Raytheon Prod. Corp. v. Commissioner

144 F.2d 110 (1st Cir. 1944)

 

RULE:

In a suit to recover damages for the destruction of the business and good will, the recovery represents a return of capital. The fact that the suit ended in a compromise settlement does not change the nature of the recovery. However, the conversion thereby of property into cash is a realization of any gain made over the cost or other basis of the good will prior to the illegal interference.

FACTS:

Raytheon Production corporation brought suit alleging that the government conspired to destroy its established business, and large and valuable good will in interstate commerce, which were totally destroyed. The antitrust suit and a counterclaim for non-payment of royalties were settled for a cash payment in favor of the corporation, but the amount paid was not allocated between patent license rights and settlement of the suit. The corporation treated most of the settlement as a non-taxable return of capital, but the government determined the entire settlement sum was taxable income.

ISSUE:

Is the entire amount received by the taxpayer in a compromise settlement of a suit for damages under the Federal Anti-Trust Laws a non-taxable return of capital?

ANSWER:

No.

CONCLUSION:

The court found the recovery for destruction of the business and good will represented a return of capital. However, the court also found that the corporation's conversion of property into cash meant that compensation for loss of good will in excess of its cost basis would be gross income to the corporation. The corporation was the result of a series of tax-free reorganizations; there was no evidence of its original predecessor's basis in good will. Since the amount of any nontaxable capital recovery could not be ascertained, the entire settlement amount was taxable income.

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