufacturer of forming machines in the United States.
By agreement entered into between Hartford and Lynch on August 23, 1933, and pursuant to subsequent instructions from Hartford, Lynch refused to furnish forming machines to customers who were not feeder licensees of Hartford unless the customer agreed to pay a large royalty on the forming machines.
In 1935 the petitioner desired to purchase the most modern forming machines available, which were "Lynch 10" forming machines. Petitioner attempted to buy these machines but was unable to do so because petitioner neither used Hartford feeder machines nor held a forming machine license from Hartford.
In 1939 the United States instituted a civil action in the United States District Court for the Northern District of Ohio, Western Division, charging Hartford, Lynch, and other members*62 of the glass industry *1105 with violations of the Federal antitrust laws. Ultimately, Hartford was held to have violated both the Sherman and Clayton Acts. These violations by Hartford occurred through misuse of its patents, through oppressive litigation against petitioner and others, and through its August 23, 1933, agreement with Lynch, by which means Hartford and other defendants eliminated competition and competitors and created a monopoly of the glass industry in the United States, contrary to law.
The final judgment of the District Court in the antitrust action, entered October 31, 1945, required Hartford to dismiss any suits, pending at the date the antitrust suit was brought, for infringement of patents covering glass-making machinery owned by Hartford.
Pursuant to this judgment, Hartford's first suit against petitioner, still pending on remand for an accounting, was dismissed with prejudice. On September 30, 1946, Hartford's complaint in its third suit was also dismissed with prejudice. On August 13, 1946, on July 2, 1947, and on October 29, 1947, following disclosures made in the antitrust case against Hartford, petitioner filed a series of amended answers and *63 counterclaims in the third suit by leave of the trial court. In the amended answers and counterclaims, petitioner charged that Hartford and its predecessors commenced as early as 1916 and continued thereafter a series of practices which were in violation of the antitrust laws and which resulted in damage and loss to petitioner. Petitioner's Amended and Supplemental Counterclaims sought to recover alleged damages as follows:
| Amount of | |
| damages sought | |
| Item | |
| 1st Amended | |
| counterclaim | |
| Sept. 30, 1946 | |
| (a) Expenses and fees in preparing and defending previous | |
| patent litigation brought by Hartford | $ 209,825.75 |
| (b) Expense in obtaining right to use and install Stuckey | |
| air feeders; reimbursement for loss of production during | |
| installation; and loss of investment in plunger | |
| feeder | 100,000.00 |
| (c) Increased cost of production through failure to secure | |
| Lynch Model 10 forming machine | 650,000.00 |
| (d) Loss of profit through failure to secure Lynch Model 10 | |
| forming machine | 800,000.00 |
| (e) Legal expenses to determine validity of claim for | |
| infringement of patent on Lynch Model 10 forming | |
| machine | -0- |
| (f) Expense and damage in attempting to build forming | |
| machine | -0- |
| (g) Additional cost of Lynch 10 machines by reason of | |
| deferring purchases from 1935-39 to 1942-46 | -0- |
| (h) Additional expense in 1945 of converting Plant No. 4 for | |
| Lynch 10 machine operation over cost estimated for | |
| 1938 | -0- |
| Actual damages prayed for | $ 1,759,825.75 |
| Total damages prayed for (being three times actual damages | |
| sought) * | $ 5,279,478.65 |
| Amount of | |
| damages sought | |
| Item | |
| 2nd Amended | |
| counterclaim | |
| July 21, 1947 | |
| (a) Expenses and fees in preparing and defending previous | |
| patent litigation brought by Hartford | $ 209,825.75 |
| (b) Expense in obtaining right to use and install Stuckey | |
| air feeders; reimbursement for loss of production during | |
| installation; and loss of investment in plunger | |
| feeder | 100,943.36 |
| (c) Increased cost of production through failure to secure | |
| Lynch Model 10 forming machine | 667,278.05 |
| (d) Loss of profit through failure to secure Lynch Model 10 | |
| forming machine | 835,823.63 |
| (e) Legal expenses to determine validity of claim for | |
| infringement of patent on Lynch Model 10 forming | |
| machine | -0- |
| (f) Expense and damage in attempting to build forming | |
| machine | -0- |
| (g) Additional cost of Lynch 10 machines by reason of | |
| deferring purchases from 1935-39 to 1942-46 | -0- |
| (h) Additional expense in 1945 of converting Plant No. 4 for | |
| Lynch 10 machine operation over cost estimated for | |
| 1938 | -0- |
| Actual damages prayed for | $ 1,813,870.79 |
| Total damages prayed for (being three times actual damages | |
| sought) * | $ 5,441,612.37 |
| Amount of | |
| damages sought | |
| Item | |
| 3rd Amended | |
| counterclaim | |
| Oct. 29, 1947 | |
| (a) Expenses and fees in preparing and defending previous | |
| patent litigation brought by Hartford | $ 209,825.75 |
| (b) Expense in obtaining right to use and install Stuckey | |
| air feeders; reimbursement for loss of production during | |
| installation; and loss of investment in plunger | |
