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Central R. Co. v. Commissioner of Internal Revenue

September 24, 1935


Petition for Review from the United States Board of Tax Appeals.

Author: Davis

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

DAVIS, Circuit Judge.

The question in this case is whether or not the value of certain property received by the taxpayer, the Central Railroad Company of New Jersey, in settlement of a suit in equity is income to the taxpayer in the year in which it was received.

For a number of years, prior to 1921, Henry L. Joyce was the executive officer of the taxpayer in charge of its New York Marine Department. He was intrusted with considerable responsibility and authority.

While he was an official in the employ of the taxpayer, Joyce and Harry B. James caused the organization of the Railroad Stevedoring Corporation, the Boat Repairing Corporation, and the Victory Steamship Company. Through these corporations, Joyce surreptitiously carried on business operations which were adverse to the interests of the taxpayer. The Interstate Commerce Commission revealed that these corporations, without disclosing Joyce's connection with them, had been enabled on account of his position to make advantageous leases and contracts with the taxpayer for his benefit.

The taxpayer brought a suit in equity against Joyce and the Victory Steamship Company on the theory that he, James, and the corporation had conspired to defraud the taxpayer. The taxpayer sought an accounting of the profits earned by the corporations or to recover damages sustained by the taxpayer in entering into contracts and agreements with the corporations organized and controlled by Joyce.

In June, 1928, the suit was settled and the taxpayer received property admittedly worth $456,405. The property consisted of certain structures, equipment, machinery, and appurtenances which were located on the water-front property leased by the Boat Repairing Corporation from the taxpayer for a term of ten years from 1919. The lease provided that the Boat Repairing Corporation might remove this property at any time prior to the termination of the lease, but this provision was nullified by the settlement.

The taxpayer did not include this property in its income tax return for 1928, the taxable year in question, but the Commissioner of Internal Revenue determined that the amount of the property received in the settlement should have been included in the gross income of the taxpayer for that year. The Board of Tax Appeals approved the determination of the commissioner.

The question of what constitutes income is defined in the statute and it is not always in accord with strict accounting practices, as has often been recognized by the Congress and courts. Section 22 (a) of the Revenue Act of 1928 (26 USCA § 22 and note) is the statute applicable here and it provides: "General definition. "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever."

It is not true as the taxpayer says that not all property received as the result of litigation is income. Alimony and separation allowances are not considered income. That is because a wife is entitled to be supported by her husband and the alimony which she receives is in the nature of the portion entitled and of which she has been deprived. Gould v. Gould, 245 U.S. 151, 38 S. Ct. 53, 62 L. Ed. 211. Damages recovered because of personal injuries or illness are exempt. Section 22 (b), Revenue Act of 1928 (26 USCA § 22 and note); regulation 22, article 82. Likewise, damages recovered for alienation of affections, breach of promise to marry, and libel and slander are generally not taxable. Those actions are of a personal nature and do not fall within the statutory definition of income. The thought is that a recovery in such actions is compensatory. The damages are in payment of injuries sustained. C. A. Hawkins v. Commissioner, 6 B.T.A. 1023; Mrs. Lyde McDonald v. Commissioner, 9 B.T.A. 1340.

It is equally true that every receipt of money is not taxable. But this case is not analogous to the so-called "contribution" cases on which the taxpayer relies.

In Edwards v. Cuba Railroad Co., 268 U.S. 628, 45 S. Ct. 614, 69 L. Ed. 1124, it was held that subsidies paid by a government to a railroad and conditioned on the completion of certain construction did not constitute taxable income. The Edwards Case and others of that sort are based on the fact that the subsidies represent an increment to capital. Tampa Electric Co. v. Commissioner, 12 B.T.A. 1002; Midland Valley Railroad Co. v. Commissioner, 19 B.T.A. 423.

In Farmers' & Merchants' Bank v. Commissioner, 59 F.2d 912, 913 (C.C.A. 6), the court held that money received in settlement of a suit by a bank for damages done to the good will of its business was not taxable. The court said in its opinion: "The fund involved must be considered in the light of the claim from which it was realized and which is reflected in the petition filed in its action against the Reserve Bank. We find nothing therein to indicate, with the certainty required in the statement of a ...

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