[Ed Note: You may remember venerable WS+B Tax Partner Steve Talkowsky from his short-lived series of posts addressing the seminal tax cases in our country's tax history. After serving a three-month ban for making insensitive remarks about my beloved dog Maci, Steve is back from exile with the third installment. Why do something like this?
Because unless you happen to be this chick, the tax law is considerably older than you are. As a result, no matter how diligent and dutiful you may be in absorbing current events, the reality is that much of the current law was established long before you were a twinkle in your daddy's eyes.
To speed up your learning curve, Mr. Talkowsky will stop by from time to time to reintroduce and dissect those landmark decisions that have had a far-reaching impact on the tax law as we know it.
Next up: The Supreme Court's decision in Glenshaw Glass Co. v Commissioner, 348 U.S. 426, 1955. Glenshaw, in many respects, may be THE most important tax case, as it addresses the central question of an income tax: what is the definition of "income?" Now on to Steve…]
Guess who’s back…back again. Steve T’s back…tell a friend!
It’s been awhile for the historical posts – busy season and all that other stuff – but here we go. My award-winning boss requested a blog dealing with the 1955 Supreme Court case of Commissioner v.Glenshaw Glass Co. If you’ve ever wondered how the tax law came to adopt the default setting that all accessions to wealth are included in taxable income unless specifically excluded, well here you go:
Glenshaw Glass was a consolidation of two different cases dealing with the same exact issue, namely, whether money received as exemplary damages for fraud or as the punitive portion of a treble damage antitrust recovery must be reported by a taxpayer as gross income.
In Commissioner v. Glenshaw Glass Co., the Glenshaw Glass Co. became engaged in a legal dispute with the Hartford-Empire Company. Among the claims advanced by Glenshaw were demands for exemplary damages for fraud and treble damages for injury to its business by reason of Hartford’s violation of the federal antitrust laws. The parties eventually a settled their differences resulting in Hartford paying Glenshaw approximately $800,000. Of this settlement, $324,529 represented payment of punitive damages for fraud and antitrust violations. Glenshaw did not report this portion of the settlement as income for the tax year involved. The Commissioner, however, disagreed, claiming the amounts were taxable. The Tax Court and the Court of Appeals upheld the taxpayer.
In Commissioner v. William Goldman Theaters, Inc., William Goldman Theatres, sued Loew’s, Inc., alleging a violation of the federal antitrust laws and seeking treble damages. It was found that Goldman had suffered a loss of profits equal to $125,000, and was entitled to treble damages in the sum of $375,000. Goldman reported only $125,000 of the recovery as gross income, and claimed that the $250,000 balance constituted punitive damages, and was not taxable. The Tax Court and court of Appeals agreed.
The Supreme Court, in reversing the Court of Appeals decisions, relied upon the intention of Congress to tax all gains except those specifically exempted. In reaching its decision it stated:
“Here, we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients. Respondents concede, as they must, that the recoveries are taxable to the extent that they compensate for damages actually incurred. It would be an anomaly that could not be justified in the absence of clear congressional intent to say that a recovery for actual damages is taxable, but not the additional amount extracted as punishment for the same conduct which caused the injury. And we find no such evidence of intent to exempt these payments.”
So there you have it – punitive damages are taxable because they represent an increase to the wealth of a taxpayer that is not specifically excluded from income by statute, regulations, or administrative ruling.
[Ed note: While at the time it was decided, the Supreme Court's decision in Glenshaw Glass appeared to be little more than a run-of-the-mill holding that punitive damages are taxable, the case has assumed its lofty position among the seminal tax decisions because it defines the concept of "income," which believe it or not, the tax law had struggled with prior to 1955. Glenshaw Glass established an enduring principle of the current law: the term "income" is a catch-all that is meant to include all accessions to wealth, unless specifically exempted by statute.]
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