| feeder | 79,627.35 |
| (c) Increased cost of production through failure to secure | |
| Lynch Model 10 forming machine | 1,254,735.33 |
| (d) Loss of profit through failure to secure Lynch Model 10 | |
| forming machine | 1,450,762.86 |
| (e) Legal expenses to determine validity of claim for | |
| infringement of patent on Lynch Model 10 forming | |
| machine | 6,449.58 |
| (f) Expense and damage in attempting to build forming | |
| machine | 21,316.01 |
| (g) Additional cost of Lynch 10 machines by reason of | |
| deferring purchases from 1935-39 to 1942-46 | 42,000.00 |
| (h) Additional expense in 1945 of converting Plant No. 4 for | |
| Lynch 10 machine operation over cost estimated for | |
| 1938 | 95,936.91 |
| Actual damages prayed for | $ 3,160,653.79 |
| Total damages prayed for (being three times actual damages | |
| sought) * | $ 9,511,961.37 |
*1106 In July of 1947 Hartford and petitioner commenced negotiations toward settlement of the controversy existing between them. Several settlement conferences were held during the summer and fall of 1947 by counsel and the executive officers of the respective parties. Nothing concrete was accomplished at these preliminary conferences. Petitioner was then assembling data, while Hartford's representatives were giving their attention to the many other suits and claims then pending against Hartford in order to determine if Hartford could survive.
Hartford and petitioner were able by November of 1947 to negotiate more definitely and concretely. At that time numerous treble damage suits and claims were pending against Hartford and, by reason of such suits, the negotiators for Hartford and petitioner feared Hartford might soon become bankrupt and collapse. Moreover, petitioner's counsel realized, and they so advised petitioner, that the amount petitioner might ultimately recover, in the event it went to trial on its counterclaim, *66 was a matter of speculation and that some of petitioner's claims were remote and indefinite.
Throughout the settlement negotiations, the representatives of petitioner brought up the matter of treble damages and kept it in mind in considering any offer by Hartford. Petitioner's counsel had advised petitioner's president at the time of the negotiations for settlement that the petitioner had a good claim for treble damages based upon whatever amount petitioner could establish as actual damages.
In November 1947 Hartford, without making a firm offer, nevertheless, admitted that about $ 350,000 could be collected in court. This amount included $ 110,000 in legal fees claimed by petitioner, $ 7,200 advanced cost of a Lynch machine, $ 21,000 expended by petitioner in an effort to develop its own forming machine, and $ 211,000 for loss of production in petitioner's Plant No. 3. Petitioner was unwilling to negotiate on the basis of a settlement in that amount but instead insisted on a lump-sum settlement of $ 1,000,000 which was arrived at by roughly trebling the actual damages admitted by Hartford. Expenses of litigation were to be added. Hartford's representatives then attempted to *67 negotiate on the basis of an amount petitioner ultimately might be able to collect in the event Hartford became bankrupt. By order of court, a receiver had previously been appointed to take possession of all the property and assets of Hartford, including all patents, and to collect and receive the income of Hartford. Hartford countered with an offer of $ 600,000, but petitioner rejected it. Finally Hartford accepted petitioner's settlement proposal. The settlement terminated the litigation in the third suit and was evidenced by a settlement agreement dated December 16, 1947. The agreement provided, in part, as follows:
*1107 WHEREAS, in said third suit No. 12,546, there is still pending a counterclaim filed by Obear-Nester against Hartford, which counterclaim is now styled as Third Amended and Supplemental Counterclaim; and
WHEREAS, in said Third Amended and Supplemental Counterclaim Obear-Nester has set forth and averred its various claims against Hartford arising from and as the result of certain alleged violations by Hartford of the Federal Anti-Trust laws to the damage of Obear-Nester, and Obear-Nester has asserted certain other claims not specifically alleged therein; *68 and
WHEREAS, Hartford has denied and does deny the aforesaid claims and alleged liabilities and there is a bona fide dispute as to the validity of said claims of Obear-Nester and as to the amount thereof; and
WHEREAS, the parties hereto desire to compromise, adjust and settle said dispute upon the terms and in the manner herein provided;
NOW, THEREFORE, In Consideration of the premises and of the compromise of said disputes and the full and complete settlement of the matters and things recited herein, the parties hereto have agreed and do hereby agree as follows:
1. Hartford agrees to pay and contemporaneously herewith does pay to Obear-Nester in full and final settlement and satisfaction of the aforesaid claims and of any and all other claims of Obear-Nester against Hartford, the sum of One Million Two Hundred Six Thousand Three Hundred Fifty-One Dollars and Twenty-Four Cents ($ 1,206,351.24), the receipt of which is evidenced by the execution of this Agreement and Settlement, and is acknowledged herein by Obear-Nester.
2. Obear-Nester agrees to dismiss the aforesaid counterclaim in Cause No. 12,546 aforesaid with prejudice to Obear-Nester and at the cost of Hartford; and Hartford*69 agrees to pay all unpaid court costs in this suit and in the aforesaid first suit.
3. Obear-Nester does, for itself, its predecessors, successors and assigns and anyone claiming through or under it or them, REMISE, RELEASE and FOREVER DISCHARGE the said Hartford-Empire Company, all its subsidiary companies and its and their respective predecessors, successors and assigns, and all its and their past, present and future officers, directors, agents and employees and the respective successors, assigns, heirs, next-of-kin, executors and administrators thereof, and/or each of the aforesaid (all hereinafter referred to as "Releases") from all claims, actions, causes of actions, suits, debts, dues, sums of money, accounts, reckonings, covenants, contracts, controversies, agreements, promises, representations, restitutions, damages and demands whatsoever in law or in equity, which against Releases it or its predecessors ever had, now has, or which it or its predecessors, successors and assigns hereafter can, shall or may have in its or their own name or names or jointly with or through any other person, natural or corporate, for, upon, or by reason of any act, matter, transaction, cause or*70 thing whatsoever from the beginning of the world to the date of these presents, including, but without in any way limiting or restricting the scope or effect of the foregoing general language, for, upon, or by reason of any act, matter, transaction, cause or thing whatsoever connected with, referred to or in any manner asserted or involved in said Third Amended and Supplemental Counterclaim in said Cause No. 12,546, and/or said Cause No. 4426 in the District Court of the United States for the Northern District of Ohio, Western Division.
The aforesaid settlement agreement was executed after nearly 6 months of negotiations. The amount Hartford agreed to pay petitioner was intended to represent a lump-sum settlement of $ 1,000,000 plus attorneys' fees and expenses of $ 206,351.24. The negotiators in *1108 their negotiations and in the agreement allocated no portion of the $ 1,000,000 settlement to treble damages, exemplary damages, or to any of the various claims asserted by petitioner. During the negotiations, petitioner's various claims, including the counterclaim for treble damages, were considered and discussed. However, Hartford at no time expressly admitted or conceded*71 it had any liability to petitioner for treble damages.
During petitioner's taxable year ended June 30, 1948, Hartford paid petitioner $ 1,206,351.24, pursuant to the aforesaid settlement agreement. No part of this sum was reported as taxable income by petitioner in its corporation income tax return for the taxable year ended June 30, 1948. It did, however, include the entire amount in controversy as income in its analysis of earned surplus and undivided profits.
The respondent deducted the expenses, court costs, and fees actually paid by petitioner amounting to $ 162,991.13 from the $ 1,206,351.24 settlement proceeds, and included the entire remaining sum of $ 1,043,360.11 in petitioner's net income for its taxable year ended June 30, 1948, stating that this net amount "realized * * * in the settlement of your counterclaim for treble damages for violation of the Federal anti-trust laws is held to be includible * * * under the provisions of Section 22 (a) of the Internal Revenue Code."
Of the total amount of $ 1,043,360.11 determined by respondent to be taxable income the sum $ 376,693.45, consisting of $ 333,333.34 added to $ 43,360.11, was the proceeds of claims for lost profits, *72 recovery of deductible amounts, and other similar claims of actual damage. The remainder was collected in lieu of punitive damages recoverable by reason of the treble damage provisions of the antitrust laws.
OPINION.
Unlike the situation in Glenshaw Glass Co., 18 T.C. 860">18 T. C. 860, petitioner makes no contention that any part of the proceeds of the settlement of an antitrust suit represented return of capital, and is hence nontaxable. The evidence is clear that some part at least of the settlement was for loss of anticipated profits and other items taxable as ordinary income. Glenshaw Glass Co., supra.See William Goldman Theatres, Inc., 19 T.C. 637">19 T. C. 637; Highland Farms Corporation, 42 B. T. A. 1314; cf. Raytheon Production Corporation, 1 T. C. 952, affd. (C. A. 1) 144 F. 2d 110, certiorari denied 323 U.S. 779">323 U.S. 779. It is equally clear that petitioner's entire cause of action was founded upon violations of the antitrust law. That in fact is the substance of respondent's determination as stated*73 in the deficiency notice. We cannot take seriously his suggestion that because the settlement involved a general release containing *1109 traditional language 1 any damages were recovered which were unrelated to the antitrust claim. But cf. Raytheon Production Corporation, supra.At least in that condition of the record the burden of going forward was shifted to respondent and was not discharged.
The real controversy is the extent if any to which the proceeds of the lump-sum settlement, no part of which was allocated by the parties to any specific ground for recovery, is nontaxable because it constitutes punitive damages under the treble damage provisions of the antitrust laws. Notwithstanding respondent's painstaking and vigorous efforts*74 we are not persuaded that such cases as William Goldman Theatres, Inc., supra;Glenshaw Glass Co., supra;Highland Farms Corporation, supra; and Central Railroad Co. of New Jersey, (C. A. 3) 79 F. 2d 697, were erroneously decided and should now be overruled. They are not distinguishable in principle from the present proceeding and reasonable stability of the body of the law makes it highly desirable that recognized judicial precedents be adhered to unless clearly wrong or altered by statute.
Although the parties originally contemplated a settlement of $ 1,000,000 in addition to $ 206,351.24 representing attorneys' fees, court costs, and expenses of litigation, the actual sum which both petitioner and respondent regard as in controversy is $ 1,043,360.11, consisting of an amount, in addition to the $ 1,000,000, which although received was not expended for costs. More accurately, as to this difference of $ 43,360.11 there is in fact no dispute. Petitioner states in its brief: "in offering a reasonable basis for allocation of the settlement proceeds, petitioner does *75 not maintain that any portion of the $ 43,360.11 * * * is attributable to the punitive damage claims." 2 (Emphasis added.)
Following the principle of the Glenshaw Glass Co. case, it thus becomes necessary to decipher from the record a formula upon which we can be satisfied that an allocation of the settlement proceeds between actual and punitive*76 damages may be made. From the evidence we have made the best allocation of which we think the record capable and used it as the basis of our ultimate finding of fact. It disposes of the issue. See Glenshaw Glass Co., supra;William Goldman Theatres, Inc., supra. Our finding on this point is based on the entire *1110 record including among other things the fact that Hartford, against which the charges of antitrust violation were made, apparently conceded actual damage claims of approximately $ 350,000; that one of petitioner's officers testified that in demanding a settlement of $ 1,000,000 the negotiators for petitioner used an initial figure of $ 350,000 which they roughly trebled in reaching the $ 1,000,000 demand; 3 and the automatic nature of treble damages which would have been awarded had petitioner successfully maintained its claim of actual damages in approximately the amounts stated. See Clark Oil Co. v. Phillips Petroleum Co., (C. A. 8) 148 F.2d 580">148 F. 2d 580, 582; Bigelow v. RKO Radio Pictures, Inc., (C. A. 7) 150 F. 2d 877, 883, reversed other*77 grounds, 327 U.S. 251">327 U.S. 251. And since petitioner has conceded taxability of the $ 43,000 figure this has been added to our allocation of the lump-sum settlement. To the extent indicated we view the deficiency as erroneous.
Decision will be entered under Rule 50.
Footnotes
*. Plus reasonable attorney's fees and costs. The figures and statements, although apparently inconsistent, are taken from the counterclaim itself.↩
1. E. g., "* * * all claims * * * whatsoever in law or in equity, which against Releases it or its predecessors ever had, now has, or which it * * * can, shall or may have * * * from the beginning of the world to the date of these presents * * *."↩
2. There has been no determination and apparently there is no contention by respondent that some part of the expenses of litigation (the $ 162,991.13) is nondeductible or includible in income because related to nontaxable items of income. We accordingly find it unnecessary to consider the principle involved in the following language in Glenshaw Glass Co., supra, p. 872:
"The parties * * * further agreed that the fees allocated to the claims that gave rise to taxable income are deductible as an ordinary and necessary business expense, and that the fees allocated to the claims that did not give rise to taxable income are not deductible."↩
3. The total settlement in Glenshaw Glass Co., supra↩, was not trebled on a one-third-two-thirds basis because some part of the damage claims was conceded to be outside the anti-trust recovery. In this respect they correspond roughly to our unspent cost figure of $ 43,360.11.